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TMI Blog2020 (2) TMI 1259X X X X Extracts X X X X X X X X Extracts X X X X ..... as collateral securities for the loans and advances made by the lender banks and financial institutions to Jaiprakash Associates Limited , the holding company of JIL, as being preferential, undervalued and fraudulent, in terms of Sections 43, 45 and 66 of the Insolvency and Bankruptcy Code, 2016. Hereinafter also referred to as 'the Code' or 'IBC'. 1.1. It may be noticed at the outset that the batch of appeals decided by the impugned common order dated 01.08.2019 also comprised of two appeals filed by the lenders of JAL, being Comp. App (AT) (Ins) No. 353 of 2018 and Comp. App (AT) (Ins) No. 301 of 2018 that were preferred against the orders passed by NCLT on 09.05.2018 and 15.05.2018 respectively, whereby NCLT approved the decision of IRP rejecting the claims of such lenders of JAL to 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. These two appeals also came to be allowed as per the result recorded in the impugned order dated 01.08.2019, though the entire discussion and the final conclusion therein had only been in relation to the ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... however, took an entirely opposite view of the matter and upturned the order so passed by NCLT, while holding that the transactions in question do not fall within the mischief of being preferential or undervalued or fraudulent; and that the lenders in question (the lenders of JAL) were entitled to exercise their rights under the Code. Aggrieved, the IRP, one of the creditors of the corporate debtor JIL and the associations of home buyers, who have invested in the proposed projects of JIL and JAL, have preferred these appeals. 2.4. As regards the second issue, noticeable it is that during CIRP, two of the respondent banks namely, ICICI Bank Limited and Axis Bank Limited, sought inclusion in the category of financial creditors of JIL but IRP did not agree and declined to recognize them as such. Being aggrieved by the decisions so taken by IRP, the said banks preferred separate applications under Section 60(5) of the Code before NCLT while asserting their claim to be recognized as financial creditors of the corporate debtor JIL, on account of the securities provided by JIL for the facilities granted to JAL. The NCLT rejected the applications so filed by the said banks, by way of its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 of 2019; and they also support the assertion of IRP that the transactions in question cannot be countenanced. 3.5. India Infrastructure Finance Company Limited: It is the financial creditor of the corporate debtor JIL and has filed Civil Appeal in Diary No. 32881 of 2019 while asserting that the transactions in question need to be avoided; and that the lenders of JAL related with such transactions cannot be the financial creditors of JIL for the purpose of CIRP in question. 3.6. Axis Bank Limited; Standard Chartered Bank Limited; ICICI Bank Limited; State Bank of India; United Bank of India; UCO Bank; The Karur Vyasa Bank (P) Limited; L&T Infrastructure Finance Company Limited; Central Bank of India; Canara Bank; Karnataka Bank Limited; IFCI Limited; Allahabad Bank; Jammu & Kashmir Bank; South Indian Bank Limited; Bank of Maharashtra and other banks and financial institutions: They are the lenders of JAL in whose favour the properties of JIL were put under mortgage by way of the impugned transactions. They oppose the assertions of appellants while maintaining that the transactions in question are not avoidable and are valid, investing them with the capacity of financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 for 158.1739 acres situated at Village Jaganpur and Aurangpur, Uttar Pradesh, executed by JIL in favour of IDBI Trustee-ship Services Limited in the capacity of security trustee for term loan of Rs. 1200 crores granted by ICICI Bank Limited to JAL against the facility agreement dated 25.05.2015. Hereinafter also referred to as 'Property No. 3' Initial mortgage deed dated 12.05.2014 for 433.35 acres of land, followed by release of land admeasuring 240 acres vide release deed dated 30.12.2015 along with release of land admeasuring 35.03 acres vide release deed dated 24.06.2016. Further release of 158.1739 acres of land vide release deed dated 07.03.2017 and thereafter re-mortgaged on 07.03.2017. Mortgage deed dated 07.03.2017 for 151.0063 acres situated at Village Jikarpur, Tehsil Khair, District Aligarh, Uttar Pradesh, executed by JIL in favour of IDBI Trustee-ship Services Limited in the capacity of security trustee for term loan of Rs. 1200 crores granted by ICICI Bank Limited to JAL against the facility agreement dated 25.05.2015. Hereinafter also referred to as 'Property No. 4' Initial mortgage deed dated 12.05.2014 released on 07.03.2017 and re-mortgaged on 07.03.2017. 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge deed dated 12.05.2014 for 100 acres of land situated at Village Tappal, Tehsil Khair, District Aligarh, Uttar Pradesh executed by JIL in favour of ICICI Bank Limited against the facility agreement dated 12.12.2013 granting Term Loan of Rs. 1500 crores and overdraft amount of Rs. 175 crores to JAL. Hereinafter also referred to as 'Property No. 7' (As regards this description, it is pointed out on behalf of the respondent ICICI Bank that it had been of 'Term Loan of Rs. 1500 crores under the Corporate Rupee Loan Facility agreement and General Conditions dated 12.12.2013 and mortgage deed was dated 10.03.2014') The relevant factual and background aspects 5. Having taken note of the principal parties to the dispute and the transactions/properties involved, but before dilating on the issues, we may briefly narrate the background in which the present CIRP is underway as also the orders passed by this Court, for ensuring its completion in accordance with law and towards the larger benefit of stakeholders. 6. JAL is stated to be a public listed company with more than 5 lakh individual shareholders. In the year 2003, JAL was awarded the rights for construction of an expressway fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecessary provisions were made to protect the interests of home buyers. Various orders were also made with directions to JAL, as holding company of JIL, for making deposits in the Court, particularly looking to the claim of refund being made by some of the home buyers. This Court also took note of the facts that CIRP commenced on 09.08.2017; the statutory period of 180 days for concluding the CIRP had come to an end; and even the extended statutory period of 90 days also ended on 12.05.2018 but then, by way of the Amendment Ordinance, 2018, the home buyers were accorded the statutory recognition as financial creditors w.e.f. 06.06.2018. While finally disposing of the matters on 09.08.2018, this Court took note of the interest of home buyers as also the creditors of JIL and JAL, the status of proceedings and the statutory provisions as then obtaining and ultimately issued the following directions: - "(i) In exercise of the power vested in this Court under Article 142 of the Constitution, we direct that the initial period of 180 days for the conclusion of the CIRP in respect of JIL shall commence from the date of this order. If it becomes necessary to apply for a further extension o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equential directions. This led to further appeals in this Court Being Civil Appeal No. 8437 of 2019 [@ D No. 27229 of 2019]: Jaiprakash Associates Ltd. & Anr. v. IDBI Bank Ltd. and connected case, which were considered and decided on 06.11.2019. 6.3.1. In the order dated 06.11.2019, we took note of the fact that CIRP in relation to JIL stood revived in view of the directions in Chitra Sharma (supra) as also the amendments brought about in IBC. In the peculiar, rather extraordinary, situation obtaining in the matter, we passed the orders under the plenary powers so as to ensure that an attempt was made for revival of the corporate debtor JIL, lest it was exposed to liquidation process while taking note of the unanimity amongst the parties that liquidation of JIL must be eschewed; and while also taking note of the time limit for completion of Insolvency Resolution Process as per third proviso to Section 12(3), which came into effect from 16.08.2019. In the given circumstances, we passed the following order for the purpose of substantial and complete justice to the parties and in the interest of all the stakeholders: "i) We direct the IRP to complete the CIRP within 90 days from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12.2019. Even while reserving the orders, looking to the facts and circumstances of the case, we stayed the operation of the order passed by NCLAT, insofar relating to the prayer of the lender-banks of JAL for treating them as financial creditors of JIL. The relevant part of the order dated 10.12.2019 reads as under: - "Civil Appeal @ Diary No(s). 