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

A company. Similarly, for late floating charges other than for new value, the vulnerability period for non-connected persons is twelve months while it is two years in the case of connected persons. The avoidance provisions under the CA 2013 does not provide for longer time periods in case the transactions are with connected B persons. It is submitted that providing for longer time periods for vulnerability would be significant in improving the efficacy of these provisions. This is because a wider range of transactions diminishing creditor wealth entered into with insiders occur not in the ‘zone of insolvency’ but as soon as early signals of trouble are visible. Such insiders have superior information of the company’s C deteriorating financial position and may raid corporate assets knowing that the company may become insolvent. These provisions are of special significance in the Indian context where even the larger corporates are often promoter/family controlled with such insiders often enjoying significant informational advantages over even well-advised secured lenders.” 23.¹. Before examining as to whether the questioned preferences were given at the relevant time as specified in sub-section (4) of Section 43, we may deal with one part of the submissions made on behalf of some of the respondents that in view of the look-back periods provided in sub-section (4), the provisions of Section 43 of the Code, by their very nature, would come into operation at least one year after the enactment of the Code and else, it would be giving retrospective effect to these provisions which is not permissible. The submissions, in our view, remain bereft of substance. 23.¹.¹. The scheme of IBC 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. Such provisions as contained in Sections 43 and 44 came into operation as the comprehensive scheme of corporate insolvency resolution and liquidation from the date of being made effective; and merely because look-back period is envisaged, for the purpose of finding ‘relevant time’, it cannot be said that the provision itself is retrospective in operation. Reference to the decision of this Court H

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 377 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

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A any provision in Chapter II or Chapter III be taken out and put in operation at a later date than the date notified. Such contentions being totally devoid of substance, deserve to be, and are, rejected.

24Copy pinpoint24. We may now take up the question as to which of the transactions in question would entail in giving preference at a relevant time or otherwise. As noticed, the preference is given to JAL who is a related party of JIL. Hence, the look-back period is two years preceding insolvency commencement date i.e., 09.08.2017 per clause (a) of sub- section (4) of Section 43; and accordingly, the point of enquiry would be as to whether the preference had been given during the period of two years preceding 09.08.2017. Therefore, the transactions commencing from 10.08.2015 until the date of insolvency commencement shall fall under the scanner. As noticed, it has been one of the major contentions of the respondents that most of the impugned transactions were not of creation of any new encumbrance by JIL and in fact, most of the properties in question had already been under mortgage with the respective lenders much before the period under consideration i.e., much before 10.08.2015. 24.¹. It may at once be noticed that the transaction that was clearly falling beyond the period under consideration was, in fact, kept out of the purview of Section 43 of the Code by NCLT itself, being that relating to Property No. 7 (as mentioned in paragraph 4.5 hereinbefore). E 24.2. So far as the transaction relating to Property No. 6 is concerned, being the mortgage deed dated 04.03.2016, towards Short- Term Loan Facility to JAL of Rs. 1000 crores by State Bank of India, the same obviously falls within the look-back period. Even if JAL had allegedly entered into the facility agreement with this lender bank on F 26.03.2015, this date is hardly of any bearing so far as transaction by the corporate debtor JIL is concerned, which was made only on 04.03.2016. 24.3. In relation to the transactions concerning Property No. 1 and Property No. 2, for securing loans by the Consortium to JAL, it is submitted that there had been initial mortgage dated 24.02.2015 that G was released on 15.09.2015 and a so-called re-mortgage was made on 15.09.2015 and thereafter, this was also released on 29.12.2016 and again the so-called re-mortgage was made on 29.12.2016. It is sought to be asserted that it had not been a case of creation of a fresh mortgage. Similarly, in relation to the transactions concerning Property No. 3, it is alleged that there had been initial mortgage dated 12.05.2014 for 433.35 H

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 379 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

acres of land of which, 240 acres was released on 30.12.2015, 35.05 A acres was released on 24.06.2016 and the remaining 158.1739 acres of land was also released on 07.03.2017 but was re-mortgaged on this very date 07.03.2017. As regards Property No. 4, it is alleged that the same was put under mortgage initially on 12.05.2014, was released on 07.03.2017 and was re-mortgaged on this very date 07.03.2017. As B regards Property No. 5, it is alleged that the same was put under mortgage initially on 24.06.2009, the mortgage was extended on 27.11.2012 and on 23.03.2013; it was released on 04.11.2015 and was re-mortgaged on 24.05.2016. 24.3.¹. It has been one of the major contentions of the respondents that most of the impugned transactions were not of creation of any new encumbrance by JIL and in fact, most of the properties in question had already been under mortgage with the respective lenders. The submissions of respondents in relation to the aforesaid five transactions, that they had been of so-called re-mortgage/s, carry their own shortcomings and cannot be accepted. In the first place, we are clearly of the view that on release by the mortgagee, the mortgage ceases to exist and it is difficult to countenance the concept of a so-called re- mortgage. The so-called re-mortgage, on all its legal effects and connotations, could only be regarded as a fresh mortgage; and it obviously befalls on the mortgagor to consider at the time of creating any fresh mortgage as whether such a transaction is expedient and whether it should be entered into at all. Noticeable it is that in relation to Property No. 1 and 2, even if the initial mortgage had been dated 24.02.2015 falling beyond the look-back period, it was released on 15.09.2015 and this date (15.09.2015) falls within the look-back period. Even if the same property has been again mortgaged with the same lender/s on the same day of release, the same cannot be countenanced for the transaction operates towards extending unwarranted preference to JAL by the corporate debtor JIL. Significant it is to notice that while making this mortgage dated 15.09.2015, the facility amount being obtained by JAL got swelled from Rs. 3250 crores to a whopping Rs. 24109 crores and the number of creditors went up from 2 to 24. Such a transaction, in our view, had only been of a fresh mortgage to secure extra facilities obtained by JAL and thereby, extending unwarranted advantage to JAL at the cost of the estate of JIL. In the other transaction dated 29.12.2016, by which the properties in question were again put under mortgage with the lender/s, the facility amount was shown as Rs. 23491 crores. The H

