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TMI Blog2018 (5) TMI 1901X X X X Extracts X X X X X X X X Extracts X X X X ..... h Ltd (the Corporate Debtor)in rejecting the claim of the applicant as a Financial Creditor of the corporate debtor on account of the security provided for the facilities granted by the applicant to the holding company of the Corporate Debtor namely Jayprakash Associates Ltd ("JAL") by its letter dated 24 November 2017 and 16 December 2017. In the aforesaid letters the Resolution Professional inter-alia, stated that the applicant cannot be termed as the Financial Creditor as defined under Sec 5 (7) of the Code and that the claim does not amount to Financial Debt under sec 5 (8) of the code in relation to the security provided by the Corporate Debtor for the loans of JAL. 3. Brief facts stated by the applicant are as under. 3.1. IDBI Bank limited filed the Company Petition under sec 7 of the Code for initiation of The Corporate Insolvency Resolution Process ("CIRP") concerning the corporate debtor. The company petition was admitted by this Tribunal vide its order dated 9 August 2017 and Mr Anuj Jain [Some text are missing in original PDF] process to carry out the functions as elucidated in the Code. The resolution Professional under the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Securitisation And Reconstruction Of Financial Assets And Enforcement Of Security Interest Act 2002 ("SARFAESI Act") and Sub-Registrar Assurances. 3.7. The applicant contends that the disclosure of the Consortium mortgages and the Exclusive mortgages at in the Annual Report of the corporate debtor ensured that everyone concerned with the business and affairs of the Corporate Debtor, including the lenders had sufficient knowledge about the Consortium Mortgages and the Exclusive Mortgages. It is further submitted that despite the knowledge of the Consortium mortgages and Exclusive mortgages being in public records and annual reports of JAL, none of the lenders of the Corporate Debtor, whether at any of the Joint Lenders Meeting or otherwise, have raised any objection to the creation of the Consortium Mortgages and the Exclusive mortgages by the corporate debtor. It is further submitted that neither any shareholder nor the Director of the Corporate Debtor has raised any objection to the creation of the "Consortium Mortgages and Exclusive Mortgages" by the corporate debtor. 3.8. The applicant further contends that on account of continuous default in payment under the various cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Resolution Professional letter dated 24 November 2017, the applicant vide its letter bearing Reference Number MSG/2017/12/743 dated 7 December 2017 verified inter alia that the Corporate Debtor has mortgaged property to secure the repayment of the loan which is granted by the applicant to JAL and was sure that it shall be discharged by JAL under its obligations to the applicant under the JAL facilities (The Mortgage Debt) and as such the Corporate Debtor assured the Applicant with respect to such Mortgage Debt. It was also brought to the attention of the Resolution Professional that regarding mortgages, the Corporate Debtor has also undertaken to indemnify and keep the applicant indemnified against all losses, costs, claim and expenses which the applicant as the security trustee may incur. 3.13. The applicant further contends that the Resolution Professional thereafter issued the letter dated 16 December 2017 in response to the applicant's letter and denied the contention of the applicant that the corporate debtor owed any financial debt to the applicant and reiterated that in terms of the provisions of the code, the applicant is not a Financial Creditor of the Corporate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AL facilities) to the mortgagee (i.e. the applicant herein). Consequently, the corporate debtor stands as a guarantor for the financial debt owned by the JAL under the JAL facilities. 4.1. However, despite clarification given by the applicant, the resolution Professional failed to appreciate the transactions and the applicable laws and admit the claim of the applicant under the JAL Form -C and consider the applicant as a Financial Creditor Of The Corporate Debtor about the claim as mentioned in JAL Form-C. 4.2. The applicant states that he was hopeful that the issue would be resolved between the applicant and the Resolution professional in the light of the correspondence exchanged between them as mentioned hereinabove as well as the discussion in the meeting of Committee of Creditors. 4.3. Applicant contends that resolution Professional has already invited resolution plans from the Resolution Applicants, which are at advanced stages of considerations. The Applicant has been constrained to file this application praying for the relief from the Tribunal as contained herein. 4.4. The applicant further contends that since the resolution professional has , rejected the claim of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lities of the Corporate Debtor for effective resolution of the corporate debtor under the provisions of the Code. vi. The resolution professional is bound to interpret "claim" in an expansive manner. 