TaxTMI 
TaxTMI 
2024 (12) TMI 1152
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..... Juris Corp., AOR Mr. Abhijnan Jha, AOR Mr. Bharat Makkar, Adv. Mr. Pranav Tomar, Adv. Mr. Sanjay Kapur, AOR Mr. Devesh Dubey, Adv. Mr. Surya Prakash, Adv. Mr. Arjun Bhatia, Adv. Ms. Divya Singh Pundir, Adv. Ms. Mahima Kapur, Adv. Ms. Shubhra Kapur , Adv JUDGMENT ABHAY S. OKA, J. FACTUAL ASPECTS 1. These appeals take exception to the judgment dated 9th September 2022 of the National Company Law Appellate Tribunal, Principal Bench, New Delhi (for short, 'the NCLAT'). The appellants in this batch of appeals (for short, 'appellants'), except the appellant in Civil Appeal No.7434 of 2023, were parties to the appeals preferred by 1st to 4th respondents in Civil Appeal No. 7298 of 2022. 2. The issue involved in these appeals is whether the appellants can be classified as 'Financial Creditors' within the meaning of sub-section (7) of Section 5 of the Insolvency and Bankruptcy Code, 2016 (for short, 'the IBC'). Another issue may arise in the event it is held that the appellants are not 'Financial Creditors'. The issue will be whether the appellants can be classified as 'Secured Creditors' and paid commensurate to their security interest. 3. 1st respondent-Doha Bank claim....
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....the 1st Respondent, the order approving the Resolution Plan could be reconsidered. 6. The appellants have relied upon the Deeds of Hypothecation dated 4th March 2011, 9th March 2011, 12th February 2012 and 15th September 2018 (collectively referred to as "the DoH"). The DoH were executed jointly by each of the Rcom entities (described therein as Chargors), including the Corporate Debtor (RCIL), to create a charge over their property for securing the repayment of the facilities advanced by the appellants. The RCom entities agreed to provide their assets as security and further undertook to pay any shortfall of debts owed by each of the RCom entities. All the RCom entities pooled their resources to provide security for the facilities availed by any of the entities, ensuring that each entity was individually liable to pay the debt of all the entities. According to the case of the appellants, in terms of the DoH, if there is any default by any entity, all the RCom entities were liable to make good the shortfall in recovery of the amounts after realisation of hypothecated assets. 7. Thereafter, the NCLT heard the application of the 1st respondent and dismissed it, upholding the st....
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....bmitted by Reliance Digital Platform and Project Services Ltd. He pointed out that the appellants by their letter dated 2nd March 2020 addressed to the RP, pointed out that there were voting in favour of the RP in their capacity as 'Secured Financial Creditors'. 11. The learned senior counsel pointed out that under the DoH, the Corporate Debtor has undertaken a three-fold obligation under the DoH. Firstly, under clause 2 of the DoH, the Corporate Debtor, in its capacity as Chargor and Obligor, has covenanted to pay the appellants the amount due under the relevant facilities availed by RCom and RTL. Secondly, under clause 3 of the DoH, the Corporate Debtor created a charge over its entire asset pool on a first-ranking pari passu basis for the benefit of the secured creditors, including the appellants and others. The learned senior counsel pointed out that the entire asset pool is the subject matter of the approved Resolution Plan. Thirdly, under sub-clauses (ii) and (iii) of clause 5 of the DoH, the Corporate Debtor unambiguously, unequivocally and expressly agreed to make good the shortfall in realisation of the outstanding debt to the appellants, in the event charged assets wer....
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....on 7 of the IBC. He submitted that the claim as defined under Section 3(6) of the IBC arises without any default taking place at the time of filing the claim. 15. He also dealt with the contention raised by the respondents that the appellants' rights as secured creditors under the MSTA and the DoH cannot survive after moratorium comes into force under Section 14 of the IBC. He urged that the moratorium only bars any action for recovery or enforcement outside the resolution process and therefore, there is a provision for filing claims to the RP. Once the CIRP commences, creditors cannot enforce any rights under the documents and are required to file their claims for outstanding dues with the RP. 16. He submitted that the definition of 'financial debt' under Section 5(8) of the IBC is inclusive and not exhaustive. He relied upon the decisions of this Court in the cases of Kotak Mahindra Bank Limited v. A. Balakrishnan (2022) 9 SCC 186 : 2022 INSC 630 and Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd (2023) 3 SCC 753 : 2021 INSC 359. He submitted that the debt need not be directly disbursed to the Corporate Debtor. He relied upon another decision of this Court in the case....
