# ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE INFRATECH LIMITED v. AXIS BANK LIMITED ETC. ETC

- **Citation:** [2020] 8 S.C.R. 291
- **Court:** Supreme Court of India
- **Decided:** 2020-02-26
- **Case number:** Civil Appeal Nos. 8512-8527 of 2019
- **Bench:** A. M. Khanwilkar, Dinesh Maheshwari
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/anuj-jain-interim-resolution-professional-for-jaypee-infratech-limited-v-axis-34132
- **Pages:** 152

## Headnote

Insolvency and Bankruptcy Code, 2016:
Sections 5(7), 5(8), 7, 43, 45 and 66 - Corporate insolvency
resolution process against corporate-debtor company - The claim
of lenders of the holding Company of corporate-debtor for being
recognized as financial creditors of the corporate-debtor on the
strength of transactions whereby the corporate-debtor had
mortgaged its properties as collateral securities for the loan to the
holding company of the corporate-debtor - The claim rejected by
Interim Resolution Professional (IRP) - Application by IRP seeking
avoidance of the mortgage transactions as being preferential,
undervalued and fraudulent u/ss. 43, 45 and 46 - National Company
Law Tribunal (NCLT) allowed the application of IRP - Appellate
Tribunal (NCLAT) set aside the order of NCLT - Appeal to Supreme
Court - Held: If a transaction entered into by a corporate-debtor is
not falling in either of the exceptions provided in sub-section (3) of
s. 43, and satisfies the threefold requirements of sub-sections (2)
and (4) thereof, it would be deemed to be a preference during a
relevant time, whether or not, it were so and whether or not it were
intended or anticipated to be so - The transactions in question were
of deemed preference to related party during the look-back period
of two years - The transactions also cannot be said to have been
done in the ordinary course of business and hence are not excepted
transfers in terms of sub-section (3) - Thus, the transactions are hit
by s. 43 - The questions as to whether the transactions were
undervalued or fraudulent in terms of ss. 45 and 66, are left open -
For a debt to become 'financial debt', the basic elements are that it
ought to be a disbursal against the consideration for time value of
money - Therefore, for a person to be designated as 'financial
creditor' of the corporate-debtor, the corporate-debtor needs to owe
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a financial debt to such person - Thus, a third party to whom the
corporate-debtor does not owe a 'financial debt' cannot become its
'financial creditor' for the purpose of insolvency and liquidation
process of corporate persons - In the present case, the mortgage
transactions in questions since were neither towards any loan,
facility or advance to the corporate-debtor nor towards protecting
any facility or security of the corporate-debtor, the lenders of the
holding company of the corporate-debtor, may fall in the category
of 'secured creditors', but not in the category of 'financial creditors'
within meaning of s. 5(8) - Therefore the claim of the lenders of
holding company rightly rejected by IRP.
Interpretation of Statutes:
Definition clause - Interpretation of - Where a word is defined
to 'mean' something, the definition is prima facie restrictive - Where
the word defined is declared to 'include' something more, the
definition is prima facie extensive.
Mortgage -
Re-mortgage - Legality of - Held: There is no concept of remortgage - On release by mortgagee, a mortgage ceases to exist -
The so-called re-mortgage can only be regarded as fresh mortgage.
Judgment:
Observations in a judgment are required to be read in the
context in which they appear.
Words and Phrases:
Expressions 'financial debt' 'financial creditors', 'operational
creditor', 'secured creditor' and 'unsecured creditor' - Meaning of
in the context of Insolvency and Bankruptcy Code, 2016.
Allowing the appeals, the Court
HELD: 1.1. The Insolvency and Bankruptcy Code, 2016
came to be enacted to consolidate and amend the laws relating to
reorganisation and insolvency resolution of corporate persons
and even of partnership firms and individuals in a time bound
manner; the objectives, inter alia, being for maximisation of value
of assets of such persons and balance of interest of all the
stakeholders. [Para 16.1][356-C]
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Swiss Ribbons Private Limited and Anr. v. Union of India
and Ors.: (2019) 4 SCC 17 : [2019] 3 SCR

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ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR
JAYPEE INFRATECH LIMITED
v.
AXIS BANK LIMITED ETC. ETC.
(Civil Appeal Nos. 8512-8527 of 2019 Etc.)
FEBRUARY 26, 2020
[A. M. KHANWILKAR AND DINESH MAHESHWARI, JJ.]