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A transactions on 15.09.2015 and 29.12.2016 cannot be given credence with reference to the previous mortgage deed dated 24.02.2015. Similar is the case in relation to Property No. 3. Even when the previous mortgage was given on 12.05.2014 i.e., beyond the look-back period, there had been release deeds on 30.12.2015 and 26.06.2016 as regards certain parcels of land. So far the release of land to JIL is concerned, B the same causes no problem and only works to the benefit of JIL and its stakeholders. However, when the remaining land was also released on 07.03.2017, its fresh mortgage, even if on the same date, cannot be countenanced and is hit by Section 43, being a deemed preference. The very same considerations apply in relation to the Property No. 4 too. As C regards Property No. 5, even if there had been certain previous mortgage transactions falling beyond the look-back period, the property got released on 04.11.2015; and thereafter, the fresh mortgage on 24.05.2016, with increased facility amount from Rs. 1470 crores to Rs. 1767 crores, suffers from the same vice, of being a deemed preference to a related party during the period of two years preceding the insolvency commencement D date. 24.4. For what has been discussed hereinabove, the conclusion is inevitable that the impugned preference was given to a related party during a relevant time. However, before concluding on this part of discussion, we may also observe that reference to the decisions of Madras E and Bombay High Courts in the case of IDBI Bank Ltd and Monarch Enterprises respectively, is neither apposite nor advances the cause of the respondents for the reason that the said decisions had essentially been on the question/s as to whether the impugned transactions were of fraudulent preference per Section 531 or lacking in good faith per Section F 531A of the Companies Act, 1956. In fact, in the case of IDBI Bank (supra) the corporate debtor attempted to transfer one of its property to the appellant bank, who was one of its creditors and in that regard, certain transactions like agreement for sale and handing over possession were suggested and it was alleged that the contract for sale was partly performed about one year and four months prior to the winding-up proceedings; and such being beyond the look-back period of six months as envisaged by Section 531 of the Companies Act, 1956, it was argued that it had not been a fraudulent transfer. The contentions were not accepted by the Single Judge and by the Division Bench of the High Court for the reason that mere handing over of possession or documents did not complete the sale; rather the Court was of the view that such

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 381 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

documents were created only in order to avoid the transaction being called a fraudulent preference. Apart that the element of fraud is not the essential ingredient of Section 43 of the Code, the said decision in IDBI Bank, on the approach of the Courts towards corporate transactions makes it clear that any transaction favouring one stakeholder at the cost of the other is viewed with disfavour and is disapproved, particularly if it takes place during the prescribed look-back period. 24.5. For what has been discussed hereinabove, the answer to question (iv) as referred in paragraph 20 is that the transactions in question had been of deemed preference to related party JAL by the corporate debtor JIL during the look-back period of two years and have rightly been held covered within the period envisaged by sub-section (4) of Section 43 of the Code. Ordinary course of business or financial affairs

25Copy pinpoint25. Even when it is held that the impugned transactions answer to the requirements of sub-section (2) of Section 43 and fall within the period specified in sub-section (4) thereof, the question still remains as to whether the impugned transactions do or do not fall within the exclusion provided by sub-section (3) of Section 43 of the Code? As noticed, two types of transfers, as specified in clauses (a) and (b) of sub-section (3) of Section 43, are not to be treated as preference for the purpose of sub- section (2). It has been the mainstay of respondent-lenders that, in any case, the transfers in question were made in the ordinary course of their business and hence, fall within clause (a) of Section 43(3) that excludes the transfer made in the ordinary course of business or financial affairs of the corporate debtor or the transferee. It has been forcefully argued that the lenders of JAL are the transferees in the transactions in question and their ordinary course of business being of providing financial support with loans and advances, such transfers are not included in sub-section (2) of Section 43 by virtue of the exclusion provided in sub-section (3) thereof. On the other hand, the main plank of submissions on behalf of the appellants has been that the expression “or” occurring in clause (a) of sub-section (3) of Section 43, seemingly disjunctive of corporate debtor on one hand and transferee on the other, is required to be read as “and” so as to be conjunctive and covering only the transfers made in the ordinary course of business or financial affairs of the corporate debtor and the transferee. It is submitted on behalf of the appellants that such mortgage transactions had neither been in the ordinary course of business H

