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TMI Blog2022 (10) TMI 290X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Allowing the Applicant to become a member of the Committee of Creditors during the Corporate Insolvency Resolution Process ("CIRP") of the Corporate Debtor. (c) Pass such or further order(s) as this Adjudicating Authority may deem fit and proper in the facts and circumstances of the present case. Brief Facts: 2. In or around April 2019, Reliance Home Finance Limited ("RHFL") RHFL proposed the issuance of Commercial Papers to raise funds to meet 'short term working capital requirements'. 3. In order to protect its interest, the Applicant got a tripartite Obligor Undertaking dated April 10, 2019 ("Obligor Undertaking") [Exhibit B at pg. 166 of Vol. II] executed by Reliance Capital Ltd. ("CD") and RHFL to ensure that any dilution of CD's stake ("Stake Sale") in Reliance Nippon Life Asset Management Limited ("Reliance Nippon") would be utilized towards the payment due under the Commercial Papers. 4. The Applicant agreed to subscribe to the Commercial Papers issued by RHFL of a face value of INR 124 Crore ("Commercial Papers") [Exhibit C, D and E at pg. 178, 181 and 184 of Vol. II respectively]. The Letters of Offer were issued by RHFL on April 15, 2019 and Deal Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Management Limited shares in a certain manner and not for paying/repayment of financial debt of Reliance Home Finance Limited. Therefore, the claim of Axis Bank as a financial creditor of RCL cannot be admitted." Submissions on behalf of the Applicant: I. The Obligor Undertaking is in the nature of a Guarantee towards the payments under the Commercial Papers: 11. Clause 2 of the Obligor Undertaking has been wholly misread by the Respondent inasmuch as it clearly states that the CD has an obligation to make payment due under the Commercial Papers. It is submitted that the obligation to pay under the Commercial Papers is crystallized upon the occurrence of the Stake Sale. It is pertinent to note that the Stake Sale has not been disputed by the Respondent. Further, it is submitted that the terms of a guarantee under Section 126 of the Contract Act, 1872 are not required to be in a specified format. It is submitted that if the terms of the Obligor Undertaking and the Commercial Papers are read as a whole, the obligation of the CD to pay the dues under the Commercial Papers is clearly made out. Reliance is placed on a judgment dated 13.11.2019 passed by this Hon'ble Tribunal i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares/stake in Reliance Nippon Asset Management Company Limited by RHFL, is only a trigger event for ascertaining the due date for payment. It does not absolve the Corporate Debtor (Obligor) from the liability to pay, on account of default by RHFL, as is clear from the words "........ or otherwise, including.........." and in the manner provided for in sub-clause (a) and (b), which payment mechanism is independent of the proceeds of stake sale referred to above. Admittedly, RHFL has not paid the Applicant. Consequently, the liability of the Corporate Debtor gets triggered to discharge the financial debt, which the corporate debtor is obliged to pay to the Applicant. II. Due Amount under Commercial Papers is a Financial Debt under Clause 5 (8) (i) of IBC: 16. The Obligor Undertaking provides for an indemnity clause (Clause 6), wherein the CD has indemnified the Applicant against any breach of the Obligor Undertaking by the CD or RHFL, including but not limited to any losses, liabilities, damages, judgments, settlements, and expenses, incurred or suffered by the Applicant arising out of or resulting from any breach by the CD or RHFL of any of the terms of the Obligor Undertaking. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espondent/Corporate Debtor: 22. On April 16, 2019 the Applicant had subscribed to commercial paper of Rs.124 Crores issued by Reliance Home Finance Limited ("RHFL"). The Applicant, RHFL and the Corporate Debtor had also executed on "Obligor Undertaking'. Under this 'Obligor Undertaking" the Corporate Debtor had undertaken to utilize the sales proceeds generated from the sale of all or any portion of its or its affiliates' shareholding in Reliance Nippon Life Asset Management Ltd ("RNLAM") towards making payments to the Applicant in respect of the Commercial Papers issued by RHFL. [See Clause 2 of Exhibit B/pg. 170. Vol II of Appn.]