PHOENIX ARC PVT. LTD. versus KETULBHAI RAMUBHAI PATEL

[2021] 1 S.C.R. 1043

PHOENIX ARC PVT. LTD.

KETULBHAI RAMUBHAI PATEL

(Civil Appeal No. 5146 of 2019)

FEBRUARY 03, 2021[ASHOK BHUSHAN, R. SUBHASH REDDYAND M. R. SHAH, JJ.]

Insolvency and Bankruptcy code, 2016 – ss. 5(7), 5(8), 3and 60 – Contract Act, 1872 – ss.124, 126 and 172 –L&TInfrastructure Finance company advanced the financial facility to‘D’ – facility agreement was executed between ‘D’ (borrower)and L&T Infrastructure Finance company (lender) – Lenderadvanced to borrower Rs.40 crores – ‘DV’ (corporate debtor) gavean undertaking in favour of L&T Infrastructure Finance to the effectthat 100% of their shareholding in GEL shall not be disposed of solong as any amounts were due and payable and outstanding underthe financial assistance proposed to be provided by L&T Infra tothe borrower –A Pledge agreement was also executed between ‘DV’and L&T Infrastructure Finance company by which agreement40,160 shares of GEL were pledged as security –L&T assigned allrights, title and interest in the financial facility including any security,interest in favour of appellant –‘D’(borrower) failed to repay –Bank filed petition u/s.7 of the Code to initiate the corporateresolution process in respect of ‘DV’(corporate debtor) – Pursuantto commencement of CIRP in respect of corporate debtor, theappellant filed its claim for an amount of Rs.83,49,85,667/- withrespondent, the Interim Resolution Professional – Respondent opinedthat the corporate debtor’s liability was restricted to pledge of shares–Appellant filed application before the NCLT – NCLT held thatappellant’s status as financial creditor of the corporate debtor isnot proved in light of s.5(8) of the Code – NCLAT dismissed theappeal filed by the appellant – On appeal, held: contract ofguarantee is contract to perform the promise, or discharge theliability, of third person in case of his default – The present is notcase where the corporate debtor has entered into contract toperform the promise, or discharge the liability of borrower in caseof his default – The Pledge Agreement is limited to pledge 40,160

DEF

1044SUPREME COURT REPORTS

Ashares as security –The corporate debtor has never promised todischarge the liability of borrower –It was borrower who hadpromised to repay the loan of Rs.40 crores in Facility Agreementand it was borrower who had undertaken to discharge the liabilitytowards lender – The appellant at best will be secured debtor quaabove security but shall not be financial creditor within the meaningBof s.5 sub-sections (7) and (8) – The appellant is not financialcreditor of the corporate debtor – The decision of the ResolutionProfessional is upheld.

Dismissing the appeal, the Court

CHELD : 1.Whether the corporate debtor owed any financialdebt to the appellant so as to treat the appellant as financialcreditor is the question to be answered. The definition of ‘financialdebt’ as contained in Section 5(8) of the 2016 Code contains theexpressions “means” and “includes”. The definition begins withthe words “financial debt” means ‘a debt alongwith interest, ifDany, which is disbursed against the consideration for the timevalue of money and includes’... The main part of the definition,thus, provides that financial debt means debt “which isdisbursed against the consideration for the time value of money”.The definition in the second part gives instances which alsoEincludes financial debt. The appellant in his submission has reliedon Section 5(8)(i) to support his claim that the appellant is thefinancial creditor. [Para 21][1054-E-G]2. It is clear from the definition contract of guarantee(section 126 of the Indian Contract Act, 1872) is contract toFperform the promise, or discharge the liability, of third personin case of his default. The present is not case where thecorporate debtor has entered into contract to perform thepromise, or discharge the liability of borrower in case of his default.The Pledge Agreement is limited to pledge 40,160 shares assecurity. The corporate debtor has never promised to dischargeGthe liability of borrower. The Facility Agreement under which theborrower was bound by the terms and conditions and containinghis obligation to repay the loan security for performance are allcontained in the Facility Agreement. contract of guaranteecontains guarantee “to perform the promise or discharge the

liability of third person in case of his default”. Thus, key words inSection 126 are contract “to perform the promise”, or “dischargethe liability”, of third person. Both the expressions “performthe promise” or “discharge the liability” relate to “a third person”.The Pledge Agreement dated 10.01.2012 does not contain anycontract that the promise which was made by the borrower in theFacility Agreement dated 12.05.2011 to discharge the liability ofdebt of Rs.40 crores is undertaken by the corporate debtor. Itwas the borrower who had promised to repay the loan of Rs.40crores in Facility Agreement dated 12.05.2011 and it was borrowerwho had undertaken to discharge the liability towards lender. ThePledge Agreement dated 10.01.2012 does not contain any contractthat corporate debtor has contracted to perform the promise, ordischarge the liability of the third person. The Pledge Agreementis limited to pledge of 40,160 shares of GEL only. This Court hasnoticed above that in the Facility Agreement there is SecurityCreation by way of Schedule IV in which 100% equity shares ofGEL were pledged by the borrower and second pari-passu chargeon all current assets of the GEL was also created as security forloan. It transpires that since some shares of GEL were also withthe corporate debtor who is subsidiary Company of ‘D’. the samewas also pledged with the lender as additional security by asubsequent agreement dated 10.01.2012. [Para 23][1055-E-H;1056-A-C]

