TMI Blog2023 (4) TMI 448X X X X Extracts X X X X X X X X Extracts X X X X ..... ransferred to. Whether the Debenture Holders can be considered Financial Creditor as defined under the IBC? - HELD THAT:- The DTD is entered into between various parties viz. LDRPL (Issuer Company), Mr. Rustom Darius Bharucha, Mr. Zubin Darius Bharucha, Bharucha Motivala Infrastructure Pvt. Ltd. and PRA Realty (India) Pvt. Ltd. and Vistra ITCL (India) Limited (The Debenture Trustee). Out of these parties, Bharucha Motivala Infrastructure Pvt. Ltd. and PRA Realty (India) Pvt. Ltd. are the Guarantors and Co-Obligors of the issued NCDs as is laid down in the Debenture Trust Deed. It is clear from clause 3.4 that the Debenture Holders shall pay the amount of subscription for the NCDs and from clause 8.12(a) that all due payments shall be made to the Debenture Holders. Significantly, clause 8.6(d) stipulates that Debenture Holders and the Debenture Trustee shall be entitled to exercise any of their rights as set out in the Transaction Documents and the Security shall be enforceable in the manner set out in the Transaction Documents. Thus the rights as set out in Transaction Documents are separately available for enforcement to the Debenture Holders and Debenture Trustee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Krishnendu Datta , Sr. Advocate with Mr. Amit Agrawal, Ms. Radhika Yadav , Ms. Varsha Himatsingka Ms. Sana Jain , Advocates for R1 R2 . JUDGMENT [ Per : Dr. Alok Srivastava , Member ( Technical ) ] This Appeal has been filed under Section 61(1) of the Insolvency and Bankruptcy Code, 2016 (in short IBC ) by the Appellant who is aggrieved by the order dated 06.05.2021 of the Adjudicating Authority (National Company Law Tribunal, Court No. V, Mumbai Bench) (in short Impugned Order passed in C.P. (IB) No. 4108/MB/2019 ). The Appellant is aggrieved by the Impugned Order whereby a Section 7 application filed by the Respondents No. 1 and 2 before NCLT, Mumbai was admitted and Corporate Insolvency Resolution Process (in short CIRP ) was initiated. 2. In brief, the case of the Appellant is that the Corporate Debtor Bharucha Motivala Infrastructure Private Limited (in short B M Infra ) had given a Corporate Guarantee as a Co-Obliger in respect of the residential project called The Cove which was being developed by Lake District Realty Private Limited (in short LDRPL and also Issuer Company ). It was developing the project with Pune Kondhwa Realty Private L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cing delay in release of PM fees instalments, the Issuer Company sent an email dated 17.01.2017 and follow up emails thereafter, whereupon it was asked to submit expenditure statement by the Debenture Holders, which was submitted by the Issuer Company. Thereafter, certain disbursements were made by the Debenture Holders in February and March, 2017. 8. The Appellant has further stated that on the hesitation of the Debenture Holders to release further amounts the Issuer Company inquired of the Debenture Holders whether they continued to be interested in supporting the project and thereafter, a condition for opening of escrow account to deposit monies received from the flat buyers was imposed by the Debenture Holders which was agreed to by the Corporate Debtor. 9. The Appellant has further stated that after a notification dated November, 2017 issued by the Government of Maharashtra, pursuant to a direction of NGT, stopped construction within 100 feet of base of the hill, the Issuer Company had to stop construction leading to delay in the completion of the project due to such hurdles in the execution of the project, which was beyond the control of the Issuer Company, the Issuer C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e part of the Transaction Documents wherein the Corporate Debtor B M Infra is a party to these documents but the Debenture Holders are not parties to them. 13. The Ld. Counsel for the Appellant has provided a brief background of the case stating that a Joint Development Agreement was entered into by the Issuer Company-LDRPL with the land owning Company PKRPL for developing the project named The Cove , and in November, 2017 which is about one year after the NCDs were issued and subscribed by the Respondents No. 1 and 2 a notification was issued by the Government of Maharashtra purportedly to give effect to an earlier order of NGT which restrained all development activity within 100 feet of the base of any hill, thereby bringing construction activity at the project site of The Cove to a halt. He has further stated that this notification issued by the Government of Maharashtra was found arbitrary by the Hon ble Supreme Court vide judgement dated 14.07.2020 and the notification was set aside, but during these proceedings the work at the project site was halted and the project plan had to be revised by the Issuer Company. He has further argued that the delays caused by uncertai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D and the Applicable Law in the present case will be the Contract Act and the Indian Trusts Act. Further, he has added that clause 18.1(h) of the DTD contemplates a role for the Debenture Trustee in enforcement of other securities and the Transaction Documents which has not been done in the present case. Therefore, the Debenture Holders are not entitled to maintain any petition under IBC claiming to be creditors for the repayment of a financial by the Corporate Debtor. He has added that the argument about locus of the