# PHOENIX ARC PVT. LTD v. KETULBHAI RAMUBHAI PATEL

- **Citation:** [2021] 1 S.C.R. 1043
- **Court:** Supreme Court of India
- **Decided:** 2021-02-03
- **Case number:** Civil Appeal No. 5146 of 2019
- **Bench:** Ashok Bhushan, R. Subhash Reddy, M. R. Shah
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/phoenix-arc-pvt-ltd-v-ketulbhai-ramubhai-patel-35412
- **Pages:** 21

## Headnote

Insolvency and Bankruptcy code, 2016 - ss. 5(7), 5(8), 3
and 60 - Contract Act, 1872 - ss.124, 126 and 172 -L&T
Infrastructure Finance company advanced the financial facility to
'D' - A facility agreement was executed between 'D' (borrower)
and L&T Infrastructure Finance company (lender) - Lender
advanced to borrower Rs.40 crores - 'DV' (corporate debtor) gave
an undertaking in favour of L&T Infrastructure Finance to the effect
that 100% of their shareholding in GEL shall not be disposed of so
long as any amounts were due and payable and outstanding under
the financial assistance proposed to be provided by L&T Infra to
the borrower -A Pledge agreement was also executed between 'DV'
and L&T Infrastructure Finance company by which agreement
40,160 shares of GEL were pledged as security -L&T assigned all
rights, title and interest in the financial facility including any security,
interest in favour of appellant -'D'(borrower) failed to repay -
Bank filed petition u/s.7 of the Code to initiate the corporate
resolution process in respect of 'DV'(corporate debtor) - Pursuant
to commencement of CIRP in respect of corporate debtor, the
appellant filed its claim for an amount of Rs.83,49,85,667/- with
respondent, the Interim Resolution Professional - Respondent opined
that the corporate debtor's liability was restricted to pledge of shares
-Appellant filed application before the NCLT - NCLT held that
appellant's status as financial creditor of the corporate debtor is
not proved in light of s.5(8) of the Code - NCLAT dismissed the
appeal filed by the appellant - On appeal, held: A contract of
guarantee is a contract to perform the promise, or discharge the
liability, of a third person in case of his default - The present is not
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
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[2021] 1 S.C.R.
shares as security -The corporate debtor has never promised to
discharge the liability of borrower -It was borrower who had
promised to repay the loan of Rs.40 crores in Facility Agreement
and it was borrower who had undertaken to discharge the liability
towards lender - The appellant at best will be a secured debtor qua
above security but shall not be a financial creditor within the meaning
of s.5 sub-sections (7) and (8) - The appellant is not financial
creditor of the corporate debtor - The decision of the Resolution
Professional is upheld.
Dismissing the appeal, the Court
HELD : 1.Whether the corporate debtor owed any financial
debt to the appellant so as to treat the appellant as financial
creditor is the question to be answered. The definition of 'financial
debt' as contained in Section 5(8) of the 2016 Code contains the
expressions "means" and "includes". The definition begins with
the words "financial debt" means 'a debt alongwith interest, if
any, which is disbursed against the consideration for the time
value of money and includes'... The main part of the definition,
thus, provides that financial debt means a debt "which is
disbursed against the consideration for the time value of money".
The definition in the second part gives instances which also
includes financial debt. The appellant in his submission has relied
on Section 5(8)(i) to support his claim that the appellant is the
financial creditor. [Para 21][1054-E-G]
2. It is clear from the definition a contract of guarantee
(section 126 of the Indian Contract Act, 1872) is a contract 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 borrower. The Facilit

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 [2021] 1 S.C.R. 1043
1043
PHOENIX ARC PVT. LTD.
v.
KETULBHAI RAMUBHAI PATEL
(Civil Appeal No. 5146 of 2019)
FEBRUARY 03, 2021
[ASHOK BHUSHAN, R. SUBHASH REDDY
AND M. R. SHAH, JJ.]