5. This Court in Swiss Ribbons (P) Ltd. v. Union of India andPioneer Urban Land & Infrastructure Ltd. v. Union of India heldthat person having only security interest over the assets ofcorporate debtor, even if falling within the description of ‘securedcreditor’ by virtue of collateral security extended by the corporatedebtor, would not be covered by the financial creditors as perdefinitions contained in sub-section (7) and (8) of section 5. Whathas been held by this Court as noted above is fully attracted inthe present case where corporate debtor has only extended asecurity by pledging 40,160 shares of GEL. The appellant at bestwill be secured debtor qua above security but shall not be afinancial creditor within the meaning of Section 5 sub-sections(7) and (8). [Para 30][1062-A-C]

ABC

DEF

A6. The Appellate Tribunal has dealt with Section 5(8)(f) whilerejecting the claim of the appellant as to be the financial creditor.It appears that the submission based on Section 5(8) (i) was notaddressed before the Appellate Tribunal. This Court, thus, upholdthe decision of the Resolution Professional as approved by theNCLAT as correct. The appellant is not financial creditor of theBcorporate debtor. Hence, Miscellaneous Application was rightlyrejected by the Adjudicating Authority.This Court, however, makeit clear that observations made by us in this judgment are onlyfor deciding the claim of the appellant as the financial creditorwithin the meaning of Section 5(7) and 5(8) of the Code and shallChave no bearing on any other proceedings undertaken by theappellant to establish any of its right in accordance with law.[Para 32][1062-F-H; 1063-A]Swiss Ribbons (P) Ltd. v. Union of India (2019) 4 SCC17 : [2019] 3 SCR 535; Pioneer Urban Land &DInfrastructure Ltd. v. Union of India (2019) 8 SCC416 : [2019] 10 SCR 381 – relied on.

Anuj Jain, Interim Resolution Professional for JaypeeInfratech Limited vs. Axis Bank Limited and others(2020) 8 SCC 401 – referred to.EJagjivandas Jethalal and another v. King Hamilton &Co. Indian Law Reports, Volume LV 1931, 617 – referredto.

From the Judgment and Order dated 09.04.2019 of the NationalCompany Law Appellate Tribunal, New Delhi in Company Appeal (AT)(Insolvency) No. 325 of 2019.

K.V. Vishwanathan, Sr. Adv., Pai Amit, Charles D. Souza,HManaswi Agarwal, Apoorv Singhal, Rahat Bansal, Ms. Pankhuri

Bhardwaj, Yash Badkur, Rohit R. Saboo, Ms. Ami Jain, Ms. AnushreePrashit Kapadia, Ashutosh Kumar, Ms. Namita Choudhary, Ms. PraveenaGautam, Pawan Shukla, Raja Ram, Ms. Sweety Pandey, Varun Singh,Gaurav Nair, Ms. Pranati Bhatnagar, Kritya Sinha, Divyanshu Bhandari,Advs. for the appearing parties.

The Judgment of the Court was delivered by

ASHOK BHUSHAN, J.

This appeal under Section 62 of the Insolvency and BankruptcyCode, 2016 (hereinafter referred to as “Code”) has been filed questioningthe judgment of the National Company Law Appellate Tribunal, NewDelhi dated 09.04.2019 dismissing the Company Appeal filed by theappellant. The Company Appeal was filed by the appellant against orderdated 22.02.2019 of National Company Law Tribunal, Mumbai Benchrejecting the Miscellaneous Application filed by the appellant underSection 60(5)(c) of the Code holding that the appellant is not the financialcreditor of the corporate debtor, Doshion Veolia Water Solutions PrivateLimited.

2. Brief facts of this case for deciding this appeal are:

L & T Infrastructure Finance Company Limited advanced thefinancial facility to Doshion Limited, Company incorporated andregistered under the Companies Act, 1956. Facility Agreement dated12.05.2011 was executed between the Doshion Limited (borrower) andL & T Infrastructure Finance Company Limited (lender) advancing tothe borrower financial facility of Rs.40 crores repayable in 72 structuredmonthly instalments. Schedule IV of the facility agreement dealt with“Security Creation”. The Board of Directors of Doshion Veolia WaterSolutions Private Limited (corporate debtor) passed Resolution on26.07.2011 to give Non-Disposal Undertaking in favour of L & TInfrastructure Finance Company Limited whereby Board was authorisedto provide an undertaking to the effect that 100% of their shareholdingin Gondwana Engineers Limited (GEL) shall not be disposed of so longas any amounts were due and payable and outstanding under the financialassistance proposed to be provided by L&T Infra to borrower. On10.01.2012 Pledge Agreement was executed between Doshion VeoliaWater Solutions Private Limited and L&T Infrastructure FinanceCompany Limited by which agreement 40,160 shares of GondwanaEngineers Limited were pledged as security. On 10.01.2012 deed of

