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2021 (3) TMI 580
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.... Code, 2016 (the Code) seeking the following prayers against the Respondent/Resolution Professional and certain other Financial Creditors of the Corporate Debtor: a. To declare the decision of the resolution professional of the Corporate Debtor for recognizing the Indirect Lenders as the Financial Creditors of the Corporate Debtor as null and void; b. To de-recognize / declassify / delete the Indirect Lenders as Financial Creditors of the Corporate Debtor; c. To prepare a reconstituted committee of creditors comprising of Financial Creditors of the Corporate Debtor as mandated under Section 21 of the IB Code, 2016; d. To perform his duties in accordance with the relevant provisions and regulation of the IB Code, 2016; e. To defer any meeting of committee of creditors of the Corporate Debtor till the exercise as set out in terms of prayer(s) c) and d) above is accomplished; f. In the event, any meeting of committee of creditors of the Corporate Debtor is held, to keep the resolutions passed in the said meeting, in abeyance till the outcome of the present application; g. Pending final hearing and disposal of the application, ad-interim relief(s) in terms of prayer (e) a....
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....ate Debtor under the Facility Agreements, challenged the classification of certain lenders, who are purportedly claiming to be the Financial Creditors of the Corporate Debtor on the basis of a purported Deed of Hypothecation. The Respondents have not produced the Deed of Hypothecation. iii. The RP convened the second meeting of the CoC on 09.07.2019, wherein, in the agenda notes, the list of Financial Creditors was placed, which did not contain the names of the Indirect Lenders and the same is enclosed as 'Exhibit C' to the Application. iv. R1 vide email dated 31.07.2019, while circulating agenda notes of 3rd meeting of the CoC, revised the list of Financial Creditors containing the names of indirect lenders who were the creditors of RCOM and RTL. The agenda did not provide any basis for admitting the indirect lenders as Financial Creditors of the Corporate Debtor. A copy of the agenda is enclosed as 'Exhibit D' to the Application. v. In the 3rd meeting of the CoC held on 02.08.2019, the Applicant asked R1 to explain the basis for admitting the indirect lenders as the Financial Creditors of the Corporate Debtor. R1 responded by saying that "these claims were under verificatio....
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....ation), on which he has relied upon for admitting the Indirect Lenders as the Financial Creditors of the Corporate Debtor. It is submitted that the understanding of R1 in admitting the Indirect Lenders as the Financial Creditors of the Corporate Debtor is erroneous and unsustainable, for the reason that the Corporate Debtor had executed the Deed of Hypothecation merely to secure the loans disbursed by the lenders of RCOM, RTL and Reliance Communications Infrastructure Limited (together as "RCOM Entities"). xi. At no stage, money was lent / disbursed by the Indirect Lenders to the Corporate Debtor. Hence, the Indirect Lenders cannot be classified as Financial Creditors of the Corporate Debtor. It is not the case that the Indirect Lenders have disbursed the debt along with interest to the Corporate Debtor against the consideration for time value of money or the Corporate Debtor has borrowed any amount from the Indirect Lenders under any other transaction having the commercial effect of borrowing. xii. No counter indemnity obligation in respect of a guarantee, indemnity, bond, documentary, letter of credit has been issued by the Corporate Debtor in favor of the Indirect Lenders. R....
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....there was no covenant of guarantee". Clearly these claims were neither made nor admitted on any assertion of the DoH containing any covenant of guarantee. xvii. Form - C filed by R2 to R5 clearly establishes the following: (i) RCOM Lenders never construed 'Clause 5(iii)' of the DoH to be in the nature of a guarantee but only as an undertaking to pay the amount of RCOM by taking steps to realise and sell security hypothecated. (ii) Claims filed by R4 and R5 describe RITL as being one of the obligors for repayment of the total outstanding amount under the Facility Agreements, by enforcing the security interest and liquidating the hypothecated assets to ensure repayment. This right to call upon RITL (through the Security Trustee) to liquidate the hypothecated assets, was understood by R4 and R5 to comprise of the 'claim against RITL' in their capacity as Financial Creditors of RITL. (iii) Similarly, R2 and R3 have, in the claims filed with the IRP, stated that RITL has undertaken to merely ensure repayment of outstanding amounts under the facility. It is further stated that RITL is under an obligation to take steps to liquidate the hypothecated assets in order to ensure repaym....
