TMI Blog2021 (2) TMI 121X X X X Extracts X X X X X X X X Extracts X X X X ..... ee contains a guarantee to perform the promise or discharge the liability of third person in case of his default . Thus, key words in Section 126 are contract to perform the promise , or discharge the liability , of a third person. Both the expressions perform the promise or discharge the liability relate to a third person . The Pledge Agreement dated 10.01.2012 does not contain any contract that the promise which was made by the borrower in the Facility Agreement dated 12.05.2011 to discharge the liability of debt of ₹ 40 crores is undertaken by the corporate debtor. It was the borrower who had promised to repay the loan of ₹ 40 crores in Facility Agreement dated 12.05.2011 and it was borrower who had undertaken to discharge the liability towards lender. This Court held that a person having only security interest over the assets of corporate debtor, even if falling within the description of 'secured creditor' by virtue of collateral security extended by the corporate debtor, would not be covered by the financial creditors as per definitions contained in sub-section (7) and (8) of Section 5. What has been held by this Court as noted above is fully att ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y agreement dealt with Security Creation . The Board of Directors of Doshion Veolia Water Solutions Private Limited (corporate debtor) passed a Resolution on 26.07.2011 to give Non-Disposal Undertaking in favour of L T Infrastructure Finance Company Limited whereby Board was authorised to provide an undertaking to the effect that 100% of their shareholding in Gondwana Engineers Limited (GEL) shall not be disposed of so long as any amounts were due and payable and outstanding under the financial assistance proposed to be provided by L T Infra to borrower. On 10.01.2012 a Pledge Agreement was executed between Doshion Veolia Water Solutions Private Limited and L T Infrastructure Finance Company Limited by which agreement 40,160 shares of Gondwana Engineers Limited were pledged as a security. On 10.01.2012 a deed of undertaking was also executed by Doshion Veolia Water Solutions Private Limited in favour of L T Infrastructure Finance Co.Ltd. By agreement dated 30.12.2013 L T Infrastructure assigned all rights, title and interest in the financial facility including any security, interest therein in favour of Phoenix ARC Pvt. Ltd., the appellant under Section 5 of the Securitisation a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djudicating Authority. After hearing the parties, the Adjudicating Authority passed an order dated 22.02.2019 rejecting the Miscellaneous Application filed by the appellant. The Adjudicating Authority held that the applicant s status as financial creditor of the corporate debtor is not proved in the light of Section 5(8) of the Code. 5. Aggrieved by the judgment of the Adjudicating Authority, the appeal was filed by the appellant before the Appellate Tribunal. The Appellate Tribunal held that pledge of shares in question do not amount to disbursement of any amount against the consideration for the time value of money and it do not fall within sub-clause (f) of sub-section (8) of Section 5 as suggested by the learned counsel for the appellant. The Appellate Authority finding no merit in the appeal, dismissed the appeal. Aggrieved by the judgment of the Appellate Tribunal, the appellant has filed the present appeal. 6. We have heard Shri K.V. Vishwanathan, learned senior counsel for the appellant, Ms. Ami Jain, learned counsel for the respondent. We have also heard learned counsel for the Bank of Baroda as intervenor. 7. Shri K.V. Vishwanathan, learned senior counsel, subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espondent is distinguishable from the facts of the present case. He submits that any security that would permit the right of action against the third party that is not the borrower, would amount to guarantee. The mere fact that corporate debtor has not borrowed money from the appellant, it cannot absolve the corporate debtor from its liability as guarantor. He submits that term guarantee is not to be understood narrowly and it has to be understood to include any security created by third party to secure repayment of financial debt including a pledge of shares. The pledge of shares by corporate debtor to secure the loan advanced to the parent Company of the corporate debtor amounts to a guarantee. He lastly submits that judgment of Anuj Jain needs to be clarified to the effect that it has been rendered in a specific facts scenario which does not apply to the present case at all. 9. Ms. Ami Jain, learned counsel, appearing for the respondent submits that the appellant is not a creditor of any nature whatsoever of the corporate debtor. The appellant has no right of recovery of any debt from the corporate debtor and has a limited right of enforcing and realising the value of its sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .01.2012 and Deed of Undertaking dated 10.01.2012 entered into with L T Infrastructure. 14. We may first notice the transaction in question on the basis of which the appellant claims to be treated as financial creditor qua corporate debtor. 15. The Facility Agreement dated 12.05.2011 was executed between the Doshian Ltd. and the L T Infrastructure Finance Company Ltd. The corporate debtor was not a party to the Facility Agreement. It was the Doshion Ltd., the borrower who was to repay the loan of ₹ 40 crores. Schedule-IV of Facility Agreement is Security Creation which is a part of the Facility Agreement, is as follows: SCHEDULE-IV SECURITY CREATION The Facility (together with all principal interest, liquidated damages, fees costs, charges, expenses and other monies and all other amounts stipulated and payable to the Lender) shall be secured by: 1.Second pari-passu charge on all current assets of the Borrower. 2.Second pari-passu charge on all current assets of Gondwana Engineers Limited (GEL). 