Aundertaking was also executed by Doshion Veolia Water Solutions PrivateLimited in favour of L&T Infrastructure Finance Co.Ltd. By agreementdated 30.12.2013 L&T Infrastructure assigned all rights, title and interestin the financial facility including any security, interest therein in favourof Phoenix ARC Pvt. Ltd., the appellant under Section 5 of theSecuritisation and Reconstruction of Financial Assets and EnforcementBof Security Interest Act, 2002. The borrower, Doshion Limited failed torepay as per agreed terms dated 12.05.2011. The appellant issued anotice dated 19.02.2014 and recalled the financial facility. The appellantfiled O.A.No.325 of 2016 before the Debts Recovery Tribunal,Ahmedabad which is said to be pending.C3. On 31.08.2018, Bank of Baroda filed Company PetitionNo.CP(IB)1752/MB/2017 before the Adjudicating Authority underSection 7 of the Code to initiate the corporate insolvency resolutionprocess in respect of the Doshion Veolia Water Solutions Private Limited(Corporate Debtor). By order dated 31.08.2018, the AdjudicatingDAuthority admitted the Company Petition and the corporate insolvencyresolution process began. The respondent was appointed as the InterimResolution Professional of the corporate debtor which was later confirmedas the Resolution Professional of the corporate debtor. Pursuant to thecommencement of corporate insolvency resolution process in respect ofthe corporate debtor, the appellant filed its claim for an amount ofERs.83,49,85,667/- with the respondent. The respondent vide email dated20.09.2018 expressed an opinion that as per the Pledge Agreementsubmitted by the appellant, the corporate debtor’s liability was restrictedto pledge of the shares only. The respondent sought further documentsin respect of the appellant’s claim. Although additional documents wereFsubmitted by the appellant, the respondent by email dated 23.11.2018reiterated the earlier view.

4. The appellant filed M.A.No.1514 of 2018 before the NationalCompany Law Tribunal, Bench at Mumbai in Company PetitionNo.CP(IB)1752/MB/2017 seeking direction to the respondent to admitGthe claim of the appellant as financial debt with all consequential benefitsincluding voting rights in the Committee of creditors of the corporatedebtor. The appellant stated that pledge of the shares by the corporatedebtor was in essence guarantee for financial debt and, therefore,appellant was financial creditor of the corporate debtor. The ResolutionProfessional vide email dated 04.12.2018 rejected the claim of theH

appellant as financial creditor of the corporate debtor on the ground thatthere was no separate Deed of Guarantee in favour of the Assignor.The respondent filed an affidavit in reply before the Adjudicating Authority.After hearing the parties, the Adjudicating Authority passed an orderdated 22.02.2019 rejecting the Miscellaneous Application filed by theappellant. The Adjudicating Authority held that the applicant’s status asfinancial creditor of the corporate debtor is not proved in the light ofSection 5(8) of the Code.

5. Aggrieved by the judgment of the Adjudicating Authority, theappeal was filed by the appellant before the Appellate Tribunal. TheAppellate Tribunal held that pledge of shares in question do not amountto “disbursement of any amount against the consideration for the timevalue 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 theappeal. Aggrieved by the judgment of the Appellate Tribunal, the appellanthas filed the present appeal.

6. We have heard Shri K.V. Vishwanathan, learned senior counselfor the appellant, Ms. Ami Jain, learned counsel for the respondent. Wehave also heard learned counsel for the Bank of Baroda as intervenor.

7. Shri K.V. Vishwanathan, learned senior counsel, submits thatthe appellant is financial creditor within the meaning of Section 5 sub-section (8)(i) of the Code. He submits that liability of the corporate debtor,who is surety, is co-extensive to that of debtor and the creditor has fullrights to pursue his liability against the surety even before the creditor.There is debt which is payable by the corporate debtor to the appellantand for securing that debt, the corporate debtor has created securityinterest in favour of the Assignor that is L&T Infrastructure Ltd. TheL&T Infrastructure Ltd. having assigned all its rights and obligations tothe appellant vide Assignment dated 30.12.2013, the appellant has steppedinto the shoes of L&T Infrastructure Ltd. The parent Company ofcorporate debtor Doshion Ltd. took credit facility from the predecessorof the appellant and the corporate debtor undertook liability by creatinga security interest in the form of shares of Gondwana Engineers Limited.The present case is covered by Section 5(8)(b) read with 5(i), notaccepting the appellant as financial creditor would have effect of leavingthe appellant effectively remediless inasmuch as the appellant cannotenforce the guarantee during the subsistence of moratorium period and

Aonce the resolution plan is passed without any redress to the appellant inthe Financial Plan, the said resolution plan would be binding upon theappellant whereupon the appellant shall be gravely prejudiced sincenothing could then be recoverable from the corporate debtor. Thecorporate debtor in effect has provided guarantee to L&T InfrastructureLtd. whereby the corporate debtor guarantees L&T Infrastructure theBdebts due from Doshion Ltd. and in case of non-payment, chargesubsisted upon the 100% shareholding of Gondwana Engineers Ltd. Asthe corporate debtor has secured the payment of the loan, the liability ofcorporate debtor to L&T Infrastructure became co-extensive to that ofDoshion Ltd. under Section 128 of the Indian Contract Act, 1872 which,Cinter alia, financial creditor to the appellant herein and the loan wasadvanced for interest and the said loan was secured by the corporatedebtor.