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....uestion of construing the same as a contract of guarantee does not arise. In any event, as stated above, reliance on Clause 2 has been given up by the Respondents during the course of hearing though pleaded in the application/reply. xxiii. Clause 5 is titled as 'Chargor's Covenants, Representations and Warranties'. The same pertains to the procedure and obligation for creation of charge, preservation of charged assets, and enforcement, sale and realization thereof and the right of the Security Trustee or the Receiver to recover the expenses incurred for any of the above purposes. It is not and cannot be construed as a covenant to pay or discharge the liability of RCOM on default or that it creates a coextensive liability on RITL for the dues of RCOM. This is more so since such an interpretation would be in the teeth of an express covenant to pay under Clause 2, whereby RITL has not agreed to discharge any liability of RCOM. xxiv. Clause 5(iii) contains the process for enforcement of security by the security trustee or the Receiver. (i) The first part of Clause 5(iii) gives a right to the trustee in the event of default and a receipt of instructions from the lender to take pos....
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....n enforcement of security interest thereunder, at present, there is no shortfall and there cannot in any event arise a shortfall upon sale of hypothecated property as moratorium has been declared under section 14 of the IB Code; and (iv) Clause 5(iii) being a clause in relation to enforcement of security, is alien to the Code and therefore cannot be construed to give rise to any liability or debt in any event whatsoever. xxvi. Without prejudice to the aforesaid, a reading of the above also establishes that these lenders of RCOM have failed to satisfy the conditions which are sine qua non to classify them as Financial Creditors of RITL. Regulation 8 of the Regulations requires a person who claims to be a Financial Creditor to submit such a claim with proof in Form-C of the Schedule to the Regulations. Regulation 8 and Form-C both necessitate such a person to submit proof and evidence to establish the following: (i) Status as a Financial Creditor [Section 5(7) of the Code]: This necessarily requires that a financial debt is owed to such person. A financial debt under Section 5(8) means that there is a debt and secondly, such debt has been disbursed against consideration for tim....
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....ion 8(2) of the Regulations. Therefore, it is submitted that for a claim of creditor to be accepted under Regulation 8(2), he is required to satisfy the mandatory criteria as specified therein as a proof of claim, failing which the claim cannot be accepted by the RP. In the present case the lenders of RCOM have not satisfied this requirement. xxxii. It is submitted that the scheme of the Code is not to satisfy the 'existence of claim' but the 'existence of the debt due and payable' and the same has remained unpaid. This criterion has also not been satisfied. xxxiii. Neither the lenders of RCOM nor the RP have shown that the monies claimed by the charge-holders i.e., the lenders of RCOM under the DoH is a 'debt' within the meaning of Section 3(11) of the Code and thus, they cannot be classified as Financial Creditors of RITL. xxxiv. The nature of transactions with Lenders of RCOM based on the DoH which are documents creating a security interest, in any event do not satisfy the requirements and criteria as prescribed in the definition of a 'financial debt' under Section 5(8) of the Code. xxxv. The Respondents as individual lenders are not entitled to file claim with the RP. S....
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....ay the Security Facilities availed by it together with interest, liquidated damages, premia on prepayment, financing charges, remuneration payable to the Security Trustee, fees payable to any Secured Party, costs, charges, expenses and all other monies stipulated in the relevant Facility Documents in the manner set out therein and shall duly observe and perform all the terms and conditions of the relevant Facility Documents and/or the other Security Documents." 3. Charge In pursuance of the aforesaid, each of the Chargors does hereby hypothecates as and by way of a first ranking pari passu charge to the Security Trustee, acting in trust for and for the benefit of the Secured Parties, for the purpose of securing the due discharge by the Obligors of all their obligations in connection with the Secured Facilities, all of its following assets: ....." Section 5(iii) of the DoH provides: "(iii) in the event that an Event of Default has occurred under a Facility Document, the Security Trustee or its nominees shall, on receiving instructions from the Secured Lender/s, in accordance with Section 4 of the Security Trustee Agreement and after providing 7 (seven) Business Days' ....
