TMI Blog2020 (2) TMI 1259X X X X Extracts X X X X X X X X Extracts X X X X ..... the descriptions noted above (para 28.1) and shall then decide as to what order is required to be passed, for avoidance of the impugned transaction or otherwise. Having found that the transactions in question cannot be countenanced, for being of preference during a relevant time to a related party; and having approved the order passed by NCLT in that regard, we do not consider it necessary to deal with the other length of arguments advanced by the learned counsel for parties on the questions as to whether the transactions are undervalued and/or fraudulent too. In the totality of circumstances, we would prefer leaving the said questions at that only, while also leaving all the related questions of law open; to be examined in an appropriate case. WHETHER LENDERS OF JAL COULD BE CATEGORISED AS FINANCIAL CREDITORS OF JIL - Held that:- A person having only security interest over the assets of corporate debtor (like the instant third party securities), even if falling within the description of secured creditor by virtue of collateral security extended by the corporate debtor, would nevertheless stand outside the sect of financial creditors as per the definitions contained in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olution plan. It was in the setup of such background that in Essar Steel, this Court made the observations relied upon by the respondents. Whether the respondents (lender of JAL) could be recognized as financial creditors of the corporate debtor JIL on the strength of the mortgage created by the corporate debtor, as collateral security of the debt of its holding company JAL? - HELD THAT:- Such lenders of JAL, on the strength of the mortgages in question, may fall in the category of secured creditors, but such mortgages being neither towards any loan, facility or advance to the corporate debtor nor towards protecting any facility or security of the corporate debtor, it cannot be said that the corporate debtor owes them any financial debt within the meaning of Section 5(8) of the Code; and hence, such lenders of JAL do not fall in the category of the financial creditors of the corporate debtor JIL. The impugned order dated 01.08.2019 as passed by NCLAT in the batch of appeals is reversed and is set aside. - CIVIL APPEAL NOS. 8512-8527 OF 2019, CIVIL APPEAL NOS. 6777-6797 OF 2019 CIVIL APPEAL NOS. 9357-77 OF 2019 (ARISING OUT OF DIARY NO. 32881 OF 2019) - - - Dated:- 26-2- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reditors of JIL for the purpose of IBC, have been allowed by NCLAT without recording any findings and without any discussion in that regard. Brief Outline and the Issues Involved 2. Before proceeding further, we may draw up a brief outline of the subjectmatter and the issues involved in these appeals. 2.1. As shall be noticed hereafter later, the CIRP concerning the corporate debtor JIL has already undergone several rounds and circles of proceedings in NCLT, NCLAT and at least twice over in this Court. 2.2. For what has been indicated in the introduction, it is evident that two major issues would arise in these appeals. One, as to whether the transactions in question deserve to be avoided as being preferential, undervalued and fraudulent, in terms of Sections 43, 45 and 66 of the Code; and second, as to whether the respondents (lender of JAL) could be recognized as financial creditors of the corporate debtor JIL on the strength of the mortgage created by the corporate debtor, as collateral security of the debt of its holding company JAL. 2.3. For a preliminary insight into the first issue, suffice would be to notice that during CIRP, the Interim Resolution Professio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... portedly allowed as per the result recorded in the impugned order dated 01.08.2019, but without any discussion in that regard. Aggrieved, one of the lenders of the corporate debtor JIL, IIFCL (appellant of Civil Appeal D. No. 32881 of 2019) has also questioned this aspect of the order impugned while asserting that such mortgagees cannot be taken as financial creditors of the corporate debtor JIL. Parties and their respective roles and interest in the matter 3. In view of the issues arising for determination in these appeals, with several parties carrying different roles, status and interests, worthwhile it would be to narrate at the outset, in brief, the relevant particulars of the key parties involved as follows: 3.1. Jaypee Infratech Limited (JIL): It is the corporate debtor company in whose relation CIRP is pending; and the mortgage transactions concerning its properties were questioned in the application filed by the Interim Resolution Professional. Such transactions form the subject-matter of these appeals. 3.2. Jaiprakash Associates Limited (JAL): It is the holding company of JIL; it had approximately 71.64% equity shareholding in JIL as on 31.03.2017. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n transactions that were questioned by IRP, the Adjudicating Authority held that six of them were preferential, undervalued and fraudulent and passed the orders for their avoidance while accepting the contentions of IRP. It may also be observed that five out of these six transactions were preceded by previous mortgage transactions for securing the loans/facilities to JAL. The transactions in question, with previous transactions and flow thereof, as given out during the course of submissions, could be comprehensively viewed as under: - 4.1. The transactions in favour of the Consortium of Banks and Financial Institutions: Property/transaction in question Previous transaction/s and flow thereof Mortgage deed dated 29.12.2016 for 167.229 acres of land situated at Village Chhalesar and Chaugan, Tehsil Etmadpur, District Agra, Uttar Pradesh executed by JIL in favour of Axis Trustee Services Ltd. to provide an additional security for term loans of ₹ 21081.5 crores sanctioned as a consortium to JAL. Hereinafter also referred to as Property No. 1 Initial mortgage deed dated 24.02.2015 released on 15.09.2015 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Property/transaction in question Previous transaction/s and flow thereof Mortgage deed dated 24.05.2016 for 25.0040 acres of land situated at Village Sultanpur, Sector-128, Noida, District Gautam Budh Nagar, Uttar Pradesh executed by JIL in favour of IDBI Trusteeship Services Ltd, as additional security, against the facility agreement dated 29.08.2012 between Standard Chartered Bank and JAL of ₹ 400 crores. The security was further extended for facility II for ₹ 450 crores on 27.12.2012; for facility III for ₹ 538.16 crores on 29.04.2015; for facility IV for ₹ 81.84 crores on 29.04.2015 and for working capital facility ₹ 297 crores on 29.08.2012. Hereinafter also referred to as Property No. 5 Initial mortgage deed dated 24.06.2009, extended by mortgage deed dated 27.11.2012 (for increased facility amount of ₹ 1300 crores as compared to ₹ 900 crores earlier). Vide mortgage on 23.03.2013, additional land admeasuring 25.0040 acres was added in the original land parcel to secure increased facility amount of ₹ 1750 crores as compared to ₹ 1300 crores earlier against the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , JAL was awarded the rights for construction of an expressway from Noida to Agra. A concession agreement was entered into with the Yamuna Expressway Industrial Development Authority. Coming on the heels of this project, JIL was set up as a special purpose vehicle. Finance was obtained from a consortium of banks against the partial mortgage of land acquired and a pledge of 51% of the shareholding held by JAL. Housing plans were envisaged for the construction of real estate projects in two locations of the land acquired, one in Wish Town, Noida and another in Mirzapur. Several other aspects of the dealings by these companies, their creditors and other stakeholders need not be dilated for the present purpose. 6.1. The crucial and relevant part of the matter is that IDBI Bank Limited instituted a petition under Section 7 of the Code before the NCLT, seeking initiation of Corporate Insolvency Resolution Process against JIL, while alleging that JIL had committed a default in repayment of its dues to the tune of ₹ 526.11 crores. JIL filed its objections to the petition but later on, withdrew the objections and furnished consent for resolution plan under the provisions of the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of this order. If it becomes necessary to apply for a further extension of 90 days, we permit the NCLT to pass appropriate orders in accordance with the provisions of the IBC; (ii) We direct that a CoC shall be constituted afresh in accordance with the provisions of the Insolvency and Bankruptcy (Amendment) Ordinance, 2018, more particularly the amended definition of the expression financial creditors ; (iii) We permit the IRP to invite fresh expressions of interest for the submission of resolution plans by applicants, in addition to the three short-listed bidders whose bids or, as the case may be, revised bids may also be considered; (iv) JIL/JAL and their promoters shall be ineligible to participate in the CIRP by virtue of the provisions of Section 29A; (v) RBI is allowed, in terms of its application to this Court to direct the banks to initiate corporate insolvency resolution proceedings against JAL under the IBC; (vi) The amount of ₹ 750 crores which has been deposited in this Court by JAL/JIL shall together with the interest accrued thereon be transferred to the NCLT and continue to remain invested and shall abide by such directions as may be issued by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all the stakeholders: i) We direct the IRP to complete the CIRP within 90 days from today. In the first 45 days, it will be open to the IRP to invite revised resolution plan only from Suraksha Realty and NBCC respectively, who were the final bidders and had submitted resolution plan on the earlier occasion and place the revised plan(s) before the CoC, if so required, after negotiations and submit report to the adjudicating authority NCLT within such time. In the second phase of 45 days commencing from 21st December, 2019, margin is provided for removing any difficulty and to pass appropriate orders thereon by the Adjudicating Authority. ii) The pendency of any other application before the NCLT or NCLAT, as the case may be, including any interim direction given therein shall be no impediment for the IRP to receive and process the revised resolution plan from the abovenamed two bidders and take it to its logical end as per the provisions of the I B Code within the extended timeline prescribed in terms of this order. iii) We direct that the IRP shall not entertain any expression of interest (improved) resolution plan individually or jointly or in concert with any other per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laborate on this aspect in our final judgment. Be that as it may, it is appropriate that we must stay the operation of the impugned judgment(s) of the Appellate Tribunal lest any confusion occurs in the revival process of JIL and the constitution of Committee of Creditors thereof, in view of the impugned order passed by the National Company Law Appellate Tribunal. Ordered accordingly. We clarify that the stay of operation is only in respect of order passed on the application(s) moved by the lender-Bank(s) of JAL before the National Company Law Appellate Tribunal for a declaration that they be regarded as financial creditor(s) of JIL and included in the Committee of Creditors of JIL. The Application by Interim Resolution Professional and the order passed by NCLT 8. Having thus referred to the orders already passed in relation to the CIRP in question, we may now advert to the application filed by IRP forming subjectmatter of the first issue involved in these appeals. 9. The IRP, in terms of his duties under clause (j) of Section 25(2) of the Code The relevant parts of Section 25 read as under: Duties of resolution professional. (1) It shall be the duty of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ued. According to the contesting parties, when the essential jurisdictional conditions were not satisfied, the provisions of Section 66 of IBC were not attracted. 