Insolvency and Bankruptcy Code, 2016:
Sections 5(7), 5(8), 7, 43, 45 and 66 - Corporate insolvency
resolution process against corporate-debtor company - The claim
of lenders of the holding Company of corporate-debtor for being
recognized as financial creditors of the corporate-debtor on the
strength of transactions whereby the corporate-debtor had
mortgaged its properties as collateral securities for the loan to the
holding company of the corporate-debtor - The claim rejected by
Interim Resolution Professional (IRP) - Application by IRP seeking
avoidance of the mortgage transactions as being preferential,
undervalued and fraudulent u/ss. 43, 45 and 46 - National Company
Law Tribunal (NCLT) allowed the application of IRP - Appellate
Tribunal (NCLAT) set aside the order of NCLT - Appeal to Supreme
Court - Held: If a transaction entered into by a corporate-debtor is
not falling in either of the exceptions provided in sub-section (3) of
s. 43, and satisfies the threefold requirements of sub-sections (2)
and (4) thereof, it would be deemed to be a preference during a
relevant time, whether or not, it were so and whether or not it were
intended or anticipated to be so - The transactions in question were
of deemed preference to related party during the look-back period
of two years - The transactions also cannot be said to have been
done in the ordinary course of business and hence are not excepted
transfers in terms of sub-section (3) - Thus, the transactions are hit
by s. 43 - The questions as to whether the transactions were
undervalued or fraudulent in terms of ss. 45 and 66, are left open -
For a debt to become 'financial debt', the basic elements are that it
ought to be a disbursal against the consideration for time value of
money - Therefore, for a person to be designated as 'financial
creditor' of the corporate-debtor, the corporate-debtor needs to owe
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a financial debt to such person - Thus, a third party to whom the
corporate-debtor does not owe a 'financial debt' cannot become its
'financial creditor' for the purpose of insolvency and liquidation
process of corporate persons - In the present case, the mortgage
transactions in questions since were neither towards any loan,
facility or advance to the corporate-debtor nor towards protecting
any facility or security of the corporate-debtor, the lenders of the
holding company of the corporate-debtor, may fall in the category
of 'secured creditors', but not in the category of 'financial creditors'
within meaning of s. 5(8) - Therefore the claim of the lenders of
holding company rightly rejected by IRP.
Interpretation of Statutes:
Definition clause - Interpretation of - Where a word is defined
to 'mean' something, the definition is prima facie restrictive - Where
the word defined is declared to 'include' something more, the
definition is prima facie extensive.
Mortgage -
Re-mortgage - Legality of - Held: There is no concept of remortgage - On release by mortgagee, a mortgage ceases to exist -
The so-called re-mortgage can only be regarded as fresh mortgage.
Judgment:
Observations in a judgment are required to be read in the
context in which they appear.
Words and Phrases:
Expressions 'financial debt' 'financial creditors', 'operational
creditor', 'secured creditor' and 'unsecured creditor' - Meaning of
in the context of Insolvency and Bankruptcy Code, 2016.
Allowing the appeals, the Court
HELD: 1.1. The Insolvency and Bankruptcy Code, 2016
came to be enacted to consolidate and amend the laws relating to
reorganisation and insolvency resolution of corporate persons
and even of partnership firms and individuals in a time bound
manner; the objectives, inter alia, being for maximisation of value
of assets of such persons and balance of interest of all the
stakeholders. [Para 16.1][356-C]
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Swiss Ribbons Private Limited and Anr. v. Union of India
and Ors.: (2019) 4 SCC 17 : [2019] 3 SCR 535 -
referred to.
1.2 Though the provisions relating to 'preferential
transactions and relevant time' (in Section 43 of the Code) occur
in Chapter III of Part II, relating to liquidation process, but such
provisions being for avoidance of certain transactions and having
bearing on the resolution process too, by their very nature, equally
operate over the corporate insolvency resolution process (CIRP),
and hence, the resolution professional is obligated, by virtue of
clause (j) of sub-section (2) of Section 25 of the Code, to file
application for avoidance of the stated transactions in accordance
with Chapter III. That being the position, Section 43 of the Code
comes into full effect in CIRP too. [Para 16.3][358-F-H]
2.1 The basic concept of 'preference' as per the law
dictionaries and lexicons is the act of 'paying or securing to one
or more of his creditors, by an insolvent debtor, the whole or part of
their claims, to the exclusion of the rest'. Various jurisdictions have
defined, described and dealt with 'preferential transfer' as being
the transaction where an insolvent debtor makes transfer to or
for the benefit of a creditor so that such beneficiary would receive
more than what it would have otherwise received through the
distribution of bankruptcy estate. Section 547 of US Bankruptcy
Code provides for the circumstances in which a bankruptcy
trustee may, for the benefit of the estate in question, recover a
preferential transfer from the transferee. Section 239 of the UK
Insolvency Act, 1986 also provides for the same measures for
avoidance of preference given to any person at the relevant time.