8. Learned counsel further submits that the judgment of this Courtin Anuj Jain, Interim Resolution Professional for Jaypee InfratechDLimited vs. Axis Bank Limited and others, (2020) 8 SCC 401,relied by the learned counsel for the respondent is distinguishable fromthe facts of the present case. He submits that any security that wouldpermit the right of action against the third party that is not the borrower,would amount to guarantee. The mere fact that corporate debtor hasnot borrowed money from the appellant, it cannot absolve the corporateEdebtor from its liability as guarantor. He submits that term guarantee isnot to be understood narrowly and it has to be understood to include anysecurity created by third party to secure repayment of financial debtincluding pledge of shares. The pledge of shares by corporate debtorto secure the loan advanced to the parent Company of the corporateFdebtor amounts to guarantee. He lastly submits that judgment of AnujJain needs to be clarified to the effect that it has been rendered in aspecific facts scenario which does not apply to the present case at all.9. Ms. Ami Jain, learned counsel, appearing for the respondentsubmits that the appellant is not creditor of any nature whatsoever ofGthe corporate debtor. The appellant has no right of recovery of any debtfrom the corporate debtor and has limited right of enforcing and realisingthe value of its security in the shape of the shares held by the corporatedebtor in its subsidiary, that is, Gondwana Engineers Ltd. which is pledgedwith the appellant as security for the loan given to its parent Company,viz. Doshion Ltd. in accordance with the Pledge Agreement datedH

10.01.2012. The pledge is not, in any manner, guarantee under theContract Act. Section 5(8)(i) of the Code takes within its sweep onlyany liability arising out of guarantee for any of the items referred to insub-clauses (a) to (h) of Section 5(8) of the Code, and not any otherinstrument in the nature of guarantee. The pledge of shares cannot beequated with the guarantee as both are absolutely different in terms oftheir ramification and implication. The corporate debtor has not enteredinto any contract of guarantee with the appellant to perform the promise,or discharge the liability of third party in case of his default. In theevent of default by the borrower, the appellant has the limited right torealise the money by sale of shares pledged without requiring thecorporate debtor to perform the promise, or discharge the liability as nopromise is given by the corporate debtor to repay the debt recoverablefrom the borrower.

10. Learned counsel for the respondent submits that the NationalCompany Law Tribunal has rightly rejected the claim of the appellant asfinancial creditor. It is further submitted that the appellant has alreadyinitiated proceedings at the Debt Recovery Tribunal, Ahmedabad forrealisation of its dues which is an admitted fact. In the Code nowherepledge is mentioned. The appellant cannot claim their pledge agreementdated 10.01.2012 as guarantee as there is no Deed of Guarantee on therecord. The Code does not deal with recovery.

11. Learned counsel appearing for Bank of Baroda/Intervenorreferring to objects and reasons of Insolvency and Bankruptcy Codecontends that the purpose and object of the Code is entirely different. Itis not mechanism for recovery of any amount. The appellant has alreadymoved to Debt Recovery Tribunal, Ahmedabad.

12. We have considered the submissions of the learned counselfor the parties and have perused the records.

13. The only question to be considered in this appeal is as towhether the appellant is financial creditor within the meaning of Section5(8) of the Code on the strength of pledge agreement dated 10.01.2012and Deed of Undertaking dated 10.01.2012 entered into with L&TInfrastructure.

14. We may first notice the transaction in question on the basis ofwhich the appellant claims to be treated as financial creditor qua corporatedebtor.

A15. The Facility Agreement dated 12.05.2011 was executedbetween the Doshian Ltd. and the L&T Infrastructure Finance CompanyLtd. The corporate debtor was not party to the Facility Agreement. Itwas the Doshion Ltd., the borrower who was to repay the loan of Rs.40crores. Schedule-IV of Facility Agreement is “Security Creation” whichis part of the Facility Agreement, is as follows:B

“SCHEDULE-IV

SECURITY CREATION

The Facility (together with all principal interest, liquidated damages,fees costs, charges, expenses and other monies and all otherCamounts stipulated and payable to the Lender) shall be securedby:

1.Second pari-passu charge on all current assets of theBorrower.

2.Second pari-passu charge on all current assets of GondwanaEngineers Limited (GEL).

3.Pledge of 100% equity shares together with all accretionsthereon of the GEL.

4.Personal guarantee of promoters of DL namely AshitEDhirajilal Doshi, Dhirajilal Shivlal Doshi and Rakshit DhirajlalDoshi.

5.Debt Service Reserve Account (DSRA) in the form of LC/BG for 3 months of interest and principal payments.

6.Demand Promissory Note.

If, at any time during the subsistence of the Facility, the Lender isof the opinion that the security provided by the Borrower hasbecome inadequate to cover the Facility then outstanding, then,on the Lender advising the Borrower to that effect, the Borrowershall provide and furnish to the Lender, to the satisfaction of theGLender, such additional security as may be acceptable to theLender to cover such deficiency.”