Insolvency and Bankruptcy code, 2016 - ss. 5(7), 5(8), 3
and 60 - Contract Act, 1872 - ss.124, 126 and 172 -L&T
Infrastructure Finance company advanced the financial facility to
'D' - A facility agreement was executed between 'D' (borrower)
and L&T Infrastructure Finance company (lender) - Lender
advanced to borrower Rs.40 crores - 'DV' (corporate debtor) gave
an undertaking in favour of L&T Infrastructure Finance to the effect
that 100% of their shareholding in GEL shall not be disposed of so
long as any amounts were due and payable and outstanding under
the financial assistance proposed to be provided by L&T Infra to
the borrower -A Pledge agreement was also executed between 'DV'
and L&T Infrastructure Finance company by which agreement
40,160 shares of GEL were pledged as security -L&T assigned all
rights, title and interest in the financial facility including any security,
interest in favour of appellant -'D'(borrower) failed to repay -
Bank filed petition u/s.7 of the Code to initiate the corporate
resolution process in respect of 'DV'(corporate debtor) - Pursuant
to commencement of CIRP in respect of corporate debtor, the
appellant filed its claim for an amount of Rs.83,49,85,667/- with
respondent, the Interim Resolution Professional - Respondent opined
that the corporate debtor's liability was restricted to pledge of shares
-Appellant filed application before the NCLT - NCLT held that
appellant's status as financial creditor of the corporate debtor is
not proved in light of s.5(8) of the Code - NCLAT dismissed the
appeal filed by the appellant - On appeal, held: A contract of
guarantee is a contract to perform the promise, or discharge the
liability, of a third person in case of his default - The present is not
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
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[2021] 1 S.C.R.
shares as security -The corporate debtor has never promised to
discharge the liability of borrower -It was borrower who had
promised to repay the loan of Rs.40 crores in Facility Agreement
and it was borrower who had undertaken to discharge the liability
towards lender - The appellant at best will be a secured debtor qua
above security but shall not be a financial creditor within the meaning
of s.5 sub-sections (7) and (8) - The appellant is not financial
creditor of the corporate debtor - The decision of the Resolution
Professional is upheld.
Dismissing the appeal, the Court
HELD : 1.Whether the corporate debtor owed any financial
debt to the appellant so as to treat the appellant as financial
creditor is the question to be answered. The definition of 'financial
debt' as contained in Section 5(8) of the 2016 Code contains the
expressions "means" and "includes". The definition begins with
the words "financial debt" means 'a debt alongwith interest, if
any, which is disbursed against the consideration for the time
value of money and includes'... The main part of the definition,
thus, provides that financial debt means a debt "which is
disbursed against the consideration for the time value of money".
The definition in the second part gives instances which also
includes financial debt. The appellant in his submission has relied
on Section 5(8)(i) to support his claim that the appellant is the
financial creditor. [Para 21][1054-E-G]
2. It is clear from the definition a contract of guarantee
(section 126 of the Indian Contract Act, 1872) is a contract 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 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
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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".
The Pledge Agreement dated 10.01.2012 does not contain any
contract that the promise which was made by the borrower in the
Facility Agreement dated 12.05.2011 to discharge the liability of
debt of Rs.40 crores is undertaken by the corporate debtor. It
was the borrower who had promised to repay the loan of Rs.40
crores in Facility Agreement dated 12.05.2011 and it was borrower
who had undertaken to discharge the liability towards lender. The
Pledge Agreement dated 10.01.2012 does not contain any contract
that corporate debtor has contracted to perform the promise, or
discharge the liability of the third person. The Pledge Agreement
is limited to pledge of 40,160 shares of GEL only. This Court has
noticed above that in the Facility Agreement there is a Security
Creation by way of Schedule IV in which 100% equity shares of
GEL were pledged by the borrower and second pari-passu charge
on all current assets of the GEL was also created as security for
loan. It transpires that since some shares of GEL were also with
the corporate debtor who is subsidiary Company of 'D'. the same
was also pledged with the lender as additional security by a
subsequent agreement dated 10.01.2012. [Para 23][1055-E-H;
1056-A-C]
5. This Court in Swiss Ribbons (P) Ltd. v. Union of India and
Pioneer Urban Land & Infrastructure Ltd. v. Union of India held
that a person having only security interest over the assets of
corporate debtor, even if falling within the description of 'secured
creditor' by virtue of collateral security extended by the corporate
debtor, would not be covered by the financial creditors as per
definitions contained in sub-section (7) and (8) of section 5. What
has been held by this Court as noted above is fully attracted in
the present case where corporate debtor has only extended a
security by pledging 40,160 shares of GEL. The appellant at best
will be secured debtor qua above security but shall not be a
financial creditor within the meaning of Section 5 sub-sections
(7) and (8). [Para 30][1062-A-C]
PHOENIX ARC PVT. LTD. v. KETULBHAI RAMUBHAI PATEL
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6. The Appellate Tribunal has dealt with Section 5(8)(f) while
rejecting the claim of the appellant as to be the financial creditor.