The time factor also plays a crucial role in such measures of
avoidance. This 'relevant time' for the purpose of avoidance of
preferential transactions is now commonly referred to as the
'look-back' period. Significantly, when the preferential transaction
is with an unconnected party, the look-back period is
comparatively lesser than that of the transaction with a connected
party, who is referred to as 'insider' or 'related party'.
[Paras 17.1 and 17.2][359-B; 360-C-F]
Advanced Law Lexicon by P. Ramanatha Aiyar (5th Ed.-
Vol 3, p.4002) - referred to.
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE
INFRATECH LTD. v. AXIS BANK LTD.
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2.2. The provisions contained in Section 43 of the Code,
however, indicate the intention of legislature that when a
transaction falls within the co-ordinates defined therein, the same
shall be deemed to be a preference given at a relevant time and
shall not be countenanced. Therefore, intent may not be of a
defence or support of any preferential transaction that falls within
the ambit of Section 43 of the Code. [Para 17.4][362-A-B]
UNCITRAL Legislative Guide on Insolvency Law -
referred to.
3.1 The consequences of offending preferential transaction
are, obviously, drastic and practically operate towards annulling
the effect of such transaction. These provisions need to be strictly
construed. However, even if Section 43 of the Code is strictly
construed, the underlying principles and the object cannot be
lost sight of. In other words, the construction has to be such that
leads towards achieving the object of these provisions. [Para
18][364-E-G]
Devinder Singh & Ors v. State of Punjab & Ors: (2008)
1 SCC 728 : [2007] 11 SCR 475; Nareshbhai v. Union
of India (2019) SCC Online SC 1027 - referred to.
3.2 If twin conditions specified in sub-section (2) of Section
43 are satisfied, the transaction would be deemed to be of
preference. As per clause (a) of sub-section (2) of Section 43, the
transaction, of transfer of property or an interest thereof of the
corporate debtor, ought to be for the benefit of a creditor or a
surety or a guarantor for or on account of an antecedent financial
debt or operational debt or other liabilities owed by the corporate
debtor; and as per clause (b) thereof, such transfer ought to be of
the effect of putting such creditor or surety or guarantor in
beneficial position than it would have been in the event of
distribution of assets under Section 53 of the case. [Para
18.1][365-B-C]
3.3 However, merely giving of the preference and putting
the beneficiary in a better position is not enough. For a preference
to become an offending one for the purpose of Section 43 of the
Code, another essential and rather prime requirement is to be
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satisfied that such event, of giving preference, ought to have
happened within and during the specified time, referred to as
"relevant time". The relevant time is reckoned, as per subsection (4) of Section 43 of the Code, in two ways: (a) if the
preference is given to a related party (other than an employee),
the relevant time is a period of two years preceding the
insolvency commencement date. [Para 18.2][365-D-E]
3.4 However, even if a transaction of transfer otherwise
answers to and comes within the scope of sub-sections (4) and
(2) of Section 43 of the Code, it may yet remain outside the ambit
of sub-section (2) because of the exclusion provided in sub-section
(3) of Section 43. Such exclusion is provided to: (a) a transfer
made in the ordinary course of business or financial affairs of the
corporate debtor or transferee; (b) a transfer creating security
interest in a property acquired by the corporate debtor to the
extent that such security interest secures new value and was
given at the time specified in sub-clause (i) of clause (b) of Section
43(3) and subject to fulfilment of other requirements of sub-clause
(ii) thereof. The meaning of the expression "new value" has also
been explained in this provision. [Paras 18.3 and 18.4][365-G;
366-A-C]
3.5 By way of these statutory provisions, legal fictions are
created whereby preference is deemed to have been given; and
is deemed to have been given at a relevant time, if the stated
requirements are satisfied. The word 'deemed' in essence, is to
deem what may or may not be in reality, thereby requiring the
subject-matter to be treated as if real. Applying the principles to
the provision in Section 43 of the Code, it could reasonably be
concluded that any transaction that answers to the descriptions
contained in sub-sections (4) and (2) is presumed to be a
preferential transaction at a relevant time, even though it may
not be so in reality. In other words, since sub-sections (4) and (2)
are deeming provisions, upon existence of the ingredients stated
therein, the legal fiction would come into play; and such
transaction entered into by a corporate debtor would be regarded
as preferential transaction with the attendant consequences as
per Section 44 of the Code, irrespective whether the transaction
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was in fact intended or even anticipated to be so. [Paras 19.2
and 19.3][367-A; 369-G-H; 370-A-C]
Pioneer Urban Land and Infrastructure Ltd. & Anr. v.
Union of India & Ors.: (2019) 8 SCC 416 : [2019] 10
SCR 381; Hindustan Cooperative Housing Building
Society Limited v. Registrar, Cooperative Societies and
Anr. (2009) 14 SCC 302 : [2009] 2 SCR 331 - relied
on.