16. Item No.3 of Schedule IV, as noted above, is Pledge of 100%equity shares together with all accretions thereon of the GEL. There isSecond pari-passu charge on all current assets of the GEL as perHSchedule IV.

17. The Pledge Agreement dated 10.01.2012 was entered intobetween the corporate debtor and L&T Infrastructure Finance Co. Ltd.Schedule II contains details of the Securities which are 40,160 shares ofGEL. The corporate debtor has pledged in favour of lender, the securities,the Clauses of the Pledge Agreement clearly describe the nature of thesecurity created by the Pledge Agreement. It is relevant to notice Clause2(iii) which is to the following effect:

“2(iii) The Obligors hereby agree and confirm that the pledgecreated/to be created in terms of this Agreement shall be acontinuing security for the payment of the Secured Obligationsand the due performance by the Obligors of their obligationshereunder.”

18. The shares of GEL were pledged with L&T Infrastructure assecurity. The Deed of Undertaking which was given on the same day,i.e., 10.01.2012 is also to the same effect.

19. Now, we may look into the provisions of the Insolvency andBankruptcy Code, 2016 relevant for the present controversy. Part II ofChapter I of the Code deals with Insolvency Resolution Liquidation forCorporate Persons. Section 5 is the definition clause. Section 5(7) defines“financial creditor” in the following words:

“Section 5(7) “financial creditor” means any person to whom afinancial debt is owed and includes person to whom such debthas been legally assigned or transferred to;”

20. What is ‘financial debt’ is defined in Section 5(8) which is tothe following effect:

“Section 5(8) “financial debt” means debt along with interest, ifany, which is disbursed against the consideration for the time valueof money and includes—

(a) money borrowed against the payment of interest;

(b) any amount raised by acceptance under any acceptance creditfacility or its de-materialised equivalent;

(c) any amount raised pursuant to any note purchase facility orthe issue of bonds, notes, debentures, loan stock or any similarinstrument.

(d) the amount of any liability in respect of any lease or hirepurchase contract which is deemed as finance or capital leaseunder the Indian Accounting Standards or such other accountingstandards as may be prescribed;

(e) receivables sold or discounted other than any receivables soldBon non-recourse basis;

(f) any amount raised under any other transaction, including anyforward sale or purchase agreement, having the commercial effectof borrowing;

(g) any derivative transaction entered into in connection withCprotection against or benefit from fluctuation in any rate or priceand for calculating the value of any derivative transaction, onlythe market value of such transaction shall be taken into account;

(h) any counter-indemnity obligation in respect of guarantee,indemnity, bond, documentary letter of credit or any other instrumentDissued by bank or financial institution;

(i) the amount of any liability in respect of any of the guarantee orindemnity for any of the items referred to in sub-clauses (a) to (h)of this clause;”

21. Whether the corporate debtor owed any financial debt to theEappellant so as to treat the appellant as financial creditor is the questionto be answered. The definition of ‘financial debt’ as contained in Section5(8) contains the expressions “means” and “includes”. The definitionbegins with the words “financial debt” means ‘a debt alongwith interest,if any, which is disbursed against the consideration for the time value ofFmoney and includes’... The main part of the definition, thus, providesthat financial debt means debt “which is disbursed against theconsideration for the time value of money”. The definition in the secondpart gives instances which also includes financial debt. Learned counselfor the appellant in his submission has relied on Section 5(8)(i) to supporthis claim that the appellant is the financial creditor. Learned counsel forGthe appellant has referred both sub-clause (b) and sub-clause (i) andsubmits that credit facility which was extended to the borrower isreferable to Section 5(8)(b) and the corporate debtor pledged his shareto give indemnity for credit facility and which is in sense of guarantee.The debt is financial debt within the meaning of Section 5(8)(i) and theHappellant is the financial creditor. There can be no dispute that credit

facility given by the Assignor to borrower by Facility Agreement dated12.05.2011 is credit facility which can be covered under Section 5(8)(b).A bare perusal of Section 5(8)(i) indicates that it contemplates amountof any liability in respect of any of the guarantee or indemnity for any ofthe items referred to in sub-clauses(a) to (h) of clause (8). Sub-clause(i) uses two expressions “guarantee” and “indemnity” for any of theitems referred to in sub-clauses (a) to (h).

22. Chapter VIII of the Indian Contract Act, 1872 deals with “OfIndemnity and Guarantee”. Section 124 defines “Contract of indemnity”and Section 126 defines “Contract of guarantee”. Section 126 which isrelevant for the present case is as follows:

“Section 126. “Contract of guarantee”, “surety”, “principaldebtor” and “creditor”.—A “contract of guarantee” is contractto perform the promise, or discharge the liability, of third personin case of his default. The person who gives the guarantee iscalled the “surety”; the person in respect of whose default theguarantee is given is called the “principal debtor”, and the personto whom the guarantee is given is called the “creditor”. guaranteemay be either oral or written.”

