TaxTMI 
TaxTMI 
2021 (3) TMI 580
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.... 60(5) of the Insolvency and Bankruptcy 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 fina....
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...., Emirates NBD Bank PJSC and VTB Capital PLC, who are the direct lenders and Financial Creditors of the Corporate 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 in....
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.... A copy of the response is enclosed as 'Exhibit H' to the Application. x. R1 has not disclosed the documents (including but not limited to the purported Deed of Hypothecation), 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. ....
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...., the question of such enforcement, sale, and realisation does not arise in proceedings under the Code in as much as the same is alien either during CIRP or in case of liquidation. It is expressly admitted by the RP that "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 fi....
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....e OBLIGOR who shall repay the facilities availed by it as stipulated in the facility documents and in the manner set out in the facility documents. Thus, under Clause 2, RITL has not covenanted that it shall repay/discharge the liability of the Obligor upon its default and hence the question 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 d....
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....eged by the Respondents; (iii) The events as contemplated in the latter part of Clause 5(iii) are an impossibility in view of the express prohibition contained in section 14(1)(c) of the Code which prohibits any enforcement of security interest during the period of moratorium. Since the claim for shortfall under the DoH is consequent upon 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-....
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....on 8 of the Regulations to classify a person as a Financial Creditor. xxxi. Next criteria for classification as Financial Creditor is not only the 'debt due' but it must be 'in default'. The default should be proved either by showing records available with information utility or from financial statements or from the order of Court or Tribunal that has adjudicated upon the non-payment of debt, under Regulation 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 ....
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....d on the DoH. The following are the important provisions of the DoH: "2. Covenant to pay In pursuance of the Secured Facilities and the Facility Documents and in consideration of the Secured Lenders having made available the Secured Facilities to the Obligors for the purpose and subject to the terms and conditions set out in the Facility Documents and/or the other Security Document, each of the Chargors does hereby covenant with the Security Trustee that each Obligor shall repay 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....
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....he Corporate Debtor has covenanted that each obligor shall repay the Secured Facilities (as defined in the DoH) together with interest, liquidated damages and all other amounts payable to any secured party as well as undertaking to make good any shortfall in realisation of proceeds from enforcement/disposal of security. These obligations are in the nature of guarantee. f. A guarantee has been defined under Section 126 of the Indian Contract Act, 1872 as "a contract to perform the promise, or discharge the liability, of a third 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 Bo....
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....n to the security and charged document?", the answer given was "No, there was a covenant to pay by the Corporate Debtor in the DoH, along with an undertaking to pay for any deficiency or shortfall in meeting the outstanding dues." The Applicant misunderstood the query and the answer. l. The RP merely collates the claims, vets, verifies the same and prepares the list of creditors. The admission of a claim is only an administrative process for which the RP does not require to give reason for admission/rejection of the claim. By referring to the judgement of Hon'ble 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 th....
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....of DoH) evidence that the Corporate Debtor has undertaken the obligation to pay all the outstanding debt of RCOM entities following their default as Principal Obligor. e. Relying on Section 18 of the Code and on judgement of Export Import Bank of India ...Vs... Resolution Professional of JKEPL supra, it is submitted that RP has to collate the claim based on the public announcement made under Section 13 of the Code. The claim should be as on the date of initiation of CIRP and any person having a right to claim the payment under Section 3(6) of the Code 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." 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 r....
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....antee of indemnity expressly provide for as a Financial Debt. Therefore, the claim made by the Respondents are in order. i. Referring to Clause 5(iii) of DoH supra, R2 to R5 submit that the same amounts to guarantee by the Corporate Debtor. The Respondents submitted the following analysis in support of their above contention: i) As per the first sentence of Clause 5(iii) beginning with "in the event that an Event of Default...", in the event of an Event of Default i.e., in this case, RCOM's default in making payment of the outstanding amounts under the Facility and the amount in default thereby being known, the Security Trustee is entitled to enforce the security against any of the Chargors (including the Corporate Debtor) and take 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....
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.... of whose default the guarantee is given is called the 'principal debtor', and the person to whom the guarantee is given is called the 'creditor'. A guarantee may be either oral or written." m. On a bare reading of Section 126 of the Contract Act, it is clear that under Clause 5(iii) of the DoH, the Corporate Debtor has undertaken to discharge the entire liability of a third person (in this case, RCOM) in case of its default, by a combination of a sale of the Charged Property and by a personal covenant to make payment of any shortfall or deficiency. Accordingly, there can be no doubt that Clause 5(iii) of the DoH satisfies the ingredients of a contract of guarantee under Section 126 of the Contract Act. n. Section 128 of the Contract Act provides that the liability of the surety 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 a....
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...., would be impaired if these creditor beneficiaries were not accorded right to obtain relief against the promisor", and on this basis allowed noteholders (in that case) to file a winding up petition against the borrower directly by the creditor beneficiary despite their being a security trustee, notwithstanding an express restriction under the transaction documents. q. In view of this ruling, it is submitted that the respondents are entitled to file claim before the IRP as the Financial Creditors directly. Further, the rights of security trustee under the DoH are only for the purpose of enforcement of security and this is not a case of enforcement of security. r. Under Section 14(1) of the Code, only the right to enforce the security, if any, is suspended and not the "liability to pay". In view of this, 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....