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.... the learned counsel appearing for the RP made it clear that while there was no deed of guarantee, there was a legal obligation in the DoH under which, the Corporate Debtor had undertaken to pay the shortfall. The learned senior counsel analysed clause 5(iii) of the DoH. He pointed out that the Chargors (including the Corporate Debtor) have agreed to accept the Security Trustee's account of the expenses, sales and realisation and to pay on demand by the Security Trustee any shortfall. He pointed out that Clause 2.15 of MSTA clarifies that the security created under the DoH is in addition to and independent of any other rights or remedies available to the appellants in law, equity or otherwise. More importantly, there is a personal covenant to pay on the part of the Chargors. He pointed out that clause 5(iii) of the DoH provides protection to the Security Trustee precisely because there is an obligation on the Chargors to pay the shortfall/deficiency in payment of debt. When there are no recoveries from the sale of the charged properties, the entirety of the amount of default by RCom would be rendered in shortfall or deficiency and form part of the Corporate Debtor's liability to pa....
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....h Kumar Gupta & Ors (2020) 8 SCC 531 : 2019 INSC 1256. He submitted that the provisions of the IBC ensure that successful resolution applicant starts running the business of the Corporate Debtors on a fresh slate. 22. The learned senior counsel also refuted 1st respondent's submission that Clause 5(iii) of the DoH becomes an impossibility since moratorium prohibits enforcement of security interest under the DoH. He submitted that the guarantee under clause 5(iii) of the DoH is not contingent upon the enforcement of the security interest. 23. In the alternative, the learned counsel submitted that in any event, the appellant is entitled to retain the security interest and be classified as a secured creditor. He submitted that in the Resolution Plan, other creditors include those creditors who have a claim against the Corporate Debtor but are neither Financial Creditors nor Operational Creditors. He submitted that while voting in favour of the Resolution Plan, the appellant made it clear that its approval was subject to the appellants being considered as Financial Creditors. Even while approving the Resolution Plan, the NCLT permitted the distribution of the payment to the Finan....
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....he basis of commercial decisions of the parties. 28. The learned counsel submitted that even assuming that a portion of clause 5(iii) of the DoH is a separate agreement, it is manifestly a contingent contract as per Section 32 of the Contract Act. The contingency would have arisen only when the hypothecated properties were sold, expenses were incurred, and there was a shortfall in realisation. He relied upon a decision of the Bombay High Court in the case of Western Coalfields Limited & Anr. v. Rajesh s/o Nandlal Biyani 2011 SCC OnLine Bom 1217 : (2012) 2 Mah LJ 394. His submission is that the contingent contract ceased to exist when the moratorium was declared under Section 14 of the IBC with effect from 15th May 2018, since after the moratorium, hypothecated property could not be sold either in fact or in law. As the hypothecated property could not be sold, there was no question of sale or realisation. As there would not be a shortfall, the question of meeting the shortfall would not arise. 29. The learned counsel further submitted that the enforcement of security is left out of the domain of CIRP as it focuses on revival of a Corporate Debtor as opposed to the process of l....
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.... appellants shows that no guarantee was provided to the appellants/third party lenders. This position was further clarified in the minutes of the CoC meeting dated 2nd August 2019. Even the RP accepted that there was no deed of guarantee. The learned senior counsel submitted that the IBC cannot be used for recovery as it is a mechanism to rehabilitate and revive the Corporate Debtor. He urged that the appellants are attempting to use the CIRP as a mode of recovery of their loans from the RCom entities. He submitted that if the DoH is treated as a guarantee, all such hypothecation deeds creating security interest will have to be construed as a guarantee in order to qualify as financial debt. 35. He submitted that the Resolution Plan has been passed in compliance with Sections 13(2) and 13(4) of the IBC and once a Resolution Plan is approved, it cannot be challenged before the forum. 36. The appellants voted and approved the Resolution Plan which extinguished their security while their status as Financial Creditors was under challenge in the pending application filed by the 1st Respondent-Doha Bank. Now, the appellants cannot be permitted to turn back and rewrite the Resolution....
