2022 (10) TMI 290 - Tri - Insolvency and Bankruptcy

Tribunal rejects claim as Obligor Undertaking not a guarantee or financial debt.

Axix Bank Limited Versus Mr. Nageswara Rao Administrator Reliance Capital Limited And Reserve Bank of India Versus Reliance Capital Limited

The Tribunal held that the Obligor Undertaking did not constitute a guarantee under Section 126 of the Indian Contract Act, 1872, and the claim did not ... Seeking acceptance of claim as Financial Creditor of the Corporate Debtor - Allowing the Applicant to become a member of the Committee of Creditors during the Corporate Insolvency Resolution Process (CIRP) of the Corporate Debtor - HELD THAT:- Under the ‘Obligor Undertaking”, the Corporate Debtor has not promised in the event of RHGL’S default, to perform RHFL’S obligation to pay under the Commercial Papers or discharge RHFL’S liability - The Obligor undertaking ins a merely a contingent contract, whereby the Corporate Debtor had undertaken inter alia that upon the sale of its or its affiliates shares in RNLAM, It would use the proceedings to use tither purchase the Commercial Papers from the Applicant or infuse funds into RHFL o redeem the Commercial Papers issued by RHFL. This undertaking was not premised on RHFL’S default in serving the Commercial Papers, a basic ingredient of a ‘guarantee’. In Phoenix ARC(P) Ltd. V. Ketulbhai R. Patel [2021 (2) TMI 121 - SUPREME COURT], an argument was advanced before the Supreme Court that a Pledge Agreement was a ‘guarantee’. The Supreme Court negated this contention after analysing and applying the definition of ‘guarantee’ under Section 126 of Contract Act. It held that the Pledge Agreement was not guarantee since the Corporate Debtor had not entered into a contract to perform the promise or discharge the liability of a borrower in case of his default - The principals in Phoenix ARC’s case apply here. The ‘Obligor Undertaking’ lacks a covenant/promise to perform in case of RHFL (borrower’s) in servicing the Commercial paper. It is thus not a guarantee, and it does not attract the definition of ‘financial debt’ under Section 5(8) of the Code. In the present case, it is an admitted position that there has been no disbursal to the Corporate Debtor for consideration against the time value of money - On going through the facts and submissions of the Applicant and the Corporate Debtor it is concluded that the Applicant has not established that the money was disbursed to the Corporate Debtor and hence the question of default on the part of the Corporate Debtor does not arise. The Applicant does not owed a ‘Financial Debt’ under the Code. Without proof of disbursement, the said amount cannot be claimed as financial debt, as a disbursement is a sine qua non for any debt to fall within the ambit of the definition of financial debt - Application dismissed. Issues Involved:1. Whether the Obligor Undertaking constitutes a guarantee under Section 126 of the Indian Contract Act, 1872.2. Whether the claim of the Applicant qualifies as a 'financial debt' under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (IBC).Issue-wise Detailed Analysis:I. Whether the Obligor Undertaking constitutes a guarantee under Section 126 of the Indian Contract Act, 1872:The Applicant argued that the Obligor Undertaking is in the nature of a guarantee towards the payments under the Commercial Papers. Clause 2 of the Obligor Undertaking, according to the Applicant, clearly states that the Corporate Debtor (CD) has an obligation to make payment due under the Commercial Papers upon the occurrence of the Stake Sale. The Applicant contended that the terms of a guarantee under Section 126 of the Contract Act, 1872, do not require a specified format and that the obligation of the CD to pay the dues is evident when the documents are read as a whole.The Respondent countered that the Obligor Undertaking is not a guarantee as defined under Section 126 of the Indian Contract Act, 1872. The essential attributes of a guarantee include a contract to perform or discharge the liability of a third party in case of default. The Respondent argued that the Obligor Undertaking merely required the CD to utilize proceeds from the Stake Sale to purchase the Commercial Papers or infuse funds into RHFL, without any promise to perform RHFL's obligation in the event of default. The Tribunal agreed with the Respondent, stating that the Obligor Undertaking lacks the basic ingredient of a guarantee, which is a promise to perform in case of RHFL's default. Therefore, it does not qualify as a guarantee under Section 126.II. Whether the claim of the Applicant qualifies as a 'financial debt' under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (IBC):The Applicant asserted that the amount due under the Commercial Papers is a financial debt under Section 5(8)(c) and 5(8)(i) of the IBC. They argued that the Obligor Undertaking, when read with the Commercial Papers, creates an independent payment obligation of the CD, thus constituting a financial debt. The Applicant also referred to the indemnity clause in the Obligor Undertaking, claiming that the CD's obligation to indemnify the Applicant in case of any default by RHFL qualifies as a financial debt.The Respondent argued that the Obligor Undertaking and the issuance of Commercial Papers do not constitute a financial debt under Section 5(8) of the IBC. They contended that the essential element of a financial debt is the disbursal of money against the time value of money vis-à-vis the Corporate Debtor. The Respondent cited the Supreme Court's ruling in Anuj Jain v. Axis Bank, which emphasized that a financial debt requires disbursal to the Corporate Debtor for consideration against the time value of money. In this case, there was no disbursal to the Corporate Debtor, and the disbursal was made to RHFL, an independent entity.The Tribunal concurred with the Respondent, stating that no financial debt is owed to the Applicant under Section 5(8) of the IBC. The Tribunal applied the principles from Anuj Jain and Pioneer Urban Land and Infrastructure Ltd. v. UOI, concluding that there was no disbursal to the Corporate Debtor against consideration for the time value of money. The Tribunal also noted that the indemnity clause in the Obligor Undertaking does not constitute a financial debt under Section 5(8) as it relates only to a breach of the Agreement itself and not to the Commercial Papers issued by RHFL.Conclusion:The Tribunal rejected the Applicant's claim, stating that the Obligor Undertaking does not constitute a guarantee under Section 126 of the Indian Contract Act, 1872, and the claim does not qualify as a financial debt under Section 5(8) of the IBC. The Application was disposed of as rejected.