Debenture Holders has been dealt with in the impugned order on the basis of another Judgment of NCLT dated 10.01.2020 in the matter of Bennett Property Holdings Company Ltd. vs. Brick Eagle Affordable Housing (CP (IB) 1267/I B/2019) but the fact is that this is a case which was decided entirely on the basis of language of clause 18.2.1 which existed in the Debenture Subscription Agreement of the parties in the Bennett Property Holding case and no general statement of law can be presumed from the order in that case which can be applied in the present case. 16. The Learned Counsel for the Appellant has further added that an English Mortgage has been created to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Debenture Trustee to the Corporate Debtor and hence the existence of debt and occurrence of default is not disputed in the present case. He has further argued that a Debenture Holder is a Financial Creditor under Section 5(8)(c) of the IBC and the debt which exists pursuant to the Debentures is also a financial debt within the meaning of the provision of IBC. He has thus claimed that a guarantee issued in relation to repayment of debentures is a financial debt and consequentially any person to whom such financial debt is owed is a financial creditor. He has added that it is not the Appellant s case that monies are owed to any other person/entity then the Respondents No. 1 and 2 which fact has been admitted in the rejoinder by the Appellant. 18. The Learned Counsel for the Respondents No. 1 and 2 has referred to the judgment of Hon ble Supreme Court in the matter of M/S Orator Marketing Pvt. Ltd. vs M/S Samtex Desinz Pvt. Ltd. dated 26.07.2021 and in Pioneer Urban Land and Infrastructure Limited Anr. Vs. Union of India Ors [(2019) 8 SCC 416] to buttress his argument that a Debenture Holder is also a Financial Creditor under the provisions of IBC and the Debentur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right of Debenture Holders to take action under applicable laws has been kept intact as per clause 18.1 of the DTD and action to be taken by the trustee is without prejudice to the rights and remedies available to the Debenture Holders. He has clarified that the Corporate Debtor had signed the Debenture Trust Deed not only as a security provider, but he standing with same footing as the Issuer Company as co-obligor in the Debenture Trust Deed. Further, it is stated that the Debenture Holders had agreed to subscribe to debentures pursuant to a guarantee issued by the Corporate Debtor which is mentioned in recital 3 of DTD, and also in clause 2 the corporate debtor acting as a guarantor and co-obliger has undertaken to repay the monies to the Debenture Holders. Moreover, the Corporate Debtor had also undertaken to make payments to Debenture Holders upon issuance of a Demand Certificate by the Debenture Trustee which is incorporated in clause 4 of the DTD which has been done in the present case. 21. The Learned Counsel for the Respondents No. 1 and 2 has finally argued that the Respondents No. 1 and 2 as the Debenture Holders are the Financial Creditors within the meaning of the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause; 26. We further look at the definition of Financial Creditor in Section 5(7) of the IBC, which lays down that Financial Creditor is a person to whom a financial debt is owed and also includes a person to whom such debt has been legally assigned or transferred to. 27. Now coming to the issue whether the Debenture Holders can be considered Financial Creditor as defined under the IBC. We note that the DTD is entered into between various parties viz. LDRPL (Issuer Company), Mr. Rustom Darius Bharucha, Mr. Zubin Darius Bharucha, Bharucha Motivala Infrastructure Pvt. Ltd. and PRA Realty (India) Pvt. Ltd. and Vistra ITCL (India) Limited (The Debenture Trustee). Out of these parties, Bharucha Motivala Infrastructure Pvt. Ltd. and PRA Realty (India) Pvt. Ltd. are the Guarantors and Co-Obligors of the issued NCDs as is laid down in the Debenture Trust Deed. The paragraphs 10, 11 and 12 of the Recital of the DTD are as follows:- 10. With a view to raising debt for the purposes as more particularly described hereinafter, the Company being dul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the persons to whom the Company shall circulate the Offer Letter and which persons have agreed to subscribe to the Debentures and shall include their successors and assigns, nominees from time to time and shall also mean and include all such persons to whom the Debentures are, transferred from time to time and all persons whose names appear in the register of beneficial owners, where such Debentures are held in dematerialised form. 29. Clause 3.1 of the DTD provides for issuance of NCDs to the Debenture Holders in accordance with the terms and conditions of the DTD. Further clause 3.4, which is about disbursement of the amount by Debenture Holders for subscription of NCDs, states as follows:- 3.4 It is clarified that the Debenture Holders shall disburse the Debentures Subscription Amount, directly into the Debenture Payment Account in accordance with the provisions of this Deed . 