32881/2019 These appeals take exception to the decision of the National Company Law Appellate Tribunal allowing the appeal(s) filed by the lender-Banks of Jayprakash Associates Limited (JAL) claiming to be financial creditors(s) of Jaypee Infratech Limited (JIL). The National Company Law Tribunal had rejected that claim but we find that in the impugned judgment, without dealing with the reasons recorded by the National Company Law Tribunal, the Appellate Tribunal allowed the appeal(s) filed by the stated lenderBanks(s), who were claiming to be the financial creditor(s) of JIL. After fully hearing counsel for the parties, prima facie, we are of view that lender-Banks of JAL cannot be regarded as financial creditor(s) of JIL. We would elaborate on this aspect in our final judgment. Be that as it may, it is appropriate that we must stay t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the corporate debtor without obtaining the approval of shareholders. 9.1. In opposition to the application, it was contended that the financial position of the corporate debtor was very strong notwithstanding the temporary financial crunch; that JAL was helping JIL in various ways and hence, creation of impugned mortgages was not unusual, but merely reciprocal; and such reciprocal accommodation cannot be termed without consideration. It was also contended that no transaction which was permitted by law and entered into transparently could amount to 'carrying on business for a fraudulent purpose'. It was further contended that the impugned mortgages had not been created on account of any antecedent debt liability owed by the corporate debtor; they had been within the ordinary course of business of corporate debtor and the transferees; and were not within the statutory period of one year and, therefore, Section 43 of IBC would not apply. It was maintained that the transactions in question were reciprocal and could not be termed as without consideration or undervalued. According to the contesting parties, when the essential jurisdictional conditions were not satisfied, the provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficient to complete the construction of flats and the home buyers are directly and adversely affected by such a decision. 10.1. With respect to Section 43 of IBC, the NCLT held that the transaction of creating a security interest by way of mortgage in favour of lenders of the third party (JAL) on the unencumbered land of the corporate debtor without any consideration or counter guarantee cannot be treated as transfer in the ordinary course of business or financial affairs of the corporate debtor. Further, it did not benefit either the business or finances of the corporate debtor in any way and hence, was not covered under 'financial affairs'. The Tribunal held that the phrase under consideration cannot be interpreted to mean that the ordinary course of business also includes the transferee's ordinary course of business because transferee can never do the transfer himself; and that the words 'the transfer made' indicate that they relate to the transferor and not the transferee. As regards 'relevant time' for the purpose of sub-section (4) of Section 43 of the Code [This "relevant time" for the purpose of avoidance of preferential transactions is now commonly referred to as "look- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an undervalued transaction as defined under section 45 of the Code. *** *** *** In this case, we have found that impugned transactions are covered under preferential transactions as defined in section 43(2) (a) of the Code. Therefore, it cannot be said that section 45 does not apply for these transactions. The impugned mortgage of unencumbered land parcels of the Corporate Debtor in favour of lenders of the JAL to create a security interest are transactions between the Corporate Debtor, lenders of JAL and JAL, who happens to be an Operational Creditor of the Corporate Debtor. It is true that the collateral security is common practice in loan transactions. It is on record that in this case, the Corporate Debtor was under liquidity crunch and its accounts were declared NPA by LIC and other creditors. The Joint Lender Forum was formed to deal with the situation. But the Corporate Debtor entered into the transaction even without taking prior approval of Joint Lender Forum and mortgaged its unencumbered land in favour of the lenders of the JAL. In the circumstances stated above it is clear that the impugned preferential transactions are also undervalued transactions and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the ambit of 'relevant time' per Section 43 of the Code. (as fully taken note of in paragraph 4 and its sub-paragraphs under the heading 'Transactions in question' ibid.). Appeals before NCLAT: the impugned order 11. Assailing the aforesaid order passed by NCLT accepting the application of IRP in relation to six of the mortgage transactions, the aggrieved parties filed separate appeals before the Appellate Tribunal, the NCLAT. The Appellate Tribunal took note of the facts of the case and the rival contentions and proceeded to upturn the order passed by NCLT on the considerations as indicated infra. 11.1. As regards the assertion of IRP that the transactions in question were preferential transactions within the relevant time as envisaged by Section 43 of the Code, the NCLAT observed that the corporate debtor had created interest over its property, but such interest had 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 and hence, Section 43(2)(a) of the Code was not attracted. It was further observed that the mortgages in question were made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial Institutions have been made in ordinary course of business and financial affairs of the transferee, as apparent from the relevant facts. 67. Therefore, we hold that Section 43 is not attracted to any ofthe transaction/mortgage(s) made in favour of the Appellants." 11.2. The Appellate Tribunal further proceeded to hold that the provisions of Section 45 of Code, for avoidance of undervalued transactions, were not applicable in relation to the transactions in question while observing as under:- "71. For holding a transaction undervalued, the 'Resolution Professional'/'Liquidator' is required to examine the transactions which were made during 'the relevant period' as prescribed under Section 46, if any of it is undervalued. As per sub-section (2) of Section 45, the transaction shall be considered 'undervalued' 'where the 'Corporate Debtor' makes a gift to a person or enters into a transaction with a person which involves the transfer of one or more assets by the 'Corporate Debtor' for a consideration the value of which is significantly less than the value of the consideration provided by the 'Corporate Debtor' and such transaction has not taken place in the ordinary course of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en made that such transactions amount to 'extortionate credit' as defined under Section 50. Therefore, the Adjudicating Authority in absence of any such finding is not empowered to pass order under Section 51. Further, as we have held that the transactions were made in the ordinary course of business in absence of any contrary evidence to show that they were made to defraud the creditors of the 'Corporate Debtor' or for any fraudulent purpose, on mere allegation made by the 'Resolution Professional', it was not open to the Adjudicating Authority to hold that mortgage deeds, in question, were made by way of transactions which come within the meaning of 'fraudulent trading' or 'wrongful trading' under Section 66." 