23. As clear from the definition contract of guarantee is contractto perform the promise, or discharge the liability, of third person incase of his default. The present is not case where the corporate debtorhas entered into contract to perform the promise, or discharge theliability of borrower in case of his default. The Pledge Agreement islimited to pledge 40,160 shares as security. The corporate debtor hasnever promised to discharge the liability of borrower. The FacilityAgreement under which the borrower was bound by the terms andconditions and containing his obligation to repay the loan security forperformance are all contained in the Facility Agreement. contract ofguarantee contains guarantee “to perform the promise or discharge”the liability of third person in case of his default. Thus, key words inSection 126 are contract “to perform the promise”, or “discharge theliability”, of third person. Both the expressions “perform the promise”or “discharge the liability” relate to “a third person”. The PledgeAgreement dated 10.01.2012 does not contain any contract that thepromise which was made by the borrower in the Facility Agreementdated 12.05.2011 to discharge the liability of debt of Rs.40 crores isundertaken by the corporate debtor. It was the borrower who had

Apromised to repay the loan of Rs.40 crores in Facility Agreement dated12.05.2011 and it was borrower who had undertaken to discharge theliability towards lender. The Pledge Agreement dated 10.01.2012 doesnot contain any contract that corporate debtor has contracted to performthe promise, or discharge the liability of the third person. The PledgeAgreement is limited to pledge of 40,160 shares of GEL only. We haveBnoticed above that in the Facility Agreement there is Security Creationby way of Schedule IV in which 100% equity shares of GEL werepledged by the borrower and second pari-passu charge on all currentassets of the GEL was also created as security for loan. It transpiresthat since some shares of GEL were also with the corporate debtor whoCis subsidiary Company of Doshion Ltd. the same was also pledged withthe lender as additional security by subsequent agreement dated10.01.2012.

24. The Pledge Agreement and undertaking given, entered betweenAssignor and corporate debtor cannot be termed as contract of guaranteeDwithin the meaning of Section 126.

25. The expression “pledge” is separately dealt with in the IndianContact Act, 1872. Section 172 defines ‘pledge’ in the following words:

“Section 172. “Pledge”, “pawnor”, and “pawnee” defined.-The bailment of goods as security for payment of debt orEperformance of promise is called “pledge”. The bailor is in thiscase called the “pawnor”. The bailee is called “pawnee”.:”

26. The word ‘guarantee’ and ‘indemnity’ as occurring in Section5(8)(i) has not been defined in the Code. Section 3 sub-section (37) ofthe Code provides that words and expressions used but not defined inFthe Code but defined in the Indian Contract Act, 1872 shall have themeanings respectively assigned to them.

27. Learned counsel for the appellant has referred to judgmentof the Bombay High Court in the Indian Law Reports, Volume LV1931, 617, Jagjivandas Jethalal and another vs. King HamiltonG& Co., which was case arising out of the suit filed to enforce an equitablemortgage of an immovable property. The defendants as owners of theimmovable property in question created an equitable mortgage upon itas sureties for the firm of Sarda & Sons who owed money to the plaintiff.The Bombay High Court had occasion to consider Section 126 of theHContract Act in the above case. Noticing the arguments based on Section

126 of the Indian Contract Act raised by the respondent, the BombayHigh Court noticed following at page 684:

“......Mr. Desai’s answer to that is that the defendants here werenot sureties. He relies on section 126 of the Indian Contract Actwhich provides that “contract of guarantee” is contract toperform the promise or discharge the liability of third person incase of his default, and the person who gives the guarantee iscalled the “surety”. Mr. Desai says that here there was no personalobligation on the defendents to pay anything: they merely handedover their property as security, and that being so, there was nocontract to perform the promise or discharge the liability of thirdperson. Then he says that in section 135, which provides that acontract between the creditor and the principal debtor by whichthe creditor makes composition with, or promises to give timeto, or not to sue, the principal debtor, dishcarges the surety unlessthe surety assents to such contract, th word “surety” must havethe same meaning as in section 126, and therefore person whomerely deposits the documents as security is not surety withinsection 135. There may possibly be something in that argumenton the wording of the sections, but it has been held often that theIndian Contract Act is not exhaustive, and, therefore, one has toconsider apart from the Act what the general is.”

28. The Bombay High Court although observed that on plainreading of Section 126, there may be some substance in the submissionof Mr. Desai but Bombay High Court proceeded to examine the generallaw. The judgment of the Bombay High Court relied by the learnedcounsel for the appellant was on its own facts and has no bearing oninterpretation of Section 5(8)(i) with reference to Section 126 of ContractAct.

29. The learned counsel for the respondent has placed heavyreliance on two-Judge Bench judgment of this Court in Jaypee InfratechLimited vs. Axis Bank Limited (supra). One of the issues whichcame before this Court was as to whether the respondent (lenders ofJAL) could be financial creditors of the corporate debtor JIL on thestrength of the mortgages created by corporate debtor as collateralsecurities of its holding Co. JIL. In the above case, the AXIS Bank hadlent finance to Jaiprakash Associates Ltd.(JAL), the holding company,Jaypee Infratech Ltd.(JIL) had mortgaged several properties as collateral