3.6 Thus, if a transaction entered into by a corporate debtor
is not falling in either of the exceptions provided by sub-section
(3) and satisfies the three-fold requirements of sub-sections (4)
and (2) of Section 43 of the Code, it would be deemed to be a
preference during a relevant time, whether or not in fact it were
so; and whether or not it were intended or anticipated to be so.
[Para 19.5][370-E-F]
3.7 In order to find as to whether a transaction, of transfer
of property or an interest thereof of the corporate debtor, falls
squarely within the ambit of Section 43 of the Code, ordinarily,
the following questions shall have to be examined in a given case:
(I) As to whether such transfer is for the benefit of a creditor or
a surety or a guarantor? (ii) As to whether such transfer is for or
on account of an antecedent financial debt or operational debt or
other liabilities owed by the corporate debtor? (iii) As to whether
such transfer has the effect of putting such creditor or surety or
guarantor in a beneficial position than it would have been in the
event of distribution of assets being made in accordance with
Section 53? (iv) If such transfer had been for the benefit of a
related party (other than an employee), as to whether the same
was made during the period of two years preceding the insolvency
commencement date; and if such transfer had been for the benefit
of an unrelated party, as to whether the same was made during
the period of one year preceding the insolvency commencement
date? (v) As to whether such transfer is not an excluded
transaction in terms of sub-section (3) of Section 43? [Para
20][370-F-G; 371-A-D]
3.8 09.08.2017 is the insolvency commencement date in
the present case. The transactions in question, even if of putting
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the concerned properties under mortgage with the lenders, carry
the ultimate effect of working towards the benefit and advantage
of the borrower i.e., the holding company who obtained loans and
finances by virtue of such transactions. It is true that there had
not been any creditor-debtor relationship between the lender
banks and corporate debtor but that will not be decisive of the
question of the ultimate beneficiary of these transactions. The
mortgage deeds in question, entered by the corporate debtor to
secure the debts of its holding company obviously, amount to
creation of security interest to the benefit of the holding company.
[Para 22.2.1][373-D-F]
3.9 The corporate debtor owed antecedent financial debts
as also operational debts and other liabilities towards the holding
company . This puts the holding company in such capacity that it
is a related party to the corporate debtor and is a creditor as also
its surety. In this scenario there is nothing to doubt that the
corporate debtor has given a preference by way of the mortgage
transactions in question for the benefit of its related person i.e.
its holding company (who has been the creditor as also surety for
the corporate debtor) for and on account of antecedent financial
debts, operational debts and other liabilities owed to such related
person. In the given fact situation, it is plain and clear that the
transactions in question meet with all the requirements of clause
(a) of sub-section (2) of Section 43. [Paras 22.2.2 and 22.3][374A-C]
3.10 In the given scenario, the requirements of clause (b)
of sub-section (2) of Section 43 are also met fair and square. By
way of the impugned transfers, the holding company is put in a
much beneficial position than it would have been in the absence
of such transfers vis-à-vis other creditors. The applicability of
clauses (a) and (b) of sub-section (2) of Section 43 of the Code is
clear and complete in relation to the impugned six transactions.
[Para 22.4][374-D-E; 375-A]
4.1 Even when all the requirements of sub-section (2) of
Section 43 of the Code are satisfied, in order to fall within the
mischief sought to be remedied by Section 43, the questioned
preference ought to have been given at a relevant time i.e. within
the period specified in sub-section (4) of Section 43. The extent
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of 'relevant time' is different with reference to the relationship
of the beneficiary with the corporate debtor inasmuch as, for the
persons falling within the expression 'related party' within the
meaning of Section 5 (24) of the Code, such period is of two years
before the insolvency commencement date whereas it is one year
in relation to the person other than a related party. [Para 23][375DF]
4.2. The scheme of the Code is to disapprove and disregard
such preferential transaction which falls within the ambit of Section
43 and to ensure that any property likely to have been lost due to
such transaction is brought back to the corporate debtor; and if
any encumbrance is created, to remove such encumbrance so as
to bring the corporate debtor back on its wheels or in other event
(of liquidation), to ensure pro rata, equitable and just distribution
of its assets. The provisions contained in Section 43, however,
indicate the intention of legislature that when a preference is
given at a relevant time and thereby, the beneficiary of preference
acquires unwarranted better position in the event of distribution
of assets, the same may not be countenanced. Looking to the
scheme of the Code and the principles applicable for the conduct
of the affairs of a corporate person, it cannot be said that anything
of a new liability has been imposed or a new right has been created.