11.4. The Appellate Tribunal, therefore, allowed the appeals and set aside the impugned order passed by NCLT on 16.05.2018 in so far relating to the lenders in question in the following:- "80. For the reasons aforesaid, we set aside the impugned order dated 16th May, 2018 so far it relates to the Appellants. In view of such findings, the Appellants-'Axis Bank Ltd', 'Standard Chartered Bank', 'ICICI Bank Ltd.', 'State Bank of India', 'Jai Prakash Associates Ltd.', 'Bank o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be; Section 3(30): "secured creditor" means a creditor in favour of whom security interest is created; Section 3(31): "security interest" means right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person: Provided that security interest shall not include a performance guarantee; Section 3(33): "transaction" includes a agreement or arrangement in writing for the transfer of assets, or funds, goods or services, from or to the corporate debtor; Section 3(34): "transfer" includes sale, purchase, exchange, mortgage, pledge, gift, loan or any other form of transfer of right, title, possession or lien; Section 3(35): "transfer of property" means transfer of any property and includes a transfer of any interest in the property 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebt" means a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority; Section 5(24): "related party", in relation to a corporate debtor, means - (a) a director or partner of the corporate debtor or a relative of a director or partner of the corporate debtor; (b) a key managerial personnel of the corporate debtor or a relative of a key managerial personnel of the corporate debtor; (c) a limited liability partnership or a partnership firm in which a director, partner, or manager of the corporate debtor or his relative is a partner; (d) a private company in which a director, partner or manager of the corporate debtor is a director and holds along with his relatives, more than two per cent of its share capital; (e) a public company in which a director, partner or manager of the corporate debtor 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor; and (b) the transfer under clause (a) has the effect of putting suchcreditor or a surety or a guarantor in a beneficial position than it would have been in the event of a distribution of assets being made in accordance with section 53. (3) For the purposes of sub-section (2), a preference shall not include the following transfers- (a) transfer made in the ordinary course of the business orfinancial affairs of the corporate debtor or the transferee; (b) any transfer creating a security interest in property acquired bythe corporate debtor to the extent that- (i) such security interest secures new value and was given at the time of or after the signing of a security agreement that contains a description of such property as security interest, and was used by corporate debtor to acquire such property; and (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r providing the extent to which any person whoseproperty is so vested in the corporate debtor, or on whom financial debts or operational debts are imposed by the order, are to be proved in the liquidation or the corporate insolvency resolution process for financial debts or operational debts which arose from, or were released or discharged wholly or in part by the giving of the preference: Provided that an order under this section shall not- (a) affect any interest in property which was acquired from a person other than the corporate debtor or any interest derived from such interest and was acquired in good faith and for value; (b) require a person, who received a benefit from the preferential transaction in good faith and for value to pay a sum to the liquidator or the resolution professional. Explanation I.-For the purpose of this section, it is clarified that where a person, who has acquired an interest in property from another person other than 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itional sale: Provided that no such transaction shall be deemed to be a mortgage, unless the condition is embodied in the document which effects or purports to effect the sale. (d) Usufructuary mortgage.-Where the mortgagor delivers possession or expressly or by implication binds himself to deliver possession of the mortgaged property to the mortgagee, and authorises him to retain such possession until payment of the mortgage-money, and to receive the rents and profits accruing from the property or any part of such rents and profits and to appropriate the same in lieu of interest, or in payment of the mortgage-money, or partly in lieu of interest or partly in payment of the mortgage-money, the transaction is called an usufructuary mortgage and the mortgagee an usufructuary mortgagee. (e) English mortgage.-Where the mortgagor binds himself to repay the mortgage-money on a certain date, and transfers the mortgaged property absolutely 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to whether the lenders of JAL, in whose favour the security interest by way of impugned transactions were created, would fall in the category of 'financial creditors' of the corporate debtor JIL. 14. Having regard to the overall circumstances, appropriate it would be to deal, at the first, with the contentions related with the issue as to whether the transactions in question are preferential transactions within the meaning of Section 43 of the Code. We may briefly summarize the contentions of the appellants, with particular focus on this issue as infra: Interim Resolution Professional for Jaypee Infratech Limited - the appellant In C.A. No. 8512-8527 of 2019 14.1. It has been contended on behalf of the appellant Interim Resolution Professional, who moved the application for avoidance of the transactions in question, that the impugned transactions have the effect of putting JAL, which is an equity shareholder and an operational creditor (for an amount of Rs. 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-à-vis other creditors; and that if the transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th reference to the decisions of this Court in State of Bombay v. R.M.D. Chamarbaugwala and Anr.: 1957 SCR 874 and Mazagaon Dock Ltd v. Commissioner of Income-Tax and Excess Profits Tax: 1959 SCR 848, it is submitted that on the well-known cannons of interpretation, "or" could be read as "and" if it is warranted to bring the provision in question in sync with the intention of the legislature which is to be discerned. 14.1.3.It is contended that Section 43 ought to be read keeping in mind the intention of the legislature in introducing such provision, which had been to protect the creditors against siphoning away of corporate assets by the management of the company, who have special knowledge of the company's financial troubles by virtue of its position. India Infrastructure Finance Company Limited - the appellant in C.A.@ D No. 32881 of 2019. 14.2. This appellant is one of the entities who has advanced loan to 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 certa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' would signify its natural import and is to be given a wide interpretation. It is submitted that as JAL was not only ad idem to the terms of the transaction but was also the beneficiary thereof, it cannot be said that the transaction was only between the corporate debtor and the lenders of JAL; rather, the transaction was with a 'related party' and the look-back period would be two years. Home buyers - the appellants in C.A. No. 6777-97/2019 14.3. On behalf of the home buyers, who have invested in the projects of the corporate debtor and whose interests would be diluted if the impugned transactions are upheld, the flow of transactions in question has been referred and essentially, the same contentions have been urged with respect to Section 43 of the Code, with reliance on the decision in Downs Distributing Co (supra), that the impugned transactions were not made in the ordinary course of business 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 substantia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be construed as preferential, particularly when they were entered into in the ordinary course of business and financial affairs of the corporate debtor as also the transferees. 