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.... person in case of his default." Since the obligations undertaken by the Corporate Debtor under DoH constitutes a contract to perform or discharge liability of a third party in case of default by the borrowers, it constitutes a guarantee and has been admitted as a financial debt under Section 5(8)(i) of the Code. It is submitted that the Code does not distinguish between direct and indirect lending and any such classification is not envisaged under the provisions of the Code. Hence these transactions will fall under the ambit of financial debt and accordingly the Respondents' claims were rightly admitted. g. Relying on the judgement of the Bombay High Court in the case of Intesa Sanpaola S.P.A. ...Vs... Videocon Industries (2013 SCC OnLine Bom 1910), it is submitted that undertaking to pay is a guarantee. Therefore, the claims of the Respondents have rightly been admitted as Financial Creditors. For initiation of CIRP, under Section 7/9/10 of the Code, debt and default is a must, however, for filing a claim before the RP in CIRP proceedings, default is not a requirement, the existence of debt is enough. As per Section 3(6) of the Code, the definition of claim is a very wide term....
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....e Supreme Court in the case of Swiss Ribbon Pvt Ltd ...Vs... Union of India & Ors supra it is submitted that the RP has only verified the claim and he has not discharged any adjudicatory role. m. It is submitted that even though the Security Trustee has the right to enforce security under the DoH, the DoH does not take away the right of the Respondents to file claim before the RP that too in the CIRP proceedings. Filing of claim before the RP is not enforcement of security. n. The judgement of Hon'ble Supreme Court in Anuj Jain ...Vs... Axis Bank Ltd (2020 SCC OnLine SC 237) is not applicable to the facts of the present case. Succinctly put, the DoH contains an undertaking/liability to pay on behalf of the Corporate Debtor, which was not the case in Anuj Jain supra. 7. Submissions of R2 to R5. a. RCOM group entities have availed several financial facilities from various lenders and all the assets of all RCOM group entities were charged in favour of various lenders who have advanced these facilities. A Master Security Trustee Agreement (MSTA) dated 04.03.2011 was entered into between RCOM group entities and Axis Trustees Services Limited (ATSL) (Security Trustee) pursuant....
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....as to whether there is a default or not is not to be seen." a) The definitions of 'claim', 'creditor', 'debt', 'financial debt' and 'Financial Creditor' under the Code are as follows: i) Section 3(6): "claim" means- i. a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured; ii. right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured." ii) Section 3(10): "creditor" means any person to whom a debt is owed and includes a Financial Creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree holder"; iii) Section 3(11): "debt" means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt"; iv) Section 5(8): "financial debt" means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes- (a) ...; ... (b) any counter-indem....
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....e steps to dispose of the Hypothecated Property (which includes the Charged Property of the Corporate Debtor). ii) as per the second sentence of Clause 5(iii) beginning with "Notwithstanding any pending suit or other proceeding each of the Chargor undertakes......", notwithstanding any suit or proceeding, each of the Chargors (including the Corporate Debtor) who have provided security, are obligated to hand over possession of the Charged Property to the Security Trustee in the manner provided therein. iii) as per the third sentence of Clause 5(iii) beginning with "Each of the Chargors further agrees to...", every Chargor (including the Corporate Debtor) has agreed to accept the Security Trustee's account of the expenses, sales and realizations and "to pay on demand by the Security Trustee and/or the Receiver any shortfall or deficiency thereby shown." It is submitted that "shortfall" or "deficiency" clearly refers to a shortfall or deficiency in realizing the amount in default from RCOM under the Facility Agreement. j. Under Clause 5(iii) of the DoH, the Corporate Debtor as the Chargor, has covenanted to pay the entire amount in default from RCOM from: (i) sale proceeds of....
