ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE INFRATECH LIMITED v. AXIS BANK LIMITED ETC. ETC.

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Court: Supreme Court of India
Decided: 26 February 2020
Bench: A. M. KHANWILKAR and DINESH MAHESHWARI
Citation: [2020] 8 S.C.R. 291

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Judgment · Supreme Court of India · decided 26 February 2020 · Bench: A. M. KHANWILKAR and DINESH MAHESHWARI

[2020] 8 S.C.R. 291

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Headnote — Supreme Court Reports (editorial summary, not part of the judgment)

(Civil Appeal Nos. 8512-8527 of 2019 Etc.) B Insolvency and Bankruptcy Code, 2016: Sections 5(7), 5(8), 7, 43, 45 and 66 – Corporate insolvency resolution process against corporate-debtor company – The claim of lenders of the holding Company of corporate-debtor for being recognized as financial creditors of the corporate-debtor on the strength of transactions whereby the corporate-debtor had mortgaged its properties as collateral securities for the loan to the holding company of the corporate-debtor – The claim rejected by Interim Resolution Professional (IRP) – Application by IRP seeking avoidance of the mortgage transactions as being preferential, undervalued and fraudulent u/ss. 43, 45 and 46 – National Company Law Tribunal (NCLT) allowed the application of IRP – Appellate Tribunal (NCLAT) set aside the order of NCLT – Appeal to Supreme E Court –

Held

If a transaction entered into by a corporate-debtor is not falling in either of the exceptions provided in sub-section (3) of s. 43, and satisfies the threefold requirements of sub-sections (2) and (4) thereof, it would be deemed to be a preference during a relevant time, whether or not, it were so and whether or not it were intended or anticipated to be so – The transactions in question were of deemed preference to related party during the look-back period of two years – The transactions also cannot be said to have been done in the ordinary course of business and hence are not excepted transfers in terms of sub-section (3) – Thus, the transactions are hit by s. 43 – The questions as to whether the transactions were undervalued or fraudulent in terms of ss. 45 and 66, are left open – For a debt to become ‘financial debt’, the basic elements are that it ought to be a disbursal against the consideration for time value of money – Therefore, for a person to be designated as ‘financial creditor’ of the corporate-debtor, the corporate-debtor needs to owe H 291

A a financial debt to such person – Thus, a third party to whom the corporate-debtor does not owe a ‘financial debt’ cannot become its ‘financial creditor’ for the purpose of insolvency and liquidation process of corporate persons – In the present case, the mortgage transactions in questions since were neither towards any loan, facility or advance to the corporate-debtor nor towards protecting any facility or security of the corporate-debtor, the lenders of the holding company of the corporate-debtor, may fall in the category of ‘secured creditors’, but not in the category of ‘financial creditors’ within meaning of s. 5(8) – Therefore the claim of the lenders of holding company rightly rejected by IRP. C Interpretation of Statutes: Definition clause – Interpretation of – Where a word is defined to ‘mean’ something, the definition is prima facie restrictive – Where the word defined is declared to ‘include’ something more, the definition is prima facie extensive. D Mortgage - Re-mortgage – Legality of –

Held

There is no concept of re- mortgage – On release by mortgagee, a mortgage ceases to exist – The so-called re-mortgage can only be regarded as fresh mortgage. E Judgment: Observations in a judgment are required to be read in the context in which they appear. Words and Phrases: F Expressions ‘financial debt’ ‘financial creditors’, ‘operational creditor’, ‘secured creditor’ and ‘unsecured creditor’ – Meaning of in the context of Insolvency and Bankruptcy Code, 2016. Allowing the appeals, the Court HELD: 1.1. The Insolvency and Bankruptcy Code, 2016 G came to be enacted to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons and even of partnership firms and individuals in a time bound manner; the objectives, inter alia, being for maximisation of value of assets of such persons and balance of interest of all the stakeholders. [Para 16.1][356-C]

Reporter's headnote (continued) and case details

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ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 293 INFRATECH LTD. v. AXIS BANK LTD.

Swiss Ribbons Private Limited and Anr. v. Union of India A and Ors.: (2019) 4 SCC 17 : [2019] 3 SCR 535 – referred to. 1.2 Though the provisions relating to ‘preferential transactions and relevant time’ (in Section 43 of the Code) occur in Chapter III of Part II, relating to liquidation process, but such provisions being for avoidance of certain transactions and having bearing on the resolution process too, by their very nature, equally operate over the corporate insolvency resolution process (CIRP), and hence, the resolution professional is obligated, by virtue of clause (j) of sub-section (2) of Section 25 of the Code, to file application for avoidance of the stated transactions in accordance with Chapter III. That being the position, Section 43 of the Code comes into full effect in CIRP too. [Para 16.3][358-F-H] 2.¹ The basic concept of ‘preference’ as per the law dictionaries and lexicons is the act of ‘paying or securing to one or more of his creditors, by an insolvent debtor, the whole or part of their claims, to the exclusion of the rest’. Various jurisdictions have defined, described and dealt with ‘preferential transfer’ as being the transaction where an insolvent debtor makes transfer to or for the benefit of a creditor so that such beneficiary would receive more than what it would have otherwise received through the distribution of bankruptcy estate. Section 547 of US Bankruptcy Code provides for the circumstances in which a bankruptcy trustee may, for the benefit of the estate in question, recover a preferential transfer from the transferee. Section 239 of the UK Insolvency Act, 1986 also provides for the same measures for avoidance of preference given to any person at the relevant time. F The time factor also plays a crucial role in such measures of avoidance. This ‘relevant time’ for the purpose of avoidance of preferential transactions is now commonly referred to as the ‘look-back’ period. Significantly, when the preferential transaction is with an unconnected party, the look-back period is G comparatively lesser than that of the transaction with a connected party, who is referred to as ‘insider’ or ‘related party’. [Paras 17.¹ and 17.2][359-B; 360-C-F] Advanced Law Lexicon by P. Ramanatha Aiyar (5th Ed.- Vol 3, p.4002) – referred to. H

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Footnotes

1 SCC 728 : [2007]

11 SCR 475; Nareshbhai v. Union of India (2019) SCC Online SC 1027 – referred to.

E 3.2 If twin conditions specified in sub-section (2) of Section 43 are satisfied, the transaction would be deemed to be of preference. As per clause (a) of sub-section (2) of Section 43, the transaction, of transfer of property or an interest thereof of the corporate debtor, ought to be for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial F debt or operational debt or other liabilities owed by the corporate debtor; and as per clause (b) thereof, such transfer ought to be of the effect of putting such creditor or surety or guarantor in beneficial position than it would have been in the event of distribution of assets under Section 53 of the case. [Para G 18.¹][365-B-C] 3.3 However, merely giving of the preference and putting the beneficiary in a better position is not enough. For a preference to become an offending one for the purpose of Section 43 of the Code, another essential and rather prime requirement is to be H

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 295 INFRATECH LTD. v. AXIS BANK LTD.

satisfied that such event, of giving preference, ought to have happened within and during the specified time, referred to as “relevant time”. The relevant time is reckoned, as per sub- section (4) of Section 43 of the Code, in two ways: (a) if the preference is given to a related party (other than an employee), the relevant time is a period of two years preceding the insolvency commencement date. [Para 18.2][365-D-E] 3.4 However, even if a transaction of transfer otherwise answers to and comes within the scope of sub-sections (4) and (2) of Section 43 of the Code, it may yet remain outside the ambit of sub-section (2) because of the exclusion provided in sub-section (3) of Section 43. Such exclusion is provided to: (a) a transfer made in the ordinary course of business or financial affairs of the corporate debtor or transferee; (b) a transfer creating security interest in a property acquired by the corporate debtor to the extent that such security interest secures new value and was given at the time specified in sub-clause (i) of clause (b) of Section D 43(3) and subject to fulfilment of other requirements of sub-clause (ii) thereof. The meaning of the expression “new value” has also been explained in this provision. [Paras 18.3 and 18.4][365-G; 366-A-C] 3.5 By way of these statutory provisions, legal fictions are created whereby preference is deemed to have been given; and is deemed to have been given at a relevant time, if the stated requirements are satisfied. The word ‘deemed’ in essence, is to deem what may or may not be in reality, thereby requiring the subject-matter to be treated as if real. Applying the principles to the provision in Section 43 of the Code, it could reasonably be concluded that any transaction that answers to the descriptions contained in sub-sections (4) and (2) is presumed to be a preferential transaction at a relevant time, even though it may not be so in reality. In other words, since sub-sections (4) and (2) are deeming provisions, upon existence of the ingredients stated therein, the legal fiction would come into play; and such transaction entered into by a corporate debtor would be regarded as preferential transaction with the attendant consequences as per Section 44 of the Code, irrespective whether the transaction

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A was in fact intended or even anticipated to be so. [Paras 19.2 and 19.3][367-A; 369-G-H; 370-A-C] Pioneer Urban Land and Infrastructure Ltd. & Anr. v. Union of India & Ors.: (2019) 8 SCC 416 : [2019] 10 SCR 381; Hindustan Cooperative Housing Building B Society Limited v. Registrar, Cooperative Societies and Anr. (2009) 14 SCC 302 : [2009] 2 SCR 331 - relied on. 3.6 Thus, if a transaction entered into by a corporate debtor is not falling in either of the exceptions provided by sub-section C (3) and satisfies the three-fold requirements of sub-sections (4) and (2) of Section 43 of the Code, it would be deemed to be a preference during a relevant time, whether or not in fact it were so; and whether or not it were intended or anticipated to be so. [Para 19.5][370-E-F] D 3.7 In order to find as to whether a transaction, of transfer of property or an interest thereof of the corporate debtor, falls squarely within the ambit of Section 43 of the Code, ordinarily, the following questions shall have to be examined in a given case: (I) As to whether such transfer is for the benefit of a creditor or a surety or a guarantor? (ii) As to whether such transfer is for or E on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor? (iii) 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 F Section 53? (iv) 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 G date? (v) As to whether such transfer is not an excluded transaction in terms of sub-section (3) of Section 43? [Para 20][370-F-G; 371-A-D] 3.8 09.08.2017 is the insolvency commencement date in the present case. The transactions in question, even if of putting H

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 297 INFRATECH LTD. v. AXIS BANK LTD.