15.2. Apart from expressing such concerns about likely prejudice to themselves and to the economy if the transactions in question are held preferential, a variety of contentions have been advanced on behalf of the respondents, while refuting those of the appellants. We may briefly summarize the leading contentions on behalf of the contesting respondents while omitting repetitions. Axis Bank 15.3. While maintaining that the impugned transactions cannot be considered as preferential within the meaning of Section 43 of the Code, the principal contentions on behalf of this respondent are as under: - a. The transactions did not occur within the 'relevant time'. 15.3.1. It is contended that the 'relevant 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice to the above, security was provided in the ordinary course of business. 15.3.5. While pointing out that Section 43(3)(a) carves out exception for the transactions made in the ordinary course of business or financial affairs of either the corporate debtor or the transferee, it is contended that no material particulars/evidence have been produced to show that the provision of the security was not in the ordinary course of business of the corporate debtor. On the contrary, according to the respondent, (i) creation of third party security is an established commercial business practice; (ii) the corporate debtor has continuously disclosed details of the security in its annual reports beginning from the financial year ending 31.03.2015 and thus, creation of security was known to all and disclosed in public documents; and (iii) no evidence of dissent from any existing 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tate Bank of India v. Jah Developers Pvt. Ltd. & Ors.: (2019) 6 SCC 787. d. Section 44 does not come into operation unless a transaction is made out to be preferential under Section 43. 15.3.8. It is further submitted that the jurisdictional condition of exercising power under Section 44 is the finding that a transaction is preferential under Section 43, as is evident from the heading of Section 44 i.e., 'Orders in cases of preferential transactions'; and, for the transaction in question being not preferential under Section 43, no orders could be made under Section 44. Standard Chartered Bank 15.4. Most of the contentions urged on behalf of this respondent are analogous to the contentions noticed in the preceding paragraphs and, therefore, we are not repeating the same. It is maintained on behalf of this respondent that in whatever way the relevant 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... secured by mortgages made by the corporate debtor, it is submitted that prior to 15.09.2015, when the questioned Consortium of Mortgages was created, only Jammu and Kashmir Bank had declared the corporate debtor as NPA, which was followed by the other lenders declaring the corporate debtor as NPA. It is contended that prior to the said declaration, the transactions with this respondent had been made as also the mortgages created on 15.09.2015, which had also secured the interests of Jammu and Kashmir Bank and, therefore, the impugned transactions could not be said to be preferential. Other respondent-lenders 15.6. Broadly speaking, similar submissions as noted above have been made on behalf of other respondent-lenders while maintaining that the impugned transactions are covered by the exclusion clause under Section 43 inasmuch as the transfers 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly to an extent of 29.04% whereas the remaining accounts were still 'standard'. According to the respondent JAL, this fact was specifically pleaded at the stage of opposing the application filed before the NCLT for initiating CIRP against JIL but JIL gave its consent for CIRP on the bona fide belief that it would be able to restructure its loans and get back the management of JIL. The submission is that, in the given economic scenario, JIL was not in any such stress or problem that it could not have continued with the existing mortgages for securing the facilities advanced to JAL by the lender banks and financial institutions. Insolvency and Bankruptcy Code, 2016: historical background, objects, scheme and structure of the relevant parts 16. The basic issue raised in the matter being related with the effect and operation of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time-bound manner, the value of the assets of such persons will deplete. Therefore, maximisation of value of the assets of such persons so that they are efficiently run as going concerns is another very important objective of the Code. This, in turn, will promote entrepreneurship as the persons in management of the corporate debtor are removed and replaced by entrepreneurs. When, therefore, a resolution plan takes off and the corporate debtor is brought back into the economic mainstream, it is able to repay its debts, which, in turn, enhances the viability of credit in the hands of banks and financial institutions. Above all, ultimately, the interests of all stakeholders are looked after as the corporate debtor itself becomes a beneficiary of the resolution scheme- workers are paid, the creditors in the long run will be 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility and also defines various expressions used in this Part (Sections 4 and 5). Chapter II of Part II contains the provisions for corporate insolvency resolution process in Sections 6 to 32 whereas Chapter III of this Part II contains the provisions for liquidation process in Sections 33 to 54. [Sections 4 to 33 came into force on 01.12.2016 whereas Section 33 to 54 came into force on 15.12.2016]. 16.3. Though the provisions relating to 'preferential transactions and relevanttime' (in Section 43 of the Code) occur in Chapter III of Part II, relating to liquidation process, but such provisions being for avoidance of certain transactions and having bearing on the resolution process too, by their very nature, equally operate over the corporate insolvency resolution process, and hence, the resolution professional is 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 involve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could be readily noticed that as far back as from 15th century, the concept of 'preference' has been taken note of and the principles relating to avoidance of certain preferences have evolved, particularly in the fields of mercantile laws and more particularly in the laws governing insolvency and bankruptcy [It may in the passing be observed that 'an insolvency' essentially refers to financial distress, i.e., financial state in which a person or entity is unable to pay its dues or meet with other akin obligations. Insolvency may be temporary in character. 'A bankruptcy', on the other hand, essentially refers to the legal process to regulate as to how an insolvent entity shall pay off his dues. As noticed, the primary focus of IBC 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'. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... person unable to pay his debts as they became due from his own money in favour of any creditor, with a view of giving that creditor a preference over the other creditors, shall, if such person is adjudged insolvent on a petition presented within three months after the date thereof, be deemed fraudulent and void as against the official assignee. (2) This section shall not affect the rights of any person making title in good faith and for valuable consideration through or under a creditor of the insolvent." The relevant part of Section 69 of the Act of 1920 had been as under: "69. Offences by debtors. - If a debtor, whether before or after the making of an order of adjudication, - *** *** *** (c) fraudulently with intent to diminish the sum to be divided among his creditors or to give an undue 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 stakehold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me shall be deemed to be a preference given at a relevant time and shall not be countenanced. Therefore, intent may not be of a defence or support of any preferential transaction that falls within the ambit of Section 43 of the Code. 17.5. At this juncture, we may usefully refer to paragraph 177 of UNCITRAL Legislative Guide on Insolvency Law, as referred to and relied upon by learned counsel for the respondent as also paragraphs 178 and 179 thereof, to indicate the basic theory and principles governing the provisions under consideration. In the said Guide, while dealing with the topic of treatment of assets on commencement of insolvency proceedings, it is stated broadly on the theory of avoidance of preferential transactions as follows: "(c) Preferential transactions (i) Criteria 177. 