6. Applicant has sought the relief of declaration to set-aside the decision of the resolution professional vide its letter dated 24 November 2017 and 16 December 2017 whereby the claim of the applicant as a financial creditor of the corporate debtor has been rejected by the resolution professional. Further directions has been sought for against the resolution professional to accept the claim of the applicant as the financial creditor of the corporate debtor to the extent of the amount of debt of Jaiprakash Associates Ltd ("JAL") secured under the mortgages and include the applicant in the committee of the creditors of the corporate debtor in respect of its claim in relation to the JAL facilities submitted vide its Form C dated 23 August 2017. Pending the hearing in final disposal of the [Some text are missing in original PDF] Resolution Professional from putting any resolution plan in respect of the corporate debtor for voting before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r under the provisions of the Code. Based on the above, the applicant claims that he is a secured Creditor of the corporate debtor under the provisions of the code. 7.3. The applicant further contends that the mortgages by nature imply a personal liability upon the Corporate Debtor to the extent of the amounts secured by the mortgage properties, till the repayment. It is submitted that the mortgages enable the mortgagee to secure the payment of a pecuniary claim through the medium of the property itself, that is mortgaged to him. The applicant further contends that Sec 58 (a) of the transfer of property act 1882 defines "mortgage" as "the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which gives rise to pecuniary liability". The applicant has a further relied on the case law of Hon'ble High Court Manic Chand vs Baldeo AIR 1951 Patna 527 wherein Hon'ble High Court has held that; "mortgage is a transfer of an interest in a specific immovable property as security for the repayment of the debt. That debt subsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ages were to be secluded from the definition of debt." 8. It is pertinent to point out that the word "debt" in the above mentioned case has been interpreted by the Hon'ble High Court of Delhi in context with the Recovery of Debts due to Banks and Financial Institutions Act 1993. In this case, we are concerned with the definition of "debt" provided in The Insolvency and Bankruptcy Code 2016 where the word financial creditor and financial debt have been defined in sec 5 (7) and (8) of the code which is given below for ready reference. Sec 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; (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- XXXXXXXXXXXXX The claim of the applicant ICICI bank has been rejected by Resolution Professional on the solitary ground that the claim submitted by the corporate debtor does not qualify as a "financial debt" within the meaning of "financial debt" as defined in sec 5 (8) under The Insolvency and Bankruptcy Code 2016 and therefore, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecurity for the debt of its holding company JAL. The corporate debtor is not a borrower; it has created a mortgage in favour of financial institutions for creating collateral security for the money borrowed by its holding company JAL. In the said transaction time value of money is not involved. The corporate debtor's liability is not regarding the debt owed by its holding company JAL. In case of default in making payment by the principal borrower, for which security interest has been created by the corporate debtor by mortgaging its property in favour of Applicant bank, the debt amount can be realised from the sale of the mortgaged property but not from the corporate debtor, i.e. Jaypee Infratech Ltd. The word debt is defined under subsection (11) of sec 3 of the code which means a liability obligation in respect of the claim which is due from any person and includes a financial debt and operational debt. The word claim is defined under sub-section (6) of sec 3 of the code. "Claim" means; (A) a right to payment, whether not such a right is reduced to judgement, fixed, disputed, disputed, legal, equitable, secured or unsecured; (B) a right to remedy for breach of contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. 10. The Ld. advocate appearing for the Resolution Professional submitted the basic ingredient of financial debt as defined under the code is that debt along with interest disbursed against time value of money. From a bare perusal of the Form C submitted by the applicant and the present application filed the applicant, it appears that this is not the case where the money has been disbursed to the corporate debtor which is payable along with interest within a period of time. The contention of the applicant, that the definition of financial debt does not envisage that the disbursement of debt has to be necessary to the corporate debtor is completely untenable in law. The contention of the applicant that under Sec 3 (10) of the code, the scope of debt is not limited to the liability or obligation owed directly by the principal borrower, but also includes liabilities or other obligations of other parties in respect of the debt of the principal borrower is untenable in law. 