Maximisation of value of assets of corporate persons and
balancing the interests of all the stakeholders being the objectives
of the Code, the provisions therein need to be given fuller effect
in conformity with the intention of the legislature. [Para
23.1.1][376-F-G; 377-C-E]
Purbanchal Cables & Conductors Pvt. Ltd. & Ors v.
Assam State Electricity Board & Ors. (2012) 7 SCC 462
: [2012] 6 SCR 905 - distinguished.
4.3 By virtue of proviso to sub-section (3) of Section 1 of
the Code, different dates can be provided for enforcement of
different provisions of the Code; and in fact, different provisions
have been brought into effect on different dates. However, after
coming into force of the provisions, if a look-back period is
provided for the purpose of any particular enquiry, it cannot be
said that the operation of the provision itself would remain in
hibernation until such look-back period from the date of
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commencement of the provision comes to an end. There is
nothing in the Code to indicate that any provision in Chapter II
or Chapter III be taken out and put in operation at a later date
than the date notified. [Para 23.1.2][377-F-H; 378-A]
4.4. The preference was given to the holding company who
was a related party of the corporate debtor. Hence, the lookback period is two years preceding insolvency commencement
date i.e., 09.08.2017 per clause (a) of sub-section (4) of Section
43; and accordingly, the point of enquiry would be as to whether
the preference had been given during the period of two years
preceding 09.08.2017. Therefore, the transactions commencing
from 10.08.2015 until the date of insolvency commencement shall
fall under the scanner. [Para 24][378-B-C]
4.5 The plea that most of the impugned transactions were
not of creation of any new encumbrance by the corporate debtor
and in fact, the transaction in respect of the 5 properties in
question had been of so-called re-mortgage/s cannot be accepted.
In the first place, on release by the mortgagee, the mortgage
ceases to exist and it is difficult to countenance the concept of a
so-called re-mortgage. The so-called re-mortgage, on all its legal
effects and connotations, could only be regarded as a fresh
mortgage; and it obviously befalls on the mortgagor to consider
at the time of creating any fresh mortgage as whether such a
transaction is expedient and whether it should be entered into at
all. [Para 24.3.1.][379-C-E]
4.6 Thus, the transactions in question had been of deemed
preference to related party i.e. the holding company by the
corporate debtor during the look-back period of two years and
have rightly been held covered within the period envisaged by
sub-section (4) of Section 43 of the Code. [Para 24.5][381-B-C]
IDBI Bank Ltd. v. The Administrator, Kothari Orient
Finance Ltd., the Official Liquidator & S. Ramaiah :
(2009) 152 Comp Case 282 (Mad); Monarch
Enterprises v. Kishan Tulpule & Ors : (1992) 74 Comp
Case 89 (Bom) - distinguished.
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5.1 In the scheme of provisions contained in s. 43 of the
Code, the underlying concept is to disregard and practically annul
such transactions which appear, in the course of insolvency
resolution or liquidation, to be preferential so as to minimise the
potential loss to other stakeholders in the affairs of the corporate
debtor, particularly its creditors. What is to be examined for the
purpose of Section 43 is the conduct and affairs of the corporate
debtor. If the beneficiary of the transaction in question is a related
party of the corporate debtor, the period of enquiry is enlarged
to two years whereas this period is one year in other cases. During
such scanning, by virtue of sub-section (3) of Section 43, two
types of transfers are kept out of the purview of sub-section (2),
which would not be treated as preference. [Para 25.2][382-C-E]
5.2 The whole of conspectus of sub-section (3) is that only
if any transfer is found to have been made by the corporate debtor,
either in the ordinary course of its business or financial affairs or
in the process of acquiring any enhancement in its value or worth,
that might be considered as having been done without any tinge
of favour to any person in preference to others and thus, might
stand excluded from the purview of being preferential, subject to
fulfilment of other requirements of sub-section (3) of Section 43.
[Para 25.2.2][383-C-D]
5.3 If the transfer is examined with reference to the ordinary
course of business or financial affairs of the transferee alone, it
may conveniently get excluded from the rigour of sub-section (2)
of Section 43, even if not standing within the scope of ordinary
course of business or financial affairs of the corporate debtor.