30. Clauses 8.6(b) (d) which are relevant about principal payment of the redemption amount and ensuring a pre-tax IRR to the Debenture Holders by the Issuer Company are as follows:- 8.6(b) Notwithstanding anything to the contrary stated herein, the Company shall, in addition to the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the manner set out in the Transaction Documents. Thus the rights as set out in Transaction Documents are separately available for enforcement to the Debenture Holders and Debenture Trustee. Clause 18.1(c) lays down that the rights given to the Debenture Trustee are available to the Debenture Holders for enforcing the Securities. Significantly, the Corporate Debtor is a Co-obligor too, and it undertakes all the obligations that are falling on the Issuer Company of the NCDs. 35. We now look at the Deed of Irrevocable and Unconditional Guarantee (in short Deed of Guarantee ) entered into between B M Infra and PRA Realty (India) Pvt. Ltd (both as the Guarantors who have jointly and severally, absolutely, irrevocably and unconditionally agree and guarantee the covenants of the Deed), Vistra ITCL (India) Limited ( Debenture Trustee ) and LDRPL ( the Company ) as a confirming party. In this Deed of Guarantee, B M Infra and PRA Realty India Pvt. Ltd. are collectively referred to a Guarantors who have jointly and severally signed the Deed of Guarantee). 36. The recital of this Deed of Guarantee clearly states that upon a request made by the Issuer Company and the other Secu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bligations, that in the event of failure on the part of the Company, the Mortgagor and the other Security Providers in complying with the Obligations, the Guarantors shall comply with such Obligations, including in the case of any payment to any of the Debenture Trustee and/or the Debenture Holders which had fallen due is not paid, whether at scheduled maturity or on acceleration or otherwise, then the Guarantors shall unconditionally and irrevocably pay, on demand from time to time by the Debenture Trustee, and no later than two days of receipt of such demand, the amounts equivalent to the amounts fallen due for appropriation towards the Debenture Outstandings and all other sums payable by the Security Providers to the Debenture Trustee and/or the Debenture Holders (as the case may be) under the Debenture Trust Deed and/or any other Transaction Documents. 39. Further, Clause 4 of the Deed of Guarantee very clearly places the obligation on the Guarantors for the payment of the amount mentioned in the Demand Certificate, which is as follows:- 4. The Guarantors agree and undertake that they shall without any demur, delay or protest and on first demand and no later than tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res as security is not a Corporate Debtor and therefore, is not liable to repay the Financial Debt claimed by the Financial Creditors. The relevant observations in the two judgments are as follows:- Extract from Anuj Jain (Supra) 50. A conjoint reading of the statutory provisions with the enunciation of this Court in Swiss Ribbons (supra), leaves nothing to doubt that in the scheme of the IBC, what is intended by the expression financial creditor is a person who has direct engagement in the functioning of the corporate debtor; who is involved right from the beginning while assessing the viability of the corporate debtor; who would engage in restructuring of the loan as well as in reorganisation of the corporate debtor s business when there is financial stress. In other words, the financial creditor, by its own direct involvement in a functional existence of corporate debtor, acquires unique position, who could be entrusted with the task of ensuring the sustenance and growth of the corporate debtor, akin to that of a guardian. In the context of insolvency resolution process, this class of stakeholders namely, financial creditors, is entrusted by the legislature with s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f New Okhla Industrial Development Authority v. Anand Sonbhadra, (2023) 1 SCC 724 wherein the essential requirements for attracting Section 5(8) of the IBC has been laid down and it is laid down that there has to be a debt and also a disbursement of the Financial Debt to the Corporate Debtor. As has been held by the Hon ble Supreme Court in the matter of Pioneer Urban Land and Infrastructure Limited Anr. (Supra) Debenture Holders are considered Financial Creditors and therefore, the factum of Debenture Holders holding a Financial Debt within the meaning of Section 5(8) of the IBC is unquestionable. 46. The Learned Counsel for the Respondent has also referred to judgment of NCLT, Mumbai in Bennett Property Holdings Company Ltd. vs. Brick Eagle Affordable Housing (CP (IB) 1267/I B/2019) to claim that debt subscription agreement is as would as a loan agreement as has been held in para 24 of this judgment. As has been noted above in various judgments cited earlier in this judgment, the Debenture Holders are Financial Creditors within the meaning of Section 5(8) of the IBC and the Corporate Debtor who has Co-obligor and Guarantor of the loan holds responsibility and obligations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he inclusion of real estate developers as financial debtors should be struck down. We have already pointed out how real estate developers are, in substance, persons who avail finance from allottees who then fund the real estate development project. The object of dividing debts into two categories under the Code, namely, financial and operational debts, is broadly to sub-divide debts into those in which money is lent and those where debts are incurred on account of goods being sold or services being rendered. We have no doubt that real estate developers fall squarely within the object of the Code as originally enacted insofar as they are financial debtors and not operational debtors, as has been pointed out hereinabove. So far as unequals being treated as equals is concerned, home buyers/allottees can be assimilated with other individual financial creditors like debenture holders and fixed deposit holders, who have advanced certain amounts to the corporate debtor. For example, fixed deposit holders, though financial creditors, would be like real estate allottees in that they are unsecured creditors. Financial contracts in the case of these individuals need not involve large sums of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a Financial Creditor. 