Asecurities for the loans and advances made by the Axis Bank to JAL.Interim Resolution Professional has rejected the claim of the Asix Bankto be recognised as financial creditor of corporate debtor (JIL). TheNational Company Law Tribunal has approved the decision of IntermResolution Professional rejecting the claim of Axis Bank as financialcreditor against which appeal was filed before the Appellate TribunalBwhich was allowed. The corporate debtor had filed an appeal beforethis Court in which appeal one of the issues was as to whether the AxisBank can be recognised as financial creditor of the corporate debtor onthe strength of the mortgaged by the JIL, corporate debtor of its holdingCo. JAL. This Court after noticing the facts, noted rival submissions ofCthe parties on the above issue in detail. The two earlier judgments of thisCourt, namely, Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4SCC 17 and Pioneer Urban Land & Infrastructure Ltd. v. Unionof India, (2019) 8 SCC 416 were extensively noted. Paragraphs 46 to50.2 contain elaborate discussion regarding the essentials of “financialdebt” and “financial creditor” which are to the following effect:D“46. Applying the aforementioned fundamental principles to thedefinition occurring in Section 5(8) of the Code, we have not aniota of doubt that for debt to become ‘financial debt’ for thepurpose of Part II of the Code, the basic elements are that itought to be disbursal against the consideration for time value ofEmoney. It may include any of the methods for raising money orincurring liability by the modes prescribed in Sub-clauses (a) to(f) of Section 5(8); it may also include any derivative transactionor counter-indemnity obligation as per Sub-clauses (g) and (h) ofSection 5(8); and it may also be the amount of any liability inFrespect of any of the guarantee or indemnity for any of the itemsreferred to in Sub-clauses (a) to (h). The requirement of existenceof debt, which is disbursed against the consideration for thetime value of money, in our view, remains an essential part evenin respect of any of the transactions/dealings stated in Sub-clauses(a) to (i) of Section 5(8), even if it is not necessarily stated therein.GIn any case, the definition, by its very frame, cannot be read soexpansive, rather infinitely wide, that the root requirements of‘disbursement’ against ‘the consideration for the time value ofmoney’ could be forsaken in the manner that any transaction couldstand alone to become financial debt. In other words, any of theHtransactions stated in the said Sub-clauses (a) to (i) of Section

5(8) would be falling within the ambit of ‘financial debt’ only if itcarries the essential elements stated in the principal Clause or atleast has the features which could be traced to such essentialelements in the principal clause. In yet other words, the essentialelement of disbursal, and that too against the consideration fortime value of money, needs to be found in the genesis of any debtbefore it may be treated as ‘financial debt’ within the meaning ofSection 5(8) of the Code. This debt may be of any nature but apart of it is always required to be carrying, or corresponding to, orat least having some traces of disbursal against consideration forthe time value of money.

47. As noticed, the root requirement for creditor to becomefinancial creditor for the purpose of Part II of the Code, theremust be financial debt which is owed to that person. He may bethe principal creditor to whom the financial debt is owed or hemay be an assignee in terms of extended meaning of this definitionbut, and nevertheless, the requirement of existence of debt beingowed is not forsaken.

48. It is also evident that what is being dealt with and described inSection 5(7) and in Section 5(8) is the transaction vis-a-vis thecorporate debtor. Therefore, for person to be designated as afinancial creditor of the corporate debtor, it has to be shown thatthe corporate debtor owes financial debt to such person.Understood this way, it becomes clear that third party to whomthe corporate debtor does not owe financial debt cannot becomeits financial creditor for the purpose of Part II of the Code.

49. Expounding yet further, in our view, the peculiar elements ofthese expressions “financial creditor” and “ financial debt”, asoccurring in Sections 5(7) and 5(8), when visualised and comparedwith the generic expressions “creditor” and “debt” respectively,as occurring in Sections 3(10) and 3(11) of the Code, the schemeof things envisaged by the Code becomes clearer. The genericterm “creditor” is defined to mean any person to whom the debtis owed and then, it has also been made clear that it includes a‘financial creditor’, ‘secured creditor’, an ‘unsecured creditor’,an ‘operational creditor’, and ‘decree-holder’. Similarly, “debt”means liability or obligation in respect of claim which is duefrom any person and this expression has also been given an

[2021] 1 S.C.R.

extended meaning to include ‘financial debt’ and an ‘operationaldebt’.

49.1. The use of the expression “means and includes” in theseclauses, on the very same principles of interpretation as indicatedabove, makes it clear that for person to become creditor, thereBhas to be debt i.e., liability or obligation in respect of claimwhich may be due from any person. “secured creditor” in termsof Section 3(30) means creditor in whose favour securityinterest is created; and “security interest”, in terms of Section3(31), means right, title or interest or claim of property createdin favour of or provided for secured creditor by transactionCwhich secures payment for the purpose of an obligation and itincludes, amongst others, mortgage. Thus, any mortgage createdin favour of creditor leads to security interest being createdand thereby, the creditor becomes secured creditor. However,when all the defining clauses are read together and harmoniously,Dit is clear that the legislature has maintained distinction amongst

the expressions ‘financial creditor’, ‘operational creditor’, ‘securedcreditor’ and ‘unsecured creditor’. Every secured creditor wouldbe creditor; and every financial creditor would also be creditorbut every secured creditor may not be financial creditor. Asnoticed, the expressions “financial debt” and “financial creditor”,

having their specific and distinct connotations and roles ininsolvency and liquidation process of corporate persons, have onlybeen defined in Part II whereas the expressions “secured creditor”and “security interest” are defined in Part I.