the concerned properties under mortgage with the lenders, carry the ultimate effect of working towards the benefit and advantage of the borrower i.e., the holding company who obtained loans and finances by virtue of such transactions. It is true that there had not been any creditor-debtor relationship between the lender banks and corporate debtor but that will not be decisive of the question of the ultimate beneficiary of these transactions. The mortgage deeds in question, entered by the corporate debtor to secure the debts of its holding company obviously, amount to creation of security interest to the benefit of the holding company. [Para 22.2.¹][373-D-F] 3.⁹ The corporate debtor owed antecedent financial debts as also operational debts and other liabilities towards the holding company . This puts the holding company in such capacity that it is a related party to the corporate debtor and is a creditor as also its surety. In this scenario there is nothing to doubt that the corporate debtor has given a preference by way of the mortgage transactions in question for the benefit of its related person i.e. its holding company (who has been the creditor as also surety for the corporate debtor) for and on account of antecedent financial debts, operational debts and other liabilities owed to such related person. In the given fact situation, it is plain and clear that the transactions in question meet with all the requirements of clause E (a) of sub-section (2) of Section 43. [Paras 22.2.2 and 22.3][374- A-C] 3.¹⁰ In the given scenario, the requirements of clause (b) of sub-section (2) of Section 43 are also met fair and square. By way of the impugned transfers, the holding company is put in a F much beneficial position than it would have been in the absence of such transfers vis-à-vis other creditors. The applicability of clauses (a) and (b) of sub-section (2) of Section 43 of the Code is clear and complete in relation to the impugned six transactions. [Para 22.4][374-D-E; 375-A] G 4.¹ Even when all the requirements of sub-section (2) of Section 43 of the Code are satisfied, in order to fall within the mischief sought to be remedied by Section 43, the questioned preference ought to have been given at a relevant time i.e. within the period specified in sub-section (4) of Section 43. The extent H

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A of ‘relevant time’ is different with reference to the relationship of the beneficiary with the corporate debtor inasmuch as, for the persons falling within the expression ‘related party’ within the meaning of Section 5 (24) of the Code, such period is of two years before the insolvency commencement date whereas it is one year in relation to the person other than a related party. [Para 23][375D- B F] 4.2. The scheme of the Code is to disapprove and disregard such preferential transaction which falls within the ambit of Section 43 and to ensure that any property likely to have been lost due to such transaction is brought back to the corporate debtor; and if any encumbrance is created, to remove such encumbrance so as to bring the corporate debtor back on its wheels or in other event (of liquidation), to ensure pro rata, equitable and just distribution of its assets. The provisions contained in Section 43, however, indicate the intention of legislature that when a preference is given at a relevant time and thereby, the beneficiary of preference acquires unwarranted better position in the event of distribution of assets, the same may not be countenanced. Looking to the scheme of the Code and the principles applicable for the conduct of the affairs of a corporate person, it cannot be said that anything of a new liability has been imposed or a new right has been created. E Maximisation of value of assets of corporate persons and balancing the interests of all the stakeholders being the objectives of the Code, the provisions therein need to be given fuller effect in conformity with the intention of the legislature. [Para 23.¹.¹][376-F-G; 377-C-E] F Purbanchal Cables & Conductors Pvt. Ltd. & Ors v. Assam State Electricity Board & Ors. (2012) 7 SCC 462 : [2012] 6 SCR 905 — distinguished. 4.3 By virtue of proviso to sub-section (3) of Section 1 of the Code, different dates can be provided for enforcement of different provisions of the Code; and in fact, different provisions have been brought into effect on different dates. However, after coming into force of the provisions, if a look-back period is provided for the purpose of any particular enquiry, it cannot be said that the operation of the provision itself would remain in hibernation until such look-back period from the date of

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 299 INFRATECH LTD. v. AXIS BANK LTD.

Footnotes

74 Comp Case

89 (Bom) – distinguished.

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A 5.¹ In the scheme of provisions contained in s. 43 of the Code, the underlying concept is to disregard and practically annul such transactions which appear, in the course of insolvency resolution or liquidation, to be preferential so as to minimise the potential loss to other stakeholders in the affairs of the corporate debtor, particularly its creditors. What is to be examined for the purpose of Section 43 is the conduct and affairs of the corporate debtor. If the beneficiary of the transaction in question is a related party of the corporate debtor, the period of enquiry is enlarged to two years whereas this period is one year in other cases. During such scanning, by virtue of sub-section (3) of Section 43, two types of transfers are kept out of the purview of sub-section (2), which would not be treated as preference. [Para 25.2][382-C-E] 5.2 The whole of conspectus of sub-section (3) is that only if any transfer is found to have been made by the corporate debtor, either in the ordinary course of its business or financial affairs or in the process of acquiring any enhancement in its value or worth, that might be considered as having been done without any tinge of favour to any person in preference to others and thus, might stand excluded from the purview of being preferential, subject to fulfilment of other requirements of sub-section (3) of Section 43. [Para 25.2.2][383-C-D] E 5.3 If the transfer is examined with reference to the ordinary course of business or financial affairs of the transferee alone, it may conveniently get excluded from the rigour of sub-section (2) of Section 43, even if not standing within the scope of ordinary course of business or financial affairs of the corporate debtor. F Such had never been the scheme of the Code nor the intent of Section 43 thereof. For the purpose of exception under clause (a) of sub-section (3) of Section 43, the intent of legislature is required to be kept in view. If the ordinary course of business or financial affairs of the transferee (lenders of the holding company G in the present case) would itself be decisive for exclusion, almost every transfer made to the transferees like the lender-banks/ financial institutions would be taken out of the net, which would practically result in frustrating the provision itself. [Para 25.3][383-D-F]

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 301 INFRATECH LTD. v. AXIS BANK LTD.

5.4 It remains trite that an interpretation that defeats the scheme, intent and object of the statutory provision is to be eschewed and for that matter, if necessary, by applying the principles of purposive interpretation rather than literal. Well known cannons of construction of statutes permit the Court to read the word “or” as “and” after looking at the clear intention of the legislature. The contents of clause (a) of sub-section (3) of Section 43 call for purposive interpretation so as to ensure that the provision operates in sync with the intention of legislature and achieves the avowed objectives. Therefore, the expression “or”, appearing as disjunctive between the expressions “corporate debtor” and “transferee”, ought to be read as “and”; C so as to be conjunctive of the two expressions i.e., “corporate debtor” and “transferee”. Thus read, clause (a) of sub-section (3) of Section 43 shall mean that, for the purposes of sub-section (2), a preference shall not include the transfer made in the ordinary course of the business or financial affairs of the corporate debtor D and the transferee. Only by way of such reading of “or” as “and”, it could be ensured that the principal focus of the enquiry on dealings and affairs of the corporate debtor is not distracted and remains on its trajectory, so as to reach to the final answer of the core question as to whether corporate debtor has done anything which falls foul of its corporate responsibilities. [Paras 25.4 and E 25.5][383-G-H; 384-A; 384-D-G] State of Bombay v. R.M.D. Chamarbaugwala and Anr. [1957] SCR 874 – followed. Mazagaon Dock Ltd v. Commissioner of Income-Tax and Excess Profits Tax [1959] SCR 848 – relied on. F

5.5 Even when furnishing a security may be one of normal business practices, it would become a part of ‘ordinary course of business’ of a particular corporate entity only if it falls in place as part of ‘the undistinguished common flow of business done’; and is not arising out of ‘any special or particular situation’. An activity G could be regarded as ‘business’ if there is a course of dealings,which are either actually continued or contemplated to be continued with a profit motive. [Paras 25.6.¹ and 25.6.2][385-B- C; 386-A-B] H

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A State of Andhra Pradesh v. H. Abdul Bakshi and Bros. 1964 STC 644; Downs Distributing Co Pty Ltd v. Associated Blue Star Stores Pty Ltd (in liq) (1948) 76 CLR 463; Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd. (2018) 2 SCC 674: [2017] 13 SCR 751 – referred to. B 5.6 Though it can be assumed that the transactions in question were entered in the ordinary course of business of bankers and financial institutions like the present respondents but on the given set of facts, there is no doubt that the impugned transactions do not fall within the ordinary course of business of the corporate debtor. The corporate debtor had been promoted as a special purpose vehicle by its holding company. It is difficult to even surmise that the business of the corporate debtor, of ensuring execution of the works assigned to its holding company and for execution of housing/building projects, in its ordinary course, had inflated itself to the extent of routinely mortgaging its assets and/or inventories to secure the debts of its holding company. It had also not been the ordinary course of financial affairs of the corporate debtor that it would create encumbrances over its properties to secure the debts of its holding company. The ordinary course of business or financial affairs of the corporate debtor cannot be taken to be that of providing mortgages to secure the loans and facilities obtained by its holding company; and that too at the cost of its own financial health. [Para 25.6.2][386-B-E] 5.7 The impugned transactions had not been in the ordinary course of business or financial affairs of the corporate debtor. The impugned transactions are not of excepted transfers in terms of sub-section (3) of Section 43 of the Code. [Paras 25.7 and 25.8][387-B-C] Keshavlal Khemchand & Sons Pvt. Ltd. & Ors v. Union G of India & Ors: (2015) 4 SCC 770 : [2015] 2 SCR 51; State Bank of India v. Jah Developers Pvt. Ltd. & Ors.: (2019) 6 SCC 787 : [2019] 7 SCR 701 – held inapplicable.

6. In the ordinary course of business, when the bankers or financial institutions examine any proposal for loan or advance or

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 303 INFRATECH LTD. v. AXIS BANK LTD.

akin facility, they are supposed to, and they indeed, take up the exercise commonly termed as ‘due diligence’ so as to study the viability of the proposed enterprise as also to ensure, inter alia, that the security against such loan/advance/facility is genuine and adequate; and would be available for enforcement at any point of time. Given the nature of transaction, the lenders must prefer a B clean security to justify the transaction as being in the ordinary course of their business. In the same exercise, in the ordinary course of their business, if they are at all entering into a transaction whereby a third party security, including that of a subsidiary company, is to be taken as collateral, they are obliged to undertake further due diligence so as to ensure that such third party security is a prudent and viable one and is not likely to be hit by any law. In that sequence, they remain under obligation to assure themselves that such third party whose security is being taken, is not already indebted or in red and is not likely to fail in dealing with its own indebtedness. In the context of the Code, such requirement is moreover imperative on a bare look at the provisions contained in Part II thereof. On the facts of the present case that in fact, several of the respondent lenders are shown to be the direct creditors of the corporate debtor too, to the extent of the advances made to the corporate debtor, they and the co- respondents cannot plead ignorance about the actual state of affairs and financial position of the corporate debtor. Despite such knowledge, if they chose to take the business risk of accepting security from the corporate debtor and that too, for securing the loans/advances/facilities made over to the holding company, who was a directly related party for being its holding company, they themselves remain responsible for present legal consequences. [Para 26.¹][387-E-F; 388-A-D] Advanced Law Lexicon by P. Ramanatha Aiyar – referred to.

