TaxTMI 
TaxTMI 
2023 (7) TMI 311
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....nts by these two Appeals have challenged two orders passed by the Adjudicating Authority (National Company Law Tribunal), Mumbai Bench, Court-III dated 31.03.2023. By first order dated 31.03.2023, I.A. No. 1311/2022 filed by the Appellant in C.P No. 2915/IBC/MB/2019 has been rejected and by the second order of the same date i.e. 31.03.2023, I.A. No. 1143/2022 filed by the Resolution Professional for approval of the Resolution Plan has been approved and the Resolution Plan submitted by Respondent No.3 has been approved by the Adjudicating Authority. Appellant aggrieved by the aforesaid orders has come up in these Appeals. The brief facts of the case giving rise to these Appeals are: i. Yes Bank Ltd. Granted a term loan of INR 150 Crores (Term Loan - I) to BILT Graphic Paper Products Ltd. (BGPPL/Principal Borrower) on 01.09.2015. A second term loan of INR 250 Crore (Term Loan - II) was granted to BGPPL on 04.05.2016. ii. Security for the loans was entrusted in favour of the Security Trustee namely Vistara ITCL (India) Ltd. Ballarpur Industries Limited (Corporate Debtor) in order to secure the loan facility availed by BGPPL created a mortgage with exclusive charge in....
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.... acres situated at Choudwar, District Cuttack, Orissa. xiv. The notice mentioned that Finquest Financial Solutions Pvt. Ltd. has emerged as Successful Resolution Applicant of the Corporate Debtor, whose Resolution Plan envisages sale of this land and proceeds shall be provided to the Financial Creditors - members of the CoC of the Corporate Debtor. The Appellant who has secured interest in the aforesaid asset and who had already filed a claim in the CIRP and his claim was admitted in the category of 'Other Creditors' with nominal value of Re.1, filed an I.A. No. 1131 of 2022 praying for rejection of the revised Resolution Plan submitted by Finquest Financial Solutions Pvt. Ltd. with other prayers. xv. The Adjudicating Authority issued notice on the application filed by the Appellant. A reply was filed by the Resolution Professional to the I.A. No. 1131 of 2022 refuting the claim of the Appellant/Applicant. In the reply, the Resolution Professional submitted that object of the IBC is to promote the resolution and not liquidation of the Corporate Debtor. In the reply filing of claim of the Appellant in Form C was mentioned. It was submitted that there was not defaul....
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....fore the Adjudicating Authority. The security interest of the Appellant has to be protected. In event, the security interest of the Appellant is auctioned, the protections of the Appellant shall come to an end. The security interest of the Appellant has not been discharged in any know process of law. The Appellant has right to realize its security. Learned counsel for the Appellant although submitted that as on date no default has been committed by the Principal Borrower i.e. BGPPL in repayment of loan, default may come in future leaving the Appellant unprotected. Learned counsel for the Appellant has placed reliance on judgment of Hon'ble Supreme Court in "M/s. Vistra ITCL (India) Ltd. and Ors. vs. Mr. Dinkar Venkatasubramanian and Anr., Civil Appeal No. 3606 of 2020, decided on 04.05.2023". Learned counsel submit that "Vistra ITCL (India) Ltd." was a case where security interest of the Appellant - M/s Vistra ITCL (India) Ltd. was sought to be relinquished. The Hon'ble Supreme Court held that the Appellant shall be entitled to be treated as a secured creditor and directed the Successful Resolution Applicant to protect the security interest of Vistra ITCL over the pledged share....
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....l Creditor. 5. Shri Ankur Mittal, learned counsel for appearing for the CoC submits that with regard to Term Loan-I, no claim was filed by the Appellant and Appellant had filed claim only with regard to Term Loan-II on 19.10.2022. The Resolution Professional rejected the claim of the Appellant as Financial Creditor which rejection was never challenged. The Resolution Professional allocated notional value of Re.1 to the Appellant, which also was never challenged. In "Vistra ITCL (India) Ltd." case, which has been relied by the Appellant, there is challenge to non-inclusion of Appellant in the CoC. 6. Shri Krishnan Venugopal, learned senior counsel appearing for the Successful Resolution Applicant refuting the submission of learned counsel for the Appellant contends that the Code permit resolution of the Corporate Debtor. The Appellant only having a security interest is not interested in resolution of the Corporate Debtor. There is no default committed by the Principal Borrower, the Appellant cannot be permitted to secure himself in unlikely default of the Principal Borrower. Acceptance of argument of the Appellant shall lead to hydra head propping which is not permissible. The....