It appears that the submission based on Section 5(8) (i) was not
addressed before the Appellate Tribunal. This Court, thus, uphold
the decision of the Resolution Professional as approved by the
NCLAT as correct. The appellant is not financial creditor of the
corporate debtor. Hence, Miscellaneous Application was rightly
rejected by the Adjudicating Authority.This Court, however, make
it clear that observations made by us in this judgment are only
for deciding the claim of the appellant as the financial creditor
within the meaning of Section 5(7) and 5(8) of the Code and shall
have no bearing on any other proceedings undertaken by the
appellant to establish any of its right in accordance with law.
[Para 32][1062-F-H; 1063-A]
Swiss Ribbons (P) Ltd. v. Union of India (2019) 4 SCC
17 : [2019] 3 SCR 535; Pioneer Urban Land &
Infrastructure Ltd. v. Union of India (2019) 8 SCC
416 : [2019] 10 SCR 381 - relied on.
Anuj Jain, Interim Resolution Professional for Jaypee
Infratech Limited vs. Axis Bank Limited and others
(2020) 8 SCC 401 - referred to.
Jagjivandas Jethalal and another v. King Hamilton &
Co. Indian Law Reports, Volume LV 1931, 617 - referred
to.
Case Law Reference
(2020) 8 SCC 401
referred to
Para 8
[2019] 3 SCR 535
relied on
Para 27
[2019] 10 SCR 381
relied on
Para 29
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 5146
of 2019.
From the Judgment and Order dated 09.04.2019 of the National
Company Law Appellate Tribunal, New Delhi in Company Appeal (AT)
(Insolvency) No. 325 of 2019.
K.V. Vishwanathan, Sr. Adv., Pai Amit, Charles D. Souza,
Manaswi Agarwal, Apoorv Singhal, Rahat Bansal, Ms. Pankhuri
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Bhardwaj, Yash Badkur, Rohit R. Saboo, Ms. Ami Jain, Ms. Anushree
Prashit Kapadia, Ashutosh Kumar, Ms. Namita Choudhary, Ms. Praveena
Gautam, Pawan Shukla, Raja Ram, Ms. Sweety Pandey, Varun Singh,
Gaurav Nair, Ms. Pranati Bhatnagar, Kritya Sinha, Divyanshu Bhandari,
Advs. for the appearing parties.
The Judgment of the Court was delivered by
ASHOK BHUSHAN, J.
This appeal under Section 62 of the Insolvency and Bankruptcy
Code, 2016 (hereinafter referred to as "Code") has been filed questioning
the judgment of the National Company Law Appellate Tribunal, New
Delhi dated 09.04.2019 dismissing the Company Appeal filed by the
appellant. The Company Appeal was filed by the appellant against order
dated 22.02.2019 of National Company Law Tribunal, Mumbai Bench
rejecting the Miscellaneous Application filed by the appellant under
Section 60(5)(c) of the Code holding that the appellant is not the financial
creditor of the corporate debtor, Doshion Veolia Water Solutions Private
Limited.
2. Brief facts of this case for deciding this appeal are:
L & T Infrastructure Finance Company Limited advanced the
financial facility to Doshion Limited, a Company incorporated and
registered under the Companies Act, 1956. A Facility Agreement dated
12.05.2011 was executed between the Doshion Limited (borrower) and
L & T Infrastructure Finance Company Limited (lender) advancing to
the borrower a financial facility of Rs.40 crores repayable in 72 structured
monthly instalments. Schedule IV of the facility agreement dealt with
"Security Creation". The Board of Directors of Doshion Veolia Water
Solutions Private Limited (corporate debtor) passed a Resolution on
26.07.2011 to give Non-Disposal Undertaking in favour of L & T
Infrastructure Finance Company Limited whereby Board was authorised
to provide an undertaking to the effect that 100% of their shareholding
in Gondwana Engineers Limited (GEL) shall not be disposed of so long
as any amounts were due and payable and outstanding under the financial
assistance proposed to be provided by L&T Infra to borrower. On
10.01.2012 a Pledge Agreement was executed between Doshion Veolia
Water Solutions Private Limited and L&T Infrastructure Finance
Company Limited by which agreement 40,160 shares of Gondwana
Engineers Limited were pledged as a security. On 10.01.2012 a deed of
PHOENIX ARC PVT. LTD. v. KETULBHAI RAMUBHAI PATEL
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[2021] 1 S.C.R.