7. The transactions in question are hit by Section 43 of the G Code and the Adjudicating Authority, having rightly held so, had been justified in issuing necessary directions in terms of Section 44 of the Code in relation to the transactions concerning Property Nos. 1 to 6. NCLAT, had not been right in interfering with the well-considered and justified order passed by NCLT in this regard. [Para 27][388-E] H

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A 8. Having approved the order passed by NCLT as regards the aspect of the transactions being preferential, the Court does not consider it necessary to deal with the questions as to whether the transactions are undervalued and/or fraudulent too. In the totality of circumstances, the said questions are left at that only, while also leaving all the related questions of law open; to be B examined in an appropriate case. [Para 29][391-A-C]

9. In the present case, the IRP moved one composite application purportedly under Sections 43, 45 and 66 of the Code while alleging that the transactions in question were preferential as also undervalued and fraudulent. In the scheme of the Code, C the parameters and the requisite enquiries as also the consequences in relation to these aspects are different and such difference is explicit in the related provisions. The arena and scope of the requisite enquiries, to find if the transaction is undervalued or is intended to defraud the creditors or had been of wrongful/fraudulent trading are entirely different. Specific material facts are required to be pleaded if a transaction is sought to be brought under the mischief sought to be remedied by Sections 45/46/47 or Section 66 of the Code. The scope of enquiry in relation to the questions as to whether a transaction is of giving preference at a relevant time, is entirely different. Hence, it would be expected of any resolution professional to keep such requirements in view while making a motion to the Adjudicating Authority. It would also have been appropriate for NCLT to deal with all these aspects separately and distinctively, rather than giving a combined findings on all these three aspects that the impugned transactions were preferential, undervalued and fraudulent. [Para 29.¹, 29.2][391-C-D; G-H; 392-A-C] 10.¹ In the Code, the significant expressions “financial creditor” and “financial debt” have been defined with the words “means” and “includes”. The law remains settled that where a G word is defined to ‘mean’ something, the definition is prime facie restrictive and exhaustive. On the other hand, where the word defined is declared to ‘include’ something more, the definition is prima facie extensive. However, a little difficulty arises when the

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 305 INFRATECH LTD. v. AXIS BANK LTD.

definition contains both the words ‘means’ and ‘includes’. A [Para 42][422-H; 423-A-B] P. Kasilingam & Ors. v. P.S.G. College of Technology & Ors. (1995) Suppl. 2 SCC 348 : [1995] 2 SCR 1061; Krishi Utapadan Mandi Samiti & Anr v. M/s Shankar Industries & Ors. (1993) Suppl. 3 SCC 361 : [1993] 1 B SCR 1037; Delhi Development Authority v. Bhola Nath Sharma (Dead) by LRs & Ors. (2011) 2 SCC 54; Black Diamond Beverages & Anr. v. Commercial Tax Office, Central Section, Assessment Wing, Calcutta & Ors. (1998) 1 SCC 458 : [1997] 4 Suppl. SCR 133 – referred to.

10.2 For a debt to become ‘financial debt’ for the purpose of Part II of the Code, the basic elements are that it ought to be a disbursal against the consideration for 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 existence of a debt, which is disbursed against the consideration for the time value of money 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. The essential element of disbursal, and that too against the consideration for time value of money, needs to be found in the genesis of any debt before it may be treated as H

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A ‘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. [Para 43][427-E-H; 428-A-C] B 10.3 The root requirement for a creditor to become financial creditor for the purpose of Part II of the Code, there must be a financial debt which is owed to that person. He may be the principal creditor to whom the financial debt is owed or he may be an assignee in terms of extended meaning of this definition but, and nevertheless, the requirement of existence of a debt being owed is not forsaken. [Para 44][428-D] 10.4 Therefore, for a person to be designated as a financial creditor of the corporate debtor, it has to be shown that the corporate debtor owes a financial debt to such person. Understood this way, it becomes clear that a third party to whom the corporate debtor does not owe a financial debt cannot become its financial creditor for the purpose of Part II of the Code. [Para 45][428-E- F] 10.5 The peculiar elements of the expressions “financial creditor” and “financial debt”, as occurring in Sections 5(7) and E 5(8), when visualised and compared with the generic expressions “creditor” and “debt” respectively, as occurring in Sections 3(10) and 3(11) of the Code, the scheme of things envisaged by the Code becomes clearer. The generic term “creditor” is defined to mean any person to whom the debt is owed and then, it has F also been made clear that it includes a ‘financial creditor’, a ‘secured creditor’, an ‘unsecured creditor’, an ‘operational creditor’, and a ‘decree-holder’. Similarly, a “debt” means a liability or obligation in respect of a claim which is due from any person and this expression has also been given an extended meaning to include a ‘financial debt’ and an ‘operational debt’. G [Para 46][428-F-H; 429-A] 10.6 The use of the expression “means and includes” in these clauses makes it clear that for a person to become a creditor, there has to be a debt i.e., a liability or obligation in respect of a claim which may be due from any person. A “secured creditor” H

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 307 INFRATECH LTD. v. AXIS BANK LTD.

in terms of Section 3(30) means a creditor in whose favour a A security interest is created; and “security interest”, in terms of Section 3(31), means a right, title or interest or claim of property created in favour of or provided for a secured creditor by a transaction which secures payment for the purpose of an obligation and it includes, amongst others, a mortgage. Thus, B any mortgage created in favour of a creditor leads to a security interest being created and thereby, the creditor becomes a secured creditor. [Para 46.¹][429-A-C] 10.7 However, when all the defining clauses are read together and harmoniously, it is clear that the legislature has maintained a distinction amongst the expressions ‘financial creditor’, ‘operational creditor’, ‘secured creditor’ and ‘unsecured creditor’. Every secured creditor would be a creditor; and every financial creditor would also be a creditor but every secured creditor may not be a financial creditor. The expressions “financial debt” and “financial creditor”, having their specific and distinct connotations and roles in insolvency and liquidation process of corporate persons, have only been defined in Part II whereas the expressions “secured creditor” and “security interest” are defined in Part I. [Para 46.¹][429-C-E] 10.8 In the scheme of the IBC, what is intended by the expression ‘financial creditor’ is a person who has direct engagement in the functioning of the corporate debtor; who is involved right from the beginning while assessing the viability of the corporate debtor; who would engage in restructuring of the loan as well as in reorganisation of the corporate debtor’s business when there is financial stress. In other words, 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. In the context of insolvency resolution process, this class of stakeholders namely, financial creditors, is entrusted by the legislature with such a role that it would look forward to ensure that the corporate debtor is rejuvenated and gets back to its wheels with reasonable capacity of repaying its debts and to attend on its other obligations. Protection of the rights of all other stakeholders, including other H

p. 308

A creditors, would obviously be concomitant of such resurgence of the corporate debtor. [Para 47][429-F-H; 430-A] 10.⁹ Keeping the objectives of the Code in view, the position and role of a person having only security interest over the assets of the corporate debtor could easily be contrasted with the role of a financial creditor because the former shall have only the interest of realising the value of its security (there being no other stakes involved and least any stake in the corporate debtor’s growth or equitable liquidation) while the latter would, apart from looking at safeguards of its own interests, would also and simultaneously be interested in rejuvenation, revival and growth of the corporate debtor. Thus understood, it is clear that if the former i.e., a person having only security interest over the assets of the corporate debtor is also included as a financial creditor and thereby allowed to have 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 the Code, particularly of the provisions aimed at corporate insolvency resolution. [Para 47.¹][430-B-D] 10.¹⁰ Therefore, a person having only security interest over the assets of corporate debtor (like the instant third party securities), even if falling within the description of ‘secured creditor’ by virtue of collateral security extended by the corporate debtor, would nevertheless stand outside the sect of ‘financial creditors’ as per the definitions contained in sub-sections (7) and (8) of Section 5 of the Code. Differently put, if a corporate debtor has given its property in mortgage to secure the debts of a third party, it may lead to a mortgage debt and, therefore, it may fall within the definition of ‘debt’ under Section 3(10) of the Code. However, it would remain a debt alone and cannot partake the character of a ‘financial debt’ within the meaning of Section 5(8) of the Code. [Para 47.2][430-E-G] G 10.¹¹ Indisputably, the debts in question are in the form of third party security; said to have been given by the corporate debtor so as to secure the loans/advances/facilities obtained by its holding company from the respondent-lenders. Such a ‘debt’ is not and cannot be a ‘financial debt’ within the meaning of Section H

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 309 INFRATECH LTD. v. AXIS BANK LTD.

