2021 (1) TMI 810 - Tri - Insolvency and Bankruptcy

Corporate Guarantee as Financial Debt under Insolvency and Bankruptcy Code: UTI's Status and Preferential Transaction Dispute

The Tribunal concluded that the Corporate Guarantee qualifies as a financial debt under the Insolvency and Bankruptcy Code, making UTI a financial ... Issuance of the Corporate guarantee - creation of second charge on all assets - admission of COC in the capacity of being a financial creditor of the Corporate Debtor - Resolution Professional submits that such uninvoked Corporate Guarantee holder cannot form part of the Creditors of the Company - HELD THAT:- The orders were reserved on 27.11.2020 by this bench, the order was pronounced today, the lead judgement was rendered by Shri Chandra Bhan Singh, Member, technical and the dissenting judgement is passed by Member Judicial. The members are divided on two legal issue: a. Whether the issuance of the Corporate guarantee in favour of Respondent No. 1(being a Creditor of Related party/Holding Company) and creation of second charge on all assets including moveable, immoveable assets and oil blocks of the Corporate Debtor in favour of Respondent No. 1 is a preferential transaction under section 43 of IBC. b. Whether the Respondent No. 1 UTI can be admitted to COC in the capacity of being a financial creditor of the Corporate Debtor. The Registry is directed to place the record before the Hon’ble Acting President for constituting appropriate 3rd member for his opinion, so that the order in application is rendered in accordance with the opinion of majority. Issues Involved:1. Whether the Deed of Guarantee dated 26.03.2018 qualifies as a Financial Debt under section 5(8)(h) of the Insolvency and Bankruptcy Code (IBC).2. Whether the transaction falls under section 43 of the IBC as a preferential transaction.3. Whether the Corporate Guarantee was invoked correctly by UTI.4. Whether UTI should be admitted as a financial creditor and included in the Committee of Creditors (CoC).Detailed Analysis:1. Financial Debt Qualification:The Tribunal examined whether the Deed of Guarantee dated 26.03.2018 qualifies as a Financial Debt under section 5(8)(h) of the IBC. It was established that the guarantee issued by the Corporate Debtor to UTI falls under the category of financial debt as it involves a counter-indemnity obligation in respect of a guarantee. The Tribunal cited section 5(8) of the IBC and relevant judgments, including the Supreme Court's judgment in Anuj Jain IRP v. Axis Bank, which clarified that for a debt to qualify as a financial debt, it must involve disbursement against the consideration for time value of money. The Tribunal concluded that the Corporate Guarantee qualifies as a financial debt, making UTI a financial creditor.2. Preferential Transaction:The Tribunal analyzed whether the transaction falls under section 43 of the IBC, which deals with preferential transactions. The Interim Resolution Professional (IRP) argued that the Corporate Guarantee was not in the ordinary course of business and was preferential, benefiting UTI over other creditors. The Tribunal noted that the Corporate Guarantee was executed on 26.03.2018 and registered on 11.03.2019, within the two-year look-back period for related party transactions under section 43(4). The Tribunal referred to the Supreme Court's judgment in Anuj Jain IRP v. Axis Bank, which outlines the criteria for determining preferential transactions. It concluded that the Corporate Guarantee was a preferential transaction as it was executed to benefit UTI, a related party, and put UTI in a beneficial position compared to other creditors.3. Invocation of Corporate Guarantee:The Tribunal addressed the issue of whether the Corporate Guarantee was invoked correctly by UTI. The IRP argued that the Corporate Guarantee had not been properly invoked as per the prescribed format in the transaction documents. However, the Tribunal noted that clause 2.1.1 of the Corporate Guarantee allowed the Debenture Trustee to invoke the guarantee in any manner deemed appropriate. The Tribunal also referred to the NCLAT judgment in Exim Bank v. Resolution Professional - JEKPL Pvt. Ltd., which confirmed that a Corporate Guarantee, whether invoked or un-invoked, constitutes a financial debt. The Tribunal concluded that the Corporate Guarantee was validly invoked by UTI.4. Admission of UTI as Financial Creditor:The Tribunal considered whether UTI should be admitted as a financial creditor and included in the CoC. The IRP had rejected UTI's claim, arguing that the Corporate Guarantee was a preferential transaction and UTI was not a direct lender to the Corporate Debtor. The Tribunal, however, found that the Corporate Guarantee qualifies as a financial debt and UTI is a financial creditor. It directed the IRP to admit UTI's claim and include UTI as a member of the CoC.Separate Judgments:The Tribunal's members delivered separate judgments. The Technical Member allowed IA 1628 of 2020, recognizing UTI as a financial creditor and dismissing IA 1746 of 2020, which sought to declare the Corporate Guarantee as a preferential transaction. The Judicial Member, however, disagreed, finding the Corporate Guarantee to be a preferential transaction and setting it aside. The matter was referred to the Acting President for the opinion of a third member to resolve the disagreement.Conclusion:The Tribunal's detailed analysis concluded that the Corporate Guarantee qualifies as a financial debt, UTI is a financial creditor, and the transaction falls under section 43 of the IBC as a preferential transaction. The final decision on the matter will be determined by the opinion of the third member as directed by the Acting President.