undertaking was also executed by Doshion Veolia Water Solutions Private
Limited in favour of L&T Infrastructure Finance Co.Ltd. By agreement
dated 30.12.2013 L&T Infrastructure assigned all rights, title and interest
in the financial facility including any security, interest therein in favour
of Phoenix ARC Pvt. Ltd., the appellant under Section 5 of the
Securitisation and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002. The borrower, Doshion Limited failed to
repay as per agreed terms dated 12.05.2011. The appellant issued a
notice dated 19.02.2014 and recalled the financial facility. The appellant
filed O.A.No.325 of 2016 before the Debts Recovery Tribunal,
Ahmedabad which is said to be pending.
3. On 31.08.2018, Bank of Baroda filed Company Petition
No.CP(IB)1752/MB/2017 before the Adjudicating Authority under
Section 7 of the Code to initiate the corporate insolvency resolution
process in respect of the Doshion Veolia Water Solutions Private Limited
(Corporate Debtor). By order dated 31.08.2018, the Adjudicating
Authority admitted the Company Petition and the corporate insolvency
resolution process began. The respondent was appointed as the Interim
Resolution Professional of the corporate debtor which was later confirmed
as the Resolution Professional of the corporate debtor. Pursuant to the
commencement of corporate insolvency resolution process in respect of
the corporate debtor, the appellant filed its claim for an amount of
Rs.83,49,85,667/- with the respondent. The respondent vide email dated
20.09.2018 expressed an opinion that as per the Pledge Agreement
submitted by the appellant, the corporate debtor's liability was restricted
to pledge of the shares only. The respondent sought further documents
in respect of the appellant's claim. Although additional documents were
submitted by the appellant, the respondent by email dated 23.11.2018
reiterated the earlier view.
4. The appellant filed M.A.No.1514 of 2018 before the National
Company Law Tribunal, Bench at Mumbai in Company Petition
No.CP(IB)1752/MB/2017 seeking a direction to the respondent to admit
the claim of the appellant as a financial debt with all consequential benefits
including voting rights in the Committee of creditors of the corporate
debtor. The appellant stated that pledge of the shares by the corporate
debtor was in essence a guarantee for financial debt and, therefore,
appellant was a financial creditor of the corporate debtor. The Resolution
Professional vide email dated 04.12.2018 rejected the claim of the
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appellant as financial creditor of the corporate debtor on the ground that
there was no separate Deed of Guarantee in favour of the Assignor.
The respondent filed an affidavit in reply before the Adjudicating Authority.
After hearing the parties, the Adjudicating Authority passed an order
dated 22.02.2019 rejecting the Miscellaneous Application filed by the
appellant. The Adjudicating Authority held that the applicant's status as
financial creditor of the corporate debtor is not proved in the light of
Section 5(8) of the Code.
5. Aggrieved by the judgment of the Adjudicating Authority, the
appeal was filed by the appellant before the Appellate Tribunal. The
Appellate Tribunal held that pledge of shares in question do not amount
to "disbursement of any amount against the consideration for the time
value of money" and it do not fall within sub-clause (f) of sub-section
(8) of Section 5 as suggested by the learned counsel for the appellant.
The Appellate Authority finding no merit in the appeal, dismissed the
appeal. Aggrieved by the judgment of the Appellate Tribunal, the appellant
has filed the present appeal.
6. We have heard Shri K.V. Vishwanathan, learned senior counsel
for the appellant, Ms. Ami Jain, learned counsel for the respondent. We
have also heard learned counsel for the Bank of Baroda as intervenor.
7. Shri K.V. Vishwanathan, learned senior counsel, submits that
the appellant is a financial creditor within the meaning of Section 5 subsection (8)(i) of the Code. He submits that liability of the corporate debtor,
who is surety, is co-extensive to that of debtor and the creditor has full
rights to pursue his liability against the surety even before the creditor.