10.1. Further, the applicant in its letter dated 12 January 2018 reference number M FG/2018/01/755, has admitted that "the mortgages have been created by the corporate debtor an account of financial debt extende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y also transfers an interest in the specific immovable property to secure that liability; none the less the loan or debt to secure which the mortgage is created will remain a pecuniary liability of the person creating the mortgage. Therefore a mortgage debt would create a pecuniary liability upon the mortgagor and would be covered by the definition of the word "debt" in Section 2(6). We may in this connection refer to the Displaced Persons (Institution of Suits) Act 47 of 1948, which has been practically repealed by the Act. In that law, suits relating to immovable property were specially excepted under Section 4, but there is no such provision in the Act. Again Section 6 of the Displaced Persons (Legal Proceedings) Act 25 of 1949, which has also been repealed by the Act mentions decrees or orders for payment of money while in Section 15 of the Act which deals with the same matter those words are omitted and the words "proceedings in respect of any debt" are used instead. There can be no doubt in consequence that the Act is a comprehensive law dealing with all kinds of pecuniary liability. We are therefore of opinion that Section 2(6) clearly includes a mortgage debt and under sub- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acious to say that the defendant is not a debtor and, therefore, the defendant could not have created a mortgage in favour of the creditor. The defendant has rendered herself liable for the dues of M/S Nitin pharmaceuticals by agreeing to provide security in the form of a mortgage for the dues. Just as the principal debtor can create a mortgage of his immovable properties, the third person can also agree to create a mortgage to secure the dues of the respondent. In that manner, he becomes surety to the extent of the security or the mortgage. If that were not so, the present commercial and banking transactions would not be possible and would be hampered to a great extent. In the present day word of commerce, a person may not have sufficient security offer for obtaining advances from a financial institution is even though satisfying the requirements. In such cases, he draws upon resources of others by asking them to give a guarantee and also security for the performance of that guarantee, and it is a perfectly a legitimate and legal way of conducting such commercial transactions-.Thus even though there is no consideration to the third-party surety for a mortgage, the consideration of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the promisor himself or by the the conduct of any other person. In the instant case, as per the Mortgage deed the repayment obligation of the loan granted to JAL by the applicant is upon JAL as stated above and therefore, no contract of indemnity as claimed by the applicant has been entered even by conduct of the corporate debtor, and therefore, the contention of the applicant that the applicant is a financial creditor of the corporate debtor is completely untenable in law. 15. From a conjoint reading of Sections 5 (7), 5 (8), 3 (11), 3 (6) and 3 (8) and Regulation 13, 14 of CIRP Regulations, it is clear that the claims are invited from the creditors of the corporate debtor i.e. financial creditors, operational creditors and other creditors, and not from any person or the creditors of the holding company of the corporate debtor, who is not under corporate insolvency Resolution Process. The Resolution Professional is required to verify the claims received from all the three categories of the creditors, by the regulation 13 of the CIRP Regulations and the statutory forms in which the claims are submitted. The Code, therefore, clearly envisages that claims are to be invited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pondent that since the appellants have paid most of the amount the respondent was ready to pay" monthly committed returns" to the appellants. However, as the appellants were not required the monthly return till December 2008 i.e. for 9 months so the Respondent-Corporate Debtor. undertook to make a consolidated payment of Rs. 99,600/- less TDS. For every calendar month the Corporate Debtor was liable to pay committee return w.e.f. January 2009 till the date of handing over of the possession to the appellants. Therefore, it is clear that the amount disbursed by the appellants was "against the consideration of the time value of the money" and "the Respondent-Corporate Debtor raised the amount by way of sale purchase agreement, having a commercial effect of borrowing. "This is also clear from annual returns filed by Respondent and not disputed by the Respondent-Corporate Debtor in their annual returns, wherein the amount so raised/borrowed has been shown as 'commitment charges' under the head "Financial cost". The financial cost includes "Interest of loans" and other charges. Therefore, the 'commitment charge', which include interest on loan, shown against the head "Fin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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