5(8) of the Code; and hence, the respondent-lenders, the mortgagees, are not the ‘financial creditors’ of the corporate debtor. [Para 48][430-G-H; 431-A] 10.¹² The lenders of the holding company of the corporate debtor, on the strength of the mortgages in question, 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’ within the meaning of Section 5(8) of the Code; and hence, such lenders do not fall in the category of the ‘financial creditors’ of the corporate debtor. [Para 54][441- C C-D] Swiss Ribbons Private Limited and Anr. v. Union of India and Ors.: (2019) 4 SCC 17 : [2019] 3 SCR 535; Committee of Creditors of Essar Steel India Limited through Authorised Signatory v. Satish Kumar Gupta D (2019) SCC OnLine SC 1478 – distinguished. Rajkumari Kaushalya Devi v. Bawa Pritam Singh & Anr. AIR 1960 SC 1030 : [1960] SCR 570 – held inapplicable. E Order dated 13.03.2019 in M.A. No. 1584/2019 in CP No. 402 of 2018 as passed by NCLT (Mumbai Bench) in the case of SREI Infrastructure Finance Limited v. Sterling International Enterprises Ltd – disapproved. Dr. B.V.S. Lakshmi v. Geometrix Laser Solutions (P) Ltd. F Company Appeal (AT) (Insolvency) No. 38 of 2017; Ramchand Sur v. Ishwar Chandra Giri 61 Ind Cases 539; Prithvi Nath Singh & Ors. v. Suraj Ahir & Ors. [1963] 3 SCR 302; State Bank of India v. Samneel Engineering Co. & Ors. 1995 (35) DRJ 485; Dassappa & Ors v. Jogaiah & Ors. (1964) ILR 545; Manik Chand G Raut v. Baldeo Chaudhary & Ors. (1949) SCC Online Pat 64; State Bank of India v. Smt. Kusum Vallabhdas Thakkar (1991) SCC Online GUJ 14; Nikhil Mehta and Sons (HUF) v. AMR Infrastructure Limited (2017) SCC Online NCLAT 859; Pomal Khanji Govindji & H

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A Ors. v. Brajlal Karsandas Purohit & Ors. (1989) 1 SCC 458 : [1988] 3 Suppl. SCR 826; K. Sashidhar v. Indian Overseas Bank and Ors. (2019) SCC OnLine SC 257; Bikram Chatterjee v. Union of India (2019) 8 SCC 527; Haryana Financial Corporation and Anr. v. Jagdamba Oil Mills and Anr. (2002) 3 SCC 496 : [2002] 1 SCR B 621 – referred to. Report of Banking Law Reform Committee; Craise on Statue Law (Seventh Ed.—Indian reprint 1999 page 213; Bankruptcy Law Reforms Committee (February 2015) – referred to. C Case Law Reference [2017] 13 SCR 751 referred to Para 14.3 [2019] 3 SCR 535 referred to Para 16.¹

D [2007] 11 SCR 475 referred to Para 18 [2019] 10 SCR 381 relied on Para 19.2 [2009] 2 SCR 331 relied on Para 19.2.2 [2012] 6 SCR 905 distinguished Para 23.¹.¹ E [1957] SCR 874 followed Para 25.4 [1959] SCR 848 relied on Para 25.4 [2015] 2 SCR 51 held inapplicable Para 25.7 [2019] 7 SCR 701 held inapplicable Para 25.7 F (1963) 3 SCR 302 referred to Para 37.¹ [1988] 3 Suppl. SCR 826 referred to Para 37.3 (2019) 8 SCC 527 referred to Para 41.¹ [1995] 2 SCR 1061 referred to Para 41.¹.2 G [1993] 1 SCR 1037 referred to Para 41.¹.2 [2002] 1 SCR 621 referred to Para 41.¹.5 (2011) 2 SCC 54 referred to Para 42.2

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 311 INFRATECH LTD. v. AXIS BANK LTD.

[1997] 4 Suppl. SCR 133 referred to Para 42.3 A [2019] 3 SCR 535 distinguished Para 50.5 [1960] SCR 570 held inapplicable Para 52 CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 8512- 8527 of 2019. B From the Judgment and Order dated 01.08.2019 of the National Company Law Appellate Tribunal, New Delhi in Company Appeal (AT) (Ins) Nos. 243, 244, 245, 249, 276, 343, 370, 374, 376, 411, 424, 436, 458, 492, 511 & 524 of 2018. With C Civil Appeal Nos. 6777-6797 and 9357-9377 of 2019. Ms. Maninder Acharya, ASG, V. Giri, Jaideep Gupta, Ritin Rai, C.U. Singh, Shyam Divan, Amit Sibal, Siddharth Bhatnagar, Anupam Lal Das, Sr. Advs., Sanjay Bhatt, Ms. Niharika Sharma, Ms. Svadha, D Rabin Majumdar, Amit Kumar Mishra, Aditya Shankar, Shashank Manish, Gaurav Priyadarshi, Ms. Smriti Shah, Ms. Twinkle Kataria, Ms. Nidhi Sahay, Ms. Anindita Mitra, Ms. Gunjan Mathur, Mridul Godha, Shivam Pandey, Sidhartha Barua, Adity Gupta, Sharan Thakur, Praful Jindal, Viplav Acharya, Aishwarya Kaushique, Harshul Choudhary, Ms. Ikshita Singh, Ms. Jasmine Damkewala, Ms. Anindita Roy Chowdhary, Abhijnan E Jha, Shivam, Abhishek Singh, Bharat Makkar,. Anannya Ghosh, Ms. Misha, Shantanu Chaturvedi, Nikhil Mathur, Shardul. S. Shroff, Ms. Jasveen Kaur, Tushar Singh, Parag Maini, Abhimanyu Chopra, Saksham Dhingra, Ms. Pankhuri, Parthasarathy, Varun Singh, Ms. Archana Singh, Arjun Raghuvanshi, Aditya Sidhra, Sumeet Sharma, F Daksh Pandit (for Vishal Gupta), Divyanshu Goyal, Ms. Swati Jain, Vijay Kumar, Ram Naresh Yadav, Mohit K. Singh, Rajiv S. Roy, Ms. Avrojyoti Chatterjee, Abhijit S. Roy, Ms. Jayshree Saha, Udayan Agarwal, R. Sanmay Rath, Rajesh Kumar-I, Anant Gautam, Ms. Sakshi Gaur, Ms. Khushboo Aggarwal, Sorabh Dahiya, Vibhu Sharma, Anmol Mehta, Umesh Kr. Khaitan, Jatin Julka, Arsalan Syed, Prateek Khaitan, G Jaswinder Singh, Ms. Niraj Jha, Ms. Pratima Singh, Vinod Sharma, Advs. for the appearing parties.

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A CIVIL APPEAL NOS. 8512-8527 OF 2019 and connected cases INDEX OF JUDGMENT*

Sl. No. Contents Page

B 1. Introductory 1-3

2. Brief Outli ne and the Issues Involved 3-5

3. Parties and their respective roles and interest in 6-7 the matter C

4. The transactions in question 8-11

5. The relevant factual and background aspects 11-18

6. The Application by Interi m Resolution 18-24 Professional and the order passed by NCLT D

7. Appeals before NCLAT: the impugned order 24-29

8. The relevant provisions 29-37

WHETHER THE TRANSACTIONS IN QUESTION ARE E PREFERENTIAL:

9. B road features of rival contentions and 38-54 su bmissi ons

10. In solvency a nd B ank ru ptcy Code, 2016: historical 54-58 backgro und, objects , scheme and s tructure of the relevant pa rts

F 11. Preferential transaction at a relevant time: concept 58-64 a nd connotati ons

12. Analys ing Section 43 of the Code 64-74

13. Whether impug ned transactions are preferential, 74-80 falling withi n the ambit of sub-section (2) of Section 43 IB C

G 14. Th e requi rements o f sub-s ection (4) of S ection 43 80-89 IB C - related party an d look-ba ck period

15. O rdinary course of business or financial affairs 90-98

16. Th e concern expres sed by lenders of JAL is 99-100 legally untenable

H *The Index is as per the Original Judgment.

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 313 INFRATECH LTD. v. AXIS BANK LTD.

17. Summation: The transactions in question are hit 100 A by Section 43 IBC

18. Search and commandeering of preference at a 101-104 relevant time B

19. Other aspects of the application made by IRP – 104-107 allegations of transactions being undervalued and fraudulent

C WHETHER LENDERS OF JAL COULD BE CATEGORISED AS FINANCIAL CREDITORS OF JIL

20. Preliminary and background 107-109

21. Reasoning and Findings of NCLT 110-114 D

22. Rival submissions 114-130

23. Unique position of financial creditor- as 130-134 explained in Swiss Ribbons E

24. Financial debt - ratio of Pioneer Urban 134-147

25. The expressions “means and includes” in the 147-152 definition clauses - effect

26. The essentials for financial debt and financial 152-158 creditor F

27. The respondent mortgagees are not the 158-171 financial creditors of corporate debtor JIL

28. Summation on second issue 171

29. Conclusion 171-172 G

Acknowledgment 172

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Judgment

A The Judgment of the Court was delivered by DINESH MAHESHWARI, J. Introductory

11. These appeals are essentially directed against the common order B dated 01.08.2019 as passed by the National Company Law Appellate Tribunal, New Delhi¹ in a batch of appeals preferred by various banks and financial institutions whereby, the Appellate Tribunal set aside the order dated 16.05.2018, passed by the Adjudicating Authority, the National Company Law Tribunal, Allahabad Bench2 on the application moved by the Interim Resolution Professional3 in the Corporate Insolvency C Resolution Process4 concerning the Corporate Debtor Company viz., Jaypee Infratech Limited5 seeking avoidance of certain transactions, whereby the corporate debtor had mortgaged its properties as collateral securities for the loans and advances made by the lender banks and financial institutions to Jaiprakash Associates Limited6, the holding company of JIL, as being preferential, undervalued and fraudulent, in terms of Sections 43, 45 and 66 of the Insolvency and Bankruptcy Code, 20167. 1.¹. It may be noticed at the outset that the batch of appeals decided by the impugned common order dated 01.08.2019 also comprised of two appeals filed by the lenders of JAL, being Comp. App (AT) (Ins) No. 353 of 2018 and Comp. App (AT) (Ins) No. 301 of 2018 that were preferred against the orders passed by NCLT on 09.05.2018 and 15.05.2018 respectively, whereby NCLT approved the decision of IRP rejecting the claims of such lenders of JAL to be recognized as financial creditors of the corporate debtor JIL on the strength of the mortgage created by the corporate debtor, as collateral security of the debt of its holding company JAL. These two appeals also came to be allowed as per the result recorded in the impugned order dated 01.08.2019, though the entire discussion and the final conclusion therein had only been in relation to the order dated 16.05.2018 that was passed by NCLT on the G 1 Hereinafter also referred to as ‘the Appellate Tribunal’ or ‘NCLAT’ 2 Hereinafter also referred to as ‘the Tribunal’ or ‘NCLT’ or ‘the Adjudicating Authority’. 3 ‘IRP’ for short.

4 ‘CIRP’ for short.

5 ‘JIL’ for short; also referred to as ‘the corporate debtor’.

6 ‘JAL’ for short.