10. The NCLT, after having heard the parties and having scanned through the record, held that the transactions in question were to defraud the lenders of the corporate debtor JIL, as 858 acres of unencumbered land owned by the corporate debtor to secure the debt of the related party JAL was mortgaged in the midst of the corporate debtor s immense financial crunch, while continuing with default towards the home buyers and financial creditors and after it had been declared as Non Performing Asset NPA for short, in utter disregard to fiduciary duties and duty of care to the creditors; and further that the mortgage of land was created without any counter guarantee from the related party and with no other consideration being paid to the corporate debtor. The Tribunal was of the view that at the time when the mortgage was created, the corporate debtor was already in default to its lenders and it was unlikely that its lenders would have provided no-objection for creation of mortgages to secure the debt of a related party as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Code [This relevant time for the purpose of avoidance of preferential transactions is now commonly referred to as look-back period .] , the Tribunal observed that the Code itself has provided a retrospective effect to the provisions of Section 43(4)(a) wherein it is stated that it is given to a related party, during two years preceding the insolvency commencement date . This, according to NCLT, indicates that the retrospective effect is laid down in the legislation itself and thus, the look-back period for the transactions was made dependent on the insolvency commencement date and not on the date when the Insolvency and Bankruptcy Code came into effect (01.12.2016). The Tribunal, therefore, held that for transactions of a related party, the look-back period was two years preceding the insolvency commencement date and hence, the relevant period for examining the transactions in question would be from 10.08.2015 to 09.08.2017 (date of commencement of CIRP). 10.2. The Tribunal made in-depth analysis of the facts of the case, particularly those related with the transactions in question as also the provisions of law applicable and, while rejecting the contentions urged on behal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the circumstances stated above it is clear that the impugned preferential transactions are also undervalued transactions and covered under section 45(1) of the Code. It is also clear that these transactions are undertaken during the relevant period of 2 years from the date of initiation of Corporate Insolvency Process as provided under section 46(1)(ii) of the Code. Therefore, this issue is also decided in positive, in favour of applicant Resolution Professional and against the Corporate Debtor. In view of the above, it is clear that the mortgage of land of JIL in favour of lenders of JAL, amounts to transfer of interest in property of JIL for the benefit of its creditor i.e. JAL and putting it in a beneficial position vis- -vis other creditors is a preferential transactions U/s 43(2)(a) (b). The transactions were executed within the look back period of two years before the commencement of Insolvency proceeding and is therefore covered U/s 43(4)(a). Further, transaction cannot be treated is in ordinary course of business or financial affairs of Corporate Debtor and is not excluded U/s 43(3). 10.3. The Tribunal concluded in its order as follows: On the above basi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debtor and hence, Section 43(2)(a) of the Code was not attracted. It was further observed that the mortgages in question were made in the ordinary course of business and financial affairs of the transferees, ruling out the applicability of Section 43 as such and hence, the Adjudicating Authority had no power to pass the order under Section 44 of the Code. The Appellate Tribunal observed and held, inter alia, as follows: 62. In the present case, the Corporate Debtor has created interest on the property of the Corporate Debtor , but such interest has not been created in favour of any 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 . 63. The aforesaid interest on the property of the CorporateDebtor has been created in all these cases with regard to financial debt given by the Appellants to Jaiprakash Associates Ltd. , which is not the Corporate Debtor . 64. Thus, it is clear that the interest on the property of the Corporate Debtor has not been created in favour of the Appellants- Financial Creditors of an antecedent financial debt of the Appellants owed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess than the value of the consideration provided by the Corporate Debtor and such transaction has not taken place in the ordinary course of business of the Corporate Debtor . 72. In these appeals, we find that the transactions as has beenmade i.e. mortgage(s) in favour of the Appellants as and when made against the amount payable by Jaiprakash Associates Limited (borrower), the amount is not payable by the Corporate Debtor . Therefore, clause (a) of sub-section (2) of Section 45 is not attracted. For the same very reason, clause (b) of sub-section (2) of Section 43 or Section 45 cannot be made applicable with regard to transaction in question which are not related to any payment due from the Corporate Debtor . 73. As Section 44 is not attracted, it is not necessary to noticeSection 46 which is not attracted and, therefore, the Adjudicating Authority has no power to pass any order under Section 48 of the I B Code . 11.3. With respect to Section 66 of the Code dealing with fraudulent trading or wrongful trading, the Appellate Tribunal observed that the corporate debtor, being one of the group company, like a guarantor, had executed mortgage deeds in favour of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... findings, the Appellants- Axis Bank Ltd , Standard Chartered Bank , ICICI Bank Ltd. , State Bank of India , Jai Prakash Associates Ltd. , Bank of Maharashtra , United Bank of India , Central Bank of India , UCO Bank , Karur Vyasa Bank (P) Ltd. , L T Infrastructure Finance Company Ltd. , Canara Bank , Karnataka Bank Ltd. , IFCI Ltd. , Allahabad Bank , Jammu Kashmir Bank , and The South Indian Bank Ltd. are entitled to exercise their rights under the I B Code . 81. All the appeals are allowed. However, we make it clear that we have not made any observations with regard to the Promoters or Directors in absence of any appeal preferred on their behalf. No costs. The relevant provisions 12. For comprehension of the subject-matter and appropriate dealing with the issues involved, before proceeding further, suitable it would be to take note of the relevant statutory provisions. 12.1. It may be observed that while generally, the expressions used in the Code are defined in Section 3 thereof but then, the expressions employed for the purpose of Part II of the Code, dealing with insolvency resolution and liquidation of corporate persons, are defined in Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perty and creation of any charge upon such property; Section 5(5A): corporate guarantor means a corporate person who is the surety in a contract of guarantee to a corporate debtor; 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; Section 5(8): financial debt means a debt alongwith 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 orthe issue of bonds, notes, debentures, loan stock or any similar instrument; (d) the amount of any liability in respect of any lease or hirepurchase 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 receivablessold on non-recourse basis; (f) any amount raised under any other transaction, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... btor is a director and holds along with relatives, more than two per cent of its paid-up share capital; (f) anybody corporate whose board of directors, managing director or manager, in the ordinary course of business, acts on the advice, directions or instructions of a director, partner or manager of the corporate debtor; (g) any limited liability partnership or a partnership firm whose partners or employees in the ordinary course of business, acts on the advice, directions or instructions of a director, partner or manager of the corporate debtor; (h) any person on whose advice, directions or instructions, a director, partner or manager of the corporate debtor is accustomed to act; (i) a body corporate which is a holding, subsidiary or an associate company of the corporate debtor, or a subsidiary of a holding company to which the corporate debtor is a subsidiary; (j) any person who controls more than twenty per cent of voting rights in the corporate debtor on account of ownership or a voting agreement; (k) any person in whom the corporate debtor controls more than twenty per cent of voting rights on account of ownership or a voting agreement; (l) any person wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) such transfer was registered with an information utility on or before thirty days after the corporate debtor receives possession of such property: Provided that any transfer made in pursuance of the order of a court shall not, preclude such transfer to be deemed as giving of preference by the corporate debtor. Explanation.-For the purpose of sub-section (3) of this section, new value means money or its worth in goods, services, or new credit, or release by the transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the liquidator or the resolution professional under this Code, including proceeds of such property, but does not include a financial debt or operational debt substituted for existing financial debt or operational debt. (4) A preference shall be deemed to be given at a relevant time, if- (a) It is given to a related party (other than by reason only of beingan employee), during the period of two years preceding the insolvency commencement date; or (b) a preference is given to a person other than a related partyduring the period of one year preceding the insolvency commencement date. Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... han the corporate debtor, or who has received a benefit from the preference or such another person to whom the corporate debtor gave the preference, - (i) had sufficient information of the initiation or commencement ofinsolvency resolution process of the corporate debtor; (ii) is a related party, it shall be presumed that the interest was acquired or the benefit was received otherwise than in good faith unless the contrary is shown. Explanation II.-A person shall be deemed to have sufficient information or opportunity to avail such information if a public announcement regarding the corporate insolvency resolution process has been made under section 13. 12.3. As the transactions in question are the mortgage(s) of the assets of corporate debtor JIL, the concept and connotations of mortgage, as occurring in Section 58 of the Transfer of Property Act, 1882 Hereinafter also referred to as the Transfer of Property Act ., could also be usefully noticed as under:- 58. Mortgage , mortgagor , mortgagee , mortgagemoney and mortgage-deed defined.- (a) A mortgage is the transfer of an interest in specific immoveableproperty for the purpose of securing the payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to the mortgagee, but subject to a proviso that he will re-transfer it to the mortgagor upon payment of the mortgage-money as agreed, the transaction is called an English mortgage. (f) Mortgage by deposit of title-deeds.-Where a person in any of the following towns, namely, the towns of Calcutta, Madras, and Bombay, and in any other town which the State Government concerned may, by notification in the Official Gazette, specify in this behalf, delivers to a creditor or his agent documents of title to immoveable property, with intent to create a security thereon, the transaction is called a mortgage by deposit of title-deeds. (g) Anomalous mortgage.- A mortgage which is not a simple mortgage, a mortgage by conditional sale, an usufructuary mortgage, an English mortgage or a mortgage by deposit of titledeeds within the meaning of this section is called an anomalous mortgage. 