Such had never been the scheme of the Code nor the intent of
Section 43 thereof. For the purpose of exception under clause
(a) of sub-section (3) of Section 43, the intent of legislature is
required to be kept in view. If the ordinary course of business or
financial affairs of the transferee (lenders of the holding company
in the present case) would itself be decisive for exclusion, almost
every transfer made to the transferees like the lender-banks/
financial institutions would be taken out of the net, which would
practically result in frustrating the provision itself. [Para
25.3][383-D-F]
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5.4 It remains trite that an interpretation that defeats the
scheme, intent and object of the statutory provision is to be
eschewed and for that matter, if necessary, by applying the
principles of purposive interpretation rather than literal. Well
known cannons of construction of statutes permit the Court to
read the word "or" as "and" after looking at the clear intention
of the legislature. The contents of clause (a) of sub-section (3) of
Section 43 call for purposive interpretation so as to ensure that
the provision operates in sync with the intention of legislature
and achieves the avowed objectives. Therefore, the expression
"or", appearing as disjunctive between the expressions
"corporate debtor" and "transferee", ought to be read as "and";
so as to be conjunctive of the two expressions i.e., "corporate
debtor" and "transferee". Thus read, clause (a) of sub-section
(3) of Section 43 shall mean that, for the purposes of sub-section
(2), a preference shall not include the transfer made in the ordinary
course of the business or financial affairs of the corporate debtor
and the transferee. Only by way of such reading of "or" as "and",
it could be ensured that the principal focus of the enquiry on
dealings and affairs of the corporate debtor is not distracted and
remains on its trajectory, so as to reach to the final answer of the
core question as to whether corporate debtor has done anything
which falls foul of its corporate responsibilities. [Paras 25.4 and
25.5][383-G-H; 384-A; 384-D-G]
State of Bombay v. R.M.D. Chamarbaugwala and Anr.
[1957] SCR 874 - followed.
Mazagaon Dock Ltd v. Commissioner of Income-Tax
and Excess Profits Tax [1959] SCR 848 - relied on.
5.5 Even when furnishing a security may be one of normal
business practices, it would become a part of 'ordinary course of
business' of a particular corporate entity only if it falls in place as
part of 'the undistinguished common flow of business done'; and
is not arising out of 'any special or particular situation'. An activity
could be regarded as 'business' if there is a course of
dealings,which are either actually continued or contemplated to be
continued with a profit motive. [Paras 25.6.1 and 25.6.2][385-BC; 386-A-B]
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State of Andhra Pradesh v. H. Abdul Bakshi and Bros.
1964 STC 644; Downs Distributing Co Pty Ltd v.
Associated Blue Star Stores Pty Ltd (in liq) (1948) 76
CLR 463; Macquarie Bank Ltd. v. Shilpi Cable
Technologies Ltd. (2018) 2 SCC 674: [2017] 13 SCR
751 - referred to.
5.6 Though it can be assumed that the transactions in
question were entered in the ordinary course of business of
bankers and financial institutions like the present respondents
but on the given set of facts, there is no doubt that the impugned
transactions do not fall within the ordinary course of business of
the corporate debtor. The corporate debtor had been promoted
as a special purpose vehicle by its holding company. It is difficult
to even surmise that the business of the corporate debtor, of
ensuring execution of the works assigned to its holding company
and for execution of housing/building projects, in its ordinary
course, had inflated itself to the extent of routinely mortgaging
its assets and/or inventories to secure the debts of its holding
company. It had also not been the ordinary course of financial
affairs of the corporate debtor that it would create encumbrances
over its properties to secure the debts of its holding company.
The ordinary course of business or financial affairs of the
corporate debtor cannot be taken to be that of providing
mortgages to secure the loans and facilities obtained by its holding
company; and that too at the cost of its own financial health.
[Para 25.6.2][386-B-E]
5.7 The impugned transactions had not been in the ordinary
course of business or financial affairs of the corporate debtor.
The impugned transactions are not of excepted transfers in terms
of sub-section (3) of Section 43 of the Code. [Paras 25.7 and
25.8][387-B-C]
Keshavlal Khemchand & Sons Pvt. Ltd. & Ors v. Union
of India & Ors: (2015) 4 SCC 770 : [2015] 2 SCR 51;
State Bank of India v. Jah Developers Pvt. Ltd. & Ors.:
(2019) 6 SCC 787 : [2019] 7 SCR 701 - held
inapplicable.
6. In the ordinary course of business, when the bankers or
financial institutions examine any proposal for loan or advance or
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akin facility, they are supposed to, and they indeed, take up the
exercise commonly termed as 'due diligence' so as to study the
viability of the proposed enterprise as also to ensure, inter alia,
that the security against such loan/advance/facility is genuine and
adequate; and would be available for enforcement at any point of
time. Given the nature of transaction, the lenders must prefer a
clean security to justify the transaction as being in the ordinary
course of their business. In the same exercise, in the ordinary
course of their business, if they are at all entering into a transaction
whereby a third party security, including that of a subsidiary
company, is to be taken as collateral, they are obliged to undertake
further due diligence so as to ensure that such third party security
is a prudent and viable one and is not likely to be hit by any law.