7 Hereinafter also referred to as ‘the Code’ or ‘IBC’. H

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 315 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

application for avoidance filed by IRP. The appellant of Civil Appeal D. A No. 32881 of 20198, IIFCL, apart from raising other contentions, has also questioned this aspect of the order impugned that the aforesaid two appeals, involving the question as to whether the lenders of JAL could be categorised as financial creditors of JIL for the purpose of IBC, have been allowed by NCLAT without recording any findings and without any discussion in that regard. Brief Outline and the Issues Involved

22. Before proceeding further, we may draw up a brief outline of the subject-matter and the issues involved in these appeals. 2.¹. As shall be noticed hereafter later, the CIRP concerning the corporate debtor JIL has already undergone several rounds and circles of proceedings in NCLT, NCLAT and at least twice over in this Court. 2.2. For what has been indicated in the introduction, it is evident that two major issues would arise in these appeals. One, as to whether the transactions in question deserve to be avoided as being preferential, undervalued and fraudulent, in terms of Sections 43, 45 and 66 of the Code; and second, as to whether the respondents (lender of JAL) could be recognized as financial creditors of the corporate debtor JIL on the strength of the mortgage created by the corporate debtor, as collateral security of the debt of its holding company JAL. E 2.3. For a preliminary insight into the first issue, suffice would be to notice that during CIRP, the Interim Resolution Professional preferred an application before the Adjudicating Authority seeking orders for avoidance of the impugned transactions, whereby several parcels of land were put under mortgage with the lenders of JAL, the holding company of JIL. The contention of IRP, that the transactions in question were preferential, undervalued and fraudulent within the meaning of Sections 43, 45 and 66 of the Code, were accepted in part by the Adjudicating Authority, the NCLT, in its order dated 16.05.2018 and necessary directions were issued for avoidance of at least six of such transactions. In other words, in relation to such six transactions, the security interest was ordered to be discharged and the properties involved therein were vested in the corporate debtor, with release of encumbrances. The NCLAT, however, took an entirely opposite view of the matter and upturned the order so passed by NCLT, while holding 8 Now numbered as Civil Appeal Nos. 009357-77 of 2019 H

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A that the transactions in question do not fall within the mischief of being preferential or undervalued or fraudulent; and that the lenders in question (the lenders of JAL) were entitled to exercise their rights under the Code. Aggrieved, the IRP, one of the creditors of the corporate debtor JIL and the associations of home buyers, who have invested in the proposed projects of JIL and JAL, have preferred these appeals. B 2.4. As regards the second issue, noticeable it is that during CIRP, two of the respondent banks namely, ICICI Bank Limited and Axis Bank Limited, sought inclusion in the category of financial creditors of JIL but IRP did not agree and declined to recognize them as such. Being aggrieved by the decisions so taken by IRP, the said banks preferred separate applications under Section 60(5) of the Code before NCLT while asserting their claim to be recognized as financial creditors of the corporate debtor JIL, on account of the securities provided by JIL for the facilities granted to JAL. The NCLT rejected the applications so filed by the said banks, by way of its orders dated 09.05.2018 and 15.05.2018 respectively, while concluding that on the strength of the mortgage created by the corporate debtor JIL, as collateral security of the debt of its holding company JAL, the lenders of JAL could not be categorised as financial creditors of JIL for the purpose of the Code. As already noticed, the appeals against the said orders dated 09.05.2018 and 15.05.2018 are purportedly allowed as per the result recorded in the impugned order dated 01.08.2019, but without any discussion in that regard. Aggrieved, one of the lenders of the corporate debtor JIL, IIFCL (appellant of Civil Appeal D. No. 32881 of 2019) has also questioned this aspect of the order impugned while asserting that such mortgagees cannot be taken as financial creditors of the corporate debtor JIL. F Parties and their respective roles and interest in the matter

33. In view of the issues arising for determination in these appeals, with several parties carrying different roles, status and interests, worthwhile it would be to narrate at the outset, in brief, the relevant particulars of the key parties involved as follows: G 3.¹. Jaypee Infratech Limited (JIL): It is the corporate debtor company in whose relation CIRP is pending; and the mortgage transactions concerning its properties were questioned in the application filed by the Interim Resolution Professional. Such transactions form the subject-matter of these appeals. H

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 317 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

3.2. Jaiprakash Associates Limited (JAL): A It is the holding company of JIL; it had approximately 71.64% equity shareholding in JIL as on 31.03.2017. The impugned mortgage transactions were entered into in favour of its lenders. 3.3. Shri Anuj Jain: B He is the Interim Resolution Professional in CIRP concerning JIL who moved the application for avoidance of the transactions in question. He is the appellant in Civil Appeal Nos. 8512-27 of 2019. 3.4. Jaypee Greens Krescent Home Buyers Welfare Association; Jaypee Kasa Isles Welfare Association; Jaypee Kensington Boulevard C Apartments Welfare Association; Garden Isle Welfare Association; Jaypee Klassic Apartment Welfare Association; Jaypee Kube Buyers Welfare Association; Wish Town Property Owners Welfare Society; KRH Buyers Association ABL Workplace: They are the associations of home buyers who have invested in D the projects of JIL and JAL. They are the appellants in Civil Appeal Nos. 6777-97 of 2019; and they also support the assertion of IRP that the transactions in question cannot be countenanced. 3.5 India Infrastructure Finance Company Limited: It is the financial creditor of the corporate debtor JIL and has filed E Civil Appeal in Diary No. 32881 of 2019 while asserting that the transactions in question need to be avoided; and that the lenders of JAL related with such transactions cannot be the financial creditors of JIL for the purpose of CIRP in question. 3.6 Axis Bank Limited; Standard Chartered Bank Limited; ICICI F Bank Limited; State Bank of India; United Bank of India; UCO Bank; The Karur Vyasa Bank (P) Limited; L&T Infrastructure Finance Company Limited; Central Bank of India; Canara Bank; Karnataka Bank Limited; IFCI Limited; Allahabad Bank; Jammu & Kashmir Bank; South Indian Bank Limited; Bank of Maharashtra and other banks and financial G institutions: They are the lenders of JAL in whose favour the properties of JIL were put under mortgage by way of the impugned transactions. They oppose the assertions of appellants while maintaining that the transactions in question are not avoidable and are valid, investing them H

p. 318

A with the capacity of financial creditors of JIL. They are the principal contesting respondents in these appeals. The transactions in question

44. Having taken note of the principal contesting parties and their respective interests, it would also be worthwhile to take note of the relevant particulars of the properties and the transactions involved in this dispute. It may be usefully noticed that out of seven transactions that were questioned by IRP, the Adjudicating Authority held that six of them were preferential, undervalued and fraudulent and passed the orders for their avoidance while accepting the contentions of IRP. It may also be observed that five out of these six transactions were preceded by previous mortgage transactions for securing the loans/facilities to JAL. The transactions in question, with previous transactions and flow thereof, as given out during the course of submissions, could be comprehensively viewed as under: - D 4.¹. The transactions in favour of the Consortium of Banks and Financial Institutions: Prope rty/transaction in Previous transaction/s and flow question thereof Mortgage deed dated 29.¹².2016 for Initial mortgage deed dated 167.229 acres of land situated at 24.02.2015 released on 15.⁹.2015 E Village Chhalesar and Chaugan, and re-mortgaged on 15.⁹.2015 Tehsil Etmadpur, District Agra, (changing facility amount from Rs. Uttar Pradesh executed by JIL in 3250 crores (appx.) to Rs. 24109 favour of Axis Trustee Services Ltd. crores); thereafter released on to provide an additiona l security for 29.¹².2016 and again re-mortgaged term loans of Rs. 21081.5 crores on 29.¹².2016 (changing facility sanctioned as a consortium to JAL.⁹ amount from Rs. 24109 crores to Rs. F 23491 crores). Mortgage deed dated 29.¹².2016 for Initial mortgage deed dated 167.9615 acres of land situated at 24.02.2015 released on 15.⁹.2015 Village Tappal, Kansera and and re-mortgaged on 15.⁹.2015 Jahangarh, Tehsil Kha ir, District (changing facility amount from Rs. Aligarh, Uttar Pradesh executed by 3250 crores (appx.) to Rs. 24109 G JIL in favour of Axis Trustee crores); thereafter released on Services Ltd. to provide as an 29.¹².2016 and again re-mortgaged additional security for term loans of on 29.¹².2016 (changing facility Rs.21081.5 crores sanctioned by the amount from Rs. 24109 crores to Rs. consortium to JAL.¹⁰ 23491 crores).

Footnotes

9 Hereinafter also referred to as ‘Property No. 1’

10 H Hereinafter also referred to as ‘Property No. 2’

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 319 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

4.2. The exclusive mortgage transactions in favour of ICICI Bank A Limited: Property/transaction in Previous trans action/s and flow question thereof Mortgage deed dated 07.03.2017 Initia l mortgage deed dated for 158.1739 acres situated at 12.05.2014 for 433.35 acres of B Village Jaganpur and land, followed by release of land Aurangpur, Uttar Pradesh, admeasuring 240 acres vide executed by JIL in favour of release deed dated 30.¹².2015 IDBI Trustee-ship Services along w ith re lease of land Limited in the capacity of admeasuring 35.03 acres vide security trustee for term loan of release deed dated 24.06.2016. Rs.1200 crores granted by ICICI Further release of 158.1739 acres Bank Limited to JAL against the of land vide release deed dated facility agreement dated 07.03.2017 and thereafter re- 11 25.05.2015. mortgaged on 07.03.2017. Mortgage deed dated 07.03.2017 Initia l mortgage deed dated for 151.0063 acres situated at 12.05.2014 released on Village Jikarpur, Tehsil Khair, 07.03.2017 and re-mortgaged on District A ligarh, Uttar Pradesh, 07.03.2017. executed by JIL in favour of IDBI Trustee-ship Services E Limited in the capacity of security trustee for term loan of Rs.1200 crores granted by ICICI Bank Limited to JAL against the facility agreement dated 12 25.05.2015. F

4.3. The exclusive mortgage transaction in favour of the Standard Chartered Bank Limited: Property/transaction in question Previous transaction/s and flow thereof Mortgage deed dated 24.05.2016 for Initial mortgage deed dated G 25.0040 acres of land situated at 24.06.2009, extended by Village Sultanpur, Sector-128, Noida, mortgage deed dated 27.¹¹.2012 District Gautam Budh Nagar, Uttar (for increased facility amount of

Footnotes

11 Hereinafter also referred to as ‘Property No. 3’

12 Hereinafter also referred to as ‘Property No. 4’ H

p. 320

A Pradesh executed by JIL in favour of Rs. 1300 crores as compared to IDBI Trustee-ship Services Ltd, as Rs. 900 crores earlier). additional security, against the facility Vide mortgage on 23.03.2013, agreement dated 29.08.2012 between additiona l land admeasuring Standard Chartered Bank and JAL of 25.0040 acres was added in the Rs.400 crores. The security was original land parcel to secure further extended for facility II for increased facility amount of Rs. Rs.450 crores on 27.¹².2012; for 1750 crores as compared to Rs. facility III for Rs.538.16 crores on 1300 crores earlier against the 29.04.2015; for facility IV for facility agreement dated Rs.81.84 crores on 29.04.2015 and for 29.08.2012 for an amount of working capital facility Rs.297 crores Rs. 400 crores. Security further on 29.08.2012. 13 extended for Facilities II, III and IV as mentioned in Column 1. The extended mortgage deed dated 23.03.2013 was released vide release deed dated 04.¹¹.2015 (changing facility amount from Rs.1750 crores to Rs. 1470 crores) and re- mortgaged on 24.05.2016 E (increasing facility amount from 1470 crores to Rs. 1767 crores).