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A or financial affairs of the corporate debtor JIL nor secure new value in the property acquired by the corporate debtor and hence, are not excepted transactions within the meaning of sub-section (3) of Section 43 of the Code. 25.¹. Having taken into comprehension the scheme of the Code B and the purpose and purport of the provisions contained in Section 43, we find force and substance in the submissions made on behalf of the appellants. 25.2. As noticed, in the scheme of such provisions in 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. Though in the present case, we are concerned only with the phraseology occurring in clause (a) of sub-section (3) but, we may usefully refer to clause (b) thereof, for an insight into the underlying concept for providing exception in regard to certain transfers and keeping them out of the purview of ‘preference’. 25.2.¹. By virtue of clause (b) of sub-section (3) [read with F Explanation thereto], any transfer creating a security interest in the property ‘acquired’ by the corporate debtor is not to be treated as preference to the extent that such security interest secures new value in monetary terms or in terms of goods, services or new credit or in release of a previously transferred property. Any micro dissection of clause (b) of sub-section (3) of Section 43 is not required in the present case. G Suffice it to notice that even a bare look at the provision brings forth the concept that value enhancement or strengthening of the corporate debtor ought to be the result of a transfer, if it is to remain out of the ambit of sub-section (2) and not to fall within the mischief of being preferential. 25.2.2. Another feature of vital importance is that the matter is H examined with reference to the dealing and conduct of the corporate

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 383 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

debtor; and qua the health and prospects of the corporate debtor. A Applying the well-known principles of noscitur a sociis, whereunder the questionable meaning of a doubtful word could be derived and understood from its associates and context; and usefully recapping that the scheme of Section 43 of the Code is essentially of scanning through the affairs of the corporate debtor and to discredit and disregard such transaction by the corporate debtor which tends to give unwarranted benefit to one of its creditor/surety/guarantor over others, in our view, the purport of clause (a) of sub-section (3) of Section 43 is also principally directed towards the corporate debtor’s dealings. In other words, 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 D (3) of Section 43. 25.3. Needless to reiterate that 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 E ordinary course of business or financial affairs of the corporate debtor. Such had never been the scheme of the Code nor the intent of Section 43 thereof. It has rightly been contended on behalf of the appellants that 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 JAL F 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. 25.4. It remains trite that an interpretation that defeats the scheme, G 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. In the case of R.M.D. Chamarbaugwala (supra), the Constitution Bench of this Court has held that well known cannons of construction of statutes permit the Court H

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A to read the word “or” as “and” after looking at the clear intention of the legislature. In the case of Mazagaon Dock Ltd (supra), when the expression “or” occurring in sub-section (2) of Section 42 of the Income Tax Act, 1922 did appear bringing out the result which could not have been intended, the same was read in the context as meaning “and”. This Court said: B “10. The word “or” in the clause would appear to be rather inappropriate, as it is susceptible of the interpretation that when some profits are made but they are less than normal profits, tax could only be imposed either on the one or on the other, and that accordingly a tax on the actual profits earned would bar the imposition of tax on profits which might have been received. Obviously, that could not have been intended, and the word “or” would have to be read in the context as meaning “and”….” 25.5. Looking to the scheme and intent of the provisions in question and applying the principles aforesaid, we have no hesitation in accepting the submissions made on behalf of the appellants that the said 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 E “corporate debtor” and “transferee”, ought to be read as “and”; 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 and the transferee. Only F 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. G 25.6. The result of discussion in the foregoing paragraphs is that the transfers in question could be considered outside the purview of sub- section (2) of Section 43 of the Code only if it could be shown that same were made in the ‘ordinary course of business or financial affairs’ of the corporate debtor JIL and the transferees. Even if transferees submit H

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 385 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

that such transfers had been in the ordinary course of their business, the question would still remain if the transfers were made in the ordinary course of business or financial affairs of the corporate debtor JIL so as to fall within the exception provided by clause (a) of sub-section (3) of Section 43 of the Code. 25.6.¹. Thus, the enquiry now boils down to the question as to whether the impugned transfers were made in the ordinary course of business or financial affairs of the corporate debtor JIL. It remains trite that an activity could be regarded as‘business’ if there is a courseof dealings,which are either actually continued or contemplated to be continued with a profit motive.43 As regards the meaning and essence of the expression ‘ordinary course of business’, reference made by the appellants to the decision of the High Court of Australia in Downs Distributing Co (supra), could be usefully recounted as under:- “As was pointed out in Burns v. McFarlane the issues in sub-s. 2(b) of s. 95 of the Bankruptcy Act 1924-1933 are “(1) good faith; (2) valuable consideration; and (3) ordinary course of business.” This last expression it was said “does not require an investigation of the course pursued in any particular trade or vocation and it does not refer to what is normal or usual in the business of the debtor or that of the creditor.” It is an additional requirement and is cumulative upon good faith and valuable consideration. It is, therefore, not so much a question of fairness and absence of symptoms of bankruptcy as of the everyday usual or normal character of the transaction. The provision does not require that the transaction shall be in the course of any particular trade, vocation or business. It speaks of the course of business in general. But it does suppose that according to the ordinary and common flow of transactions in affairs of business there is a course, an ordinary course. It means that the transaction must fall into place as part of the undistinguished common flow of business done, that it should form part of the ordinary course of business as carried on, calling for no remark and arising out of no special or particular situation.” (emphasis supplied)