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....ainst a corporate debtor before the Adjudicating Authority when a default has occurred". In other words, it is only a Financial Creditor whose debt is in default who can file proceedings under Section 7 of the Code for CIRP to be initiated. This itself is clearly indicative that the term 'Financial Creditor' is not necessarily synonymous with default. If it were necessarily synonymous, there was no question of Section 7 of the Code requiring a 'Financial Creditor' to also prove a 'default' for initiation of CIRP. It is a patently misconceived contention that after the CIRP is initiated at the instance of a Financial Creditor whose financial debt was in default, only such other persons whose financial debts are in default are entitled to file claims with the IRP/RP for the status of Financial Creditors in the CIRP. This also becomes clear from 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 "finan....
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....btor by virtue of Clauses 2, 3 and 5(iii) of DoH to pay the entirety of the amounts of RCOM's default which fulfills the ingredients of a guarantee and renders the same a 'financial debt' under Section 5(8)(i) of the Code. It is submitted that the fundamental distinction between the facts of the present case and Anuj Jain (supra) is apparent from para 36.3, 43, 47.2 of the judgment in Anuj Jain (supra). z. The Applicant placed reliance upon certain legal commentaries containing sample drafts/specimens of deeds of hypothecation to contend that words similar to clause 5(iii) of the DoH are also to be found in such sample drafts/specimens. On this basis, the Applicant contended that if words similar to clause 5(iii) of the DoH are being provided by a borrower then upholding Respondents' contention that the said words constitute a guarantee, in law, would result in the 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....
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.... Debtor. iii. The Master Security Trustee Agreement dated 04.03.2011 was entered between RCOM group entities and ATSL pursuant to which ATSL was appointed as Common Security Trustee with respect to the security created on the assets of RCOM entities including the Corporate Debtor. iv. The Lenders who have advanced facilities to RCOM entities and who wish to have pari passu benefit of the same security could accede to the MSTA while signing the Deed of Accession. All the lenders of RCOM entities including the Applicant have acceded to MSTA, which means that all the lenders have pari passu sharing of security amongst the secured lenders. v. In terms of the Loan Agreement, Facility Agreement and the MSTA, the RCOM group entities in their capacity as Chargors executed the Deed of Hypothecation in favour of ATSL. vi. Even though the DoH is named as such, it is categorically stated 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. ....
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....antee, the said guarantee clearly falls within the four corners of Section 5(8)(a) and 5(8)(i) of the Code and the debt is undoubtedly a financial debt as provided under the Code. xi. The contention of the Applicant that there is no disbursal of any amount or loan to the Corporate Debtor and hence there is no financial debt is untenable. Here the loans were disbursed to RCOM entities and the Corporate Debtor had given guarantee in favour of the Respondents. xii. When there is a Financial Debt due, irrespective of the fact that the same is defaulted or not, a claim can be made in the CIRP proceedings. For making a claim under CIRP, it is not required that the said debt should have been defaulted. We accept the contention of the Respondents that they were within their rights in filing the claim before the IRP as Financial Creditors. In this regard, the reliance of the Applicant on the judgement of Swiss Ribbons supra is totally misplaced since Swiss Ribbons 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 ....
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.... to pay the debts and the Respondents are right in filing a claim as a Financial Creditor. xvi. If the proposition of the Applicant that no claim can be made before the IRP/RP, until the debt is defaulted is accepted, then except the petitioning creditor whose petition has been admitted for the reason that there is debt and default, the other debtors whose debts are not defaulted by the Corporate Debtor cannot file claim and that would lead to an unenviable proposition that only the defaulted debts of the creditors can be claimed and the rest will end up in a remediless situation. The said proposition of the Applicant is entirely foreign to the Code. In this regard, the reliance of the Applicant on the decision of the Hon'ble Supreme Court in the case of Swiss Ribbon (supra), Para 63 to 65 is totally misplaced since the paras referred deals with the differentiation in the triggering of the CIRP by Financial Creditors under Section 7 and Operational Creditors under Section 8 & 9 of the Code and not with the filing 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 ....
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.... of expenses for sale of the hypothecated properties and if there is any shortfall/deficit in the expenses which the Security Trustee could not repay from the sale proceeds that shortfall/deficiency has to be collected from the Chargors and it does not relate to the deficiency/shortfall that will take place after adjusting the sale proceeds to the debt recoverable. The Ld. Counsel submitted that in view of this, there is no guarantee as provided under Section 126 of the Contract Act. Without prejudice to the above submission, it is further submitted that there is no occasion for the Security Trustee to realize the hypothecated properties in view of the fact that moratorium has triggered on admission of the CIRP petition against the Corporate Debtor as provided under Section 14(1)(c) of the Code. It is further submitted that the security interest as defined under Section 3(31) of the Code does not have any effect as long as the moratorium continues. In this case, since moratorium has already kicked in there is no question of realization of 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....