Vipul Ganda is an Independent Litigation Counsel with over 14 years of experience and a proven track record in Litigation and Dispute Resolution.
Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited Versus Axis Bank Limited, etc.
Court / Forum : Supreme Court of India Case Number : Civil Appeal Nos. 8512-8527 of 2019 Coram :
Justice Dinesh Maheshwari, Justice A.M. Khanwilkar Subject : Sections 43, 44, 45 and 66 of the Insolvency and Bankruptcy Code, 2016 Date of Decision : February 26, 2020
The appeal was preferred against the order of NCLAT by three sets of parties, namely, (i) Mr. Anuj Jain, the Interim Resolution Professional (“IRP”) for corporate debtor Jaypee Infratech Ltd. (“JIL”), (ii) India Infrastructure Finance Co. Ltd., the financial creditor; and (iii) Homebuyers who have invested in the projects of JIL and Jaiprakash Associates Ltd. (“JAL”), the holding company of JIL.
The NCLAT set aside the order passed by NCLT, Allahabad Bench which had allowed the application filed by IRP appointed for JIL’s corporate insolvency resolution process, seeking avoidance of mortgage transactions by JIL as being preferential, undervalued and fraudulent under Sections 43, 45, 66 of the Insolvency and Bankruptcy Code, 2016 (“Code”).
Whether the impugned transactions fall under the scope of preferential transactions under the Code?
Whether the lenders of the holding company of a corporate debtor can be categorised as the financial creditors of corporate debtor?
While deciding the first issue the Bench stated that the provisions of Section 43 of the Code and the following questions shall be examined to find whether a transaction falls within the ambit of Section 43: -
“As to whether such transfer is for the benefit of a creditor or a surety or a guarantor?
As to whether such transfer is for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor?
As to whether such transfer has the effect of putting such creditor or surety or guarantor in a beneficial position than it would have been in the event of distribution of assets being made in accordance with Section 53?
If such transfer had been for the benefit of a related party (other than an employee), as to whether the same was made during the period of two years preceding the insolvency commencement date; and if such transfer had been for the benefit of an unrelated party, as to whether the same was made during the period of one year preceding the insolvency commencement date?
As to whether such transfer is not an excluded transaction in terms of sub-section (3) of Section 43?”
It was held that the relevant time as per Section 43 of the Code is a period of two years preceding the insolvency commencement date, if the preference is given to a related party and a period of one year preceding the insolvency commencement date, if the preference is given to an unrelated party.
The Bench concluded the first issue by answering the above-mentioned questions and finding that “since the impugned transactions have the effect of putting JAL in a beneficial position than it would have been in the event of distribution of assets being made in accordance with Section 53 of the Code. Thus, the corporate debtor JIL has given a preference in the manner laid down in sub-section (2) of Section 43 of the Code.”
While deciding the second issue, the Bench relied on the Swiss Ribbons Private Limited & Anr. v. Union of India & Ors. (2019 SCC OnLine SC 73) and held that 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.
The Bench further held that, if a corporate debtor has given its property in mortgage to secure the debts of a third party, it may fall within the definition of 'debt' under Section 3(10) of the Code as a mortgage debt and cannot partake the character of a 'financial debt' within the meaning of Section 5(8) of the Code.
The Bench concluded that, the lenders of JAL, on the strength of the mortgages, may fall in the category of secured creditors, but such mortgages being neither towards any loan, facility or advance to the corporate debtor nor towards protecting any facility or security of the corporate debtor, it cannot be said that the corporate debtor owes them any 'financial debt'. Thus, lenders of JAL do not fall in the category of the 'financial creditors'.