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....y is coextensive with that of the principal debtor unless otherwise provided by the contract. Clause 5(iii) of the DoH also satisfies this ingredient. As a result of Clause 16(viii) of the DoH, in the event of a default from RCOM, the Security Trustee can take steps against the Corporate Debtor for recovery of the amounts in default from RCOM, without having any obligation to first proceed against RCOM. Accordingly, there can be no doubt that the liability on the Corporate Debtor under the DoH to make payment of the amounts in default from RCOM is co-extensive with RCOM, absolute and immediate upon RCOM's default. o. In the present case, it is an admitted position that RCOM has defaulted in repayment of amounts under the Facility Agreement. Accordingly, the amounts in default from RCOM are crystallized for the purposes of the first sentence of Clause 5(iii) of the DoH. Under the DoH, this liability is to be discharged by the Corporate Debtor by sale of the Charged Property and by a personal covenant to make payment of any shortfall or deficiency. It is also an admitted position that there can be no sale of the Charged Property on account of the moratorium imposed under Section 1....
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....s, it is submitted that moratorium will not kick in or affect the liability of the Corporate Debtor to pay under the DoH. s. Reliance is placed on the judgement of Hon'ble Supreme Court in the case of Committee of Creditors of Essar Steel India Ltd supra, to say that the successful Resolution Applicant starts running of the business of the Corporate Debtor on a fresh slate, and in view of this, all the creditors of the Corporate Debtor have to submit their claims before RP, so that the claims and pay out can be decided by the CoC of the Company under CIRP, so that the Successful Resolution Applicant can start the business on fresh slate on approval of the resolution plan by the Adjudicating Authority. t. The fact that moratorium precludes the sale of the charged assets cannot mean that the Corporate Debtor, can entirely escape its liability for payment when there are no recovery from the sale of the charged asset, the entirety of the amount in default from the RCOM entities to the Respondents would undoubtedly be rendered a shortfall or deficiency and it is the liability of the Corporate Debtor to make the payment under DoH. The fact that the liability cannot be enforced agai....
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.... Section 21(2) of the Code which provides that the "[t]he committee of creditors shall comprise all Financial Creditors of the corporate debtor" without any requirement of the Financial Creditor's debt being in default. It is submitted that the Applicant's contention does significant violence to the definition of "Financial Creditor" and "financial debt" under the Sections 5(7) and 5(8) of the Code and also Section 21(2) of the Code, none of which provide for the element of 'default'. v. The reliance of the Applicant on the decision of the case in Swiss Ribbon supra, is completely misplaced, since it is relating to existence of default of a debt for admission of Section 7 petition and not for admission of claim by IRP. w. Relying on the judgement of Hon'ble NCLAT in Export Import Bank of India (supra), it is submitted that any person who has right to claim payment as defined under Section 3(6) is supposed to file the claim whether matured or unmatured. The question as to whether there is a default or not is not to be seen. Further it was held that maturity of claim or default of claim or invocation of guarantee for claiming the amount has no nexus with filing of claim pursuan....
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....he conclusion that borrowers are guaranteeing their own debts under the sample drafts/specimens of deeds of hypothecation, which can never be the case. However, this contention is merely a red-herring and is entirely misconceived. The DoH is a document in writing between the parties and has to be interpreted on its own terms and not otherwise. aa. Without prejudice to the aforesaid, it is submitted that even otherwise the Applicant's contention based on the so-called sample drafts/specimens of deeds of hypothecation is totally misconceived. It is submitted that in a deed of hypothecation provided by a borrower where the language is consistent with Clause 5(iii) of the DoH, it is axiomatic that the borrower can never be said to be providing a guarantee since perforce a guarantee can only be provided by a third person and not by the borrower himself. However, this would not detract from the position that even in the context of the borrower, language consistent with Clause 5(iii) of the DoH would ex facie constitute an undertaking by the borrower to pay the entire debt by sale of the hypothecated property and by a personal covenant to make payment of any shortfall or deficiency. The A....