3.Pledge of 100% equity shares together with all accretions thereon of the GEL. 4.Personal guarantee of promoters of DL namely Ashit Dhir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes- (a) money borrowed against the payment of interest; (b) any amount raised by acceptance under any acceptance credit facility or its dematerialised equivalent; (c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument; (d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed; (e) receivables sold or discounted other than any receivables sold on non-recourse basis; (f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing; (g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 126. Contract of guarantee , surety , principal debtor and creditor .-A contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the surety ; the person in respect of whose default the guarantee is given is called the principal debtor , and the person to whom the guarantee is given is called the creditor . A guarantee may be either oral or written. 23. As clear from the definition a contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The present is not a case where the corporate debtor has entered into a contract to perform the promise, or discharge the liability of borrower in case of his default. The Pledge Agreement is limited to pledge 40,160 shares as security. The corporate debtor has never promised to discharge the liability of borrower. The Facility Agreement under which the borrower was bound by the terms and conditions and containing his obligation to repay the loan security for performance are all contained in the Facility Agreement. A contract of guarantee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respectively assigned to them. 27. Learned counsel for the appellant has referred to a judgment of the Bombay High Court in the Indian Law Reports, Volume LV 1931, 617, Jagjivandas Jethalal and another vs. King Hamilton Co., which was case arising out of the suit filed to enforce an equitable mortgage of an immovable property. The defendants as owners of the immovable property in question created an equitable mortgage upon it as sureties for the firm of Sarda Sons who owed money to the plaintiff. The Bombay High Court had occasion to consider Section 126 of the Contract Act in the above case. Noticing the arguments based on Section 126 of the Indian Contract Act raised by the respondent, the Bombay High Court noticed following at page 684: ......Mr. Desai's answer to that is that the defendants here were not sureties. He relies on section 126 of the Indian Contract Act which provides that a contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default, and the person who gives the guarantee is called the surety . Mr. Desai says that here there was no personal obligation on the defendents to pay any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal one of the issues was as to whether the Axis Bank can be recognised as financial creditor of the corporate debtor on the strength of the mortgaged by the JIL, corporate debtor of its holding Co. JAL. This Court after noticing the facts, noted rival submissions of the parties on the above issue in detail. The two earlier judgments of this Court, namely, Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17 and Pioneer Urban Land Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416 were extensively noted. Paragraphs 46 to 50.2 contain elaborate discussion regarding the essentials of financial debt and financial creditor which are to the following effect: 46. Applying the aforementioned fundamental principles to the definition occurring in Section 5(8) of the Code, we have not an iota of doubt that for a debt to become 'financial debt' for the purpose of Part II of the Code, the basic elements are that it ought to be a disbursal against the consideration for time value of money. It may include any of the methods for raising money or incurring liability by the modes prescribed in Subclauses (a) to (f) of Section 5(8); it may also include any derivative tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such person. Understood this way, it becomes clear that a third party to whom the corporate debtor does not owe a financial debt cannot become its financial creditor for the purpose of Part II of the Code. 49. 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'. 49.1. The use of the expression means and includes in these clauses, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rocess, this class of stakeholders namely, financial creditors, is entrusted by the legislature with such a role that it would look forward to ensure that the corporate debtor is rejuvenated and gets back to its wheels with reasonable capacity of repaying its debts and to attend on its other obligations. Protection of the rights of all other stakeholders, including other creditors, would obviously be concomitant of such resurgence of the corporate debtor. 50.1. 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 corpora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent case corporate debtor has been the direct and real beneficiary of the loan advanced by Assigner to the parent Company of the corporate debtor. The above point as contended by the learned counsel does not commend us. The present is also a case where only security was created by the corporate debtor in 40,160 shares of GEL, there was no liability to repay the loan taken by the borrower on the corporate debtor in the present case. At best the Pledge Agreement and Agreement of undertaking executed on 10.01.2012, that is, subsequent to Facility Agreement, is security in favour of Lender-Assignor who at best will be secured creditor qua corporate debtor and not the financial creditor qua corporate debtor. 32. We may notice that the Appellate Tribunal has dealt with Section 5(8)(f) while rejecting the claim of the appellant as to be the financial creditor. It appears that the submission based on Section 5(8) (i) was not addressed before the Appellate Tribunal which has now been pressed before us. We, thus, uphold the decision of the Resolution Professional as approved by the NCLAT as correct. The appellant is not financial creditor of the corporate debtor. Hence, Miscellaneous App ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