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....The DoH has been executed by the Security Trustee acting on behalf of the Appellants, by the authority vested in it by MSTA. Therefore, before coming to the DoH, we must consider the MSTA executed on 4th March 2011 by and between the RCom entities described therein as "Original Obligors", "Original Lenders" and the Security Trustee. The MSTA defines "Original Lenders" as collectively the persons listed in Schedule I. The appellants are the Original Lenders. Under the agreement, an "Acceding Lender" is defined as a person who accedes to the MSTA by way of the lender's deed of accession. "Secured Lenders" are defined as collectively the Original Lenders and each acceding lender or syndicate of the lenders. Therefore, all the Original Lenders are described as Secured Lenders, and each acceding lender becomes a Secured Lender. 41. Clause 2.1 of the MSTA provides that each Original Obligor appoints the Security Trustee who acts as a trustee for the benefit of the secured parties and their permitted successors, etc. "Secured Parties" are defined to include the Security Trustee, Secured Lenders and any other persons named as Secured Parties. Therefore, the Security Trustee is appointed....
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....ovenants, representations and warranties. Sub-clause (iii) of Clause 5 is material, which reads thus: "5. Chargor's Covenants, Representations and Warranties .. .. .. . .. .. .. .. .. .. .. . ... .. .. .. .. .. . .. . . (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 notice to any of the Chargors and without assigning any reasons and at the risk and expense of the Chargors and if necessary as attorney for and in the name of the Chargors, be entitled to take charge and/or possession of, seize, recover, receive and remove them and/or sell by public auction or by private contract, dispatch or consign for realisation or otherwise dispose of or deal with all or any part of the Hypothecated Property (including by way or through the exercise of its powers and rights specified in Section 6 hereof) and to enforce, realise, settle, compromise and deal with any rights or claims relating thereto, without being bound to exercise any ....
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....ments were executed under which facilities were granted to RCom. In the case of the Industrial Commercial Bank of China, there is one agreement under which finance was provided to RCom. The appellants have not advanced any facilities to the Corporate Debtor. 47. The answer to the question of whether the appellants are the Financial Creditors depends upon the answer to the question of whether the appellants are the guarantors. Therefore, we are adverting to the relevant provisions of IBC. Sub-section (6) of Section 3 of the IBC defines "claim" which reads thus: "3. Definitions:- .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. (6) "claim" means - (a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured, or unsecured; (b) 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;" Sub-section (11) of Section 3 of the IBC defines "debt" which reads thus: "3. Definitions:- ....
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....obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution; (i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clause (a) to (h) of this clause." ( emphasis added ) In terms of sub-section (11) of Section 3, debt is a liability or obligation in respect of a claim which is due from any person and includes a financial debt or operational debt. As noted earlier, a claim is a right to payment whether or not, such right is reduced to judgment and whether it is disputed or undisputed. The right to payment can be legal, equitable, secured or unsecured. Therefore, if there is a liability or obligation in respect of a payment which is disputed, it still becomes a claim. Once there is a liability or obligation in respect of a claim, it becomes a debt. Once there is a financial debt, the person to whom a debt is owed, becomes a Financial Creditor. 49. The appellants are claiming that their case is covered by clause (i) of sub-section (8) of Section 5 of the IBC. Under clause (i), the amount of any liability in r....
