2021 Supreme(SC) 49

SUPREME COURT OF INDIA
Ashok Bhushan, R. Subhash Reddy, M.R. Shah, JJ.
Phoenix Arc Pvt. Ltd. – Appellant
Versus
Ketulbhai Ramubhai Patel – Respondent
Civil Appeal No.5146 of 2019
Decided On : 03-02-2021

IMPORTANT POINTS
(1) Contract of guarantee is a contract to perform promise or discharge liability, of a third person in case of his default
(2) A person having only security interest over assets of corporate debtor, even if falling within description of 'secured creditor' by virtue of collateral security extended by corporate debtor, would not be covered by financial creditors as per definitions contained in sub-section (7) and (8) of Section 5 of Insolvency and Bankruptcy Code, 2016

Headnote:

(A) Contract Act, 1872 – Section 126 – Insolvency and Bankruptcy Code, 2016 – Sections 77, 60(5)(c) and 622 – Corporate insolvency resolution process – Denial of status as financial creditor – Whether corporate debtor owed any financial debt to appellant so as to treat appellant as financial creditor is the question to be answered – Contract of guarantee is a contract to perform promise or discharge liability, of a third person in case of his default – Present is not a case where corporate debtor has entered into a contract to perform the promise, or discharge liability of borrower in case of his default – Pledge Agreement is limited to pledge 40,160 shares as security – Corporate debtor has never promised to discharge liability of borrower – Facility Agreement under which borrower was bound by terms and conditions and containing his obligation to repay loan security for performance are all contained in Facility Agreement – A contract of guarantee contains a guarantee to perform the promise or discharge liability of third person in case of his default – Pledge Agreement does not contain any contract that promise which was made by borrower in Facility Agreement to discharge liability of debt of Rs.40 Crores is undertaken by corporate debtor – It was borrower who had promised to repay loan of Rs.40 Crores in Facility Agreement and it was borrower who had undertaken to discharge liability towards lender – Pledge Agreement and undertaking given, entered between Assignor and corporate debtor cannot be termed as contract of guarantee within meaning of Section 126 of Contract Act. (Paras 23 and 24)

(B) Insolvency and Bankruptcy Code, 2016 – Sections 77, 60(5)(c) and 622 read with sub-section (7) and (8) of Section 5 – Contract Act, 1872 – Section 16 – Corporate insolvency resolution process – Denial of status as financial creditor – A person having only security interest over assets of corporate debtor, even if falling within description of 'secured creditor' by virtue of collateral security extended by corporate debtor, would not be covered by financial creditors as per definitions contained in sub-section (7) and (8) of Section 5 – Corporate debtor (Appellant) has only extended a security by pledging 40,160 shares of GEL – Appellant at best will be secured debtor qua given security but shall not be a financial creditor within meaning of Section 5 sub-sections (7) and (8) – Present is also a case where only security was created by corporate debtor in 40,160 shares of GEL, there was no liability to repay loan taken by borrower on corporate debtor in present case – At best Pledge Agreement and Agreement of undertaking executed subsequent to Facility Agreement, is security in favour of Lender-Assignor who at best will be secured creditor qua corporate debtor and not financial creditor qua corporate debtor – Appellant is not financial creditor of corporate debtor – Miscellaneous Application was rightly rejected by Adjudicating Authority – Appeal dismissed. (Paras 30, 31 and 32)

Facts of the case:

Present appeal under Section 62 of the Insolvency and Bankruptcy Code, 2016 has been filed questioning the judgment of National Company Law Appellate Tribunal, New Delhi dated 09.04.2019 dismissing the Company Appeal filed by the appellant. The Company Appeal was filed by the appellant against order dated 22.02.2019 of National Company Law Tribunal, Mumbai Bench rejecting Miscellaneous Application filed by the appellant under Section 60(5)(c) of the Code holding that appellant is not the financial creditor of the corporate debtor, Doshion Veolia Water Solutions Private Limited. Only question to be considered in this appeal is as to whether the appellant is a financial creditor within the meaning of Section 5(8) of Code on the strength of pledge agreement dated 10.01.2012 and Deed of Undertaking dated 10.01.2012 entered into with L&T Infrastructure.

Findings of Court:

Miscellaneous Application was rightly rejected by Adjudicating Authority. We, however, make it clear that observations made by us in this judgment are only for deciding the claim of the appellant as the financial creditor within the meaning of Section 5(7) and 5(8) of the Code and shall have no bearing on any other proceedings undertaken by the appellant to establish any of its right in accordance with law.

Result : Appeal dismissed.