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....ed in Section 5(iii) thereof that if the Event of Default has occurred, the security trustee or its nominees on receiving instructions from secured lenders would be entitled to take charge or/and possession etc. or otherwise dispose of or deal with the hypothecated properties. The Security Trustee or its nominee is also entitled to enforce, realize, settle and compromise, etc. vii. Another important clause is that "each of the chargors" further agrees to accept the security trustees account of sales and realization, as sufficient amount of proof realized and relative expenses and to pay on demand by the Security Trustee or the receiver any shortfall or deficiency thereby shown. viii. From the above, it is clear that when the amount realized by disposing or dealing with the hypothecated assets, if there is any shortfall or deficiency, to meet the claim of the lenders such shortfall is undertaken to be paid or guaranteed to be paid by the Chargors. ix. As per Section 126 of the Contract Act, a contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of default. Here, the Corporate Debtor has undertaken to pay the deficit/de....
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....bbons deals with the debt and default for triggering CIRP process and the issue of limitation. In this respect, it is beneficial to refer Section 18 of the Code wherein it is provided that: "(1) the IRP shall perform the following duties namely: (a)... (b) receive and collate all the claims submitted by creditors to him, pursuant to the public announcement made under section 13 and 15 (c) constitute a Committee of Creditors; ............" xiii. Further Chapter IV of IBBI (Insolvency Resolution Process for Corporate Persons), Regulations 2016 - Regulations 7 to 14 deals with the claims by Operational Creditors, Financial Creditors, Workmen, Employees etc. Regulations clearly provides that a person claiming to be a creditor (either financial or operational, etc.) shall submit proof of claim to the IRP. xiv. Neither the Section of law nor the Regulation says that the claim of a debt can be made only when there is a default. The debt and default would be a sine qua non for the admission of a Section 7 or Section 9 or Section 10 petition. But for filing claim before IRP, mere debt is sufficient and it would not be necessary that the debt has been defaulted. In view ....
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....g of claim with the RP. Para 65 of the Hon'ble Supreme Court's case in Swiss Ribbon supra is extracted below: "65. ...Whereas a claim gives rise to a debt only when it becomes due, a default occurs only when a debt becomes due and payable and is not paid by the debtor. It is for this reason that a Financial Creditor has to prove default as opposed to an operational creditor who merely claims a right to payment of a liability or obligation in respect of a debt which may be due. When this aspect is borne in mind, the differentiation in the triggering of insolvency resolution process by Financial Creditors under Section 7 and by operational creditors under Sections 8 and 9 of the Code becomes clear." The submission of the Applicant that the ratio decided in Export Import Bank of India (supra) is contrary to Swiss Ribbons' case does not hold water. xvii. In respect of the contention of the Applicant that the individual lenders are not entitled to file claims with the RP on the guise that the Respondents do not have a legal title to the security under DoH but only have a beneficial interest, the legal rights having been vested with the Trustee, we are of the view that the judge....
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....the security interest by the Security Trustee. It is further submitted that in case the resolution plan then pending for approval of the Bench is rejected, the Respondents as Creditors can either relinquish their security interest and stand in the que as creditors or can prefer to stay outside the insolvency proceedings and realize the hypothecated security. 10. As far as the above argument is concerned, we are unable to accept the contention that the said sentence of Clause 5(iii) of DoH is only relating to the expense of sales and realizations. The proper meaning according to us is that on default, the Security Trustee is entitled to sell and realize the hypothecated assets and on such sale and realization of hypothecated assets the Security Trustee will account for each and every realization, deduct the expenses of sale and the balance amount available in his hands will be appropriated to the loan due and after such appropriation, still if any balance is pending towards the loan, then the Chargors undertakes/guarantees to pay the deficit amount of the loan. This is what our understanding is. In view of this, we hold that the submission made by the Ld. Counsel for the Applicant ....