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t which is still potentially viable. Other defences available under insolvency laws include that the counterparty extended credit to the debtor after the transaction and that credit has not been paid (the defence is limited to the amount of the new credit); that the counterparty gave new value for which it was not granted a security interest; the counterparty can show that it did not know a preference would be created; that the counterparty did not know or could not have known that the debtor was insolvent at the time of the transaction; or that the debtor's assets exceeded its liabilities at the time of the transaction. Some of these latter defences, in particular those involving the intent of the parties to the transaction, suffer from the disadvantage of being difficult to prove and may 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., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder Section 53 Section 53 IBC makes provision for distribution of the proceeds from sale of the liquidation assets, in case of liquidation of the corporate debtor. 18.2. However, merely giving of the preference and putting the beneficiary in a better position is not enough. For a preference to become an offending one for the purpose of Section 43 of the Code, another essential and rather prime requirement is to be satisfied that such event, of giving preference, ought to have happened within and during the specified time, referred to as "relevant time". The relevant time is reckoned, as per sub-section (4) of Section 43 of the Code, in two ways: (a) if the preference is given to a related party (other than an employee), the relevant time is a period of two years preceding the insolvency commencement date; 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 pref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been in the event of distribution of assets in accordance with Section 53; and (iii) preference is given, either during the period of two years preceding the insolvency commencement date when the beneficiary is a related party (other than an employee), or during the period of one year preceding the insolvency commencement date when the beneficiary is an unrelated party. 19.2. By way of these statutory provisions, legal fictions are created whereby preference is deemed to have been given; and is deemed to have been given at a relevant time, if the stated requirements are satisfied. Variegated features of a deeming provision have been discussed by this Court in the case of Pioneer Urban (supra) with reference to several of the past decisions, albeit in the context of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r fiction; it may simply be the statement of an indisputable conclusion." 19.2.2. In Pioneer Urban, this Court further extracted extensively from the decision in Hindustan Cooperative Housing Building Society Limited v. Registrar, Cooperative Societies and Anr.: (2009) 14 SCC 302 on various features of the processes of construction of different deeming provisions in different contexts. Some of the relevant parts of such extraction (as occurring in paragraph 95 of Pioneer Urban) read as follows (in SCC at pp. 524): " '... The word "deemed" is used a great deal in modern legislation. Sometimes it is used to impose for the purposes of a statute an artificial construction of a word or phrase that would not otherwise prevail. Sometimes it is used to put beyond doubt a particular 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay not be so in reality. In other words, since sub-sections (4) and (2) are deeming provisions, upon existence of the ingredients stated therein, the legal fiction would come into play; and such transaction entered into by a corporate debtor would be regarded as preferential transaction with the attendant consequences as per Section 44 of the Code, irrespective whether the transaction was in fact intended or even anticipated to be so. Exclusion part 19.4. Even when the above-stated indicting parts of Section 43 as occurring in sub-sections (4) and (2) are satisfied and the corporate debtor is deemed to have given preference at a relevant time to a related party or unrelated party, as the case may be, such deemed preference may yet not be an offending preference, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of dealing with the crucial question as to whether the impugned transactions are preferential and fall within the prescription of subsection (2) of Section 43 of the Code, appropriate it shall be to recapitulate and summarize the overall scenario of this case. 22.1. The fact that JAL, a public listed company with more than 5 lakh individual shareholders, is the holding company of the corporate debtor JIL is neither of any doubt nor of any dispute. As on 31.03.2017, JAL owned 71.64% of shares of JIL, having a value of Rs. 995 crores. The background had been that when in the year 2003, JAL was awarded the rights for construction of an expressway and a concession agreement was entered into with the Yamuna Expressway Industrial Development 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DBI Trustee-ship Services Limited for term loan of Rs. 1200 crores granted by ICICI Bank to JAL; 4. Mortgage deed dated 07.03.2017 for 151.0063 acres of land (Property No. 4), again executed by JIL in favour of IDBI Trustee-ship Services Limited for term loan of Rs. 1200 crores granted by ICICI Bank to JAL; 5. Mortgage deed dated 24.05.2016 for 25.0040 acres of land (Property No. 5) executed by JIL in favour of IDBI Trustee-ship Services Limited, as additional security against the facility agreement dated 29.08.2012 between Standard Chartered Bank and JAL for Rs. 400 crores and other facilities, respectively for Rs. 450 crores, Rs. 538.16 crores and Rs. 81.84 crores as also for working capital facility of Rs. 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 Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 53 of the Code), JAL, as an operational creditor, stands much lower in priority than the other creditors and stakeholders. Such submissions, in our view, only strengthen the position that by way of the impugned transfers, JAL is put in a much beneficial position than it would have been in the absence of such transfers. It has rightly been contended on behalf of the appellants that with the transactions in question, JAL has been put in an advantageous position vis-à-vis other creditors on the counts that: a) JAL received a huge working capital (approx. Rs. 30000 crores), by way of loans and facilities extended to it by the respondent-lenders; and b) by way of the transactions 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 Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d with the company (other than employees) by incorporating longer time periods in relation to which such transactions can be challenged. Thus, while the relevant time period for avoiding preferences is six months prior to the onset of insolvency, the time period is increased to two years in the case of persons connected with the company. Similarly, for late floating charges other than for new value, the vulnerability period for non-connected persons is twelve months while it is two years in the case of connected persons. The avoidance provisions under the CA 2013 does not provide for longer time periods in case the transactions are with connected persons. It is submitted 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 sign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and transfers not in good faith are dealt with whereas, in the scheme of IBC, separate provisions are made as regards the transactions intended at defrauding the creditors (Section 49 IBC) as also for fraudulent trading or wrongful trading (Section 66 IBC). The provisions contained in Section 43, however, indicate the intention of legislature that when a preference is given at a relevant time and thereby, the beneficiary of preference acquires unwarranted better position in the event of distribution of assets, the same may not be countenanced. Looking to the scheme of IBC and the principles applicable for the conduct of the affairs of a corporate person, it cannot be said that anything of a new liability has been imposed or a new right has been created. Maximisation of value of assets of corporate persons and balancing the interests of all the stakeholders being the objectives of the Code, the provisions therein need to be given fuller effect in conformity with the intention of the legislature. 