TMI Blog2022 (9) TMI 543X X X X Extracts X X X X X X X X Extracts X X X X ..... position that the Corporate Debtor hypothecated its asset in favor of R-2 to R- 5 under the Deed of Hypothecation to secure the loans disbursed by them to the Reliance Communication Entities. It is also an admitted position that R-2 to R-5 have not disbursed money to Corporate Debtor. Section 5(8) of the Code is exhaustive and mere Deed of Hypothecation does not fall within its ambit. RP has considered DOH as a Deed of Guarantee which is a misconception of the obligations - The Security Interest created under the DOH shall be continuing security and shall remain enforce until all the obligations have been discharged by the borrowers under the respective facility documents. Hence, it can be construed that the clauses of DOH cannot be construed to be a Covenant of Guarantee or Contract of Guarantee . Hypothecation Deed is a legal document and it establishes contractual relations between the parties where the lender agrees to grant a loan to the borrower in return for movable assets provided as security. Hypothecation of a moveable assets does not involve giving up ownership rights like title or possession. The Hypothecation Deed ensures that the parties are aware of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... UDGMENT Dr. Ashok Kumar Mishra, Technical Member The present Appeal has been filed under Section 61 of the IBC, 2016 against the order dated 02.03.2021 passed by Adjudicating Authority (National Company Law Tribunal, Mumbai Bench, Court No. I) in M.A. No. 3055 of 2019 in CP (IB) No. 1385/(MB)/2017. 2. The Appellant No. 1/Doha Bank who claims to be the direct lender and a secured Financial Creditor of Reliance Infratel Ltd.(Corporate Debtor) is aggrieved with the order passed by the Adjudicating Authority holding the decision of the Resolution Professional of classifying the indirect lenders as the Financial Creditor of the Corporate Debtor as correct. Here, the Corporate Debtor is Reliance Infratel Ltd. 3. The Appellant has sought following Reliefs: To allow the present Appeal and set aside the Impugned Order dated 2nd March, 2021 passed by the Ld. Adjudicating Authority, Mumbai Bench, in I.A. No. 3055/MB/2019 in C.P. (IB) No. 1385/(MB)/2017, whereby the Ld. Adjudicating Authority dismissed all the prayers in the I.A. No. 3055/MB/2019, filed by the Appellant No.1 herein etc. 4. The facts of the case as revealed from pleadings of Appellants including submissions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Code. (h) Thereafter, the Appellants challenged the same before the Adjudicating Authority and the Adjudicating Authority has not passed a reasoned order nor it is a speaking order. (i) It was also stated by the Ld. Sr. Counsel of the Appellant that DOH records that it is the borrower and not the CD who shall repay the facilities availed by it as stipulated in the facility documents. (j) Corporate Debtor has not agreed that it shall repay/discharge the liability of other borrowers upon their default and hence the question of construing the same as Contract of Guarantee is untenable. DOH creates only Security Interest to the extent of hypothecated assets. (k) DOH is a boiler plate clause at present in any standard draft of a DOH which was presented by the Ld. Counsel before this Appellate Tribunal. (l) The DOH upon such enforcement if results into a shortfall in the value of Secured/charged assets over realisation of Assets vis a vis list of its realisation the Security trustee can call upon to pay on demand that particular borrower, who has committed the default in payment or occasioned the event of default to make good the said shortfall or the deficiency th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Ltd. (2013 SCC Online Bom 1910)- para 5 to 9, 23 59. (i) Ld. Sr. Counsel has also stated the Judgment of B.K. Education Service Pvt. Ltd. Vs. Parag Gupta of Supreme Court ref. does not apply in the present case, as the supreme court in the said case was considering a time barred debt. (j) The Code is a complete code with respect to insolvency laws [Refer para 13 of Innoventive Industries Ltd. v. ICICI Bank (2018) 1 SC 407]. The Code mandates all creditors of the CD, irrespective of the nature of its claim, to file claims before the RP in the CIRP. This is to ensure that the Resolution Applicant can take over the business of the CD on a clean slate [CoC of Essar Steels India vs. Satish Kumar Gupta (2019 SCC Online SC 1478)- Para 88]. Under Section 31 of the Code, an approved Resolution Plan is binding upon all the creditors/stakeholders of the CD. Considering that the Affected Lenders have a claim against the CD, they are bound to file claim in the CIRP. Further, since the claims of the Affected Lenders are based on the financial debt disbursed to RCOM, and the undertaking of the CD to repay the said financial debt, the claims squarely fall within the definition of fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble with respect to commercial contracts, for the reason that the clause in a commercial contract is bilateral and has been mutually agreed upon. (h) Respondent No.2 is admittedly a Secured Creditor of the Corporate Debtor. In the alternative and without prejudice to the rights and contentions of R-2 it is submitted that R-2 s security interest cannot be extinguished during the CIRP