12.4. The provisions contained in Sections 124, 126 and 127 of the Indian Contract Act, 1872 Hereinafter also referred to as the Contract Act . shall also have bearing on the issues at hand and hence, the same may also be noted as follows:- 124. Contract of indemnity defined.- A contract by whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erational creditor (for an amount of ₹ 261.77 crores) of the corporate debtor JIL, in a beneficial position than it would have been in the event of distribution of assets under Section 53 of the Code vis- -vis other creditors; and that if the transactions are held to be valid, the liability of JAL towards its own creditors gets secured and becomes realisable from the value of the mortgaged properties whereby, JAL s liabilities are reduced and JAL gets benefitted in exclusion of creditors of the corporate debtor JIL. It is submitted that, in the event of distribution of assets in terms of Section 53 of IBC, for the sake of argument, even if JAL is to get full value of its shares (₹ 995 crores), such amount is significantly less than the value of assets which have been mortgaged by way of impugned transactions for satisfaction of debts owed by JAL to its lenders. 14.1.1. It is submitted on behalf of the appellant Interim Resolution Profession that the assets in question were released from the earlier mortgages and fresh mortgages were created during the look-back period with increased/enhanced amount of facilities as provided under each individual transaction. The said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o JIL and has preferred appeal with permission, assailing the order passed by NCLAT and maintaining, inter alia, that in any case, the lenders of JAL cannot be taken as financial creditors of JIL. While referring to the theory behind the provisions for avoidance of certain transactions, it is submitted on behalf of this appellant that the Court should consider substance rather than legal form in evaluating the true economic effect of a transaction or a set of transactions in applying the relevant provisions. On behalf of this appellant, the following submissions have been made in regard to the relevant expressions and phrases occurring in the provisions under consideration: Ordinary Course of Business 14.2.1. It is submitted that mortgages could not have been made in the ordinary course of business of the corporate debtor JIL, as it is difficult to fathom why a subsidiary would furnish security to its parent company in the ordinary course and, on the contrary, it is the parent company which at times furnishes security on behalf of its subsidiary since it derives economic value from the subsidiary. According to the appellant, it is difficult to appreciate that when the corp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness of the corporate debtor JIL; and had been preferential transactions, putting JAL in a beneficial position at the cost of bona fide creditors of JIL, including the home buyers. We are not re-narrating all their contentions to avoid repetition. However, we may observe that to substantiate their arguments with respect to Section 43 of the Code, on behalf of these appellants, reliance is also placed on the interim report of the Bankruptcy Law Reforms Committee (February 2015) and the decision of this Court in Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd.: (2018) 2 SCC 674. The respondents 15. The contesting respondents have refuted the contentions of the appellants with essentially similar submissions that the transactions in question cannot be termed as preferential transactions within the meaning of Section 43 of the Code. 15.1. The respondents, particularly the lenders of JAL, while maintaining a consistent stand that the transactions in question are not preferential and do not fall under Section 43 of the Code, have submitted that they being the bankers and financial institutions, are regularly engaged in the business of extending loans and other facilitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant time in the present circumstances could be only one year as the transfer of property interest was to this respondent, which is a Bank and an unrelated party. It is further contended that, in any event, the land parcels were mortgaged on 24.02.2015, which is beyond even the two years formulation, the relevant time being from 10.08.2015 to 09.08.2017. The subsequent re-execution of the mortgage deeds on 15.09.2015 and then again on 29.12.2016 cannot be considered to be a substantive event since the nature and identity of the security remained the same and no fresh encumbrances were created. The re-mortgage was done to reflect the increase in the amount of facilities and number of members in the consortium. It is not the case that the existing facilities were paid, the mortgage satisfied, and fresh facilities were created for which a fresh mortgage was required. b. Without prejudice to the above, the ingredients of Section 43(2) are not met. 15.3.2. It is further submitted that Sections 43/44 of the Code are expropriating provisions as they affect concluded transactions and have the potential to render void the transfers of property done through the transactions whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creditor of the corporate debtor has been shown at the time of creation of the security. The transaction in question, according to the respondent, had been in the ordinary course of business of the corporate debtor and remains unexceptionable. 15.3.6. It is further contended that the provision of security was also in the ordinary course of business of the respondent who is a scheduled commercial bank and is duly authorized by statute to carry out the business of commercial lending on a secured basis [per Section 6(1)(a) of the Banking Regulation Act, 1949]; and is statutorily entitled to seek credit enhancement on account of outstanding debts by way of creation of security interests by borrowers or their related entities. For this reason too, with the transaction being in the ordinary course of business of the transferee i.e., the respondent, it cannot be termed as a preferential transaction. 15.3.7. It is yet further submitted that the contention of IRP that the corporate debtor ought not to have given the security as its accounts had turned NPA with certain banks is fallacious as it conflates the concepts of NPA and willful defaulter and ignores that the security was g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t time is reckoned for the purpose of Section 43 of the Code, its transactions would not fall therein because the initial mortgage in favour of this respondent was made in the year 2012, which is beyond the two years formulation. The further submission is that the subsequent conversion of registered mortgage into an equitable mortgage on 04.11.2015 and thereafter, re-conversion from equitable mortgage to registered mortgage on 24.05.2016, in relation to the same subject property as a security, cannot be considered as a fresh creation of mortgage and hence, the transaction in question does not fall within relevant time. ICICI Bank 15.5. Again, for most of the contentions on behalf of this respondent being similar in nature, we are not repeating the same. However, we may notice that with reference to Section 43(4) of the Code, it has been contended that since this respondent bank is an unrelated party to both the corporate debtor and JAL, the relevant look-back period would be one year and not two years. It is submitted that the mortgages were created on 15.09.2015 and the same property was re-mortgaged on 29.12.2016, which is much before the look-back period of one year and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sfers had been made in the ordinary course of business of the corporate debtor as also the transferees; and that for the purpose of Section 43 of the Code, the relationship between the respondent-lenders and JIL ought to be looked into rather than assuming JAL to be the primary transferee. It has also been argued, while relying on the decision of this Court in Purbanchal Cables Conductors Pvt. Ltd. Ors v. Assam State Electricity Board Ors : (2012) 7 SCC 462, that the provisions of Section 43 of the Code, by their very nature, would come into operation at least one year after the enactment of the Code i.e., it would have only the prospective effect and cannot be given retrospective effect so as to operate over any period prior to the enactment. Jaiprakash Associates Ltd. (JAL) 15.7. As noticed, this respondent JAL is the holding company of corporate debtor JIL; and the transactions in question had been for securing the loans/facilities obtained by this respondent. Even while broadly adopting the contentions advanced by other respondents, further submissions have been made on behalf of this respondent to assert on the credence of the transactions in question. With refere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Section 43 of the Code, concerning Preferential transactions and relevant time , appropriate it shall be to comprehend the principles underlying the concept of preferential transactions . A little insight into the objects sought to be achieved by the Insolvency and Bankruptcy Code, 2016 and its historical background shall be apposite. 16.1. As noticed from Preamble, the Code 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. 16.1.1. In the case of Swiss Ribbons Private Limited and Anr. v. Union of India and Ors.: (2019) 4 SCC 17 Hereinafter also referred to as the case of Swiss Ribbons , this Court had the occasion to traverse through the historical background and scheme of the Code in the wake of challenge to the constitutional validity of various provisions therein. One part of such challenge had also been founded on the ground that classification between financial creditor and operational ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... repaid in full, and shareholders/investors are able to maximise their investment. Timely resolution of a corporate debtor who is in the red, by an effective legal framework, would go a long way to support the development of credit markets. Since more investment can be made with funds that have come back into the economy, business then eases up, which leads, overall, to higher economic growth and development of the Indian economy. What is interesting to note is that the Preamble does not, in any manner, refer to liquidation, which is only availed of as a last resort if there is either no resolution plan or the resolution plans submitted are not up to the mark. Even in liquidation, the liquidator can sell the business of the corporate debtor as a going concern. (See ArcelorMittal ArcelorMittal India (P) Ltd. v. Satish Kumar Gupta Ors: (2019) 2 SCC 1 at para 83, fn 3) 28. It can thus be seen that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The Code is thus a beneficial legislation which puts the corporate debtor back on its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obligated, by virtue of clause (j) of subsection (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. Preferential transaction at a relevant time: concept and connotations 17. Having regard to the questions involved, a brief insight into the theory relating to avoidance of certain transactions as being preferential would be pertinent at this stage. 17.1.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 P. Ramanatha Aiyar s Advanced Law Lexicon (5th Ed.-Vol 3, p.4002). We may usefully take note of the meaning, definition and basic ingredients of preference and preferential transfer , as defined in Black s Law Dictionary-10th Edition pp. 1369 and 1370: preference. (15c) 1. The favouring of one person or thing over another. 2. The person or thing so favoured. 