4.4. The sixth transaction in question had been the exclusive mortgage transaction in favour of State Bank of India that was not F preceded by any earlier transaction; the same had been as under:- Mortgage deed dated 04.03.2016 for 90 acres of land situated at Village Chaugan Tehsil Elmadpur, District Agra, Uttar Pradesh, executed by JIL in favour of State Bank of India against the facility agreement dated 26.03.2015 granting Short Term Loan Facility to G JAL of Rs.1000 crores.¹⁴ 4.5. Yet another transaction was questioned by IRP as being avoidable but the Adjudicating Authority held the same to be not falling

Footnotes

13 Hereinafter also referred to as ‘Property No. 5’ H

14 Hereinafter also referred to as ‘Property No. 6’

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 321 INFRATECH LTD. v. AXISBANK LTD. [DINESH MAHESHWARI, J.]

within the relevant time as provided under Section 43 of the Code. The A particulars of this transaction are as follows: Mortgage deed dated 12.05.2014 for 100 acres of land situated at Village Tappal, Tehsil Khair, District Aligarh, Uttar Pradesh executed by JIL in favour of ICICI Bank Limited against the facility agreement dated 12.¹².2013 granting Term Loan of Rs. B 1500 crores and overdraft amount of Rs. 175 crores to JAL.15 The relevant factual and background aspects

55. Having taken note of the principal parties to the dispute and the transactions/properties involved, but before dilating on the issues, we may briefly narrate the background in which the present CIRP is underway as also the orders passed by this Court, for ensuring its completion in accordance with law and towards the larger benefit of stakeholders.

66. JAL is stated to be a public listed company with more than 5 lakh individual shareholders. In the year 2003, JAL was awarded the rights for construction of an expressway from Noida to Agra. A concession agreement was entered into with the Yamuna Expressway Industrial Development Authority. Coming on the heels of this project, JIL was set up as a special purpose vehicle. Finance was obtained from a consortium of banks against the partial mortgage of land acquired and E a pledge of 51% of the shareholding held by JAL. Housing plans were envisaged for the construction of real estate projects in two locations of the land acquired, one in Wish Town, Noida and another in Mirzapur. Several other aspects of the dealings by these companies, their creditors and other stakeholders need not be dilated for the present purpose. F 6.¹. The crucial and relevant part of the matter is that IDBI Bank Limited instituted a petition under Section 7 of the Code before the NCLT, seeking initiation of Corporate Insolvency Resolution Process against JIL, while alleging that JIL had committed a default in repayment of its dues to the tune of Rs. 526.¹¹ crores. JIL filed its objections to the petition but later on, withdrew the objections and furnished consent for G resolution plan under the provisions of the Code. On 09.08.2017, NCLT

15 Hereinafter also referred to as ‘Property No. 7’ (As regards this description, it is

pointed out on behalf of the respondent ICICI Bank that it had been of ‘Term Loan of Rs. 1500 crores under the Corporate Rupee Loan Facility agreement and General Conditions dated 12.¹².2013 and mortgage deed was dated 10.03.2014’) H

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A initiated the CIRP in respect of JIL. An order of moratorium was issued under Section 14 by which, the institution of suits and continuation of pending proceedings, including execution proceedings were prohibited and an Interim Resolution Professional was appointed. On 14.08.2017, IRP, in pursuance of the order of NCLT, called for submissions of claims by financial creditors in Form-C, by operational creditors in Form-B, by the workmen and employees in Form-E and by other creditors in Form- F. On 16.08.2017, the Insolvency and Bankruptcy Board of India made an amendment to its regulations and Regulation 9(a) was inserted to include the claims by other creditors. On 18.08.2017, the Board released a press note that the home buyers could fill in Form-F as they could not be treated at par with financial and operationalcreditors. 6.2. The aforesaid position led to the proceedings in this Court that were dealt with in a batch of petitions led by Writ Petition (Civil) No. 744 of 2017: Chitra Sharma and Ors. v. Union of India and Ors. Several orders were passed by this Court in the said batch of petitions from time to time, inter alia, to the effect that IRP was permitted to take over management of JIL and was directed to ensure that necessary provisions were made to protect the interests of home buyers. Various orders were also made with directions to JAL, as holding company of JIL, for making deposits in the Court, particularly looking to the claim of refund being made by some of the home buyers. This Court also took note of the facts that CIRP commenced on 09.08.2017; the statutory period of 180 days for concluding the CIRP had come to an end; and even the extended statutory period of 90 days also ended on 12.05.2018 but then, by way of the Amendment Ordinance, 2018, the home buyers were accorded the statutory recognition as financial creditors w.e.f. F 06.06.2018. While finally disposing of the matters on 09.08.2018, this Court took note of the interest of home buyers as also the creditors of JIL and JAL, the status of proceedings and the statutory provisions as then obtaining and ultimately issued the following directions: - “(i) In exercise of the power vested in this Court under Article G 142 of the Constitution, we direct that the initial period of 180 days for the conclusion of the CIRP in respect of JIL shall commence from the date of this order. If it becomes necessary to apply for a further extension of 90 days, we permit the NCLT to pass appropriate orders in accordance with the provisions of the IBC; H

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 323 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

(ii) We direct that a CoC shall be constituted afresh in accordance with the provisions of the Insolvency and Bankruptcy (Amendment) Ordinance, 2018, more particularly the amended definition of the expression “financial creditors”; (iii) We permit the IRP to invite fresh expressions of interest for the submission of resolution plans by applicants, in addition to the three short-listed bidders whose bids or, as the case may be, revised bids may also be considered; (iv) JIL/JAL and their promoters shall be ineligible to participate in the CIRP by virtue of the provisions of Section 29A; (v) RBI is allowed, in terms of its application to this Court to direct the banks to initiate corporate insolvency resolution proceedings against JAL under the IBC; (vi) The amount of Rs 750 crores which has been deposited in this Court by JAL/JIL shall together with the interest accrued thereon be transferred to the NCLT and continue to remain invested and shall abide by such directions as may be issued by the NCLT.” 6.3. It had been during pendency of the aforesaid proceedings that the application leading to present appeals came to be filed by IRP on 06.02.2018, complaining against the transactions in question. However, E before taking note of the matters involved in such application filed by IRP and, for completion of the narration about the orders passed by this Court, we may also point out that during the CIRP of JIL, an application came to be made by IDBI bank, for excluding the period of pendency of the application for clarification regarding the manner of counting of the F votes of the concerned financial creditors, for the purpose of the period of 270 days for completion of corporate insolvency resolution process but, during the pendency of such application, NCLT, by its order dated 06.05.2019, called upon the authorities and the representatives of allottees and others to file reply on the necessity to proceed further with CIRP for considering the resolution plan received from the concerned bidder. G The IDBI Bank assailed this order of NCLT by way of an appeal before the NCLAT that came to be decided on 30.07.2019 whereby, NCLAT granted relief to exclude the period from 17.⁹.2018 to 04.06.2019 for the purpose of counting 270 days of CIRP period and issued consequential H

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A directions. This led to further appeals in this Court16, which were considered and decided on 06.¹¹.2019. 6.3.¹. In the order dated 06.¹¹.2019, we took note of the fact that CIRP in relation to JIL stood revived in view of the directions in Chitra Sharma (supra) as also the amendments brought about in IBC. In the peculiar, rather extraordinary, situation obtaining in the matter, we passed the orders under the plenary powers so as to ensure that an attempt was made for revival of the corporate debtor JIL, lest it was exposed to liquidation process while taking note of the unanimity amongst the parties that liquidation of JIL must be eschewed; and while also taking note of the time limit for completion of Insolvency Resolution Process as per third proviso to Section 12(3), which came into effect from 16.08.2019. In the given circumstances, we passed the following order for the purpose of substantial and complete justice to the parties and in the interest of all the stakeholders: “i) We direct the IRP to complete the CIRP within 90 days from today. In the first 45 days, it will be open to the IRP to invite revised resolution plan only from Suraksha Realty and NBCC respectively, who were the final bidders and had submitted resolution plan on the earlier occasion and place the revised plan(s) before the CoC, if so required, after negotiations and submit report to the adjudicating authority NCLT within such time. In the second phase of 45 days commencing from 21st December, 2019, margin is provided for removing any difficulty and to pass appropriate orders thereon by the Adjudicating Authority. ii) The pendency of any other application before the NCLT or F NCLAT, as the case may be, including any interim direction given there in shall be no impediment for the IRP to receive and process the revised resolution plan from the above-named two bidders and take it to its logical end as per the provisions of the I & B Code within the extended timeline prescribed in terms of this order.

G iii) We direct that the IRP shall not entertain any expression of interest (improved) resolution plan individually or jointly or in concert with any other person, much less ineligible in terms of Section 29A of the I & BCode.