without it being paid a proportionate or commensurate value of the security held by it under the DoH. If the Appellant s are successful in the present appeal then (subject to the right of the Respondents), the distributions provided under the approved Resolution Plan would be rendered non-compliant with Section 30 of the IBC as the Resolution Plan does not provide for any distributions to this class of secured creditors . In order to avoid any prejudice, and to ensure that the Resolution Plan is compliant, so that the rights of the Secured Creditors are protected: a. The office of the RP (R-1) would be required to be re-constituted for processing the Form C filed by R-2, as statutory forms as secured creditors ; b. The claim of R-2 which was already filed would need to be refiled (or in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t RP admitted that there is no contract of guarantee. (f) Reliance upon specimen drafts of deeds of hypothecation by Appellant s are of no relevance to interpret the terms of DOH. (g) Reliance by the Appellant s on the rule of contra-proferentem is misplaced. (h) Respondent No.3 is admittedly a Secured Creditor of the Corporate Debtor. In the alternative and without prejudice to the rights and contentions of R-3 it is submitted that R-3 s security interest cannot be extinguished during the CIRP without it being paid a proportionate or commensurate value of the security held by it under the DoH. If the Appellant s are successful in the present appeal then (subject to the right of the Respondents), the distributions provided under the approved Resolution Plan would be rendered non-compliant with Section 30 of the IBC as the Resolution Plan does not provide for any distributions to a class of secured creditors . In order to avoid any prejudice, and to ensure that the Resolution Plan is compliant and so that the rights of the Secured Creditors are protected: a. The office of the RP (R-1) would be required to be re-constituted for processing the Form C filed by R-3, as s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment of the facilities advanced by R-4. Even if the loan was availed by any of the RCom Entities (in this case RCom and RTL), the other RCom Entities agreed to provide their assets as security and a further undertaking to repay any shortfall of debts owed by each of the RCom Entities. This understanding by the RCom Entities is clearly recorded by terms of the DoH. [Ref: Annexure O of the present Appeal, @ Page No. 483] c. It is submitted that the RCom Entities had pooled their resources in order to provide not only security for the facilities availed by any of the entities, but to ensure that each of the entities were individually liable to repay the debt of all the entities. Thus, as per the terms of the DoH, in the event there is any default by any of the entities, all of the RCom entities are liable to make good the default and repay the outstanding amount. d. While the four RCom Entities jointly created a security interest in favour of R-4 under the DoH, the DoH also includes an unambiguous, equivocal and express covenant by the CD, as well as the other RCom Entities, to pay the amount of the secured facilities along with interest, liquidated damages and all other amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as in spirit. An individual sentence cannot be read in isolation while interpreting the document. The fact that the DoH does not use the term guarantee in its nomenclature shall not have any bearing on deciding the nature of the DoH. [Ref: Assam Small Scale Ind. Dev. Corp. v. M/s. J.D. Pharmaceuticals, @ Page 56 of the Case Compilation on behalf of R-4]. On a perusal of the overall scheme of the DoH, it is evident that the only purpose of the DoH is not to merely create a charge, but it also includes an express obligation to repay the outstanding debt of R-4. i. Under Clause 5 (iii) of the DoH, the CD has covenanted to make good any shortfall in the realization of proceeds of the creditors of RCom/RTL, by paying on a demand made by the creditor. Thus, the CD had undertaken a clear obligation to pay the shortfall in the realization of proceeds of the lenders. Hence, Clause 5 (iii) cannot be read down to apply only to shortfall of expenses incurred in the sale of assets. j. The definition of financial debt under Section 5(8) (i) of the Code specifically includes the amount of liability in respect of any guarantee or indemnity. As per the DoH, the CD has guaranteed to pay R-4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... despite having such enormous outstanding against the Corporate Debtor and waiting for resolution of debt for over four years, the Financial Creditors have been unable to recover any dues from the Corporate Debtor. (e) However, on the contrary if the present Application is dismissed by this Hon ble Tribunal, there will be severe prejudice which will be caused to the stakeholders of the Corporate Debtor, including the Intervenor and the Consortium. 