In that sequence, they remain under obligation to assure
themselves that such third party whose security is being taken,
is not already indebted or in red and is not likely to fail in dealing
with its own indebtedness. In the context of the Code, such
requirement is moreover imperative on a bare look at the
provisions contained in Part II thereof. On the facts of the present
case that in fact, several of the respondent lenders are shown to
be the direct creditors of the corporate debtor too, to the extent
of the advances made to the corporate debtor, they and the corespondents cannot plead ignorance about the actual state of
affairs and financial position of the corporate debtor. Despite such
knowledge, if they chose to take the business risk of accepting
security from the corporate debtor and that too, for securing the
loans/advances/facilities made over to the holding company, who
was a directly related party for being its holding company, they
themselves remain responsible for present legal consequences.
[Para 26.1][387-E-F; 388-A-D]
Advanced Law Lexicon by P. Ramanatha Aiyar -
referred to.
7. The transactions in question are hit by Section 43 of the
Code and the Adjudicating Authority, having rightly held so, had
been justified in issuing necessary directions in terms of Section
44 of the Code in relation to the transactions concerning Property
Nos. 1 to 6. NCLAT, had not been right in interfering with the
well-considered and justified order passed by NCLT in this regard.
[Para 27][388-E]
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8. Having approved the order passed by NCLT as regards
the aspect of the transactions being preferential, the Court does
not consider it necessary to deal with the questions as to whether
the transactions are undervalued and/or fraudulent too. In the
totality of circumstances, the said questions are left at that only,
while also leaving all the related questions of law open; to be
examined in an appropriate case. [Para 29][391-A-C]
9. In the present case, the IRP moved one composite
application purportedly under Sections 43, 45 and 66 of the Code
while alleging that the transactions in question were preferential
as also undervalued and fraudulent. In the scheme of the Code,
the parameters and the requisite enquiries as also the
consequences in relation to these aspects are different and such
difference is explicit in the related provisions. The arena and
scope of the requisite enquiries, to find if the transaction is
undervalued or is intended to defraud the creditors or had been
of wrongful/fraudulent trading are entirely different. Specific
material facts are required to be pleaded if a transaction is sought
to be brought under the mischief sought to be remedied by
Sections 45/46/47 or Section 66 of the Code. The scope of enquiry
in relation to the questions as to whether a transaction is of giving
preference at a relevant time, is entirely different. Hence, it would
be expected of any resolution professional to keep such
requirements in view while making a motion to the Adjudicating
Authority. It would also have been appropriate for NCLT to deal
with all these aspects separately and distinctively, rather than
giving a combined findings on all these three aspects that the
impugned transactions were preferential, undervalued and
fraudulent. [Para 29.1, 29.2][391-C-D; G-H; 392-A-C]
10.1 In the Code, the significant expressions "financial
creditor" and "financial debt" have been defined with the words
"means" and "includes". The law remains settled that where a
word is defined to 'mean' something, the definition is prime facie
restrictive and exhaustive. On the other hand, where the word
defined is declared to 'include' something more, the definition is
prima facie extensive. However, a little difficulty arises when the
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definition contains both the words 'means' and 'includes'.
[Para 42][422-H; 423-A-B]
P. Kasilingam & Ors. v. P.S.G. College of Technology &
Ors. (1995) Suppl. 2 SCC 348 : [1995] 2 SCR 1061;
Krishi Utapadan Mandi Samiti & Anr v. M/s Shankar
Industries & Ors. (1993) Suppl. 3 SCC 361 : [1993] 1
SCR 1037; Delhi Development Authority v. Bhola Nath
Sharma (Dead) by LRs & Ors. (2011) 2 SCC 54; Black
Diamond Beverages & Anr. v. Commercial Tax Office,
Central Section, Assessment Wing, Calcutta & Ors.
(1998) 1 SCC 458 : [1997] 4 Suppl. SCR 133 - referred
to.
10.2 For a debt to become 'financial debt' for the purpose
of Part II of the Code, the basic elements are that it ought to be
a disbursal against the consideration for time value of money. It
may include any of the methods for raising money or incurring
liability by the modes prescribed in sub-clauses (a) to (f) of Section
5(8); it may also include any derivative transaction or counterindemnity obligation as per sub-clauses (g) and (h) of Section
5(8); and it may also be the amount of any liability in respect of
any of the guarantee or indemnity for any of the items referred to
in sub-clauses (a) to (h). The requirement of existence of a debt,
which is disbursed against the consideration for the time value of
money remains an essential part even in respect of any of the
transactions/dealings stated in sub-clauses (a) to (i) of Section
5(8), even if it is not necessarily stated therein. In any case, the
definition, by its very frame, cannot be read so expansive, rather
infinitely wide, that the root requirements of 'disbursement'
against 'the consideration for the time value of money' could be
forsaken in the manner that any transaction could stand alone to
become a financial debt. In other words, any of the transactions
stated in the said sub-clauses (a) to (i) of Section 5(8) would be
falling within the ambit of 'financial debt' only if it carries the
essential elements stated in the principal clause or at least has
the features which could be traced to such essential elements in
the principal clause. The essential element of disbursal, and that
too against the consideration for time value of money, needs to
be found in the genesis of any debt before it may be treated as
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'financial debt' within the meaning of Section 5(8) of the Code.