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-sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to Property No. 6 is concerned, being the mortgage deed dated 04.03.2016, towards Short-Term Loan Facility to JAL of Rs. 1000 crores by State Bank of India, the same obviously falls within the look-back period. Even if JAL had allegedly entered into the facility agreement with this lender bank on 26.03.2015, this date is hardly of any bearing so far as transaction by the corporate debtor JIL is concerned, which was made only on 04.03.2016. 24.3. In relation to the transactions concerning Property No. 1 and Property No. 2, for securing loans by the Consortium to JAL, it is submitted that there had been initial mortgage dated 24.02.2015 that was 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by which the properties in question were again put under mortgage with the lender/s, the facility amount was shown as Rs. 23491 crores. The transactions on 15.09.2015 and 29.12.2016 cannot be given credence with reference to the previous mortgage deed dated 24.02.2015. Similar is the case in relation to Property No. 3. Even when the previous mortgage was given on 12.05.2014 i.e., beyond the look-back period, there had been release deeds on 30.12.2015 and 26.06.2016 as regards certain parcels of land. So far the release of land to JIL is concerned, the same causes no problem and only works to the benefit of JIL and its stakeholders. 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 Rs. 1470 crores to Rs. 1767 crores, suffers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the period envisaged by sub-section (4) of Section 43 of the Code. Ordinary course of business or financial affairs 25. Even when it is held that the impugned transactions answer to the requirements of sub-section (2) of Section 43 and fall within the period specified in sub-section (4) thereof, the question still remains as to whether the impugned transactions do or do not fall within the exclusion provided by subsection (3) of Section 43 of the Code? As noticed, two types of transfers, as specified in clauses (a) and (b) of sub-section (3) of Section 43, are not to be treated as preference for the purpose of sub-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 include ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 'acquired' by the corporate debtor is not to be treated as preference to the extent that such security interest secures new value in monetary terms or in terms of goods, services or new credit or in release of a previously transferred property. Any micro dissection of clause (b) of sub-section (3) of Section 43 is not required in the present case. Suffice it to notice that even a bare look at the provision brings forth the concept that value enhancement or strengthening of the corporate debtor ought to be the result of a transfer, if it is to remain out of the ambit of sub-section (2) and not to fall within the 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 suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Income Tax Act, 1922 did appear bringing out the result which could not have been intended, the same was read in the context as meaning "and". This Court said: "10. The word "or" in the clause would appear to be rather inappropriate, as it is susceptible of the interpretation that when some profits are made but they are less than normal profits, tax could only be imposed either on the one or on the other, and that accordingly a tax on the actual profits earned would bar the imposition of tax on profits which might have been received. Obviously, that could not have been intended, and the word "or" would 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 "transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se pursued in any particular trade or vocation and it does not refer to what is normal or usual in the business of the debtor or that of the creditor." It is an additional requirement and is cumulative upon good faith and valuable consideration. It is, therefore, not so much a question of fairness and absence of symptoms of bankruptcy as of the everyday usual or normal character of the transaction. The provision does not require that the transaction shall be in the course of any particular trade, vocation or business. It speaks of the course of business in general. But it does suppose that according 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rwise of a preference at a relevant time. Similarly, the distinction between 'NPA' and 'wilful default'; the submission that NPA could be regularised; and further the submission that the mortgages were created before JIL was declared NPA, are hardly of any bearing on the question as to whether the impugned transactions had been in the ordinary course of business or financial affairs of JIL. Thus, reference to the decisions like that in Keshavlal Khemchand and Jah Developers (supra) is not of any consequence and need not be dilated upon. The answer to this question, in our view, could only be in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they chose to take the business risk of accepting security from JIL and that too, for securing the loans/advances/facilities made over to JAL, who was a directly related party of JIL for being its holding company, they themselves remain responsible for present legal consequences. Summation: The transactions in question are hit by Section 43 IBC 27. For what has been discussed hereinabove, we are clearly of the view that the transactions in question are hit by Section 43 of the Code and the Adjudicating Authority, having rightly held so, had been justified in issuing necessary directions in terms of Section 44 of the Code in relation to the transactions concerning Property Nos. 1 to 6. NCLAT, 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 ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of these sub-sets to find: (i) as to whether the transaction is of transfer of property or an interest thereof of the corporate debtor; and (ii) as to whether the beneficiary involved in the transaction stands in the capacity of creditor or surety or guarantor qua the corporate debtor. These steps shall lead to shortlisting of such transactions which carry the potential of being preferential. 4. In the next step, the said shortlisted transactions would be scrutinised to find if the transfer in question is made for or on account of an antecedent financial debt or operational 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 affirmativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present case, the IRP moved one composite application purportedly under Sections 43, 45 and 66 of the Code while alleging that the transactions in question were preferential as also undervalued and fraudulent. In our view, in the scheme of the Code, the parameters and the requisite enquiries as also the consequences in relation to these aspects are different and such difference is explicit in the related provisions. As noticed, the question of intent is not involved in Section 43 and by virtue of legal fiction, upon existence of the given ingredients, 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 trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as financial creditors of JIL for the purpose of IBC? 31. The issue aforesaid was raised before NCLT by two of the respondent banks namely, ICICI Bank Limited and Axis Bank Limited by way of separate applications under Section 60(5) of the Code, seeking to question the decision of IRP rejecting their claims to be recognized as financial creditors of the corporate debtor JIL on account of the securities provided by JIL for the facilities granted to JAL. The NCLT rejected the applications so filed, by way of its orders dated 09.05.2018 and 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial creditors of JIL, independent of the finding that the transactions in question are hit by Section 43 of the Code. 32. Before proceeding further, apposite it would be to take note of the reasons assigned by NCLT in its impugned orders for rejecting the claim of two of the lender banks to be treated as financial creditors of JIL. Reasoning and Findings of NCLT 33. The Adjudicating Authority, NCLT, in its order dated 09.05.2018 as passed on the application moved by ICICI Bank Limited, with reference to the nature of transaction 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bt', 'financial debt', 'financial creditor' and 'creditor' in the present context would be limited to the definitions given in the Code. The NCLT further distinguished the decision of Gujarat High Court in the case of State Bank of India v. Smt. Kusum Vallabhdas Thakkar: 1991 SCC Online Guj 14, while again pointing out that in the present case, the corporate debtor has created a mortgage of its property in favour of third party without any consideration for time value of money. 