43vide State of Andhra Pradesh v. H. Abdul Bakshi and Bros.: 1964 STC 644 (at p. 647). H

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A 25.6.2. Taking up the transactions in question, we are clearly of the view that 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’, as rightly expressed in Downs B Distributing Co (supra). Though we may assume 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, we have not an iota of doubt that the impugned transactions do not fall within the ordinary course of business of the corporate debtor C JIL. As noticed, the corporate debtor has been promoted as a special purpose vehicle by JAL for construction and operation of Yamuna Expressway and for development of the parcels of land along with the expressway for residential, commercial and other use. It is difficult to even surmise that the business of JIL, 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 JIL that it would create encumbrances over its properties to secure the debts of its holding company. In other words, we are clearly of the view that the ordinary course of business or financial affairs of the corporate debtor JIL 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. As noticed, JIL was already reeling under debts with its accounts with some of the lenders having been declared NPA; and it was also under heavy pressure to honour its commitment to the home buyers. In the given circumstances, we have no hesitation in concluding that the transfers in questions were not made in ordinary course of business or financial affairs of the corporate debtor JIL. 25.7. The submissions that security was disclosed in the Annual G Reports or that none of the creditors expressed dissent are of no effect because such disclosure or want of objection by creditors, by themselves, do not operate as estoppel against anybody nor would take the transaction out of the purview of the legal fiction predicated in Section 43, if it is otherwise of a preference at a relevant time. Similarly, the distinction between ‘NPA’ and ‘wilful default’; the submission that NPA could be

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 387 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

regularised; and further the submission that the mortgages were created before JIL was declared NPA, are hardly of any bearing on the question as to whether the impugned transactions had been in the ordinary course of business or financial affairs of JIL. Thus, reference to the decisions like that in Keshavlal Khemchand and Jah Developers (supra) is not of any consequence and need not be dilated upon. The answer to this question, in our view, could only be in the negative. That is to say that the impugned transactions had not been in the ordinary course of business or financial affairs of JIL. 25.8. Therefore, the answer to question (v) as referred in paragraph 20 is that the impugned transactions are not of excepted transfers in terms of sub-section (3) of Section 43 of the Code. The concern expressed by lenders of JAL is legally untenable

26Copy pinpoint26. The argument of lenders, that holding the transactions in question as preferential would result in impacting large number of transactions undertaken by the bankers/financial institutions, of financing in the ordinary course of their business; and the consequences may be devastating and irreversible on the economy, has only been noted to be rejected. 26.¹. It needs hardly any emphasis that in the ordinary course of their business, when the bankers or financial institutions examine any proposal for loan or advance or akin facility, they are supposed to, and they indeed, take up the exercise commonly termed as ‘due diligence’ 44 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 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, As regards the present context, the term ‘due diligence’ is explained in P. Ramanatha 44 G Aiyar’s Advanced Law Lexicon (5 th Ed.-Vol 2, p.1654) in the following: “The detailed review of the borrower/issuer’s overall position, which is supposed to be undertaken by the lead manager of a new financing in conjunction with the preparation of legal documentation. Analysis of the financial status and prospects of company before it receives a major investment of capital. It is usually carried out by an independent accountant.” H

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A 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 B indebtedness. In the context of IBC, such requirement is moreover imperative on a bare look at the provisions contained in Part II thereof. Interesting it is to notice on the facts of the present case that in fact, several of the respondent lenders are shown to be the direct creditors of JIL too, to the extent of the advances made to JIL. They and the co- C respondents cannot plead ignorance about the actual state of affairs and financial position of JIL. Despite such knowledge, if they chose to take the business risk of accepting security from JIL and that too, for securing the loans/advances/facilities made over to JAL, who was a directly related party of JIL for being its holding company, they themselves remain responsible for present legal consequences. D Summation: The transactions in question are hit by Section 43 IBC

27Copy pinpoint27. For what has been discussed hereinabove, we are clearly of the view that the transactions in question are hit by Section 43 of the E 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, in our view, had not been right in interfering with the well- considered and justified order passed by NCLT in this regard.