3. The quality, state, or condition of treating some persons or things more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orporate debtor from its own management and from a corporate death by liquidation . In other words, insolvency resolution is the main object; and liquidation with bankruptcy is the last resort.]; and definitively from 1874, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e preference to any of his creditors, - (i) has discharged or concealed any debt due to or from him, or (ii) has made away with, charged, mortgaged or concealed any part of hisproperty of any kind whatsoever, he shall be punishable on conviction with imprisonment which may extend to one year. of one or a few of its creditors or third parties, at the cost of the other stakeholders, has always been viewed with considerable disfavour. In relation to the corporate personalities, the concept of fraudulent preference , earlier embodied in Section 531 of the Companies Act, 1956 now occurs in its modified form in Sections 328 and 329 of the Companies Act, 2013. Tersely put, fraudulent preference means parting with assets of the corporate person in favour of one or a few of its creditors, which has the effect of defeating the claim of other creditors. Per Section 329 of the Act of 2013, any transfer of property by a company, other than that in the ordinary course of business, if made within a period of one year before presentation of a petition for winding up by the Tribunal and not in good faith and for valuable consideration, is regarded as void against the liquidator. Per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. Preferential transactions may be subject to avoidance where: (a) the transaction took place within the specified suspect period; (b) the transaction involved a transfer to a creditor on account of a pre-existing debt; and (c) as a result of the transaction, the creditor received a larger percentage of its claim from the debtor s assets than other creditors of the same rank or class (in other words, a preference). Many insolvency laws also require that the debtor was insolvent or close to insolvent when the transaction took place and some further require that the debtor have an intention to create a preference. The rationale for including these types of transaction within the scope of avoidance provisions is that, when they occur very close to the commencement of proceedings, a state of insolvency is likely to exist and they breach the key objective of equitable treatment of similarly situated creditors by giving one member of a class more than they would otherwise legally be entitled to receive. 178. Examples of preferential transactions may include paymentor set-off of debts not yet due; performance of acts that the debtor was under no obligation to perform; granting of a se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay make avoidance proceedings complex, unpredictable and lengthy. Analysing Section 43 of the Code 18. In the backdrop of the foregoing, we may now scrutinise Sections 43and 44 of the Code. Section 44 provides for the consequences of an offending Note: Here the expression offending is only to denote the unacceptability of such transaction and not any criminality. preferential transaction i.e., when the preference is given at a relevant time. Under Section 44, the Adjudicating Authority may pass such orders as to reverse the effect of an offending preferential transaction. Amongst others, the Adjudicating Authority may require any property transferred in connection with giving of preference to be vested in the corporate debtor; it may also release or discharge (wholly or in part) any security interest created by the corporate debtor. The consequences of offending preferential transaction are, obviously, drastic and practically operate towards annulling the effect of such transaction. Looking to the contents, context and consequences, we are at one with the contentions urged on behalf of the respondents with reference to the decisions in Devinder Singh (supra) and other cite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... insolvency commencement date; and (b) if the preference is given to a person other than a related party, the relevant time is a period of one year preceding such commencement date. In other words, for a transaction to fall within the mischief sought to be remedied by Sections 43 and 44 of the Code, it ought to be a preferential one answering to the requirements of sub-section (2) of Section 43; and the preference ought to have been given at a relevant time, as specified in sub-section (4) of Section 43. 18.3. 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. 18.4. Sub-section (3) of Section 43 specifically excludes some of the transfers from the ambit of sub-section (2). Such exclusion is provided to: (a) a transfer made in the ordinary course of business or financial affairs of the corporate debtor or transferee Whether the expression or , as occurring in between the expressions corporate debtor and transferee in clause (a) of sub-section (3) of Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such deeming expression occurring in the Explanation added to sub-clause (f) of Section 5(8) of the Code Such discussion in Pioneer Urban essentially led to this Court holding that the said deeming provision was clarificatory of the true legal position as it already obtained; and was to put beyond the pale of doubt the fact that allottees are to be regarded as financial creditors within the meaning of the enacting part contained in Section 5(8)(f) of the Code. The crucial aspects relating to Section 5(8) of the Code shall be dilated hereafter during the discussion on the second issue involved in these matters. . We may usefully extract some of the relevant passages from the said decision in Pioneer Urban as follows: 19.2.1. As regards construction of a deeming fiction, this Court pointed out the basic and settled principles in the following: 88. In every case in which a deeming fiction is to be construed, the observations of Lord Asquith in a concurring judgment in East End Dwellings Co. Ltd. v. Finsbury Borough Council: 1952 AC 109 (HL) are cited. These observations read as follows: (AC pp. 132-133) If you are bidden to treat an imaginary state of affairs as real, you ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... articular construction that might otherwise be uncertain. Sometimes it is used to give a comprehensive description that includes what is obvious, what is uncertain and what is, in the ordinary sense, impossible. (Per Lord Radcliffe in St. Aubyn v. Attorney General:1952 AC 15 (HL), AC p. 53) 14. Deemed , as used in statutory definitions [is meant] to extend the denotation of the defined term to things it would not in ordinary parlance denote, is often a convenient devise for reducing the verbiage of an enactment, but that does not mean that wherever it is used it has that effect; to deem means simply to judge or reach a conclusion about something, and the words deem and deemed when used in a statute thus simply state the effect or meaning which some matter or thing has - the way in which it is to be adjudged; this need not import artificiality or fiction; it may simply be the statement of an undisputable conclusion. (Per Windener, J. in Hunter Douglas Australia Pty. v. Perma Blinds: (1970) 44 Aust LJ R 257) 15. When a thing is to be deemed something else, it is to be treated as that something else with the attendant consequences, but it is not that something else ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce, if it falls into any or both of the exclusions provided by sub-section (3) i.e., having been entered into during the ordinary course of business of the corporate debtor or As noticed, whether this expression or , as occurring in between the expressions corporate debtor and transferee in clause (a) of sub-section (3) of Section 43, is to be read as and remains a question to be dealt with. transferee or resulting in acquisition of new value for the corporate debtor. Net concentrate of Section 43 19.5. Thus, the net concentrate of Section 43 is that 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), 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. 20. The analysis foregoing leads to the position that 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 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Authority, JIL was set up as a special purpose vehicle. Finance was obtained from a consortium of banks against partial mortgage of land acquired and pledge of 51% of the shareholding of JAL. Housing plans were envisaged for construction of real estate projects in two locations of the land acquired, one in Wish Town, Noida and another in Mirzapur. 22.1.1. Shorn of other details which may not be necessary for the present purpose, relevant it is to notice that JIL was declared NPA by Life Insurance Corporation of India on 30.09.2015 and by some of its other lenders on 31.03.2016. Then, IDBI Bank Limited instituted a petition under Section 7 of the Code before NCLT, seeking initiation of Corporate Insolvency Resolution Process against JIL, while alleging that JIL had committed a default to the tune of ₹ 526.11 crores in repayment of its dues. On 09.08.2017, NCLT passed an order under Section 7 of the Code and appointed an Interim Resolution Professional CIRP in relation to JIL is underway by virtue of the orders passed by this Court on 09.08.2018 and 06.11.2019 (as referred to in paragraphs 6.2 and 6.3.1 - supra) - This date i.e., 09.08.2017 is the insolvency commencement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of ₹ 297 crores; and 6. Mortgage deed dated 04.03.2016 for 90 acres of land (Property No. 6), executed by JIL in favour of State Bank of India for Short Term Loan Facility to JAL to the tune of ₹ 1000 crores. 22.2.1. As noticed, 09.08.2017 is the insolvency commencement date in this case. The transactions in question, even if of putting the concerned properties under mortgage with the lenders, carry the ultimate effect of working towards the benefit and advantage of the borrower i.e., JAL 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 JIL 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 JIL to secure the debts of JAL, obviously, amount to creation of security interest to the benefit of JAL. 22.2.2. Now, the capacity of JAL is admittedly that of the holding company of JIL as its largest equity shareholder ( with approximately 71.64 % shareholding). Moreover, JAL had admittedly been the operational creditor of JIL, for an am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actions in question, JAL s liability towards its own creditors shall be reduced, in so far as the value of the mortgaged properties is concerned, which is said to be approximately ₹ 6000 crores. As a necessary corollary of the beneficial and advantageous position of the related party JAL with creation of such security interest over the properties of JIL, in the eventuality of distribution of assets under Section 53, the other creditors and stakeholders of JIL shall have to bear the brunt of the corresponding disadvantage because such heavily encumbered assets will not form the part of available estate of the corporate debtor. Obviously, JAL stands dearly benefited and has derived such benefits at the cost, and in exclusion, of the other creditors and stakeholders of the corporate debtor JIL. 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. 22.5. Therefore, in relation to the present case, the answers to questions (i), (ii) and (iii) as referred in paragraph 20 are that: the impugned transactions had been of transfers for the benefit of JAL, who is a related party of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that providing for longer time periods for vulnerability would be significant in improving the efficacy of these provisions. This is because a wider range of transactions diminishing creditor wealth entered into with insiders occur not in the zone of insolvency but as soon as early signals of trouble are visible. Such insiders have superior information of the company s deteriorating financial position and may raid corporate assets knowing that the company may become insolvent. These provisions are of special significance in the Indian context where even the larger corporates are often promoter/family controlled with such insiders often enjoying significant informational advantages over even well-advised secured lenders. 