There is a debt which is payable by the corporate debtor to the appellant
and for securing that debt, the corporate debtor has created a security
interest in favour of the Assignor that is L&T Infrastructure Ltd. The
L&T Infrastructure Ltd. having assigned all its rights and obligations to
the appellant vide Assignment dated 30.12.2013, the appellant has stepped
into the shoes of L&T Infrastructure Ltd. The parent Company of
corporate debtor Doshion Ltd. took a credit facility from the predecessor
of the appellant and the corporate debtor undertook a liability by creating
a security interest in the form of shares of Gondwana Engineers Limited.
The present case is covered by Section 5(8)(b) read with 5(i), not
accepting the appellant as financial creditor would have effect of leaving
the appellant effectively remediless inasmuch as the appellant cannot
enforce the guarantee during the subsistence of moratorium period and
PHOENIX ARC PVT. LTD. v. KETULBHAI RAMUBHAI PATEL
[ASHOK BHUSHAN, J.]
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[2021] 1 S.C.R.
once the resolution plan is passed without any redress to the appellant in
the Financial Plan, the said resolution plan would be binding upon the
appellant whereupon the appellant shall be gravely prejudiced since
nothing could then be recoverable from the corporate debtor. The
corporate debtor in effect has provided a guarantee to L&T Infrastructure
Ltd. whereby the corporate debtor guarantees L&T Infrastructure the
debts due from Doshion Ltd. and in case of non-payment, a charge
subsisted upon the 100% shareholding of Gondwana Engineers Ltd. As
the corporate debtor has secured the payment of the loan, the liability of
corporate debtor to L&T Infrastructure became co-extensive to that of
Doshion Ltd. under Section 128 of the Indian Contract Act, 1872 which,
inter alia, financial creditor to the appellant herein and the loan was
advanced for interest and the said loan was secured by the corporate
debtor.
8. Learned counsel further submits that the judgment of this Court
in Anuj Jain, Interim Resolution Professional for Jaypee Infratech
Limited vs. Axis Bank Limited and others, (2020) 8 SCC 401,
relied by the learned counsel for the respondent is distinguishable from
the facts of the present case. He submits that any security that would
permit the right of action against the third party that is not the borrower,
would amount to guarantee. The mere fact that corporate debtor has
not borrowed money from the appellant, it cannot absolve the corporate
debtor from its liability as guarantor. He submits that term guarantee is
not to be understood narrowly and it has to be understood to include any
security created by third party to secure repayment of financial debt
including a pledge of shares. The pledge of shares by corporate debtor
to secure the loan advanced to the parent Company of the corporate
debtor amounts to a guarantee. He lastly submits that judgment of Anuj
Jain needs to be clarified to the effect that it has been rendered in a
specific facts scenario which does not apply to the present case at all.
9. Ms. Ami Jain, learned counsel, appearing for the respondent
submits that the appellant is not a creditor of any nature whatsoever of
the corporate debtor. The appellant has no right of recovery of any debt
from the corporate debtor and has a limited right of enforcing and realising
the value of its security in the shape of the shares held by the corporate
debtor in its subsidiary, that is, Gondwana Engineers Ltd. which is pledged
with the appellant as a security for the loan given to its parent Company,
viz. Doshion Ltd. in accordance with the Pledge Agreement dated
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10.01.2012. The pledge is not, in any manner, a guarantee under the
Contract Act. Section 5(8)(i) of the Code takes within its sweep only
any liability arising out of a guarantee for any of the items referred to in
sub-clauses (a) to (h) of Section 5(8) of the Code, and not any other
instrument in the nature of a guarantee. The pledge of shares cannot be
equated with the guarantee as both are absolutely different in terms of
their ramification and implication. The corporate debtor has not entered
into any contract of guarantee with the appellant to perform the promise,
or discharge the liability of a third party in case of his default. In the
event of default by the borrower, the appellant has the limited right to
realise the money by sale of shares pledged without requiring the
corporate debtor to perform the promise, or discharge the liability as no
promise is given by the corporate debtor to repay the debt recoverable
from the borrower.
10. Learned counsel for the respondent submits that the National
Company Law Tribunal has rightly rejected the claim of the appellant as
financial creditor. It is further submitted that the appellant has already
initiated proceedings at the Debt Recovery Tribunal, Ahmedabad for
realisation of its dues which is an admitted fact. In the Code nowhere
pledge is mentioned. The appellant cannot claim their pledge agreement
dated 10.01.2012 as guarantee as there is no Deed of Guarantee on the
record. The Code does not deal with recovery.