33.2. Yet further, the NCLT rejected the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ney' was lacking in the impugned transactions. NCLT also referred to the interpretation of the expression 'financial creditors' by NCLAT in the case of Nikhil Mehta and Sons v. AMR Infrastructure Ltd. Company: Appeal (AT) (Insolvency) No. 07 of 2017 and endorsed the decision of IRP while holding that,- "15. ....On the above basis, we are of the view that The Resolution Professional has correctly rejected the claim of the applicant on the ground that the Applicant is not a financial creditor of the corporate debtor 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollateral security in favour of lender banks for the money borrowed by JAL. Concisely put, the submission is that in the said mortgage transactions, disbursal against the consideration for the time value of money qua the corporate debtor JIL being not involved, the lenders of JAL are not the 'financial creditors' of JIL and cannot be included in the Committee of Creditors 'CoC' for short, as to be constituted per Section 21 of the Code. 36.1. It is further submitted that the said lenders of JAL have 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 incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n repayment of debts. In other words, only where the debtor and the mortgagor are the same person that the mortgagor would be liable to pay his debts and else, the mortgage itself does not create a pecuniary liability. Moreover, in the present case, when there is a tri-partite contract wherein, the mortgagor and debtor are different, the impugned transactions do not satisfy the ingredients of Section 126 of the Contract Act, as JIL has not undertaken specifically to discharge the liability of 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... direct disbursement of debt to the corporate debtor; and secondly, when the corporate debtor furnishes guarantee to any person, such person would also become a financial creditor and a secured creditor by virtue of sub-clause (i) of Section 5(8) of the Code, of course, such guarantee may even be to secure the debt obligation of a third party. However, according to the counsel for the appellant, when the corporate debtor creates mortgage to secure payment obligation of a third party, without 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 unsecure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of Mysore High Court in Dassappa & Ors v. Jogaiah & Ors : (1964) ILR 545, it is submitted that the purpose of 'mortgage' is to secure a debt; and with reference to the decision in Manik Chand Raut v. Baldeo Chaudhary & Ors: (1949) SCCOnline Pat 64, it is also contended that mortgage, by its very nature, presupposes existence of a debt and the transaction by which a debt is extinguished is not a mortgage but a sale. Further, with reference to the aforementioned decision of this 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 refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omes within the ambit of 'secured creditor' per Section 3(30) of the Code. 37.1.4. It is emphasised by learned counsel for this respondent that a mortgage debt constitutes a 'financial debt' within the meaning of Section 5(8) of the Code even if no amount is directly disbursed to the corporate debtor. While relying on the decision of this Court in Pioneer Urban Land and Infrastructure Ltd. & Anr. v. Union of India & Ors.: (2019) 8 SCC 416 Hereinafter also referred to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and is rather unavoidable. ICICI Bank 37.4. On behalf of this respondent, it is maintained that in view of Section 5(8) (i) read with Section 5(8)(a) of the Code, the creation of impugned mortgage had resulted in creation of a 'financial debt' as defined under the Code, for the transaction being akin to that of a 'guarantee' as defined under Section 126 of the Contract Act. Again, with reference to the decision in Smt. Kusum (supra), it is submitted 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 submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to as 'the SARFAESI Act' ; and that the resolution plan, without including the secured creditors, would be unenforceable, as the secured creditors will then seek enforcement against mortgage property under the SARFAESI Act. It is, therefore, contended that the secured creditor, like the respondent, needs to be recognized as financial creditor, and thereby a participant in CoC of the corporate debtor JIL. Bank of Maharashtra 37.6. While 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 JA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... definition of "financial creditor" and "financial debt" makes it clear that a financial debt is a debt together with interest, if any, which is disbursed against the consideration for time value of money. It may further be money that is borrowed or raised in any of the manners prescribed in Section 5(8) or otherwise, as Section 5(8) is an inclusive definition. On the other hand, an "operational debt" would include a claim in respect 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng maximum recovery for all creditors being the objective of the Code, financial creditors are clearly different from operational creditors and therefore, there is obviously an intelligible differentia between the two which has a direct relation to the objects sought to be achieved by the Code. *** *** *** 75. Since the financial creditors are in the business of moneylending, banks and financial institutions are best equipped 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. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The larger parts of the expressions employed in the definition of "financial debt" in sub-section (8) of Section 5 of the Code with their connotations were explicated in Pioneer Urban by a three-Judge Bench of this Court; and, in view of the contentions urged, it would be appropriate to take a deeper look into the exposition of law by this Court, while also keeping in view the plain basic principle that a decision 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the petitioners, by no stretch of imagination, could an allottee under a real estate project fall within Section 5(8)( f), as it originally stood and the Explanation must then be read prospectively i.e. only on and from the date of the Amendment Act. Several sub-arguments were made on the effect of deeming fictions generally and on the functions of an explanation to a section. Let us address all of these arguments. *** *** *** 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 unliqu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus: "present value: today's value of a payment or a stream of payment amount due and payable at some specified future date, discounted by a compound interest rate of DISCOUNT RATE. Also called the time value of money. Today's value of a stream of cash flows is worth less than the sum of the cash flows to be received or saved over time. Present value accounting is widely used in DISCOUNTED CASH FLOW analysis." (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se definitions would show that even though thepetitioners may be right in stating that a "borrowing" is a loan of money for temporary use, they are not necessarily right in stating that the transaction must culminate in money being given back to the lender. The expression "borrow" is wide enough to include an advance given by the homebuyers to a real estate developer for "temporary use" i.e. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r meaning could be assigned to the expression than is put down in the definition. As regards the word 'includes', this Court said that it 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 shall include. Further, this Court said that the words '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 furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as also been held that the expression "and includes" is an expression which extends the definition contained in words which follow the expression "means". From this discussion, two things follow. Krishi Utpadan Mandi Samiti cannot be said to be good law insofar as its exposition on "means" and "includes" is concerned, as it ignores earlier precedents of larger and coordinate Benches and 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 wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it originally stood as has been held by us hereinabove. As a matter of statutory interpretation, that interpretation, which accords with the objects of the statute in question, particularly when we are dealing with a beneficial legislation, is always the better interpretation or the "creative interpretation" which is the modern trend of authority, and which is reflected in the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Rather, a submission made therein, with reference to the decision in Krishi Utapadan Mandi Samiti, that 'and includes' part in a definition may lead to it being extensive, was rejected by this Court while holding that the said decision was not a good law. However, the other extreme of submissions, seeking restrictive interpretation with reference to 'means' part of 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 "m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny bearing on the conclusion because, eventually, the amendment in question was held to be only clarificatory in nature; and this Court held that the Explanation added to Section 5(8)(f) of the Code by the Amendment Act did not enlarge the scope of the original Section. 42.2. Various features of the process of interpretation while dealing with such definition 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act is clearly indicative of the legislative intent to make the definition exhaustive and would cover only those banking companies which fall within the purview of the definition and no other." 27. In N.D.P. Namboodripad v. Union of India : (2007) 4 SCC 502 the Court observed: (SCC p. 509, para 18) "18. The word 'includes' has different meanings in different 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inciple of construction. Craies on Statute Law (7th Edn., 1.214) says: "An interpretation clause which extends the meaning of a word does not take away its ordinary meaning.... Lord Selborne said in Robinson v. Barton-Eccles Local Board : (1883) 8 AC 798, AC at p. 801: 'An interpretation clause of this kind is not meant to prevent the word receiving 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- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orporate debtor owes a financial debt to such person. Understood this way, it becomes clear that a third party to whom the corporate debtor does not owe a financial debt cannot become its financial creditor for the purpose of Part II of the Code. 46. Expounding yet further, in our view, the peculiar elements of these expressions "financial creditor" and " financial debt", as occurring in Sections 5(7) and 5(8), when visualised and compared with the generic expressions "creditor" and "debt" respectively, as occurring in Sections 3(10) and 3(11) of the Code, the scheme of things envisaged by the Code becomes clearer. The generic term "creditor" is defined to mean any person to whom the debt is owed and then, it has also been made clear that it includes a 'financial creditor', a 'secured creditor', an 'unsecured creditor', an 'operational creditor', and a 'decree-holder'. Similarly, a "debt" means a liability or obligation in respect of a claim which is due from any person and this expression has also been given an extended meaning to include a 'financial debt' and an 'operational debt'. 46.1. The use of the expression "means and includes" in these clauses, on the very same princ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sted by the legislature with such a role that it would look forward to ensure that the corporate debtor is rejuvenated and gets back to its wheels with reasonable capacity of repaying its debts and to attend on its other obligations. Protection of the rights of all other stakeholders, including other creditors, would obviously be concomitant 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 it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of Essar Steel, the questions before the Court related to the roles of resolution applicant, resolution professional and Committee of Creditors constituted under the Code and the jurisdiction of Adjudicating Authority as also the Appellate Tribunal in questioning the resolution plans. The constitutional validity 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. Fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ier paragraphs, the Appellate Tribunal has fallen into grave error. Paragraph 76 clearly refers to the UNCITRAL Legislative Guide which makes it clear beyond any doubt that equitable treatment is only of similarly situated creditors. This being so, the observation in paragraph 77 cannot be read to mean that financial and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as was existing in the NCLAT's decision that was disapproved by this Court in Essar Steel i.e., reading of a line in a judgment disjunct from the context. Secondly, in the decisions above-referred, this Court has never expanded the scope of 'financial debt' as envisaged by Section 5(8) of the Code. Thirdly, the case of 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and not by the borrower, is for consideration and is valid. The High Court held that by making the promise, the respondent had agreed to provide collateral security and thereby to discharge the liability to a third party in case of his default. The Court observed that such guarantee was limited to the security 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 do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vable properties, a third person can also agree to create a mortgage so as to secure the dues of the principal debtor. In that manner, he becomes a surety to the extent of the security or the mortgage. If that were not so, the present commercial and banking transactions would not be possible and would be hampered to a great extent. In the present day 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the principal debtor-husband, wife comes forward and agrees to give collateral security obviously to secure forbearance against the principal debtor. Thus, at the desire of the promisor (defendant) the bank has abstained from enforcing its claim against the principal debtor and has forborne 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for the present purpose read as under:- " 'Debt' means any pecuniary liability, whether payable presently or in future, or under a decree or order of civil or revenue court or otherwise, or whether ascertained or to be ascertained, which- *** *** ***" 52.2. This Court, inter 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above, these appeals are allowed to the extent and in the manner that: 1) The impugned order dated 01.08.2019 as passed by NCLAT in the batch of appeals is reversed and is set aside. 2) The appeals preferred before NCLAT against the order dated 16.05.2018, as passed by NCLT on the application filed by IRP, are dismissed; and consequently, the order dated 16.05.2018 so passed by NCLT is upheld in regard to the findings that the transactions in question are preferential within the meaning of Section 43 of the Code. The directions by NCLT for avoidance of such transactions are also upheld accordingly. 3) The appeals preferred before NCLAT against the orders passed by NCLT dated 09.05.2018 and 15.05.2018 on the applications filed by the lender banks are also dismissed and the respective orders passed by NCLT are restored with the findings that the applicants are not the financial creditors of the corporate debtor Jaypee Infratech Limited. Acknowledgement 56. While closing on these appeals, we put on record our thanks and compliments to the learned counsel for the respective parties as also their associates and researchers for erudite and scholarly presentation of their resp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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