23.1. Before examining as to whether the questioned preferences were given at the relevant time as specified in sub-section (4) of Section 43, we may deal with one part of the submissions made on behalf of some of the respondents that in view of the look-back periods provided in sub-section (4), the provisions of Section 43 of the Code, by their very nature, would come into operation at least one year after the enactment of the Code and else, it would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot 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. 23.1.2. We may also observe that if the contentions urged on behalf of the respondents were to be accepted, the result would be of postponing the effective date of operation of sub-section (4) of Section 43 by two years in the case of related party and to one year in the case of unrelated party, and thereby, effectively postponing the application of entire Section 43 for a period of two years! That cannot be and had never been the intention of legislature. It is also noteworthy that 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, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s released on 15.09.2015 and a so-called re-mortgage was made on 15.09.2015 and thereafter, this was also released on 29.12.2016 and again the so-called re-mortgage was made on 29.12.2016. It is sought to be asserted that it had not been a case of creation of a fresh mortgage. Similarly, in relation to the transactions concerning Property No. 3, it is alleged that there had been initial mortgage dated 12.05.2014 for 433.35 acres of land of which, 240 acres was released on 30.12.2015, 35.05 acres was released on 24.06.2016 and the remaining 158.1739 acres of land was also released on 07.03.2017 but was remortgaged on this very date 07.03.2017. As regards Property No. 4, it is alleged that the same was put under mortgage initially on 12.05.2014, was released on 07.03.2017 and was re-mortgaged on this very date 07.03.2017. As regards Property No. 5, it is alleged that the same was put under mortgage initially on 24.06.2009, the mortgage was extended on 27.11.2012 and on 23.03.2013; it was released on 04.11.2015 and was re-mortgaged on 24.05.2016. 24.3.1. It has been one of the major contentions of the respondents that most of the impugned transactions were not of creation of any n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, when the remaining land was also released on 07.03.2017, its fresh mortgage, even if on the same date, cannot be countenanced and is hit by Section 43, being a deemed preference. The very same considerations apply in relation to the Property No. 4 too. As regards Property No. 5, even if there had been certain previous mortgage transactions falling beyond the look-back period, the property got released on 04.11.2015; and thereafter, the fresh mortgage on 24.05.2016, with increased facility amount from ₹ 1470 crores to ₹ 1767 crores, suffers from the same vice, of being a deemed preference to a related party during the period of two years preceding the insolvency commencement date. 24.4. For what has been discussed hereinabove, the conclusion is inevitable that the impugned preference was given to a related party during a relevant time. However, before concluding on this part of discussion, we may also observe that reference to the decisions of Madras and Bombay High Courts in the case of IDBI Bank Ltd and Monarch Enterprises respectively, is neither apposite nor advances the cause of the respondents for the reason that the said decisions had essentially bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b-section (2). It has been the mainstay of respondent-lenders that, in any case, the transfers in question were made in the ordinary course of their business and hence, fall within clause (a) of Section 43(3) that excludes the transfer made in the ordinary course of business or financial affairs of the corporate debtor or the transferee. It has been forcefully argued that the lenders of JAL are the transferees in the transactions in question and their ordinary course of business being of providing financial support with loans and advances, such transfers are not included in sub-section (2) of Section 43 by virtue of the exclusion provided in sub-section (3) thereof. On the other hand, the main plank of submissions on behalf of the appellants has been that the expression or occurring in clause (a) of sub-section (3) of Section 43, seemingly disjunctive of corporate debtor on one hand and transferee on the other, is required to be read as and so as to be conjunctive and covering only the transfers made in the ordinary course of business or financial affairs of the corporate debtor and the transferee. It is submitted on behalf of the appellants that such mortgage transactions had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he mischief of being preferential. 25.2.2. Another feature of vital importance is that the matter is examined withreference to the dealing and conduct of the corporate debtor; and qua the health and prospects of the corporate debtor. Applying the well-known principles of noscitur a sociis, whereunder the questionable meaning of a doubtful word could be derived and understood from its associates and context; and usefully recapping that the scheme of Section 43 of the Code is essentially of scanning through the affairs of the corporate debtor and to discredit and disregard such transaction by the corporate debtor which tends to give unwarranted benefit to one of its creditor/surety/guarantor over others, in our view, the purport of clause (a) of sub-section (3) of Section 43 is also principally directed towards the corporate debtor s dealings. In other words, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld have to be read in the context as meaning and . 25.5. Looking to the scheme and intent of the provisions in question and applying the principles aforesaid, we have no hesitation in accepting the submissions made on behalf of the appellants that the said 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 fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the ordinary and common flow of transactions in affairs of business there is a course, an ordinary course. It means that the transaction must fall into place as part of the undistinguished common flow of business done, that it should form part of the ordinary course of business as carried on, calling for no remark and arising out of no special or particular situation. (emphasis supplied) 25.6.2. Taking up the transactions in question, we are clearly of the view that 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 , as rightly expressed in Downs Distributing Co (supra). Though we may assume 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, we have not an iota of doubt that the impugned transactions do not fall within the ordinary course of business of the corporate debtor JIL. As no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the negative. That is to say that the impugned transactions had not been in the ordinary course of business or financial affairs of JIL. 25.8. Therefore, the answer to question (v) as referred in paragraph 20 is that the impugned transactions are not of excepted transfers in terms of subsection (3) of Section 43 of the Code. The concern expressed by lenders of JAL is legally untenable 26. The argument of lenders, that holding the transactions in question as preferential would result in impacting large number of transactions undertaken by the bankers/financial institutions, of financing in the ordinary course of their business; and the consequences may be devastating and irreversible on the economy, has only been noted to be rejected. 26.1. It needs hardly any emphasis that in the ordinary course of their business, when the bankers or financial institutions examine any proposal for loan or advance or akin facility, they are supposed to, and they indeed, take up the exercise commonly termed as due diligence As regards the present context, the term due diligence is explained in P. Ramanatha Aiyar s Advanced Law Lexicon (5th Ed.-Vol 2, p.1654) in the following: Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directions in terms of Section 44 of the Code in relation to the transactions concerning Property Nos. 1 to 6. NCLAT, in our view, had not been right in interfering with the well-considered and justified order passed by NCLT in this regard. Search and commandeering of preference at a relevant time 28. Although we have analysed the transactions in question on the anvil of Section 43 with reference to the submissions made and the facts of the present case but, before moving on to other aspects, we deem it appropriate to point out the manner in which the provisions concerning preference at a relevant time are expected to be applied, particularly by the resolution professional, in a given case. It could be readily recapitulated that as per the charging parts of Section 43 i.e., sub-sections (4) and (2) thereof, a corporate debtor shall be deemed to have given preference at a relevant time if the twin requirements of clauses (a) and (b) of sub-section (2) coupled with the applicable requirements of either clause (a) or clause (b) of sub-section (4), as the case may be, are satisfied. However, even if the requirements of subsections (4) and (2) are satisfied, a transaction may not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rational debt or other liability owed by the corporate debtor. The transactions which are so found would be answering to clause (a) of sub-section (2) of Section 43. 5. In yet further step, such of the scanned and scrutinized transactions that are found covered by clause (a) of sub-section (2) of Section 43 shall have to be examined on another touchstone as to whether the transfer in question 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 per Section 53 of the Code. If answer to this question is in the affirmative, the transaction under examination shall be deemed to be of preference within a relevant time, provided it does not fall within the exclusion provided by sub-section (3) of Section 43. 6. In the next and equally necessary step, the transaction which otherwise is to be of deemed preference, will have to pass through another filtration to find if it does not answer to either of the clauses (a) and (b) of sub-section (3) of Section 43. 7. After the resolution professional has carried out the aforesaid volumetric as also gravimetric analysis of the transactions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a transaction is deemed to be of giving preference at a relevant time. However, whether a transaction is undervalued requires a different enquiry as per Sections 45 and 46 of the Code and significantly, such application can also be made by the creditor under Section 47 of the Code. The consequences of undervaluation are contained in Sections 48 and 49. Per Section 49, if the undervalued transaction is referable to sub-section (2) of Section 45, the Adjudicating Authority may look at the intent to examine if such undervaluation was to defraud the creditors. On the other hand, the provisions of Section 66 related to fraudulent trading and wrongful trading entail the liabilities on the persons responsible therefor. We are not elaborating on all these aspects for being not necessary as the transactions in question are already held preferential and hence, the order for their avoidance is required to be approved; but it appears expedient to observe that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15.05.2018 respectively, while concluding that on the strength of the mortgages created by the corporate debtor JIL, as collateral security of the debts of its holding company JAL, the applicants cannot be treated as financial creditors of the corporate debtor JIL. 31.1. The aforesaid orders dated 09.05.2018 and 15.05.2018 were questioned before NCLAT by the said lenders of JAL in Comp. App (AT) (Ins) No. 353 of 2018 and Comp. App (AT) (Ins) No. 301 of 2018 respectively. These appeals formed part of the bunch of appeals decided by NCLAT by way of the impugned common order dated 01.08.2019 and, as per the final result recorded therein, these two appeals also stand allowed. However, fact of the matter remains that nothing has been discussed by NCLAT in the impugned order dated 01.08.2019 as regards the subject-matter of these two appeals i.e., as to whether the said lenders of JAL could be categorised as financial