11. Learned counsel appearing for Bank of Baroda/Intervenor
referring to objects and reasons of Insolvency and Bankruptcy Code
contends that the purpose and object of the Code is entirely different. It
is not a mechanism for recovery of any amount. The appellant has already
moved to Debt Recovery Tribunal, Ahmedabad.
12. We have considered the submissions of the learned counsel
for the parties and have perused the records.
13. The only question to be considered in this appeal is as to
whether the appellant is a financial creditor within the meaning of Section
5(8) of the Code on the strength of pledge agreement dated 10.01.2012
and Deed of Undertaking dated 10.01.2012 entered into with L&T
Infrastructure.
14. We may first notice the transaction in question on the basis of
which the appellant claims to be treated as financial creditor qua corporate
debtor.
PHOENIX ARC PVT. LTD. v. KETULBHAI RAMUBHAI PATEL
[ASHOK BHUSHAN, J.]
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15. The Facility Agreement dated 12.05.2011 was executed
between the Doshian Ltd. and the L&T Infrastructure Finance Company
Ltd. The corporate debtor was not a party to the Facility Agreement. It
was the Doshion Ltd., the borrower who was to repay the loan of Rs.40
crores. Schedule-IV of Facility Agreement is "Security Creation" which
is a part of the Facility Agreement, is as follows:
"SCHEDULE-IV
SECURITY CREATION
The Facility (together with all principal interest, liquidated damages,
fees costs, charges, expenses and other monies and all other
amounts stipulated and payable to the Lender) shall be secured
by:
1.
Second pari-passu charge on all current assets of the
Borrower.
2.
Second pari-passu charge on all current assets of Gondwana
Engineers Limited (GEL).
3.
Pledge of 100% equity shares together with all accretions
thereon of the GEL.
4.
Personal guarantee of promoters of DL namely Ashit
Dhirajilal Doshi, Dhirajilal Shivlal Doshi and Rakshit Dhirajlal
Doshi.
5.
Debt Service Reserve Account (DSRA) in the form of LC/
BG for 3 months of interest and principal payments.
6.
Demand Promissory Note.
If, at any time during the subsistence of the Facility, the Lender is
of the opinion that the security provided by the Borrower has
become inadequate to cover the Facility then outstanding, then,
on the Lender advising the Borrower to that effect, the Borrower
shall provide and furnish to the Lender, to the satisfaction of the
Lender, such additional security as may be acceptable to the
Lender to cover such deficiency."
16. Item No.3 of Schedule IV, as noted above, is Pledge of 100%
equity shares together with all accretions thereon of the GEL. There is
Second pari-passu charge on all current assets of the GEL as per
Schedule IV.
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17. The Pledge Agreement dated 10.01.2012 was entered into
between the corporate debtor and L&T Infrastructure Finance Co. Ltd.
Schedule II contains details of the Securities which are 40,160 shares of
GEL. The corporate debtor has pledged in favour of lender, the securities,
the Clauses of the Pledge Agreement clearly describe the nature of the
security created by the Pledge Agreement. It is relevant to notice Clause
2(iii) which is to the following effect:
"2(iii) The Obligors hereby agree and confirm that the pledge
created/to be created in terms of this Agreement shall be a
continuing security for the payment of the Secured Obligations
and the due performance by the Obligors of their obligations
hereunder."
18. The shares of GEL were pledged with L&T Infrastructure as
security. The Deed of Undertaking which was given on the same day,
i.e., 10.01.2012 is also to the same effect.
19. Now, we may look into the provisions of the Insolvency and
Bankruptcy Code, 2016 relevant for the present controversy. Part II of
Chapter I of the Code deals with Insolvency Resolution Liquidation for
Corporate Persons. Section 5 is the definition clause. Section 5(7) defines
"financial creditor" in the following words:
"Section 5(7) "financial creditor" means any person to whom a
financial debt is owed and includes a person to whom such debt
has been legally assigned or transferred to;"
20. What is 'financial debt' is defined in Section 5(8) which is to
the following effect:
"Section 5(8) "financial debt" means a debt along with interest, if
any, which is disbursed against the consideration for the time value
of money and includes-
(a) money borrowed against the payment of interest;
(b) any amount raised by acceptance under any acceptance credit
facility or its de-materialised equivalent;
(c) any amount raised pursuant to any note purchase facility or
the issue of bonds, notes, debentures, loan stock or any similar
instrument.