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.... to realize its security. The security interest of the Appellant cannot be lost. There is no unjust enrichment on the part of the Appellant. Clause 11 of the Loan Agreement gives additional right to the Lender but it does not affect any security. 8. We have considered the submissions of learned counsel for the parties and perused the record. 9. Before we proceed to consider the rival submissions of counsel for the parties, it is necessary to notice few provisions of the I&B Code and CIRP Regulations, 2016, which delineates the Scheme of the Code. Section 3(31) of the Code defines 'security interest' in following words: "3(31). "security interest" means right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person: Provided that security interest shall not include a performance guarantee;" 10. After admission of application under Section 7, moratorium is declared under Se....
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....anner of filing claims by Financial Creditor, Operational Creditor and Other Creditors. Regulation 37 deals with 'Resolution Plan' which we shall notice hereinafter. 14. From the submissions of the parties and materials on record following facts are undisputed: (i) The Term Loan facility was extended by Yes Bank to BGPPL, the Principal Borrower. The Corporate Debtor created a charge on its immovable property by mortgaging the immovable property at Choudwar, Orissa for securing Term Loan-I and Term Loan-II. A corporate guarantee was also executed by the Corporate Debtor to secure Term Loan-II on 22.06.2016. (ii) The Principal Borrower has not committed any default in repayment of its loan to the Financial Creditor. (iii) In response to the public announcement by the IRP, the Appellant filed its claim on 05.02.2020 in Form 'C' for an amount of INR 133,24,05,045/-. The Resolution Professional on 19.10.2020 communicated to the Appellant that since there is no default by Principal Borrower, the Appellant's claim cannot be accepted as Financial Creditor and Appellant's claim is categorized in the category of 'Other Creditors'. (iv) In the final list....
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.... Resolution Plan of the Corporate Debtor to the detriment of the Applicant/ Secured Creditor, as per the observations and findings of the Hon'ble Supreme Court in the matter of Jaypee Kensington Boulevard Apartments Welfare Association & Ors. vs. NBCC (India) Ltd. & Ors, (Civil Appeal No. 3395 of 2020); (e) Direct the initiation of Liquidation proceedings of the Corporate Debtor in terms of the IBC in view of the order allowing prayer (b); (f) Pass any such other or further orders as this Hon'ble Tribunal may deem fit and proper in the interest of justice." 16. The Resolution Professional did not accept the claim of Appellant as Financial Creditor rightly. Law in this context is well settled. We may refer to judgment of Hon'ble Supreme Court in "Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. vs. Axis Bank Ltd. & Ors., (2020) 8 SCC 401" where the Hon'ble Supreme Court had occasion to consider the role and status of Financial Creditor and a Creditor who has only security interest. Para 50, 50.1, 50.2 and 51 are as follows: "50. A conjoint reading of the statutory provisions with the enunciation of this Court in Swiss Ribbons....
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....rest over the assets of corporate debtor (like the instant third party securities), even if falling within the description of 'secured creditor' by virtue of collateral security extended by the corporate debtor, would nevertheless stand outside the sect of 'financial creditors' as per the definitions contained in subsections (7) and (8) of Section 5 of the Code. Differently put, if a corporate debtor has given its property in mortgage to secure the debts of a third party, it may lead to a mortgage debt and, therefore, it may fall within the definition of 'debt' under Section 3(10) of the Code. However, it would remain a debt alone and cannot partake the character of a 'financial debt' within the meaning of Section 5(8) of the Code. The respondent mortgagees are not the financial creditors of corporate debtor JIL 51. Indisputably, the debts in question are in the form of third party security; said to have been given by the corporate debtor JIL so as to secure the loans/advances/facilities obtained by JAL from the respondent-lenders. Such a 'debt' is not and cannot be a 'financial debt' within the meaning of Section 5(8) of the Code; and hence, the respondent-lender....