F Search and commandeering of preference at a relevant time

28Copy pinpoint28. Although we have analysed the transactions in question on the anvil of Section 43 with reference to the submissions made and the facts of the present case but, before moving on to other aspects, we deem it appropriate to point out the manner in which the provisions concerning preference at a relevant time are expected to be applied, particularly by the resolution professional, in a given case. It could be readily recapitulated that as per the charging parts of Section 43 i.e., sub-sections (4) and (2) thereof, a corporate debtor shall be deemed to have given preference at a relevant time if the twin requirements of clauses (a) and (b) of sub-section (2) coupled with the applicable requirements of either clause (a) or clause (b) of sub-section (4), as the

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 389 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

case may be, are satisfied. However, even if the requirements of sub- A sections (4) and (2) are satisfied, a transaction may not be regarded as an offending preference if it falls in either or both of the exceptions provided by sub-section (3) of Section 43. 28.¹. Looking to the legal fictions created by Section 43 and looking to the duties and responsibilities per Section 25, in our view, for the purpose of application of Section 43 of the Code in any insolvency resolution process, what a resolution professional is ordinarily required to do could be illustrated as follows:

1. In the first place, the resolution professional shall have to take two major but distinct steps. One shall be of sifting through the entire cargo of transactions relating to the property or an interest thereof of the corporate debtor backwards from the date of commencement of insolvency and up to the preceding two years. The other distinct step shall be of identifying the persons involved in such transactions and of putting them in two categories; one being of the persons who fall within the definition of ‘related party’ D in terms of Section 5(24) of the Code and another of the remaining persons.

2. In the next step, the resolution professional ought to identify as to in which of the said transactions of preceding two years, the beneficiary is a related party of the corporate debtor and in which the beneficiary is not a related party. It would lead to bifurcation of the identified transactions into two sub-sets: One concerning related party/parties and other concerning unrelated party/parties with each sub-set requiring different analysis. The sub-set concerning unrelated party/parties shall further be trimmed to include only the transactions of preceding one year from the date of commencement of insolvency.

3. Having thus obtained two sub-sets of transactions to scan, the steps thereafter would be to examine every transaction in each of these sub-sets to find: (i) as to whether the transaction is of transfer of property or an interest thereof of the corporate debtor; and (ii) as to whether the beneficiary involved in the transaction stands in the capacity of creditor or surety or guarantor qua the corporate debtor. These steps shall lead to shortlisting of such transactions which carry the potential of being preferential. H

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A 4. In the next step, the said shortlisted transactions would be scrutinised to find if the transfer in question is made for or on account of an antecedent financial debt or operational debt or other liability owed by the corporate debtor. The transactions which are so found would be answering to clause (a) of sub-section (2) of Section 43. B

5. In yet further step, such of the scanned and scrutinised transactions that are found covered by clause (a) of sub-section (2) of Section 43 shall have to be examined on another touchstone as to whether the transfer in question has the effect of putting such creditor or surety or guarantor in a beneficial position than it C would have been in the event of distribution of assets per Section 53 of the Code. If answer to this question is in the affirmative, the transaction under examination shall be deemed to be of preference within a relevant time, provided it does not fall within the exclusion provided by sub-section (3) of Section 43.

D 6. In the next and equally necessary step, the transaction which otherwise is to be of deemed preference, will have to pass through another filtration to find if it does not answer to either of the clauses (a) and (b) of sub-section (3) of Section 43.

7. After the resolution professional has carried out the aforesaid E volumetric as also gravimetric analysis of the transactions on the defined coordinates, he shall be required to apply to the Adjudicating Authority for necessary order/s in relation to the transaction/s that had passed through all the positive tests of sub- section (4) and sub-section (2) as also negative test of sub-section F (3). 28.2. On a motion made by the resolution professional after and in terms of the exercise aforesaid, the Adjudicating Authority, in its turn, shall have to examine if the referred transaction answers to all the descriptions noted above and shall then decide as to what order is required to be passed, for avoidance of the impugned transaction or otherwise. 28.3. In our view, looking to the legal fictions created by Section 43 and looking to the duties and responsibilities of the resolution professional and the Adjudicating Authority, ordinarily an adherence to the process illustrated hereinabove shall ensure reasonable clarity and less confusion; and would aid in optimum utilization of time in any insolvency resolution process.

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 391 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

Other aspects of the application made by IRP – allegations of transactions being undervalued and fraudulent

29Copy pinpoint29. Having found that the transactions in question cannot be countenanced, for being of preference during a relevant time to a related party; and having approved the order passed by NCLT in that regard, we do not consider it necessary to deal with the other length of arguments advanced by the learned counsel for parties on the questions as to whether the transactions are undervalued and/or fraudulent too. In the totality of circumstances, we would prefer leaving the said questions at that only, while also leaving all the related questions of law open; to be examined in an appropriate case. C 29.¹. However, we are impelled to make one comment as regards the application made by IRP. It is noticed that 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 our view, in the scheme of the Code, 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. As noticed, the question of intent is not involved in Section 43 and by virtue of legal fiction, upon existence of the given ingredients, a transaction is deemed to be of giving preference at a relevant time. However, whether a transaction is undervalued requires a different enquiry as per Sections 45 and 46 of the Code and significantly, such application can also be made by the creditor under Section 47 of the Code. The consequences of undervaluation are contained in Sections 48 and 49. Per Section 49, if the undervalued transaction is referable to sub-section (2) of Section 45, the Adjudicating Authority may look at the intent to examine if such undervaluation was to defraud the creditors. On the other hand, the provisions of Section 66 related to fraudulent trading and wrongful trading entail the liabilities on the persons responsible therefor. We are not elaborating on all these aspects for being not necessary as the transactions in question are already held preferential and hence, the order for their avoidance is required to be approved; but it appears expedient to observe that 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 H