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(d) the amount of any liability in respect of any lease or hire
purchase contract which is deemed as a finance or capital lease
under the Indian Accounting Standards or such other accounting
standards as may be prescribed;
(e) receivables sold or discounted other than any receivables sold
on non-recourse basis;
(f) any amount raised under any other transaction, including any
forward sale or purchase agreement, having the commercial effect
of a borrowing;
(g) any derivative transaction entered into in connection with
protection against or benefit from fluctuation in any rate or price
and for calculating the value of any derivative transaction, only
the market value of such transaction shall be taken into account;
(h) any counter-indemnity 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-clauses (a) to (h)
of this clause;"
21. Whether the corporate debtor owed any financial debt to the
appellant so as to treat the appellant as financial creditor is the question
to be answered. The definition of 'financial debt' as contained in Section
5(8) contains the expressions "means" and "includes". The definition
begins with the words "financial debt" means 'a debt alongwith interest,
if any, which is disbursed against the consideration for the time value of
money and includes'... The main part of the definition, thus, provides
that financial debt means a debt "which is disbursed against the
consideration for the time value of money". The definition in the second
part gives instances which also includes financial debt. Learned counsel
for the appellant in his submission has relied on Section 5(8)(i) to support
his claim that the appellant is the financial creditor. Learned counsel for
the appellant has referred both sub-clause (b) and sub-clause (i) and
submits that credit facility which was extended to the borrower is
referable to Section 5(8)(b) and the corporate debtor pledged his share
to give indemnity for credit facility and which is in a sense of guarantee.
The debt is a financial debt within the meaning of Section 5(8)(i) and the
appellant is the financial creditor. There can be no dispute that credit
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facility given by the Assignor to borrower by Facility Agreement dated
12.05.2011 is a credit facility which can be covered under Section 5(8)(b).
A bare perusal of Section 5(8)(i) indicates that it contemplates 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) of clause (8). Sub-clause
(i) uses two expressions "guarantee" and "indemnity" for any of the
items referred to in sub-clauses (a) to (h).
22. Chapter VIII of the Indian Contract Act, 1872 deals with "Of
Indemnity and Guarantee". Section 124 defines "Contract of indemnity"
and Section 126 defines "Contract of guarantee". Section 126 which is
relevant for the present case is as follows:
"Section 126. "Contract of guarantee", "surety", "principal
debtor" and "creditor".-A "contract of guarantee" is a contract
to perform the promise, or discharge the liability, of a third person
in case of his default. The person who gives the guarantee is
called the "surety"; the person in respect 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."
23. As clear from the definition a contract of guarantee is a contract
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 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". The Pledge
Agreement dated 10.01.2012 does not contain any contract that the
promise which was made by the borrower in the Facility Agreement
dated 12.05.2011 to discharge the liability of debt of Rs.40 crores is
undertaken by the corporate debtor. It was the borrower who had
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promised to repay the loan of Rs.40 crores in Facility Agreement dated
12.05.2011 and it was borrower who had undertaken to discharge the
liability towards lender. The Pledge Agreement dated 10.01.2012 does
not contain any contract that corporate debtor has contracted to perform
the promise, or discharge the liability of the third person. The Pledge
Agreement is limited to pledge of 40,160 shares of GEL only. We have
noticed above that in the Facility Agreement there is a Security Creation
by way of Schedule IV in which 100% equity shares of GEL were
pledged by the borrower and second pari-passu charge on all current
assets of the GEL was also created as security for loan. It transpires
that since some shares of GEL were also with the corporate debtor who
is subsidiary Company of Doshion Ltd. the same was also pledged with
the lender as additional security by a subsequent agreement dated
10.01.2012.
24. The Pledge Agreement and undertaking given, entered between
Assignor and corporate debtor cannot be termed as contract of guarantee
within the meaning of Section 126.
25. The expression "pledge" is separately dealt with in the Indian
Contact Act, 1872. Section 172 defines 'pledge' in the following words:
"Section 172. "Pledge", "pawnor", and "pawnee" defined.-
The bailment of goods as security for payment of a debt or
performance of a promise is called "pledge". The bailor is in this
case called the "pawnor". The bailee is called "pawnee".:"
26. The word 'guarantee' and 'indemnity' as occurring in Section
5(8)(i) has not been defined in the Code. Section 3 sub-section (37) of
the Code provides that words and expressions used but not defined in
the Code but defined in the Indian Contract Act, 1872 shall have the
meanings respectively assigned to them.