Being Civil Appeal No. 8437 of 2019 [@ D No. 27229 of 2019]: Jaiprakash Associates 16

H Ltd. & Anr. v. IDBI Bank Ltd. and connected case

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 325 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

iv) These directions are issued in exceptional situation in the facts of the present case and shall not be treated as a precedent. v) This order may not be construed as having answered the questions of law raised in both the appeals, including as recognition of the power of the NCLT / NCLAT to issue direction or order not consistent with thestatutory timelines and stipulations specified in the I & B Code and Regulations framed thereunder.”17

77. Having thus referred to the orders previously passed in relation to the CIRP in question, we may, for complete narration of the orders passed by this Court, also refer to the fact that in this batch of appeals, the extensive arguments were finally concluded on 10.¹².2019. Even C while reserving the orders, looking to the facts and circumstances of the case, we stayed the operation of the order passed by NCLAT, insofar relating to the prayer of the lender-banks of JAL for treating them as financial creditors of JIL. The relevant part of the order dated 10.¹².2019 reads as under: - D “Civil Appeal @ Diary No(s). 32881/2019 These appeals take exception to the decision of the National Company Law Appellate Tribunal allowing the appeal(s) filed by the lender-Banks of Jayprakash Associates Limited (JAL) claiming to be financial creditors(s) of Jaypee Infratech Limited (JIL). The E National Company Law Tribunal had rejected that claim but we find that in the impugned judgment, without dealing with the reasons recorded by the National Company Law Tribunal, the Appellate Tribunal allowed the appeal(s) filed by the stated lender-Banks(s), who were claiming to be the financial creditor(s) of JIL. F After fully hearing counsel for the parties, prima facie, we are of view that lender-Banks of JAL cannot be regarded as financial creditor(s) of JIL. We would elaborate on this aspect in our final judgment. Be that as it may, it is appropriate that we must stay the operation of the impugned judgment(s) of the Appellate Tribunal lest any confusion occurs in the revival process G 17It may also be noticed that by another order dated 03.02.2020, while accepting the reasons stated in an application filed by the IRP pointing out various difficulties and unavoidable circumstances which have delayed the culmination of proposal for approval of resolution plan, though submitted within the time frame prescribed by this Court, we had extended the time by four weeks for approval of the resolution plan, in the proceedings now being dealt with by the Principal Bench of NCLT at New Delhi. H

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A of JIL and the constitution of Committee of Creditors thereof, in view of the impugned order passed by the National Company Law Appellate Tribunal. Ordered accordingly. We clarify that the stay of operation is only in respect of order passed on the application(s) moved by the lender-Bank(s) B of JAL before the National Company Law Appellate Tribunal for a declaration that they be regarded as financial creditor(s) of JIL and included in the Committee of Creditors of JIL.” The Application by Interim Resolution Professional and the order passed by NCLT

88. Having thus referred to the orders already passed in relation to the CIRP in question, we may now advert to the application filed by IRP forming subject-matter of the first issue involved in these appeals.

99. The IRP, in terms of his duties under clause (j) of Section 25(2) of the Code18, made the application under consideration before the D Adjudicating Authority stating, inter alia, that the corporate debtor was itself in dire need of funds; and was facing severe liquidity crunch to complete the construction of projects and deliver flats to home buyers as well as to honour the payment obligations to financial creditors, including the Fixed Deposit Holders. It was contended that JIL could have sold/mortgaged its unencumbered land to raise funds to complete the construction of flats in a timely manner and fulfil its obligation to its creditors and prevent value deterioration or erosion or insolvency but then, the mortgages in question were created in a highly questionable manner and in complete disregard to the interests of the creditors and stakeholders of the corporate debtor. Also, that the mortgage of land was in nature of assetstripping and was entered with intent to defraud the creditors of the corporate debtor without obtaining the approval of shareholders. 18The relevant parts of Section 25 read as under: “Duties of resolution professional. - (1) It shall be the duty of the resolution professional to preserve and protect the assets of the corporate debtor, including the continued business operations of the corporate debtor. (2) For the purposes of sub-section (1), the resolution professional shall undertake the following actions, namely:-

*** *** *** (j) file application for avoidance of transactions in accordance with Chapter H III, if any;…”

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 327 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

9.¹. In opposition to the application, it was contended that the financial position of the corporate debtor was very strong notwithstanding the temporary financial crunch; that JAL was helping JIL in various ways and hence, creation of impugned mortgages was not unusual, but merely reciprocal; and such reciprocal accommodation cannot be termed without consideration. It was also contended that no transaction which was permitted by law and entered into transparently could amount to ‘carrying on business for a fraudulent purpose’. It was further contended that the impugned mortgages had not been created on account of any antecedent debt liability owed by the corporate debtor; they had been within the ordinary course of business of corporate debtor and the transferees; and were not within the statutory period of one year and, therefore, Section 43 of IBC would not apply. It was maintained that the transactions in question were reciprocal and could not be termed as without consideration or undervalued. According to the contesting parties, when the essential jurisdictional conditions were not satisfied, the provisions of Section 66 of IBC were not attracted. D

1010. The NCLT, after having heard the parties and having scanned through the record, held that the transactions in question were to defraud the lenders of the corporate debtor JIL, as 858 acres of unencumbered land owned by the corporate debtor to secure the debt of the related party JAL was mortgaged in the midst of the corporate debtor’s immense financial crunch, while continuing with default towards the home buyers and financial creditors and after it had been declared as Non Performing Asset19, in utter disregard to fiduciary duties and duty of care to the creditors; and further that the mortgage of land was created without any counter guarantee from the related party and with no other consideration being paid to the corporate debtor. The Tribunal was of the view that at the time when the mortgage was created, the corporate debtor was already in default to its lenders and it was unlikely that its lenders would have provided no-objection for creation of mortgages to secure the debt of a related party as that would have compromised not only the recovery of their dues but also the interests of thousands of home buyers waiting for their homes with investment of their hard earned money. The Tribunal also observed that even though the nominees of lenders attended the Board Meeting of the corporate debtor in which decision to mortgage the land was taken, but that cannot be treated as approval or no-objection of lenders, as the lenders invariably have covenants in the loan agreement 19 ‘NPA’ for short H

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A that require their approval for creating interest in favor of any one of the unencumbered assets of the borrower. Moreover, directors of the corporate debtor (JIL) and the related party (JAL) were well aware of the fact that the corporate debtor was in default and had been declared as NPA by several creditors. The Tribunal, thus, formed the opinion that when the directors of the corporate debtor were fully aware that they were in the twilight zone and insolvency was imminent, they ought to have exercised due diligence in minimizing the potential loss to the creditors but they entered into such transactions which ex facie gave benefits to the related party JAL, with a clear intent to defraud the creditors of JIL. The Tribunal further observed that the land in question could have been sold to generate cash that would have been sufficient to complete the construction of flats and the home buyers are directly and adversely affected by such a decision. 10.¹. With respect to Section 43 of IBC, the NCLT held that the transaction of creating a security interest by way of mortgage in favour of lenders of the third party (JAL) on the unencumbered land of the corporate debtorwithout any consideration or counter guarantee cannot be treated as transfer in the ordinary course of business or financial affairs of the corporate debtor. Further, it did not benefit either the business or finances of the corporate debtor in any way and hence, was not covered under ‘financial affairs’. The Tribunal held that the phrase under consideration cannot be interpreted to mean that the ordinary course of business also includes the transferee’s ordinary course of business because transferee can never do the transfer himself; and that the words ‘the transfer made’ indicate that they relate to the transfer or and not the transferee. As regards ‘relevant time’ for the purpose of sub-section F (4) of Section 43 of the Code20, the Tribunal observed that the Code itself has provided a retrospective effect to the provisions of Section 43(4)(a) wherein it is stated that ‘it is given to a related party, during two years preceding the insolvency commencement date’. This, according to NCLT, indicates that the retrospective effect is laid down in the legislation itself and thus, the look-back period for the transactions was made dependent on the insolvency commencement date and not on the date when the Insolvency and Bankruptcy Code came into effect (01.¹².2016). The Tribunal, therefore, held that for transactions of a related party, the look-back period was two years preceding the insolvency 20This “relevant time” for the purpose of avoidance of preferential transactions is now commonly referred to as “look-back period”.

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 329 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

commencement date and hence, the relevant period for examining the transactions in question would be from 10.08.2015 to 09.08.2017 (date of commencement of CIRP). 10.2. The Tribunal made in-depth analysis of the facts of the case, particularly those related with the transactions in question as also the provisions of law applicable and, while rejecting the contentions urged on behalf of the opposing parties, including JAL, observed and held as under: “After the elaborate discussion, we have decided that impugned transactions are preferential transactions as defined in the subsection (2)(a) of Section 43 of insolvency and bankruptcy code C

2016. We have found that corporate debtor Jaypee Infratech Ltd (JIL) has by way of mortgage of unencumbered land created security interest in favour of lenders of the Jaiprakash Associates Ltd. (JAL), which happens to be the holding company of JIL, without any consideration. We have also found that the corporate debtor was facing liquidity crunch and their accounts were declared as NPA and even after formation of Joint Lender Forum, without obtaining approval from Joint Lender Forum, unencumbered land of the corporate debtor has been mortgaged in favour of lenders of JAL. There by this transfer has the effect of putting the JAL, one of the creditors of JIL in a beneficial position than it would have been in the event of distribution of assets being made by section 53 of the code. The said mortgage of immovable properties, i.e. of the unencumbered land of the corporate debtor has been made without any consideration to the corporate debtor. Therefore the said transaction is covered under the umbrella of Sec 45(1) of the Code and will be treated as an undervalued transaction as defined under section 45 of the Code. *** *** *** In this case, we have found that impugned transactions are covered under preferential transactions as defined in section 43(2)(a) of the Code. Therefore, it cannot be said that section 45 does not apply for these transactions. The impugned mortgage of unencumbered land parcels of the Corporate Debtor in favour of lenders of the JAL to create a H

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A security interest are transactions between the Corporate Debtor, lenders of JAL and JAL, who happens to be an Operational Creditor of the Corporate Debtor. It is true that the collateral security is common practice in loan transactions. It is on record that in this case, the Corporate Debtor B was under liquidity crunch and its accounts were declared NPA by LIC and other creditors. The Joint Lender Forum was formed to deal with the situation. But the Corporate Debtor entered into the transaction even without taking prior approval of Joint Lender Forum and mortgaged its unencumbered land in favour of the lenders of the JAL. C In the circumstances stated above it is clear that the impugned preferential transactions are also undervalued transactions and covered under section 45(1) of the Code. It is also clear that these transactions are undertaken during the relevant period of 2 years from the date of initiation of Corporate Insolvency Process D as provided under section 46(1)(ii) of the Code. Therefore, this issue is also decided in positive, in favour of applicant Resolution Professional and against the Corporate Debtor. In view of the above, it is clear that the mortgage of land of JIL in favour of lenders of JAL, amounts to transfer of interest in property of JIL for the benefit of its creditor i.e. JAL and putting it in a beneficial position vis-à-vis other creditors is a preferential transactions U/s 43(2)(a) & (b). The transactions were executed within the look back period of two years before the commencement of Insolvency proceeding and is therefore covered U/s 43(4)(a). Further, transaction cannot be treated is in ordinary course of business or financial affairs of Corporate Debtor and is not excluded U/s 43(3).” 10.3. The Tribunal concluded in its order as follows:

G “On the above basis, it is clear that the company application filed by the Resolution Applicant deserves to be allowed. Hence, is allowed. ORDER The company application filed by the Resolution Professional under H Sec. 66, 43 & 45 of the Insolvency and Bankruptcy 2016 is allowed.

