Author: Niyush Kumar, 4th Year, Amity Law School, Delhi.
CITATION: 2020 SCC OnLine SC 237
DATE OF DECISION: 26 FEBRUARY, 2020
BENCH: A.M. Khanwilkar, Dinesh Maheshwari
ORIGINAL COPY: VIEW
ISSUE IN QUESTION
- Whether the JAL corporation is considered as a Potential Creditor to JIL corporation on the basis of mortgage created by them as collateral security to their Debts?
FACTS OF THE CASE
- Jaiprakash Associates Limited (“JAL”) is a publicly traded company and Jaypee Infratech Limited (“JIL”) is its subsidiary. JAL has received funding from a consortium of banks and financial institutions, ICICI Bank Limited, Standard Chartered Bank Limited and State Bank of India (“JAL Lenders”), whose guarantee included a JIL-created mortgage on certain lands of its property.
- IDBI Bank Limited, a JIL creditor, filed a motion in the National Company Law Court, Allahabad Bench (“NCLT”) under Section 7 of the Bankruptcy and Bankruptcy Act 2016 (the “Code”), seeking the initiation of CIRP against JIL, while he alleged: JIL was in arrears with paying its fees of 526.11 million rupees. On August 9, 2017 the NCLT approved the JIL-IRP decision on May 9, 2018 and May 15, 2018 denying the JAL lenders’ claims for recognition as financial creditors of the JIL corporate debtor based on the mortgage created by JIL Corporate Debtor created as collateral for the debt of its JAL holding company.
- On May 16, 2018, the NCLT entered into certain deals whereby the JIL corporate debtor pledged its real estate as collateral for loans and advances from JAL Lenders because it was preferred, undervalued and fraudulent under Sections 43, 45 and 66 of the Code.
- The Court of Appeal of the National Societies Act, New Delhi (“NCLAT”) on August 1, 2019 by joint order to repeal the NCLT Regulation of May 16, 2018 and also allowed the lenders to appeal against JAL, the corporate debtor’s financial creditors. However, the entire NCLAT ruling related only to the NCLT’s May 16, 2018 resolution approved by the IRP, and no reasons were given for the overturning of the May 9, 2018 and May 15, 2018 NCLT rulings Complaints against the NCLAT ruling of August 1, 2019 will be addressed in this Supreme Court ruling.
- Regarding the first question, the court held that it will review the provisions of Article 43 of the Code and the following questions to determine whether the transaction falls within the scope of Article 43:-
- The lender or the guarantor or the guarantor?
- And is the transfer aimed at or transferred from the company’s debtors’ previous financial debts, commercial debts, or other debts?
- Is the guarantor in a better position than the allocation of assets according to Section 53?
- If the transfer is made with a related party (except employees) as the beneficiary, will it be carried out within two years before the bankruptcy commencement date; if the transfer is carried out within one year before the bankruptcy date, what will be done in favor of the independent party?
- Regarding the question of whether the transfer referred to is not a prohibited transaction in the sense of Article 43, paragraph 3?
- If an affiliate is preferred, according to Article 43 of the Code, the two-year period before the commencement of bankruptcy proceedings shall be the relevant period; if the preference is given to a third party, the period of one year prior to the commencement of the bankruptcy proceedings shall be determined as the relevant period.
- The bank closed the first question by answering the above questions and stated that “the position of JAL is better than asset allocation due to the disputed transaction, which is carried out in accordance with Article 53 of the Act.
- The corporate debtor JIL is based on Article 43 of the Code. Article (2) gives priority to the code. In solving the second problem, the bank relies on Swiss Ribbons Private Limited & Anr. v. Union of India and Ols. and decided that financial creditors obtain a unique position by directly participating in the functional existence of the company’s debtors, and can be entrusted with the task of ensuring the survival and growth of the company’s debtors. Like a mentor.
- The bank also ruled that if the corporate debtor has mortgaged its property to secure third-party debt, it can be regarded as a “debt” under Article 3(10) of the Code as a mortgage debt and cannot be used as a “financial debt”. The meaning of Article 5, paragraph 8 of the Code. The bank concluded that the JAL mortgage lender can be classified as a secured loan, but the mortgage is not intended to provide a loan, line of credit or advance payment to company debtors, nor to obtain a line of credit or guarantee debtor.
- The company cannot be told that its debtors owe them some “finance”. Therefore, JAL lenders do not fall into the category of “financial lenders”.
- While the Supreme Court recognized the various forms of “financial debt” set out in the Code, it excluded mortgages on the premise that they did not explicitly fall within the Code’s definition of “financial debt”. The court also acknowledges that the definition of “financial debt” is not exhaustive.
- Interestingly, the status of such mortgage creditors has not been clarified other than that they will not be “financial creditors”. Can’t you join the JIL creditors’ committee? The decision should also not result in a different (or lower) class of third party securityholder than secured creditors who have paid directly to JIL.
- There is uncertainty as to whether the guarantees are similarly affected by this ruling, it is expected that this ruling is only applicable to mortgages and not to guarantees as those expressly included in this ruling would also mean that other third party securities in the form of Pledges and mortgages, which are also terms not included in the definition of “financial debt”, would not constitute “financial debt” with respect to a corporate debtor, which has a major impact on loans backed by such securities could have.