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....l and as secured or unsecured. Full freedom and discretion has been given, as has been seen hereinabove, to the Committee of Creditors to so classify creditors and to pay secured creditors amounts which can be based upon the value of their security, which they would otherwise be able to realise outside the process of the Code, thereby stymying the corporate resolution process itself." 20. We may also notice, at this stage, the provisions of Regulation 37 of the CIRP Regulation, 2016, which provides as follows: "37. Resolution plan. - A resolution plan shall provide for the measures, as may be necessary, for insolvency resolution of the corporate debtor for maximization of value of its assets, including but not limited to the following:- (a) transfer of all or part of the assets of the corporate debtor to one or more persons; (b) sale of all or part of the assets whether subject to any security interest or not; [(ba) restructuring of the corporate debtor, by way of merger, amalgamation and demerger;] (c) the substantial acquisition of shares of the corporate debtor, or the merger or consolidation of the corporate debtor with one or mor....
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.... can be dealt with, modified, satisfied and there is no exclusion to the resolution plan with regard to dealing of the security interest. 22. The above can be explained by taking example of a Financial Creditor. Financial Creditors may also have security interest in the assets of the Corporate Debtor. Section 30 of the Code, as amended from time to time, provides for payment to Operational Creditor(s) as well as dissenting Financial Creditor(s), which payment shall not be less than the amount which they are entitled to receive under Sub-section (1) of Section 53 in event of liquidation of the Corporate Debtor. Insolvency resolution process and liquidation are two different concepts with two different consequences. When in the insolvency resolution process claim of Financial Creditors are dealt with, there is no cap to the effect that they are entitled to receive the amount equivalent to their debt which is owed by the Corporate Debtor. Thus, despite Financial Creditor having security interest in the assets of the Corporate Debtor, they can be dealt with in the resolution plan in any manner as per the commercial wisdom of the CoC. When the security interest of Financial Creditor ....
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....etermination have been framed by the Hon'ble Supreme Court in Para 18. In Para 18.11(K)(i) following issue was noticed: "18.11(K) (i) As to whether Clause 23 of Schedule 3 of the resolution plan providing for extinguishment of security interest of lenders of JAL could not have been approved by the Adjudicating Authority?" 25. Point (K) was dealt by the Hon'ble Supreme Court in Paras 248 to 261, which discussion is relevant in the present case. Several paragraphs with regard to discussion on point (K) have been relied by learned counsel for both the parties in the present case. In Para 251 of the judgment, the Hon'ble Supreme Court noticed the relevant Clause 23 of Schedule 3 in the plan, which is to the following effect: "251. In the resolution plan, apart from various stipulations in regard to the land of JIL and creation of two SPVs with transfer of certain parcels of land, the resolution applicant stated in Clause 23 of Schedule 3 relating to 'reliefs and concessions' as under: - "23. The JAL Lenders Mortgaged Land shall continue to be vested in the Corporate Debtor free of any mortgage, charge and encumbrance."" 26. The Hon'ble Supreme Court has....
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....03.03.2020, and corrected it to '758' but, did not examine the consequences thereof. In other words, while making the correction on 17.03.2020, the Adjudicating Authority failed to advert to the relevant question as to what would be the proper order as regards the remaining 100 acres of land, if only 758 acres was released in terms of the judgment in Anuj Jain (supra). 259.2. The fact that the Adjudicating Authority dealt with this segment rather cursorily is yet further seen from the part of the table reproduced hereinabove where, while making reference to the mortgages in favour of the lenders of JAL, an incorrect cross-reference was made to Clause 1 of Schedule 3 of the resolution plan. This error was also corrected in the order dated 17.03.2020 and correct reference was made to Clause 23 of Schedule 3 but, again, the implication of this correction totally escaped the attention of the Adjudicating Authority. 259.3. As noticed, in the said Clause 23, a fleeting suggestion on the part of the resolution applicant had been that 'JAL lenders mortgaged land shall continue to be vested in the corporate debtor free from any mortgage, charge and encumbrance'. The Adjudi....