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 331 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

The impugned transactions, details of which are given in the schedule of the judgment are declared as fraudulent, preferential and undervalued transactions as defined under section 66, 43 and 45 of the Code respectively. Transactions given in the following schedule of property have been found as preferential, undervalued and fraudulent, therefore, we pass the order for release and discharge of the security interest created by the Corporate Debtor in favour of lenders of the Jaiprakash Associates Ltd. under the provision of Section 44(c) of the Insolvency and Bankruptcy Code 2016. We also pass an order under Section 48(a) of the Code that the properties mortgaged by way of preferential and undervalued transactions shall from now on be deemed to be vested in the Corporate Debtor.”21 Appeals before NCLAT: the impugned order D

1111. Assailing the aforesaid order passed by NCLT accepting the application of IRP in relation to six of the mortgage transactions, the aggrieved parties filed separate appeals before the Appellate Tribunal, the NCLAT. The Appellate Tribunal took note of the facts of the case and the rival contentions and proceeded to upturn the order passed by NCLT on the considerations as indicated infra. E 11.¹. As regards the assertion of IRP that the transactions in question were preferential transactions within the relevant time as envisaged by Section 43 of the Code, the NCLAT observed that the corporate debtor had created interest over its property, but such interest had not been created in favour of any creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor and hence, Section 43(2)(a) of the Code was not attracted. It was further observed that the mortgages in question were made in the ordinary course of business and financial affairs of the transferees, ruling out the applicability of Section 43 as such and hence, the Adjudicating Authority had no power to pass the 21In the schedule to the order aforesaid, NCLT gave out the description of six transaction with particulars of the properties which were treated as preferential, undervalued and fraudulent and also gave the description of one transaction that was not coming within the ambit of ‘relevant time’ per Section 43 of the Code. (as fully taken note of in paragraph 4 and its sub-paragraphs under the heading ‘Transactions in question’ ibid.). H

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A order under Section 44 of the Code. The Appellate Tribunal observed and held, inter alia, as follows: “62. In the present case, the ‘Corporate Debtor’ has created interest on the property of the ‘Corporate Debtor’, but such interest has not been created in favour of any creditor or a surety or a B guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the ‘Corporate Debtor’.

63. The aforesaid interest on the property of the ‘Corporate Debtor’ has been created in all these cases with regard to financial debt given by the Appellants to ‘Jaiprakash Associates Ltd.’, which is not the ‘Corporate Debtor’.

64. Thus, it is clear that the interest on the property of the ‘Corporate Debtor’ has not been created in favour of the Appellants- ‘Financial Creditors’ of an antecedent financial debt of the Appellants owed by the ‘Jaypee Infratech Ltd.’ (‘Corporate Debtor’). Therefore, we hold that clause (a) of sub- section (2) of Section 43 is not attracted in any of the case of the Appellants Bank, thereby none of the Appellants Bank come within the meaning of ‘deemed to have given a preference’, as used in Section 43. Therefore, the mortgage(s) created in their favour cannot be annulled on the ground of preferential transaction in terms of Section 43 (2) (a) of the ‘I&B Code’.

65. Clause (b) of sub-section(2) of Section 43 relates to transfer under clause (a) of sub-section (2) of Section 43, which in effect puts such creditor or a surety or a guarantor in a beneficial position than it would have been in the event of a distribution of assets being made in accordance with Section 53. As clause (a) of sub- section (2) of Section 43 is not attracted, the question of applicability of clause (b) of sub-section (2) of Section 43 does not arise.

G 66. Apart from the aforesaid position of law in respect of mortgage, in question, as per sub-section (3) of Section 43, for the purposes of sub-section (2), “a preference shall not include the transfer made in the ordinary course of the business or financial affairs of the ‘Corporate Debtor’ or the transferee”. The mortgages in question which were made in favour of the Appellants-Banks and H

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 333 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

Financial Institutions have been made in ordinary course of A business and financial affairs of the transferee, as apparent from the relevant facts.

67. Therefore, we hold that Section 43 is not attracted to any of the transaction/mortgage(s) made in favour of the Appellants.” B 11.2. The Appellate Tribunal further proceeded to hold that the provisions of Section 45 of Code, for avoidance of undervalued transactions, were not applicable in relation to the transactions in question while observing as under:- “71. For holding a transaction undervalued, the ‘Resolution Professional’/‘Liquidator’ is required to examine the transactions which were made during ‘the relevant period’ as prescribed under Section 46, if any of it is undervalued. As per sub-section (2) of Section 45, the transaction shall be considered ‘undervalued’ ‘where the ‘Corporate Debtor’ makes a gift to a person or enters into a transaction with a person which involves the transfer of one or more assets by the ‘Corporate Debtor’ for a consideration the value of which is significantly less than the value of the consideration provided by the ‘Corporate Debtor’ and such transaction has not taken place in the ordinary course of business of the ‘Corporate Debtor’.’ E

72. In these appeals, we find that the transactions as has been made i.e. mortgage(s) in favour of the Appellants as and when made against the amount payable by ‘Jaiprakash Associates Limited’ (borrower), the amount is not payable by the ‘Corporate Debtor’. Therefore, clause (a) of sub-section (2) of Section 45 is not attracted. For the same very reason, clause (b) of sub-section F (2) of Section 43 or Section 45 cannot be made applicable with regard to transaction in question which are not related to any payment due from the ‘Corporate Debtor’.

73. As Section 44 is not attracted, it is not necessary to notice Section 46 which is not attracted and, therefore, the Adjudicating G Authority has no power to pass any order under Section 48 of the ‘I&B Code’. “ 11.3. With respect to Section 66 of the Code dealing with fraudulent trading or wrongful trading, the Appellate Tribunal observed that the H

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A corporate debtor, being one of the group company, like a guarantor, had executed mortgage deeds in favour of the lender banks and financial institutions; and the transactions were in the ordinary course of business of the corporate debtor. Thus, according to NCLAT, in the absence of any contrary evidence to show that they were made to defraud the creditors of the corporate debtor or for any fraudulent purpose, it was not open to the Adjudicating Authority to hold that the mortgage deeds in question were made by way of transactions within the meaning of ‘fraudulent trading’ or ‘wrongful trading’ under Section 66. The Appellate Tribunal held,- “76. In the present case, we have noticed that the transactions in question i.e. mortgage(s) were made in favour of the ‘Banks and Financial Institutions’ by the ‘Corporate Debtor’ (‘Jaypee Infratech Limited’) in the ordinary course of business of the ‘Corporate Debtor’. The Appellants-Banks and Financial Institutions have given loans to the holding Company namely-‘Jaiprakash Associates D Limited’. The ‘Corporate Debtor’ being one of the group company, like a guarantor, executed mortgage deed(s) in favour of the Appellants-‘Banks and Financial Institutions’. We have seen that none of the transactions were ‘preferential transaction’ or ‘undervalued transaction’. It has not been alleged that the transactions, in question, were made to defraud the creditors in terms of Section 49 so allegation has been made that such transactions amount to ‘extortionate credit’ as defined under Section 50. Therefore, the Adjudicating Authority in absence of any such finding is not empowered to pass order under Section

51. Further, as we have held that the transactions were made in the ordinary course of business in absence of any contrary evidence to show that they were made to defraud the creditors of the ‘Corporate Debtor’ or for any fraudulent purpose, on mere allegation made by the ‘Resolution Professional’, it was not open to the Adjudicating Authority to hold that mortgage deeds, in question, were made by way of transactions which come within the meaning of ‘fraudulent trading’ or ‘wrongful trading’ under Section 66.” 11.4. The Appellate Tribunal, therefore, allowed the appeals and set aside the impugned order passed by NCLT on 16.05.2018 in so far relating to the lenders in question in the following:- H

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 335 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

“80. For the reasons aforesaid, we set aside the impugned order A dated 16th May, 2018 so far it relates to the Appellants. In view of such findings, the Appellants-‘Axis Bank Ltd’, ‘Standard Chartered Bank’, ‘ICICI Bank Ltd.’, ‘State Bank of India’, ‘Jai Prakash Associates Ltd.’, ‘Bank of Maharashtra’, ‘United Bank of India’, ‘Central Bank of India’, ‘UCO Bank’, ‘Karur Vyasa Bank (P) B Ltd.’, ‘L&T Infrastructure Finance Company Ltd.’, ‘Canara Bank’, ‘Karnataka Bank Ltd.’, ‘IFCI Ltd.’, ‘ Allahabad Bank’, ‘Jammu & Kashmir Bank’, and ‘The South Indian Bank Ltd.’ are entitled to exercise their rights under the ‘I&B Code’.

81. All the appeals are allowed. However, we make it clear that we have not made any observations with regard to the Promoters C or Directors in absence of any appeal preferred on their behalf. No costs.” The relevant provisions

1212. For comprehension of the subject-matter and appropriate dealing with the issues involved, before proceeding further, suitable it would be to take note of the relevant statutory provisions. 12.¹. It may be observed that while generally, the expressions used in the Code are defined in Section 3 thereof but then, the expressions employed for the purpose of Part II of the Code, dealing with insolvency resolution and liquidation of corporate persons, are defined in Section 5 thereof. The relevant definitions as occurring in Sections 3 and 5 are as under:- “Section 3(4): “charge” means an interest or lien created on the property or assets of any person or any of its undertakings or both, as the case may be, as security and includes a mortgage; Section 3(6): “claim” means— (a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured; G (b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured; H

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