Recognition of Indirect Lenders as Financial Creditors in Corporate Insolvency: Deed of Hypothecation Determination

The Tribunal upheld the decision to recognize certain indirect lenders as Financial Creditors of the Corporate Debtor, based on the Deed of Hypothecation constituting a guarantee under the Indian Contract Act. It ruled that the debt need not be in default for claims to be admissible in the Corporate Insolvency Resolution Process, and individual lenders had the right to file claims directly. The Applicant's challenge was dismissed, affirming the admission of claims by the indirect lenders as Financial Creditors.

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Issues Involved:
1. Recognition of Indirect Lenders as Financial Creditors.
2. Validity of the Deed of Hypothecation as a guarantee.
3. Admissibility of claims without default.
4. Rights of individual lenders to file claims.

Issue-wise Analysis:

1. Recognition of Indirect Lenders as Financial Creditors:
The Applicant, a Financial Creditor of Reliance Infratel Limited (RITL), challenged the decision of the Resolution Professional (RP) to recognize certain indirect lenders (R2 to R5) as Financial Creditors of the Corporate Debtor. The Applicant argued that these lenders had not disbursed any money to the Corporate Debtor and were only creditors of RCOM entities. The RP and respondents contended that the Deed of Hypothecation (DoH) executed by the Corporate Debtor included a covenant to pay and an undertaking to cover any shortfall, which constituted a guarantee under Section 126 of the Indian Contract Act, 1872. The Tribunal held that the covenant to pay in the DoH amounted to a guarantee, thus classifying the indirect lenders as Financial Creditors under Section 5(8) of the Insolvency and Bankruptcy Code (IBC).

2. Validity of the Deed of Hypothecation as a guarantee:
The Applicant argued that the DoH did not constitute a guarantee as defined under Section 126 of the Indian Contract Act, 1872. The Tribunal examined Clause 5(iii) of the DoH, which stated that the Corporate Debtor agreed to pay any shortfall or deficiency after the sale of hypothecated assets. The Tribunal concluded that this clause constituted a guarantee, as it obligated the Corporate Debtor to cover any shortfall, thereby meeting the requirements of Section 126. The Tribunal emphasized that the nomenclature of the document (DoH) was not determinative of its legal nature.

3. Admissibility of claims without default:
The Applicant contended that for a claim to be admitted in the Corporate Insolvency Resolution Process (CIRP), the debt must be in default. The RP and respondents argued that the existence of a debt was sufficient for filing a claim, irrespective of default. The Tribunal agreed with the respondents, stating that neither the IBC nor the regulations required a debt to be in default for a claim to be admitted. The Tribunal referenced Section 18 of the IBC and relevant regulations, which mandate the Interim Resolution Professional (IRP) to collate all claims submitted by creditors. The Tribunal held that the RP had rightly admitted the claims of the respondents as Financial Creditors.

4. Rights of individual lenders to file claims:
The Applicant argued that the individual lenders did not have the legal title to file claims and that only the Security Trustee had such rights. The Tribunal referred to the judgment in Essar Steel v. Gramercy Emerging Market Fund, which allowed creditor beneficiaries to file claims directly. The Tribunal held that the respondents, as lenders/creditors, were entitled to file Form C as required under Regulation 8 of the CIRP Regulations. The Tribunal noted that filing a claim in CIRP could not be construed as enforcement of security interest, and the Security Trustee could not be considered a Financial Creditor for filing claims.

Conclusion:
The Tribunal dismissed the Applicant's challenge, affirming the RP's decision to admit the claims of the indirect lenders (R2 to R5) as Financial Creditors of the Corporate Debtor. The Tribunal held that the DoH constituted a guarantee, the existence of debt was sufficient for filing claims in CIRP, and individual lenders had the right to file claims directly.

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