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A the mischief sought to be remedied by Sections 45/46/47 or Section 66 of the Code. As noticed, 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. B 29.2. In the present case, it is noticed that NCLT in its detailed and considered order essentially dealt with the features of the transaction in question being preferential at a relevant time but recorded combined findings on all these three aspects that the impugned transactions were preferential, undervalued and fraudulent. Appropriate it would have been to deal with all these aspects separately and distinctively. 29.3. We are conscious of the fact that IBC is comparatively a new legislation and various aspects expected therein are in the progression of taking proper shape, particularly in the adjudicatory processes envisaged. Having said so, we would leave this aspect at that only, while expecting all the concerned to be more attentive to the scheme, object and requirements of the provisions contained in the Code. SECOND ISSUE: WHETHER LENDERS OF JAL COULD BE CATEGORISED AS FINANCIAL CREDITORS OF JIL

E Preliminary and background

30Copy pinpoint30. The discussion and summation in the foregoing paragraphs and conclusion on the first issue itself would have been the end of the matter because the transactions in question stand disapproved as being preferential. However, there remains another significant issue to be adjudicated herein, which, though not adverted to by NCLAT, is indeed involved in these matters. 30.¹. The issue is as to whether the lenders of JAL could be categorised as financial creditors of JIL for the purpose of IBC?

31Copy pinpoint31. The issue aforesaid was raised before NCLT by two of the respondent banks namely, ICICI Bank Limited and Axis Bank Limited by way of separate applications under Section 60(5) of the Code, seeking to question the decision of IRP rejecting their claims 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 way of its orders dated 09.05.2018 and H

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 393 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

15.05.2018 respectively, while concluding that on the strength of the A mortgages created by the corporate debtor JIL, as collateral security of the debts of its holding company JAL, the applicants cannot be treated as financial creditors of the corporate debtor JIL. 31.¹. The aforesaid orders dated 09.05.2018 and 15.05.2018 were questioned before NCLAT by the said lenders of JAL in Comp. App B (AT) (Ins) No. 353 of 2018 and Comp. App (AT) (Ins) No. 301 of 2018 respectively. These appeals formed part of the bunch of appeals decided by NCLAT by way of the impugned common order dated 01.08.2019 and, as per the final result recorded therein, these two appeals also stand allowed. However, fact of the matter remains that nothing has been C discussed by NCLAT in the impugned order dated 01.08.2019 as regards the subject-matter of these two appeals i.e., as to whether the said lenders of JAL could be categorised as financial creditors of JIL or not; and the entire discussion in the impugned order and the final conclusion therein had only been in relation to the order dated 16.05.2018 that was passed by NCLT on the application for avoidance filed by IRP. D 31.2. The appellant of Civil Appeal D. No. 32881 of 2019, IIFCL, apart from raising other contentions, has also questioned this aspect of the order impugned that the aforesaid two appeals, involving the issue as to whether the mortgagees of the corporate debtor could be taken as financial creditors, have been allowed by NCLAT without recording any findings and without any discussion in that regard. 31.3. Though, ordinarily, such omission in the impugned order dated 01.08.2019 might have resulted in the matter being remitted to the Appellate Tribunal for appropriate consideration and finding but, as aforesaid, in the entire process, adherence to the time limit is also of significance; and in view of the fact that learned counsel for the respective parties have advanced elaborate submissions on the merits of the issue as to whether such lenders of JAL could be treated as financial creditors of the corporate debtor JIL and have invited the decision of this Court, we deem it just, proper and expedient to finally decide the relevant questions in this regard. G 31.4. We may, of course, reiterate that in view of the conclusion that we have reached in relation to the principal issue, the transactions in question are denuded of their value and worth, per the force of the order by NCLT under Section 44 of the Code, which has been approved by H

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A us. To be more specific, the security interests created by the corporate debtor JIL over the properties in question stand discharged in whole. Therefore, the respondent-lenders cannot claim any status as creditors of the corporate debtor JIL and there could arise no question of their making any claim to be treated as financial creditors as such. However, for its relevance, we deem it appropriate to determine the issue as to whether the lenders of JAL, because of creation of the mortgages in question, could be treated as financial creditors of JIL, independent of the finding that the transactions in question are hit by Section 43 of the Code.