. 23. On the basis of this 'Obligor Undertaking', the Applicant submitted two Form C Claims dated December 20, 2021 [See Exhibit K of Appn/Pg. 201 Vol II of Appn.] & February 25, 2022 [See Exhibit Mof Appn/Pg.217 Vol II of Appn.] to the Administrator seeking admission into the Committee of Creditors as a 'Financial Creditor" on the footing that the 'Obligor Undertaking' constituted 'financial debt' under the Code. Both Form C claims were rejected by the Administrator vide communication dated January 24, 2022 [See Exhibit K of Appn/Pg.214 Vol II of Appn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be submitted on or before December 20,2021. Exhibit J/Pg. 199, Vol II of Appn. 5. December 20, 2021 The applicant submitted its claim under Form C (Proof of claim of Financial Creditor) for INR 1,44,85,03,128.04/- as on December 06,2021, with the Administrator. Under this Form C, the Applicant arrayed RHFL as the Principal borrower and the Corporate Debtor as a guarantor. The Applicant sought to be declared as a 'financial creditor' on the basis of the 'Obligor Undertaking' Exhibit K of Appn/Pg. 201, Vol II of Appn. 6. January 24, 2022 The Administrator rejected the Applicant's claim for 'Financial Debt' by inter alia stating that the Corporate Debtor (by way of the 'Obligor Undertaking'_ had not furnished a guarantee in terms of the Indian Contract Act, 1872. The Administrator further, instructed the Applicant to file its claims under the appropriate form (other than Financial Creditor) Exhibit L of Appn/Pg.241, Vol II of Appn. 7. February 25,2022 The Applicant fled a second Form C with the Administrator seeking to be declared as a 'Financial Creditor' in respect of the 'Obligor Undertaking'. In this Form C, the Applicant now arrayed the Corporate Debtor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by RHFL. This undertaking was not premised on RHFL'S default in serving the Commercial Papers, a basic ingredient of a 'guarantee'. 33. In Phoenix ARC(P) Ltd. V. Ketulbhai R. Patel (Paras 24-25, 2021 2 SCC 799), an argument was advanced before the Supreme Court that a Pledge Agreement was a 'guarantee'. The Supreme Court negated this contention after analysing and applying the definition of 'guarantee' under Section 126 of Contract Act. It held that the Pledge Agreement was not guarantee since the Corporate Debtor had not entered into a contract to perform the promise or discharge the liability of a borrower in case of his default. 34. The principals in Phoenix ARC's case apply here. The 'Obligor Undertaking' lacks a covenant/promise to perform in case of RHFL (borrower's) in servicing the Commercial paper. It is thus not a guarantee, and it does not attract the definition of 'financial debt' under Section 5(8) of the Code. 35. It is the highest form of security. II. The Applicant does not owed a 'financial debt' under section 5(8) of the code: 36. The Applicant has alternatively urged that the 'Obligor Undertaking' and the issuance or Commercial Papers construed together ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition that there has been no disbursal to the Corporate Debtor for consideration against the time value of money. 40. In Pioneer Urban Land and Infrastructure Ltd & Anr. V. UOI & Ors. (Paras 75-76, 2019 8 SCC 416), one of the questions that arose for consideration was whether flat purchasers were always considered as 'financial creditors' under the Code. i. The Court ruled that flat purchase agreements attracted the definition of 'financial debt' under Section 5(8) of the Code and that flat purchasers were 'financial creditors'. ii. It held that flat purchasers were financial creditors since they had disbursed money under a Flat Purchase Agreement to the builder for consideration (i.e. a flat) against the time value of money and which had 'commercial effect of borrowing' under section 5(8) (f). iii. The Supreme Court observed that eh expression 'borrow' interalia meant to obtain or receive (something, such as money) on temporary use. It further observed that the expression 'Commercial' interalia meant, "having profit as the main aim." [See paras 75-76 of the Judgment] iv. In other words, for transaction to have a 'commercial effect of borrowing, money must be lent and/or r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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