The Hon'ble Supreme Court of India recently in its judgment in the matter of Jaypee Infratech Limited (JIL) held that mortgagees of the Corporate Debtor are not financial creditors in absence of disbursal of financial debt as defined underSection 5(8) of the Insolvency and Bankruptcy Code, 2016 (IBC). The Hon'ble Supreme Court vide its said judgment has not only annulled the creation of mortgage over land parcels belonging to JIL in favour of the lenders of the 'Holding Company'i.e.Jaiprakash Associates Ltd. (JAL) on account of the said mortgages being preferential but has also extensively dealt with and explained the meaning of the term financial debt while deliberating upon the existing law as laid down by the Hon'ble Supreme Court in the matter of Swiss Ribbon as well as Pioneer Infrastructure Ltd.
The said judgment gains significance in the backdrop of applicability of the term "Financial Debt" and its close association with the terms "disbursal against consideration for the time value of money". Such "disbursal for consideration of time value of money" has been further linked to disbursal being made to the Corporate Debtor itself which in some cases can lead to restrictive applicability of the term "Financial Debt". Besides, the Hon'ble Supreme Court has further held that the most important feature, of a creditor being a financial creditor "is that a financial creditor, from the very beginning, involved in assessing the viability of the corporate debtor who can, and indeed, engage in the restructuring of the loan as well as the reorganization of the corporate debtor's business when there is financial stress. Hence, a financial creditor is not only about in terrorem clauses for repayment of dues; it has the unique parental and nursing roles too. In short, the financial creditor is the one whose stakes are intrinsically interwoven with the well-being of the corporate debtor."
The Hon'ble Supreme Court after discussing the provisions of the IBC, the meaning and scope of the term "financial debt" as laid down by the Court in the earlier judgments categorically held that for a debt to become 'financial debt' for Part II of the Code, the basic elements are that it ought to be a disbursal against the consideration for the time value of money. It may include any of the methods for raising money or incurring liability by the modes prescribed in sub-clauses (a) to (f) of Section 5(8); it may also include any derivative transaction or counter-indemnity obligation as per sub-clauses (g) and (h) of Section 5(8), and it may also be the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h).The requirement of the existence of a debt, which is disbursed against the consideration for the time value of money, in our view, remains an essential part even in 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. In any case, the definition, by its very frame, cannot be read so expansive, rather infinitely wide, that the root requirements of 'disbursement' against 'the consideration for the time value of money' could be forsaken in the manner that any transaction could stand alone to become a financial debt. In other words, any of the transactions stated in the said sub-clauses (a) to (i) of Section 5(8) would be falling within the ambit of 'financial debt' only if it carries the essential elements stated in the principal clause or at least has the features which could be traced to such essential elements in the principal clause. In yet other words, the essential element of disbursal, and that too against the consideration for the time value of money, needs to be found in the genesis of any debt before it may be treated as 'financial debt' within the meaning of Section 5(8) of the Code. This debt may be of any nature but a part of it is always required to be carrying, or corresponding to, or at least having some traces of disbursal against consideration for the time value of money.
The above indicates the aspect of "disbursement against consideration for the time value of money" is a prerequisite which needs to be established in every case wherein a creditor is claiming to be a financial creditor and the said aspect of "disbursement against consideration for the time value of money" can thereafter be linked to any of the sub-clauses of Section 5(8) of IBC. The said requirement of Section 5(8) of the IBC shall thereafter, also satisfy the rationale of a creditor being a "Financial Creditor" in as much as the said creditor should be directly involved and interested in the resolution of the Corporate Debtor. Now, how will this aspect of disbursement be satisfied in a case wherein the Corporate Debtor is merely a guarantor?
Can this judgment be now read in a manner to say that in cases of Corporate Guarantees, since there is no disbursement to the Corporate Guarantor for consideration of time value of money, such a creditor cannot be said to be a financial creditor? Further, in the case of Corporate Guarantees, the creditor may or may not be directly involved and interested in the resolution of the Guarantor in cases where such a creditor has no other interest other than its guarantee. The Hon'ble Supreme Court in the said judgment while dealing with and differentiating mortgagees only as a secured creditor who in the opinion of the Hon'ble Court cannot be considered as a financial creditor since such mortgagees have neither disbursed any amount against consideration of time value of money to the Corporate Debtor and who have no interest in the resolution of the Corporate Debtor other than realizing its security interest, created an ambiguity as regards other creditors particularly creditors having guarantees from the Corporate Debtor. Can such Corporate Guarantors in light of the disbursal against consideration for the time value of money being missing now claim to be immune from proceedings under the IBC in absence of any financial debts? The facts of the judgment in the JIL argued about the mortgages being similar to guarantees, however, the said aspect has not been elucidated in the judgment.
All creditors having third party security and debts have been relegated to an inferior position wherein despite having security, the proceedings under the IBC can result in elimination, modification of such securities/interest/debt without even granting any representation or opportunity to such creditors. The same shall result in interfering with the right available to such creditors who are otherwise having a superior position in case of liquidation. It is noteworthy that the liquidation proceedings under the IBC, recognizes secured creditors and also entitles the secured creditor to exercise rights outside IBC. However, such secured creditors might not necessarily be financial creditors and thus their rights prejudicially impacted at the stage of resolution as against liquidation. There appears to be some anomaly in applying the provisions of the IBC in this backdrop.
Since the Hon'ble Supreme Court in the matter of Jaypee itself reiterated the principles which are required to apply while relying upon any judgment i.e. the judgments are required to be read in light of the facts and circumstances of each case, be duly explained and applied with reasons in each matter, it is only a matter of time when the aspect of the criticality of "disbursement against consideration for the time value of money" for a debt to be classified as financial debt is brought before the Supreme Court again. Till such time we have to keep in mind that to be considered as financial creditors the creditor needs to satisfy the test of "disbursal against consideration for the time value of money", is a person having a direct engagement in the functioning of the corporate debtor; is involved right from the beginning while assessing the viability of the corporate debtor; would engage in the restructuring of the loan as well as in reorganization of the corporate debtor's business when there is financial stress.
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