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....not taken as part of the resolution process. It is submitted that since the security interest was not taken as part of the resolution process, it could not have been extinguished. Whereas in the present case, security interest of the Appellant was part of the resolution process, hence, can very well be extinguished. 29. From the facts of the present case, it is clearly noticeable that security interest of the Appellant was part of the CIRP process since the Appellant has filed its claim on 05.02.2020 in Form 'C' and its claim although was rejected as Financial Creditor but was accepted as 'Other Creditor' with notional value of Re.1. The Resolution Professional has communicated to the Appellant on 19.10.2020 that since no default has been committed by the Principal Borrower against its claim of Rs.133 Crore and odd, nominal value of Re.1 only is admitted. It is also noticeable that the Appellant at no point of time challenged the admission of its claim by Resolution Professional as 'Other Creditor'. The main distinguishing feature of present case with that of "Jaypee Kensington" is that in "Jaypee Kensington" security interest of the Lender of that case was not part of the CIPR ....
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....e judgment of "Anuj Jain vs. Axis Bank Ltd." (supra). Hon'ble Supreme Court in Para 9 noticed the issues raised and observed that two-fold answers can be given to the problem. First was to treat the Secured Creditor as a Financial Creditor, which according to the judgment of the Hon'ble Supreme Court may require reference to a larger bench. Hence, the Hon'ble Supreme Court proceeded to the Second option under which the Hon'ble Supreme Court held that Appellant was entitled to retain the security interest in the pledged shares, which means was entitled to retain the security proceeds on the sale of the said pledged shares. In Para 9 following was held: "9. Thus, we are presented with a difficult situation, wherein, Appellant No.1 - Vistra, a secured creditor, is being denied the rights under Section 52 as well as Section 53 of the Code in respect of the pledged shares, whereas, the intent of the amended Section 30(2) read with Section 31 of the Code is too contrary, as it recognises and protects the interests of other creditors who are outside the purview of the CoC. To our mind, the answer to this tricky problem is twofold. First is to treat the secured creditor as a finan....
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.... of Article 141. 35. A third-party security interest holder is entitled to retain the security proceeds on the land of security interest under Section 52 of the Code. As noted above, Section 52 and 53 becomes applicable only in Liquidation Proceeding and reference of Section 53 under Section 30(2) is for the purpose of computing the payment to Operational Creditors and dissenting Financial Creditors to which they may be entitled under Section 53. 36. We, thus, accept the submission of learned counsel for the Respondent that judgment of Hon'ble Supreme Court in "Vistra ITCL (India) Ltd." and direction issued in Para 9 have been in exercise of Article 142. Learned counsel for the Respondent has placed reliance on judgment of Hon'ble Supreme Court in "State of Pujab & Ors. vs. Rafiq Masih, (2014) 8 SCC 883", where Hon'ble Supreme Court dealing with Article 141 and 142 of the Constitution of India enumerated the principles in Paras 8 and 11, which are to the following effect: "8. In our view, the law laid down in Chandi Prasad Uniyal's case, no way conflicts with the observations made by this Court in the other two cases. In those decisions, directions were issued in....
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.... a direction of the Court that changes its complexion with the peculiarity in the facts and circumstances of the case." 38. We, thus, are of the view that judgment of Hon'ble Supreme Court in "Vistra ITCL (India) Ltd." is in facts of the said case. The Appellant in the present case cannot rely on the said judgment as a declaration of law within the meaning of Article 141 of the Constitution of India. 39. Learned counsel for the Respondent has relied on the Loan Agreement dated 04.05.2016, where Clause 11 provides as follows : "11. If at any time the value of the said securities falls so as to create a deficiency in the margin requirement specified by the Bank from time to time or if there is an excess over the Loan amount, the Borrower shall within seven days of notice from the Bank, deposit with the Bank additional security in the form of cash or such other securities which may be acceptable to the Bank, failing which the Bank may at its discretion sell, dispose off or realise any or all of the said securities without being liable for any loss or damage or diminution in value sustained thereby." 40. Said clause has been provided in the Agreement to protect the Le....