51. We note the above judgment and are of the opinion that it is distinguishable on the basis of the fact that the observation of Hon ble Supreme Court is that the Adjudicating Authority may in its discretion not admit the application but it would depend on all the relevant facts and circumstances of the case and the overall financial health and viability of the Corporate Debtor. In the facts of the case as argued by both the parties, it is evident that the project has suffered for variety of reasons and its progress is hindered, yet the financial creditors cannot be put to disadvantage on this ground, and initiation of CIRP becomes necessary to for repayment of the financial debt owed to the financial creditors. Therefore, the discretion has to be exercised in favour of the financial creditors who, in the present case, are the Debenture Holders. 52. The Learned Counsel for the Respondent has also placed reliance on a decision of this Tribunal in the case of Ascot Realty Pvt. Ltd. Vs. Ajay Kumar Agarwal Ors., 2020 SCC Online NCLAT 732 which is as follows, to claim that guarantors are not liable to repay financial debt:- 19. We proceed to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct provides that anything done, or any promise made for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee. 53. The Learned Counsel for the Respondents has relied upon the following decision of this Tribunal in the matter of Budhpur Buildcon Pvt. Ltd. Vs Abhay Narayan Manudhane, CA (AT) (Ins) No. 589 of 2021 in support of his argument that the subscription towards debentures carry a time value for money and therefore such amounts are financial debts . We find strength in his argument. The relevant portion of the cited judgment is as follows: m. All the above citations reflect one thing categorically Creditor to the Debtor purely in the form of release of fund as a borrowing and must have a time value of money . The method may be different but the nature must be borrowing and in extended terminology even the liability in respect of guarantee is also covered. There must be a Financial Debt which is owed by the other side i.e. the Debtor. It should be amply clear that the CD owe the Financial Debt to the Creditor. There is a difference between the levy of liquidated damages or penal interest for default ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess it is incomplete. Speaking through Justice Rohinton F Nariman, the Court has observed: 28. When it comes to a financial creditor triggering the process, Section 7 becomes relevant. Under the Explanation to Section 7(1), a default is in respect of a financial debt owed to any financial creditor of the corporate debtor it need not be a debt owed to the applicant financial creditor. Under Section 7(2), an application is to be made under sub-section (1) in such form and manner as is prescribed, which takes us to the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Under Rule 4, the application is made by a financial creditor in Form 1 accompanied by documents and records required therein. Form 1 is a detailed form in 5 parts, which requires particulars of the applicant in Part I, particulars of the corporate debtor in Part II, particulars of the proposed interim resolution professional in Part III, particulars of the financial debt in Part IV and documents, records and evidence of default in Part V. Under Rule 4(3), the applicant is to dispatch a copy of the application filed with the adjudicating authority by registered post or speed post to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntee and the Debenture Trust Deed and the facts of this case, we find that an Event of Default notice was first sent by the Debenture Holders on 02.01.2019 and another Event of Default notice was sent on 21.02.2019 where after the Demand Certificate dated 14.05.2019 was issued by the Debenture Trustee to B M Infra which was the Respondent No. 3 in the Section 7 petition invoking the Guarantee dated 06.10.2016 and calling upon B M Infra to pay to the Debenture Holders an amount of Rs. 37,51,64,939/-. It is thus clear that in accordance with clause 4 of the Deed of Guarantee the Guarantors have to pay to the Debenture Holders the amount stated in the Demand Certificate once an Event of Default has been declared under the Debenture Trust Deed. Therefore, in accordance with clause (i) of Section 5(8), B M Infra is liable to pay the amount claimed as Financial Debt on account of the Deed of Guarantee given by it both as a Guarantor and Co-obligor. Therefore, we come to the inescapable conclusion that B M Infra (R-3) is the Corporate Debtor with regard to the Section 7 application filed by the R-1 and R-2 as Financial Creditors. 57. We therefore answer the first iss ..... X X X X Extracts X X X X X X X X Extracts X X X X
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