10. While dismissing the Application, the Adjudicating Authority has observed the following: Para 8. (xiii) Further Chapter IV of IBBI (Insolvency Resolution Process for Corporate Persons), Regulations 2016- Regulations 7 to 14 deals with the claims by Operational Creditors, Financial Creditors, Workmen, Employees etc. Regulations clearly provides that a person claiming to be a creditor (either financial or operational, etc.) shall submit proof of claim to the IRP. Para 8. (xiv) Neither the Section of law nor the Regulations says that the claim of a debt can be made only when there is a default. The debt and default would be a sine qua non for the admission of a Section 7 or Section 9 or Section 10 petition. But for filing cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CIRP by Financial Creditors under Section 7 and Operational Creditors under Section 8 9 of the Code and not with the filing of claim with the RP. Para 65 of the Hon ble Supreme Court s case in Swiss Ribbon supra is extracted below: 65. Whereas a claim gives rise to a debt only when it becomes due, a default occurs only when a debt becomes due and payable and is not paid by the debtor. It is for this reason that a Financial Creditor has to prove default as opposed to an operational creditor who merely claims a right to payment of a liability or obligation in respect of a debt which may be due. When this aspect is borne in mind, the differentiation in the triggering of the insolvency resolution process by Financial Creditors under Section 7 and by operational creditors under Sections 8 and 9 of the Code becomes clear. The submission of the Applicant that the ratio decided in Export Import Bank of India (supra) is contrary to Swiss Ribbons case does not hold water. Para 8. (xvii) In respect of the contention of the Applicant that the individual lenders are not entitled to file claims with the RP on the guise that the Respondents do not have a legal title to the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot have any effect as long as the moratorium continues. In this case, since moratorium has already kicked in there is no question of realization of the security interest by the Security Trustee. It is further submitted that in case the resolution plan then pending for approval of the Bench is rejected, the Respondents as Creditors can either relinquish their security interest and stand in the que as creditors or can prefer to stay outside the insolvency proceedings and realize the hypothecated security. Para 10. As far as the above argument is concerned, we are unable to accept the contention that the said sentence of Clause 5 (iii) of DoH is only relating to the expense of sales and realizations. The proper meaning according to us is that on default, the Security Trustee is entitled to sell and realize the hypothecated assets and on such sale and realization of hypothecated assets the Security Trustee will account for each and every realization, deduct the expenses of sale and the balance amount available in his hands will be appropriated to the loan due and after such appropriation, still if any balance is pending towards the loan, then the chargors undertakes/guarantees to pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R- 5 as Financial Creditors of the Corporate Debtor. The basis of consideration is the Deed of Hypothecation only for considering the R-2 to R-5 as Financial Creditors of the Corporate Debtor. The Appellant No. 1 has critically sought that R-2 to R-5 should be derecognized/deleted as Financial Creditors of the Corporate Debtor. (iv) It is an admitted position that the Corporate Debtor hypothecated its asset in favor of R-2 to R- 5 under the Deed of Hypothecation to secure the loans disbursed by them to the Reliance Communication Entities. It is also an admitted position that R-2 to R-5 have not disbursed money to Corporate Debtor. (v) Clause 5(iii) of the Deed of Hypothecation states as follows: In the event that an Event of Default has occurred under a Facility Document, the Security Trustee or its nominees shall, on receiving instructions from the Secured Lenders, in accordance with Section 4 of the Security Trustee Agreement and after providing 7 (seven) Business Days notice to any of the Chargors and without assigning any reasons and at the risk and expense of the Chargors and if necessary as attorney for and in the name of the Chargors, be entitled to take charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be continuing security and shall remain enforce until all the obligations have been discharged by the borrowers under the respective facility documents. Hence, it can be construed that the clauses of DOH cannot be construed to be a Covenant of Guarantee or Contract of Guarantee . (Clause 9 of DoH- page 492). (ix) Hypothecation Deed is a legal document and it establishes contractual relations between the parties where the lender agrees to grant a loan to the borrower in return for movable assets provided as security. Hypothecation of a moveable assets does not involve giving up ownership rights like title or possession. The Hypothecation Deed ensures that the parties are aware of their rights and liabilities and have a document which can be enforced in a court of law. It also grants the lender a right to cease the asset when the borrower fails to meet the terms of the Hypothecation Deed. (x) Clause 3 of the Hypothecation Deed as appearing at page 9 of convenience compilation submitted vide Diary no. 30494 dated 18.10.2021 is depicted below: (xi) The Deed of Hypothecation also provides certain standard features which includes definitions, issuance rights and re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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