32Copy pinpoint32. Before proceeding further, apposite it would be to take note of the reasons assigned by NCLT in its impugned orders for rejecting the claim of two of the lender banks to be treated as financial creditors of JIL. Reasoning and Findings of NCLT

33Copy pinpoint33. The Adjudicating Authority, NCLT, in its order dated 09.05.2018 D as passed on the application moved by ICICI Bank Limited, with reference to the nature of transaction in question, whereby JIL had extended collateral security towards the facility extended to its holding company JAL as also with reference to the definition and connotations of the expressions ‘financial debt’ and ‘financial creditor’ as occurring in IBC, essentially proceeded to find that in such a transaction, as regards the corporate debtor JIL, no consideration for time value for money was involved; and hence, the transaction in question did not qualify as ‘financial debt’ qua the corporate debtor JIL. The NCLT, interalia, observed as under:- “9. In the present case undisputedly corporate debtor has mortgaged its property for creating collateral security for the debt of its holding company JAL. The Corporate debtor is not a borrower, it has created a mortgage in favour of financial institutions for creating collateral security for the money borrowed by its holding company JAL. In the said transaction time value of money is not involved. The corporate debtor’s liability is not regarding the debt owed by its holding company JAL. In case of default in making payment by the principal borrower, for which security interest has been created by the corporate debtor by mortgaging its property in favour of Applicant bank, the debt amount can be realized from the sale of the mortgaged property but not from the corporate debtor, i.e. Jaypee Infratech Ltd. *** *** ***

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 395 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

9.2 In this case, the applicant has not disbursed the debt along with interest against the consideration for the time value of money. It is also not the case of the applicant that the corporate debtor has borrowed money against payment of interest from the applicant. It is also not the case that the corporate debtor has raised any amount from the applicant under any credit facility. It B is not the case of the applicant that there is any liability towards the corporate debtor in respect of any lease or higher purchase contract. It is further not the case of an applicant that any receivables been sold or discounted. It is further not the case of the applicant that any amount has been raised for the corporate debtor under any other transaction having the commercial effect of borrowing to the corporate debtor. It is not the case of the applicant that any derivative transaction has been entered with the corporate debtor. It is also not the case of the applicant that any counter indemnity obligation in respect of a guarantee, indemnity, bond, documentary, letter of credit or any other instrument issued by a bank or a financial institution for the corporate debtor. Further, no amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to above has been issued by the corporate debtor.” 33.¹. The NCLT also distinguished the decision of this Court in the case of Rajkumari Kaushalya Devi v. Bawa Pritam Singh & E Anr.: AIR 1960 SC 1030, as relied upon by the learned counsel for the applicant, while pointing out the distinct context of the said decision and while observing that the connotations of the expressions ‘debt’, ‘financial debt’, ‘financial creditor’ and ‘creditor’ in the present context would be limited to the definitions given in the Code. The NCLT further F distinguished the decision of Gujarat High Court in the case of State Bank of India v. Smt. Kusum Vallabhdas Thakkar: 1991 SCC Online Guj 14, while again pointing out that in the present case, the corporate debtor has created a mortgage of its property in favour of third party without any consideration for time value of money. G 33.2. Yet further, the NCLT rejected the contentions that the transaction in question could be termed as either ‘guarantee’ or ‘indemnity’ while observing, inter alia, as under:- “13. The contention of the applicant that mortgage created by the corporate debtor can be termed as either a guarantee or indemnity H

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A is not tenable. In terms of the mortgage deeds the corporate debtor has created a mortgage over its immovable properties, which is either money borrowed against payment of interest nor indemnity or a guarantee as claimed by the applicant and therefore, the same does not fall within the definition of the financial debt in terms of Sec. 5 (8) of IBC. It is stated that the corporate debtor B has neither issued any guarantee nor has provided an indemnity to the applicant in respect of the financial assistance granted to JAL.

14. The Resolution Professional further submitted that the mortgage deed shows that the corporate debtor has only agreed to create a C mortgage in favour of the applicant towards the financial assistance granted to its holding company, i.e. JAL. On perusal of mortgage it is clear that the corporate debtor has neither given any guarantee to repay or any indemnity qua the repayment of the loans granted by the applicant to JAL. The definition of Mortgage Debt as per the mortgage deed dated 7th March 2017 is as under : - “Mortgage debt shall mean the principal amount of the facility, all interest therein additional interest, default interest, liquidated damages, fees, costs, charges, expenses, any other amounts due and payable to secured parties under the transaction documents, premia on prepayment, costs, charges, and expenses and other monies whatsoever stipulated in or payable together with other debts and liabilities of JAL to lender under the transaction document and/or these presents.”

It is important to point out that sec. 124 of the Indian Contract Act F defines a “Contract of Indemnity” as being a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person. In the instant case, as per the Mortgage deed the repayment obligation of the loan granted to JAL by the applicant is upon JAL as stated above and therefore, no contract of G indemnity as claimed by the applicant has been entered even by conduct of the corporate debtor, and therefore, the contention of the applicant that the applicant is a financial creditor of the corporate debtor is completely untenable in law.”

