TMI Blog2022 (10) TMI 290X X X X Extracts X X X X X X X X Extracts X X X X ..... ME COURT] , 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 - 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. In the present case, it is an admitted position that there has been no disbursal to the Corporate Debtor for consideration against the time value of money - On going through the facts and submissions of the Applicant and the Corporate Debtor it is concluded that the Applicant has not established that the money was disbursed to the Corporate Debtor and hence the question of default on the part of the Corporate Debtor does not arise. The Applicant does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16, 2019. Thereafter, the Commercial Papers were issued on April 16, 2019 by the Issuing and Paying Agent i.e. ICICI Bank Limited. 5. Since the execution of the Obligor Undertaking and the subsequent issuance of the Commercial Papers, CD has diluted and sold its stake in Reliance Nippon (reduced to 4.28% from 42.88%) for which it has realised an amount of Rs. 5500 Crores from the said sale. However, despite the stake sale, CD has failed to make payment towards its payment obligations in relation to the Commercial Papers. 6. The Applicant addressed various letters to the CD for making the payments under the Obligor Undertaking [Exhibit F, G and H at pg. 187, 189 and 191 of Vol. II respectively], however, no response was received from the CD. The Applicant issued a legal notice dated October 10, 2019 [Exhibit I at pg. 194 of Vol. II] to CD and RHFL for payment of an amount of approx. INR 120 Crore pursuant to their obligation under the Obligor Undertaking. 7. Thereafter, the CD was admitted into CIRP and the Public Announcement was made by the Administrator on December 07, 2021 [Exhibit J at pg. 199 of Vol. II]. Accordingly, the Applicant filed FORM C dated December 20, 2021 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 1124/2019 in CP No. 2714/2018. The relevant paragraph is reproduced hereinbelow: Now, the points for consideration are basically of two-fold whether the documents relied upon by the Respondents for being considered as Financial Creditors are correct and will the same fasten any liability on the Corporate Debtor who is projected as obligor/guarantor as the case may be. The basic principle is that Documents speak for themselves , a simple verification of the above documents infact are sufficient enough to conclude that the Corporate Debtor has a liability to pay the amounts as claimed in the documents. Any amount of interpretation from the side of the Applicants that there is no privity of Contracts or the term 'obligor does not bind them, nor documents does not directly or indirectly connect the Claimants with that of the Corporate Debtor, is of no consequence or for consideration, 12. The Definition of 'Obligor' under SARFAESI Act, 2002 is, Obligor means a person liable to the originator, whether under a contract or otherwise, to pay a financial asset or to discharge any obligation in respect of a financial asset, whether existing, future, conditiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or Undertaking. It is an admitted position that RHFL has not paid any amount under the Commercial Papers, therefore, the obligation of the CD to indemnify the Applicant in case of any default of the Obligor Undertaking (after the Stake Sale has happened) has arisen since the Obligor Undertaking has been breached. 17. Therefore, the obligation of the CD can be termed as a financial debt under Clause 5(8) (i) i.e., the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in subclause (a) to (h) of this clause. . III. Due Amount under Commercial Papers is a Financial Debt under Clause 5 (8) (f) of IBC: 18. The Obligor Undertaking specifically refers to making payments under the Commercial Papers issued by RHFL to the Applicant i.e., discharging a 'financial debt having a commercial effect of a borrowing'. The Obligation to pay under the Obligor Undertaking gets triggered upon occurrence of the Stake Sale, creating an independent payment obligation (of a financial debt) of CD towards the Applicant. 19. That the present transaction under the Obligor Undertaking and the subsequent issuance of Commercial Papers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22 [See Exhibit K of Appn/Pg.214 Vol II of Appn.] February 28,2022 [See Exhibit K of Appn/Pg.226 Vol II of Appn.] 24. The Applicant was directed to file its claim via the appropriate form [See Exhibit K of Appn/Pg.233 Vol II of Appn.] 25. By this Application, the Applicants seeks the issuance of Orders by this Tribunal for admitting it as a financial creditor into the Corporate Debtor s committee of Creditors (Coc) on the strength of the Obligor Undertaking bearing a financial debt under section 5(8) of the code. [See reliefs sought /Vol.I, Pg. 10-11 of Appn.] 26. The Applicant contends that it is owed a financial debt under the following two grounds; I. It is asserted that eh Obligor undertaking is and /or asking to a Guarantee and therefore it attracts the definition of financial debt under Section 5(8) of the Code. II. Alternatively, it has urged that the Obligor Undertaking and the Commercial papers must be construed together to constitute financial debt under Section 5(8) of the Code. 27. These contentions are not sustainable in law for the reasons elaborated hereinbelow. These reasons must be assessed and examined in the following factual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 as the principal borrower. It further alleged that the Obligor Undertaking and Commercial Papers issued by RHFL must be construed together to constitute a financial debt under Section 5(8) of the Code. Along with a legal opinion from its counsels to the Administrator. Exhibit M of Appn./Pg. 217, Vol II of Appn. 8. February 28,2022 and March 03, 2022 The Administrator rejected the Applicant s second Form C previously and requested the Applicant to file its claim under the appropriate form (other than Fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der 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 is a financial debt u/s 5(8) of the Code. Even this contention is not legally sustainable. 37. 16. Section 5(8) reads as under; Section 5(8) financial debt means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes- (f) any amount raised under any other transaction, including any forward sale or purchase agreement, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 received by the Corporate Debtor for temporary use with profit as the main aim . 41. On going through the facts and submissions of the Applicant and the Corporate Debtor it is concluded that the Applicant has not established that the money was disbursed to the Corporate Debtor and hence the question of default on the part of the Corporate Debtor does not arise. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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