This debt may be of any nature but a part of it is always required
to be carrying, or corresponding to, or at least having some traces
of disbursal against consideration for the time value of money.
[Para 43][427-E-H; 428-A-C]
10.3 The root requirement for a creditor to become financial
creditor for the purpose of Part II of the Code, there must be a
financial debt which is owed to that person. He may be the principal
creditor to whom the financial debt is owed or he may be an
assignee in terms of extended meaning of this definition but, and
nevertheless, the requirement of existence of a debt being owed
is not forsaken. [Para 44][428-D]
10.4 Therefore, for a person to be designated as a financial
creditor of the corporate debtor, it has to be shown that the
corporate debtor owes a financial debt to such person. Understood
this way, it becomes clear that a third party to whom the corporate
debtor does not owe a financial debt cannot become its financial
creditor for the purpose of Part II of the Code. [Para 45][428-EF]
10.5 The peculiar elements of the expressions "financial
creditor" and "financial debt", as occurring in Sections 5(7) and
5(8), when visualised and compared with the generic expressions
"creditor" and "debt" respectively, as occurring in Sections 3(10)
and 3(11) of the Code, the scheme of things envisaged by the
Code becomes clearer. The generic term "creditor" is defined
to mean any person to whom the debt is owed and then, it has
also been made clear that it includes a 'financial creditor', a
'secured creditor', an 'unsecured creditor', an 'operational
creditor', and a 'decree-holder'. Similarly, a "debt" means a
liability or obligation in respect of a claim which is due from any
person and this expression has also been given an extended
meaning to include a 'financial debt' and an 'operational debt'.
[Para 46][428-F-H; 429-A]
10.6 The use of the expression "means and includes" in
these clauses makes it clear that for a person to become a creditor,
there has to be a debt i.e., a liability or obligation in respect of a
claim which may be due from any person. A "secured creditor"
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in terms of Section 3(30) means a creditor in whose favour a
security interest is created; and "security interest", in terms of
Section 3(31), means a right, title or interest or claim of property
created in favour of or provided for a secured creditor by a
transaction which secures payment for the purpose of an
obligation and it includes, amongst others, a mortgage. Thus,
any mortgage created in favour of a creditor leads to a security
interest being created and thereby, the creditor becomes a
secured creditor. [Para 46.1][429-A-C]
10.7 However, when all the defining clauses are read
together and harmoniously, it is clear that the legislature has
maintained a distinction amongst the expressions 'financial
creditor', 'operational creditor', 'secured creditor' and 'unsecured
creditor'. Every secured creditor would be a creditor; and every
financial creditor would also be a creditor but every secured
creditor may not be a financial creditor. The expressions "financial
debt" and "financial creditor", having their specific and distinct
connotations and roles in insolvency and liquidation process of
corporate persons, have only been defined in Part II whereas
the expressions "secured creditor" and "security interest" are
defined in Part I. [Para 46.1][429-C-E]
10.8 In the scheme of the IBC, what is intended by the
expression 'financial creditor' is a person who has direct
engagement in the functioning of the corporate debtor; who is
involved right from the beginning while assessing the viability of
the corporate debtor; who would engage in restructuring of the
loan as well as in reorganisation of the corporate debtor's business
when there is financial stress. In other words, the financial
creditor, by its own direct involvement in a functional existence
of corporate debtor, acquires unique position, who could be
entrusted with the task of ensuring the sustenance and growth of
the corporate debtor, akin to that of a guardian. In the context of
insolvency resolution process, this class of stakeholders namely,
financial creditors, is entrusted by the legislature with such a
role that it would look forward to ensure that the corporate debtor
is rejuvenated and gets back to its wheels with reasonable capacity
of repaying its debts and to attend on its other obligations.
Protection of the rights of all other stakeholders, including other
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creditors, would obviously be concomitant of such resurgence of
the corporate debtor. [Para 47][429-F-H; 430-A]
10.9 Keeping the objectives of the Code in view, the
position and role of a person having only security interest over
the assets of the corporate debtor could easily be contrasted with
the role of a financial creditor because the former shall have only
the interest of realising the value of its security (there being no
other stakes involved and least any stake in the corporate debtor's
growth or equitable liquidation) while the latter would, apart from
looking at safeguards of its own interests, would also and
simultaneously be interested in rejuvenation, revival and growth
of the corporate debtor.