creditors of JIL or not; and the entire discussion in the impugned order and the final conclusion therein had only been in relation to the order dated 16.05.2018 that was passed by NCLT on the application for avoidance filed by IRP. 31.2. The appellant of Civil A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action in question, whereby JIL had extended collateral security towards the facility extended to its holding company JAL as also with reference to the definition and connotations of the expressions financial debt and financial creditor as occurring in IBC, essentially proceeded to find that in such a transaction, as regards the corporate debtor JIL, no consideration for time value for money was involved; and hence, the transaction in question did not qualify as financial debt qua the corporate debtor JIL. The NCLT, inter alia, observed as under:- 9. In the present case undisputedly corporate debtor has mortgaged its property for creating collateral security 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 mortga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contentions that the transaction in question could be termed as either guarantee or indemnity while observing, inter alia, as under:- 13. The contention of the applicant that mortgage created by the corporate debtor can be termed as either a guarantee or indemnity is not tenable. In terms of the mortgage deeds the corporate debtor has created a mortgage over its immovable properties, which is either money borrowed against payment of interest nor indemnity or a guarantee as claimed by the applicant and therefore, the same does not fall within the definition of the financial debt in terms of Sec. 5 (8) of IBC. It is stated that the corporate debtor has neither issued any guarantee nor has provided an indemnity to the applicant in respect of the financial assistance granted to JAL. 14. The Resolution Professional further submitted that the mortgage deed shows that the corporate debtor has only agreed to create a mortgage in favour of the applicant towards the financial assistance granted to its holding company, i.e. JAL. On perusal of mortgage it is clear that the corporate debtor has neither given any guarantee to repay or any indemnity qua the repayment of the loans gra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or concerning the Mortgages and the Mortgaged Debt. The resolution professional has rightly observed that guarantee and indemnity are distinct documents under the relevant laws and the mortgages executed by the corporate debtor are not like guarantee and indemnity. The basic ingredient of the financial debt as defined under the Code is that debt along with interest disbursed against time value of money lacks in the impugned transaction . 33.4. Accordingly, NCLT rejected the application of ICICI Bank Limited by way of its order dated 09.05.2018, while concluding as under:- Therefore, by the mortgage created by the corporate debtor, as collateral security by the debt of its holding company, i.e. Jaiprakash Associates Ltd. ( JAL ) in favour of the Applicant i.e. ICICI Bank, the applicant cannot be treated as Financial Creditor of the Corporate Debtor. Therefore in our view, Resolution Professional has rightly rejected the claim of the applicant, which was filed by the Applicant in the capacity of Financial Creditors of the corporate debtor, i.e. Jaypee Infratech Ltd. ( JIL ) . 33.4.1. Thereafter, the other application filed by Axis Bank Limited was rejected by NCLT on 15. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no right to demand the mortgage money from the corporate debtor nor is the corporate debtor JIL under any liability to pay the same; and mere holding of security interest, which too had not been extended for direct disbursement of any credit to JIL, cannot make the JAL lenders as financial creditors of JIL within the meaning of IBC. Learned counsel for the appellant has referred to the judgment and order dated 22.12.2017 by the NCLAT in Dr. B.V.S. Lakshmi v. Geometrix Laser Solutions (P) Ltd.: Company Appeal (AT) (Insolvency) No. 38 of 2017, to substantiate this submission. 36.2. It is contended on behalf of the appellant that though the definition of financial debt extends to include various types of transactions, yet it does not include a mortgage, as could be gathered from a plain and simple reading of the said provision. The counsel for the appellant has further relied on the judgment of this Court in Swiss Ribbons (supra), wherein the concept of financial creditor has been explicated to mean and include a person who has direct engagement in the functioning of corporate debtor right from the beginning, while assessing the viability of corporate debtor; and who would als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... JAL nor has entered into a contract of guarantee with the lenders of JAL nor has provided any indemnity; and therefore, the corporate debtor JIL is not bound by any liabilities and obligations incurred by JAL. To support the contention that liability always flows from debt and not from the security created under the mortgage, learned counsel for the appellant has also relied on several decisions including that in Ramchand Sur v. Ishwar Chandra Giri: 61 Ind Cases 539. 36.4. It is submitted that a general reference to the transaction documents would not be sufficient to fasten liability for JIL to pay any outstanding debt of JAL because any payment obligation has to be unequivocal and ought to be of specific undertaking to discharge such obligations; and that general words of incorporation or general covenant in some mortgage deeds cannot bind JIL to all the terms and conditions of the documents, particularly any liability to incur JAL s indebtedness by fastening payment obligations. It is further submitted that when the intention of parties is ascertained with reference to the terms of documents and all the surrounding factors, it cannot be inferred that JIL undertook the liabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut disbursement of any debt to itself (the corporate debtor), the mortgagee, even if becoming a secured creditor because of creation of mortgage, could only be described as indirect secured creditor and cannot be treated as a direct secured creditor so as to become a financial creditor because, the mortgage transaction is not envisaged to be a financial debt in Section 5(8) with its subclauses (a) to (i). 36.5.1. It is submitted that Essar Steel judgment envisages the position and priorities of secured creditors, mainly in the context of a creditor who has disbursed direct debt to the corporate debtor and has secured its debt by a security interest, who should have priority over unsecured creditors of the corporate debtor. However, the said decision, according to the learned counsel, cannot be read to the effect that even the indirect secured creditor be also necessarily construed as financial creditor. It is submitted that the crux of the said decision is that creditors not similarly situated cannot be at par; that the arrangements of the corporate debtor with its creditors must be taken into consideration; and that the aim of equitable treatment is based on the notion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Court in case of Rajkumari Kaushalya Devi v. Bawa Pritam Singh Anr: AIR 1960 SC 1030, it is contended that a mortgage debt creates pecuniary liability upon the mortgagor; and that a mortgagor who transfers an interest in immovable property so as to secure a debt, incurs a mortgage debt. With reference to the decision of Delhi High Court in the case of State Bank of India v. Samneel Engineering Co. Ors: 1995 (35) DRJ 485, it is further submitted that a mortgage is both a promise by a debtor to repay the loan as well as a real property right; of course, the right being intended to secure the due payment of the debt; and a suit on a mortgage is essentially a suit for recovery of a debt. 37.1.1. With reference to principles aforesaid, it is contended that a mortgage debt is a debt within the meaning of Section 3(11) of the Code; that a debt can be classified to be a debt due from any person and not necessarily restricted to the borrower alone. The aforementioned decision of Gujarat High Court in State Bank of India v. Smt. Kusum Vallabhdas Thakkar: 1991 SCCOnline GUJ 14 has again been referred to submit that Indian Law recognizes that a person, other than the borrower, ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the case of Pioneer Urban , it is contended that the definition of financial debt under Section 5(8) of Code has been given an extended meaning so as to include the situations which may not directly involve disbursal against the consideration for time value money. 37.1.5.Further, with reference to the aforementioned UNCITRAL Legislative Guide on Insolvency Law and the decisions of this Court in the cases of Essar Steel and Swiss Ribbons, it is submitted that a holistic interpretation of the Code would support the position that the respondent, being a secured creditor and a financial creditor, should be included in CoC so as to protect its security interest. 37.2. The submissions and contentions made on behalf of this respondent largely cover the stand of other respondents too. Hence, we may only notice, in brief, the other or additional part of major submissions on behalf of other respondents, while avoiding repetition. Standard Chartered Bank 37.3. It is submitted on behalf of this respondent that the terms envisaged in the mortgage deed dated 24.05.2016 make it abundantly clear that the corporate debtor JIL had unequivocally promised to pay to this respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that even a third party mortgage leads to creation of an implied guarantee with an obligation to pay the mortgage debt. In other words, since the definition of financial debt is not exhaustive, any transaction which is akin to creation of a guarantee would come under the purview of the definition of financial debt and as such, the mortgage provided by the corporate debtor JIL, being akin to the guarantee, would be squarely within the definition of financial debt . It is further submitted that in the given scenario, this respondent takes on the role of a financial creditor of the corporate debtor JIL within the meaning of Section 5(8)(i) of the Code and hence, ought to be admitted as a member of the CoC. 37.4.1.It is submitted on behalf of this respondent that on a holistic reading of the mortgage deeds, it is clear that exclusive mortgages were executed in favour of this respondent with express clauses whereby, the corporate debtor JIL had undertaken to either discharge the debt or to ensure repayment of facilities extended to JAL and in the event of default, this respondent shall have the right to sell the mortgaged properties. Such stipulations, it is contended, cle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e going in tandem with the submissions aforesaid, it is asserted on behalf of this respondent that the corporate debtor JIL is under a pecuniary obligation to discharge the liability in view of the Indenture of Mortgage (IOM) dated 29.12.2016, which is a contract of guarantee and, therefore, the relationship between the parties cannot be classified merely as that of mortgagor and mortgagee, but is also of a guarantor and guarantee which, in turn, is covered under Section 5(8) of the Code and thereby, this respondent is a financial creditor within the meaning of Section 5(7) of the Code. Unique position of financial creditor- as explained in Swiss Ribbons 38. Having taken note of the rival contentions on the issue as to whether the lenders of JAL could be categorised as financial creditors of JIL for the purpose of CIRP in question, gist of the matter is as to whether the subject transactions could be categorised as financial debts within the meaning of Section 5(8) of the Code so as to confer the status of financial creditors upon the respondents, lenders of JAL. 38.1. The expressions financial creditor and financial debt as occurring in the Code have come up fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of the provision of goods or services, including employment, or a debt in respect of payment of dues arising under any law and payable to the Government or any local authority. 