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....ding the nature of the document or the transactions affected by the document. In the case of C.C., C.E. and S.T. Bangalore (Adjudication) & Ors. v. Northern Operating Systems Pvt. Ltd. AIR 2022 SC 2450 : 2022 INSC 598, in paragraphs 53 to 55, this Court held thus: "53. From the above discussion, it is evident, that prior to July 2012, what had to be seen was whether a (a) person provided service, (b) directly or indirectly, (c) in any manner for recruitment or supply of manpower, (d) temporarily or otherwise. After the amendment, all activities carried out by one person for another, for a consideration, are deemed services, except certain specified excluded categories. One of the excluded category is the provision of service by an employee to the employer in relation to his employment. 54. One of the cardinal principles of interpretation of documents, is that the nomenclature of any contract, or document, is not decisive of its nature. An overall reading of the document, and its effect, is to be seen by the courts. Thus, in State of Orissa v. Titaghur Paper Mills Co. Ltd. [State of Orissa v. Titaghur Paper Mills Co. Ltd., 1985 Supp SCC 280] it was held as follows ....
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.... to the MSTA. Under the said agreement, the Security Trustee has been appointed to act as trustee for the benefit of secured parties which include Secured Lenders. Under clause 2.2.1 of the MSTA, the Secured Lenders have authorised and directed the Security Trustee to execute and deliver security documents to which, the Security Trustee is to be a party and to accept the security, all related deeds and documents as may be required to be submitted by the Obligors for the benefit of secured parties. Under sub-clause (c) of clause 2.2.1 of MSTA, it is the duty of the Security Trustee to enforce the security in accordance with the provisions of the agreement and to receive and apply all money in accordance with the security documents. Therefore, the Secured Lenders have authorised the Security Trustee to accept the security on their behalf. 55. In light of this discussion, we turn to the DoH. We have already quoted the relevant portion of the DoH. The RCom entities, including RITL-Corporate Debtor, are described as Chargors in the DoH. Clause 2 of the DoH reads thus: "2. Covenant to Pay : In pursuance of the Secured Facilities and the Facility Documents and in cons....
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....onnection with secured facilities. The Security Trustee acted on behalf of the appellants by accepting the security of hypothecation. Therefore, the DoH is a document executed on behalf of the appellants. The effect of clause 5(iii) is that for the discharge of liabilities of the RCom entities, all four RCom entities hypothecated their properties for securing repayment of the facilities extended by the appellants to RCom and RTL. In short, the parties to the DoH are Security Trustees acting on behalf of the present appellants, the Corporate Debtor who is not the borrower of the appellants and the other three RCom entities. Therefore, there are three parties to the DoH. Promise to discharge the Liability of third party 57. Sub-clause (i) of clause 3 of the DoH is a clause which is normally found in hypothecation agreements. Then comes sub-clause (iii) of clause 5 of the DoH, which we have already quoted. It provides that in the event of default committed by the borrowers (in the case of the appellants, the borrowers are RCom and RTL), the Security Trustee is entitled to take charge and/or possession of, seize, recover, receive and remove the hypothecated goods and/or sell by p....
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.... to perform the promise, or discharge the liability, of a third person in case of his default. The present is not a case where the corporate debtor has entered into a contract to perform the promise, or discharge the liability of borrower in case of his default. The pledge agreement is limited to pledge 40,160 shares as security. The corporate debtor has never promised to discharge the liability of the borrower. The facility agreement under which the borrower was bound by the terms and conditions and containing his obligation to repay the loan security for performance are all contained in the facility agreement. A contract of guarantee contains a guarantee "to perform the promise or discharge the liability of third person in case of his default". Thus, key words in Section 126 are contract "to perform the promise", or "discharge the liability", of a third person. Both the expressions "perform the promise" or "discharge the liability" relate to "a third person"." In this case, from the last part of clause 5(iii) of the DoH, it is very clear that the Corporate Debtor has undertaken to discharge the liability of the RCom and RTL, the borrowers of the appellants. RCom and RTL are th....
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....ted assets. It is contended that the contract has become impossible, since owing to the moratorium imposed, the hypothecated properties could not be sold and the shortfall could not arise. Reliance is placed on Section 14(1) of the IBC, which reads thus: "14. Moratorium.- (1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely: (a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority; (b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein; (c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002); (d) the recovery of any prope....