27. Learned counsel for the appellant has referred to a judgment
of the Bombay High Court in the Indian Law Reports, Volume LV
1931, 617, Jagjivandas Jethalal and another vs. King Hamilton
& Co., which was case arising out of the suit filed to enforce an equitable
mortgage of an immovable property. The defendants as owners of the
immovable property in question created an equitable mortgage upon it
as sureties for the firm of Sarda & Sons who owed money to the plaintiff.
The Bombay High Court had occasion to consider Section 126 of the
Contract Act in the above case. Noticing the arguments based on Section
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126 of the Indian Contract Act raised by the respondent, the Bombay
High Court noticed following at page 684:
"......Mr. Desai's answer to that is that the defendants here were
not sureties. He relies on section 126 of the Indian Contract Act
which provides that a "contract of guarantee" is a contract to
perform the promise or discharge the liability of a third person in
case of his default, and the person who gives the guarantee is
called the "surety". Mr. Desai says that here there was no personal
obligation on the defendents to pay anything: they merely handed
over their property as security, and that being so, there was no
contract to perform the promise or discharge the liability of a third
person. Then he says that in section 135, which provides that a
contract between the creditor and the principal debtor by which
the creditor makes a composition with, or promises to give time
to, or not to sue, the principal debtor, dishcarges the surety unless
the surety assents to such contract, th word "surety" must have
the same meaning as in section 126, and therefore a person who
merely deposits the documents as security is not a surety within
section 135. There may possibly be something in that argument
on the wording of the sections, but it has been held often that the
Indian Contract Act is not exhaustive, and, therefore, one has to
consider apart from the Act what the general is."
28. The Bombay High Court although observed that on plain
reading of Section 126, there may be some substance in the submission
of Mr. Desai but Bombay High Court proceeded to examine the general
law. The judgment of the Bombay High Court relied by the learned
counsel for the appellant was on its own facts and has no bearing on
interpretation of Section 5(8)(i) with reference to Section 126 of Contract
Act.
29. The learned counsel for the respondent has placed heavy
reliance on two-Judge Bench judgment of this Court in Jaypee Infratech
Limited vs. Axis Bank Limited (supra). One of the issues which
came before this Court was as to whether the respondent (lenders of
JAL) could be financial creditors of the corporate debtor JIL on the
strength of the mortgages created by corporate debtor as collateral
securities of its holding Co. JIL. In the above case, the AXIS Bank had
lent finance to Jaiprakash Associates Ltd.(JAL), the holding company,
Jaypee Infratech Ltd.(JIL) had mortgaged several properties as collateral
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securities for the loans and advances made by the Axis Bank to JAL.
Interim Resolution Professional has rejected the claim of the Asix Bank
to be recognised as financial creditor of corporate debtor (JIL). The
National Company Law Tribunal has approved the decision of Interm
Resolution Professional rejecting the claim of Axis Bank as financial
creditor against which appeal was filed before the Appellate Tribunal
which was allowed. The corporate debtor had filed an appeal before
this Court in which appeal one of the issues was as to whether the Axis
Bank can be recognised as financial creditor of the corporate debtor on
the strength of the mortgaged by the JIL, corporate debtor of its holding
Co. JAL. This Court after noticing the facts, noted rival submissions of
the parties on the above issue in detail. The two earlier judgments of this
Court, namely, Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4
SCC 17 and Pioneer Urban Land & Infrastructure Ltd. v. Union
of India, (2019) 8 SCC 416 were extensively noted. Paragraphs 46 to
50.2 contain elaborate discussion regarding the essentials of "financial
debt" and "financial creditor" which are to the following effect:
"46. Applying the aforementioned fundamental principles to the
definition occurring in Section 5(8) of the Code, we have not an
iota of doubt that 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 counter-indemnity 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, in our view, 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
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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. In yet other words, 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 '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.
47. As noticed, 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.
48. It is also evident that what is being dealt with and described in
Section 5(7) and in Section 5(8) is the transaction vis-a-vis the
corporate debtor. 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.
49.