39.2. The unique position assigned to a financial creditor , who plays a crucial role in insolvency resolution process as against the role of other creditors, has been extensively explained by this Court in the case of Swiss Ribbons, albeit in the context of its differentiation with the category of operational creditor , in the following: 50. According to us, it is clear that most financial creditors, particularly banks and financial institutions, are secured creditors whereas most operational creditors are unsecured, payments for goods and services as well as payments to workers not being secured by mortgaged documents and the like. The distinction between secured and unsecured creditors is a distinction which has obtained since the earliest of the Companies Acts both in the United Kingdom and in this country. Apart from the above, the nature of loan agreements with financial creditors is different from contracts with operational creditors for supplying goods and services. Financial creditors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uipped to assess viability and feasibility of the business of the corporate debtor. Even at the time of granting loans, these banks and financial institutions undertake a detailed market study which includes a techno-economic valuation report, evaluation of business, financial projection, etc. Since this detailed study has already been undertaken before sanctioning a loan, and since financial creditors have trained employees to assess viability and feasibility, they are in a good position to evaluate the contents of a resolution plan. On the other hand, operational creditors, who provide goods and services, are involved only in recovering amounts that are paid for such goods and services, and are typically unable to assess viability and feasibility of business. The BLRC Report, already quoted above, makes this abundantly clear. (emphasis supplied) 39.3. The enunciation aforementioned illuminates the reasons as to why at all a financial creditor is conferred with a major, rather pivotal, role in the processes contemplated by Part II of the Code. It is the financial creditor who lends finance on a term loan or for working capital that enables the corporate debtor to set up an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the Court is required to be understood in the context of the facts and issues involved therein. 41.1. In the case of Pioneer Urban, this Court was concerned with the challenge to the constitutional validity of amendments made to the Code pursuant to a report dated 26.03.2018 prepared by the Insolvency and Bankruptcy Law Committee. The amendments were essentially to the effect of putting the allottees of real estate projects into the sect of financial creditors and thereby investing them with the rights and entitlement to trigger the proceedings under Section 7 of the Code against the real estate developers and to be represented in the Committee of Creditors. In the background of such amendments had been certain important decisions/orders by NCLAT and by this Court. One had been the order dated 21.07.2017 by the NCLAT in the case of Nikhil Mehta and Sons (HUF) v. AMR Infrastructure Limited: (2017) SCC Online NCLAT 859, where it was held that the amount raised by the developers had the commercial effect of a borrowing and the allottees of such developers were financial creditors within the meaning of Section 5(7) of the Code. The other one had been the order dated 11.09.201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rguments. *** *** *** 68. Thus, in order to be a debt , there ought to be a liability orobligation in respect of a claim which is due from any person. Claim then means either a right to payment or a right to payment arising out of breach of contract, and this claim can be made whether or not such right to payment is reduced to judgment. Then comes default , which in turn refers to non-payment of debt when whole or any part of the debt has become due and payable and is not paid by the corporate debtor. Learned counsel for the petitioners relied upon the judgment in Union of India v . Raman Iron Foundry : (1974) 2 SCC 231, and, in particular relied strongly upon the sentence reading: (SCC p.243, para 11) 11....Now the law is well settled that a claim for unliquidated damages does not give rise to a debt until the liability is adjudicated and damages assessed by a decree or order of a court or other adjudicatory authority. 69. It is precisely to do away with judgments such as Raman Iron Foundry (supra) that claim is defined to mean a right to payment or a right to remedy for breach of contract whether or not such right is reduced to judgment. What is clear, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis. (emphasis supplied) That this is against consideration for the time value of money is also clear as the money that is disbursed is no longer with the allottee, but, as has just been stated, is with the real estate developer who is legally obliged to give money s equivalent back to the allottee, having used it in the construction of the project, and being at a discounted value so far as the allottee is concerned (in the sense of the allottee having to pay less by way of instalments than he would if he were to pay for the ultimate price of the flat/apartment). *** *** *** 74. What is clear from what Shri Venugopal has read to us is thata wide range of transactions are subsumed by para (f) and that the precise scope of para (f) is uncertain. Equally, para (f) seems to be a catch all provision which is really residuary in nature, and which would subsume within it transactions which do not, in fact, fall under any of the other sub-clauses of Section 5(8). 75. And now to the precise language of Section 5(8)( f). First and foremost, the sub-clause does appear to be a residuary provision which is catch all in nature. This is clear from the words any amount and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for use in the construction project so long as it is intended by the agreement to give something equivalent to money back to the homebuyers. The something equivalent in these matters is obviously the flat/apartment. Also of importance is the expression commercial effect . Commercial would generally involve transactions having profit as their main aim. Piecing the threads together, therefore, so long as an amount is raised under a real estate agreement, which is done with profit as the main aim, such amount would be subsumed within Section 5(8) ( f) as the sale agreement between developer and home buyer would have the commercial effect of a borrowing, in that, money is paid in advance for temporary use so that a flat/apartment is given back to the lender. Both parties have commercial interests in the same the real estate developer seeking to make a profit on the sale of the apartment, and the flat/apartment purchaser profiting by the sale of the apartment. Thus construed, there can be no difficulty in stating that the amounts raised from allottees under real estate projects would, in fact, be subsumed within Section 5(8) ( f) even without adverting to the explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'means and includes', on the other hand, indicate an exhaustive explanation of the meaning which, for the purposes of the Act, must invariably be attached to these words or expressions. On the other hand, another decision of this Court in Krishi Utapadan Mandi Samiti Anr v. M/s Shankar Industries Ors: 1993 Suppl. (3) SCC 361 was referred on behalf of the respondents wherein, the Court had considered a definition clause whereby the expression agricultural produce was defined to mean such items of produce of agriculture, horticulture, viticulture, apiculture, sericulture, pisciculture, animal husbandry, or forest as specified in the Schedule and then, the definition included therein admixture of two or more of such items, and further included any such item in processed form and yet further included specific items like gur, rub, shakkar, khandsari and jaggery. While examining such definition in Krishi Utapadan Mandi Samiti, the Court proceeded to say that under the rules of interpretation, when the words means and includes are used in a definition, they are to be given a wider meaning and are not exhaustive or restricted to the items contained therein. This statemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd is out of sync with later decisions on the same point. Equally, Dr. Singhvi's argument that clauses (a) to (i) of Section 5(8) of the Code must all necessarily reflect the fact that a financial debt can only be a debt which is disbursed against the consideration for the time value of money, and which permeates clauses (a) to (i), cannot be accepted as a matter of statutory interpretation, as the expression and includes speaks of subject-matters which may not necessarily be reflected in the main part of the definition. (emphasis supplied) 41.1.3. In the end, however, this Court rejected the contentions urged on behalf of the petitioners while accepting other line of submissions on behalf of the respondents that the legislature is not precluded by way of amendment from inserting words into what may even be an exhaustive definition and while observing that an exhaustive definition is exhaustive only for the purposes of interpretation of a statute by the Courts. This Court said,- 83. In any event, as was correctly argued by learned Additional Solicitor General Mrs. Madhavi Divan, the legislature is not precluded by way of amendment from inserting words into what may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he concurring judgment of Eera v. State (NCT of Delhi) : (2017) 15 SCC 133 paras 122 and 127. This argument must, therefore, also be rejected. 98. We, therefore, hold that allottees/homebuyers were included in the main provision, i.e. Section 5(8)(f) with effect from the inception of the Code, the explanation being added in 2018 merely to clarify doubts that had arisen. (emphasis supplied) 41.1.5. For taking into comprehension the ratio of Pioneer Urban (supra) and for its application to the question at hand, appropriate it would be to recount the basic principles expounded and explained by a three-Judge Bench in the case of Haryana Financial Corporation and Anr. v. Jagdamba Oil Mills and Anr.: (2002) 3 SCC 496 that the observations of the Court in a judgment are always required to be read in the context in which they appear. This Court has said,- 19. Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. Observations of courts are not to be read as Euclid s theorems nor as provisions of the statute. These observations must be read in the context i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the definition, was also not accepted and, in that context, the Court observed that the expression and includes speaks of subject-matters which may not necessarily be reflected in the main part of the definition. Obviously, there could be several subject-matters which may not, as such, be found squarely manifested in the expressions employed in the means part of a definition and could be reasonably found in the includes part. However, it has not been laid down as a rule of statutory interpretation that the includes part could stand alone, disjunct from and totally alien to the means part. The expressions means and includes in the definition clauses - effect 42. Looking to the frame of the Code, where the significant expressions financial creditor and financial debt have been defined with the words means and includes , we may further refer to the principles of construction of such a definition clause in a statute. Tersely put, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion clauses were explained by this Court in the case of Delhi Development Authority v. Bhola Nath Sharma (Dead) by LRs Ors: (2011) 2 SCC 54 in the following: 25. The definition of the expressions local authority and person interested are inclusive and not exhaustive. The difference between exhaustive and inclusive definitions has been explained in P. Kasilingam v. P.S.G. College of Technology : 1995 Supp (2) SCC 348 in the following words: (SCC p. 356, para 19) 19. A particular expression is often defined by the legislature by using the word means or the word includes . Sometimes the words means and includes are used. The use of the word means indicates that definition is a hardand-fast definition, and no other meaning can be assigned to the expression than is put down in definition . (See Gough v. Gough : (1891) 2 QB 665 (CA); Punjab Land Development and Reclamation Corpn. Ltd. v. Labour Court : (1990) 3 SCC 682, SCC p. 717, para 72.) The word includes when used, enlarges the meaning of the expression defined so as to comprehend not only such things as they signify according to their natural import but also those things which the clause declares that they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent contexts. Standard dictionaries assign more than one meaning to the word include . Webster s Dictionary defines the word include as synonymous with comprise or contain . Illustrated Oxford Dictionary defines the word include as: (i) comprise or reckon in as a part of a whole; (ii) treat or regard as so included. Collins Dictionary of English Language defines the word includes as: (i) to have as contents or part of the contents; be made up of or contain; (ii) to add as part of something else; put in as part of a set, group or a category; (iii) to contain as a secondary or minor ingredient or element. It is no doubt true that generally when the word include is used in a definition clause, it is used as a word of enlargement, that is to make the definition extensive and not restrictive. But the word includes is also used to connote a specific meaning, that is, as means and includes or comprises or consists of . (emphasis in original) 28. In Hamdard (Wakf) Laboratories v. Labour Commr. : (2007) 5 SCC 281 it was held as under: (SCC p. 294, para 33) 33. When an interpretation clause uses the word includes , it is prima facie extensive. When it uses the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eiving its ordinary, popular, and natural sense whenever that would be properly applicable, but to enable the word as used in the Act to be applied to something to which it would not ordinarily be applicable. (emphasis supplied) Therefore, the inclusive part of the definition cannot prevent the main provision from receiving its natural meaning. The essentials for financial debt and financial creditor 43. 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 existenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... editor 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 . 46.1. The use of the expression means and includes in these clauses, on the very same principles of interpretation as indicated above, 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 in terms of Section 3(30) means a creditor in whose favour a security interest is created; and security intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant of such resurgence of the corporate debtor. 47.1. 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. Thus understood, it is clear that if the former i.e., a person having only security interest over the assets of the corporate debtor is also included as a financial creditor and thereby allowed to have its say in the processes contemplated by Part II of the Code, the growth and revival of the corporate debtor may be the casualty. Such result would defeat the very objective and purpose of the Code, particularly of the provisions aimed at corporate insolvency resolution. 47.2. Therefore, we have no hesitation in saying that a person h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Insolvency and Bankruptcy (Amendment) Act, 2019 was also under challenge. The problem arose essentially with the decision of NCLAT holding that in a resolution plan, there could be no difference amongst the creditors in that, a financial creditor and operational creditor deserve equal treatment under a resolution plan. It was in the setup of such background that in Essar Steel, this Court made the observations relied upon by the respondents. 50.1. The referred observations in the case of Essar Steel are essentially based on the earlier observations occurring in the case of Swiss Ribbons. As noticed, the decision in Swiss Ribbons was rendered by this Court when constitutional validity of various provisions of the Code was put to challenge. In Essar Steel, this Court reiterated the enunciations in Swiss Ribbons in paragraph 55 in the following: 55. Financial creditors are in the business of lending money. The RBI report on Trend and Progress of Banking in India, 2017-2018 reflects that the net interest margin of Indian banks for the financial year 2017-2018 is averaged at 2.5%. Likewise, the global trend for net interest margin was at 3.3% for banks in the USA and 1.6% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operational creditors must be paid the same amounts in any resolution plan before it can pass muster. On the contrary, paragraph 77 itself makes it clear that there is a difference in payment of the debts of financial and operational creditors, operational creditors having to receive a minimum payment, being not less than liquidation value, which does not apply to financial creditors. The amended Regulation 38 set out in paragraph 77 again does not lead to the conclusion that financial and operational creditors, or secured and unsecured creditors, must be paid the same amounts, percentage wise, under the resolution plan before it can pass muster. Fair and equitable dealing of operational creditors rights under the said Regulation involves the resolution plan stating as to how it has dealt with the interests of operational creditors, which is not the same thing as saying that they must be paid the same amount of their debt proportionately. Also, the fact that the operational creditors are given priority in payment over all financial creditors does not lead to the conclusion that such payment must necessarily be the same recovery percentage as financial creditors. So long as the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an indirect secured creditor i.e., the person having in its hand only the security interest over the property of the corporate debtor but with no corresponding involvement in the finances and growth of the corporate debtor, was never under consideration in the said decisions. 50.4. We may usefully elaborate a little. On a contextual reading of the expositions in Essar Steel and Swiss Ribbons, it is but clear that the Court had examined the status of direct secured creditor of the corporate debtor and there had not been any occasion to examine the features related with an indirect secured creditor, who is neither involved in assessing the viability of the corporate debtor nor in lending finances to the corporate debtor for setting up the business. As noticed, the prime, rather only, area of interest of such indirect secured creditor is in recovery of its debt and not in reorganization of the corporate debtor s business. Thus understood, it is absolutely clear that the class of secured creditors indicated by this Court in Essar Steel and Swiss Ribbons, as being subsumed in financial creditors, is only that of such secured creditors who are directly engaged in advancing credit to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty offered and no personal liability by the promisor; and thus, the promisor became a surety and referred to Sections 126, 127 and 128 of the Contract Act. 51.3. With reference to Section 128 of the Contract Act, the Court pointed out that the liability of a surety is ordinarily coextensive with that of the debtor but in the case at hand, such liability of the surety was as otherwise provided by the contract; and such liability of the respondent was to the extent of securing the dues by creation of mortgage. The Court said that as the principal debtor could create a mortgage of his immoveable property, a third person could also agree to create a mortgage so as to secure the dues of the principal debtor. As regards the consideration, the Court said that though no direct consideration had flowed from the appellant to the respondent but, in such tripartite agreement, anything done for the benefit of the principal debtor is sufficient consideration to the surety for giving guarantee. For their relevance, we may notice the relevant parts of paragraphs 12,13,14,17 and 21 of the said decision in Smt. Kusum as follows:- 12. The next question that arises is whether such promise to cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hampered to a great extent. In the present day world of commerce, a person may not have sufficient security to offer for obtaining advances from financial institutions even though satisfying the requirements. In such cases, he draws upon resources of others by asking them to give guarantee and also security for the performance of that guarantee and it is a perfectly legitimated and legal way of conducting such commercial transactions. In fact, Chapter VIII of the Contract Act deals with indemnity and guarantee and provides for this kind of tripartite arrangement. 14. As regards consideration, it is true that no direct consideration has flowed from the plaintiff to the defendant who has made the promise to create a mortgage. But in such tripartite arrangement, anything done for the benefit of the principal debtor is a sufficient consideration to the survey for giving guarantee as expressly provided in Section 127 of the Contract Act. Thus, even though there is no consideration to the third party-surety for mortgages, the consideration of having done anything for the benefit of the principal debtor is a sufficient consideration. *** *** *** *** 17. In the present case, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne itself from suing the husband. Such forbearance is sufficient and valid consideration for the promise made by the defendant to agree to create mortgage and give collateral security. The learned Trial Judge is in error in observing that an act done at the desire of third party is not a consideration. It must, therefore, be held that the suit agreement Ex. 20 is for sufficient and valid consideration and is valid and enforceable. 51.4. The said decision in Smt. Kusum, at best, leads to the position that a promise to create a mortgage, even if given by a third party and not by the borrower would be deemed to be for consideration; that even if no direct consideration had flown from the plaintiff to the defendant who made the promise to create the mortgage, anything done for the benefit of the principal debtor would be sufficient consideration to the surety for giving guarantee as provided under Section 127 of the Contract Act. When the creditor abstained from enforcing the claim against the principal debtor because of such promise to create mortgage by the defendant, such forbearance was held to be sufficient and valid consideration. It is difficult to stretch the ratio of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alia, observed, with reference to the definition aforesaid as occurring in Act 70 of 1951 and the definition of mortgage as occurring in the Transfer of Property Act, as under: 3 .The main contention of the appellant in this connection is that a mortgage debt is not a pecuniary liability and therefore does not fall within the definition of debt at all. We are of opinion that there is no force in this contention. The words pecuniary liability will cover any liability which is of a monetary nature. Now the definition of a mortgage in Section 58 of the Transfer of Property Act 4 of 1882, shows that though it is the transfer of an interest in specific immovable property, the purpose of the transfer is to secure the payment of money advanced or to be advanced by way of loan or to secure an existing or future debt or the performance of an engagement which may give rise to a pecuniary liability. The money advanced by way of loan, for example, which is secured by a mortgage, obviously creates a pecuniary liability. It is true that a mortgage in addition to creating the pecuniary liability also transfers interest in the specific immovable property to secure that liability; none the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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