50. conjoint reading of the statutory provisions with theFenunciation of this Court in Swiss Ribbons (supra), leaves nothingto doubt that in the scheme of the IBC, what is intended by theexpression ‘financial creditor’ is person who has directengagement in the functioning of the corporate debtor; who isinvolved right from the beginning while assessing the viability ofGthe corporate debtor; who would engage in restructuring of theloan as well as in reorganisation of the corporate debtor’s businesswhen there is financial stress. In other words, the financial creditor,by its own direct involvement in functional existence of corporatedebtor, acquires unique position, who could be entrusted with thetask of ensuring the sustenance and growth of the corporate debtor,

akin to that of guardian. In the context of insolvency resolutionprocess, this class of stakeholders namely, financial creditors, isentrusted by the legislature with such role that it would lookforward to ensure that the corporate debtor is rejuvenated andgets back to its wheels with reasonable capacity of repaying itsdebts and to attend on its other obligations. Protection of the rightsof all other stakeholders, including other creditors, would obviouslybe concomitant of such resurgence of the corporate debtor.

50.1. Keeping the objectives of the Code in view, the position androle of person having only security interest over the assets ofthe corporate debtor could easily be contrasted with the role of afinancial creditor because the former shall have only the interestof realising the value of its security (there being no other stakesinvolved and least any stake in the corporate debtor’s growth orequitable liquidation) while the latter would, apart from looking atsafeguards of its own interests, would also and simultaneously beinterested in rejuvenation, revival and growth of the corporatedebtor. Thus understood, it is clear that if the former i.e., personhaving only security interest over the assets of the corporate debtoris also included as financial creditor and thereby allowed tohave its say in the processes contemplated by Part II of the Code,the growth and revival of the corporate debtor may be the casualty.Such result would defeat the very objective and purpose of theCode, particularly of the provisions aimed at corporate insolvencyresolution.

50.2. Therefore, we have no hesitation in saying that personhaving only security interest over the assets of corporate debtor(like the instant third party securities), even if falling within thedescription of ‘secured creditor’ by virtue of collateral securityextended by the corporate debtor, would nevertheless stand outsidethe sect of ‘financial creditors’ as per the definitions contained inSub-sections (7) and (8) of Section 5 of the Code. Differently put,if corporate debtor has given its property in mortgage to securethe debts of third party, it may lead to mortgage debt and,therefore, it may fall within the definition of ‘debt’ Under Section3(10) of the Code. However, it would remain debt alone andcannot partake the character of ‘financial debt’ within themeaning of Section 5(8) of the Code.”

A30. This Court held that person having only security interestover the assets of corporate debtor, even if falling within the descriptionof ‘secured creditor’ by virtue of collateral security extended by thecorporate debtor, would not be covered by the financial creditors as perdefinitions contained in sub-section (7) and (8) of Section 5. What hasbeen held by this Court as noted above is fully attracted in the presentBcase where corporate debtor has only extended security by pledging40,160 shares of GEL. The appellant at best will be secured debtor quaabove security but shall not be financial creditor within the meaning ofSection 5 sub-sections (7) and (8).

31. Mr. Vishwanathan tried to distinguish the judgment of thisCCourt in Jaypee Infratech Limited (supra) by contending that theabove judgment has been rendered in the specific facts scenario whichdoes not apply to the present case at all. Shri Vishwanathan submits thatin Jaypee Infratech Limited case (supra) corporate debtor hadcreated mortgage for the loan obtained by the parent Company and noDbenefit of such loan has been received by the corporate debtor whereas

in the present case corporate debtor has been the direct and realbeneficiary of the loan advanced by Assigner to the parent Company ofthe corporate debtor. The above point as contended by the learned counseldoes not commend us. The present is also case where only securitywas created by the corporate debtor in 40,160 shares of GEL, there wasEno liability to repay the loan taken by the borrower on the corporatedebtor in the present case. At best the Pledge Agreement and Agreementof undertaking executed on 10.01.2012, that is, subsequent to FacilityAgreement, is security in favour of Lender-Assignor who at best will besecured creditor qua corporate debtor and not the financial creditor quaFcorporate debtor.

32. We may notice that the Appellate Tribunal has dealt withSection 5(8)(f) while rejecting the claim of the appellant as to be thefinancial creditor. It appears that the submission based on Section 5(8)(i) was not addressed before the Appellate Tribunal which has now beenGpressed before us. We, thus, uphold the decision of the ResolutionProfessional as approved by the NCLAT as correct. The appellant isnot financial creditor of the corporate debtor. Hence, MiscellaneousApplication was rightly rejected by the Adjudicating Authority. We,however, make it clear that observations made by us in this judgmentare only for deciding the claim of the appellant as the financial creditorH

within the meaning of Section 5(7) and 5(8) of the Code and shall haveno bearing on any other proceedings undertaken by the appellant toestablish any of its right in accordance with law. We, thus, do not findany merit in this appeal. The appeal is dismissed. No costs.

Ankit Gyan

Appeal dismissed.