33.3. While observing that in the scheme of the Code and CIRP H Regulations thereunder, the claims are invited from the creditors

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 397 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

of the corporate debtor i.e., financial creditors, operational creditors A and other creditors, and not from any person or creditors of the holding company of the corporate debtor; and while further observing that the resolution professional had righty observed that the mortgages in questions were not like guarantee or indemnity, NCLT observed that the basic ingredient of financial debt i.e., B ‘debt alongwith interest disbursed against time value of money’ was lacking in the impugned transactions. NCLT also referred to the interpretation of the expression ‘financial creditors’ by NCLAT in the case of Nikhil Mehta and Sons v. AMR Infrastructure Ltd. Company: Appeal (AT) (Insolvency) No. 07 of 2017andendorsed the decision of IRP while holding that,- C

“15. ….On the above basis, we are of the view that The Resolution Professional has correctly rejected the claim of the applicant on the ground that the Applicant is not a financial creditor of the corporate debtor concerning the Mortgages and the Mortgaged Debt. The resolution professional has rightly observed that guarantee and indemnity are distinct documents under the relevant laws and the mortgages executed by the corporate debtor are not like guarantee and indemnity. The basic ingredient of the financial debt as defined under the Code is that debt along with interest disbursed against time value of money lacks in the impugned transaction….”

33.4. Accordingly, NCLT rejected the application of ICICI Bank Limited by way of its order dated 09.05.2018, while concluding as under:- “…Therefore, by the mortgage created by the corporate debtor, as collateral security by the debt of its holding company, i.e. Jaiprakash Associates Ltd. (“JAL”) in favour of the Applicant i.e. ICICI Bank, the applicant cannot be treated as Financial Creditor of the Corporate Debtor. Therefore in our view, Resolution Professional has rightly rejected the claim of the applicant, which was filed by the Applicant in the capacity of Financial Creditors G of the corporate debtor, i.e. Jaypee Infratech Ltd. (“JIL”)”. 33.4.¹. Thereafter, the other application filed by Axis Bank Limited was rejected by NCLT on 15.05.2018, while following the earlier order dated 09.05.2018. H

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34Copy pinpoint34. As noticed, the aforesaid orders dated 09.05.2018 and 15.05.2018 were questioned in two appeals before NCLAT by the said lenders of JAL; and the said appeals stand allowed in the impugned order dated 01.08.2019 without any discussion as regards the issue involved therein. We have heard learned counsel for the parties at length in relation to this issue too, and, in the circumstances of the case, as B noticed, we had indicated prima facie view in the order dated 10.12.201945, that such lenders of JAL cannot be categorised as financial creditors of JIL and had stayed the operation of impugned order to that extent. Rival submissions C

35Copy pinpoint35. Having noticed the relevant background, we may now take note of the contentions of learned counsel for the parties in regard to the issue under consideration. Submissions on behalf of the appellant

36Copy pinpoint36. It has essentially been argued on behalf of the appellant IIFCL that as per sub-section (7) of Section 5 of the Code, only such creditor could be the ‘financial creditor’ of the corporate debtor to whom a ‘financial debt’ is owed by the corporate debtor; and, as per sub-section (8) of Section 5 of the Code, the key requirement of a financial debt is E ‘disbursal against the consideration for the time value of money’, which includes the events or modes of disbursement as enumerated in sub-clauses (a) to (i) of Section 5(8). It is submitted that in the present case, the lenders of JAL having not disbursed any debt against the consideration for the time value of money to the corporate debtor JIL, the corporate debtor does not owe any ‘financial debt’ to such lenders; and the transactions in question do not fall within the brackets of ‘financial debt’ only for the reason that the corporate debtor JIL created mortgages as collateral security in favour of lender banks for the money borrowed by JAL. Concisely put, the submission is that in the said mortgage transactions, disbursal against the consideration for the time value of money qua the corporate debtor JIL being not involved, the lenders of JAL are not the ‘financial creditors’ of JIL and cannot be included in the Committee of Creditors46, as to be constituted per Section 21 of the Code.

45 Reproduced in paragraph 7 hereinbefore. H 46 ‘CoC’ for short

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 399 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

36.¹. It is further submitted that the said lenders of JAL have no right to demand the mortgage money from the corporate debtor nor is the corporate debtor JIL under any liability to pay the same; and mere holding of security interest, which too had not been extended for direct disbursement of any credit to JIL, cannot make the JAL lenders as financial creditors of JIL within the meaning of IBC. Learned counsel for the appellant has referred to the judgment and order dated 22.12.2017 by the NCLAT in Dr. B.V.S. Lakshmi v. Geometrix Laser Solutions (P) Ltd.:Company Appeal (AT) (Insolvency) No. 38 of 2017, to substantiate this submission. 36.2. It is contended on behalf of the appellant that though the definition of ‘financial debt’ extends to include various types of transactions, yet it does not include a mortgage, as could be gathered from a plain and simple reading of the said provision. The counsel for the appellant has further relied on the judgment of this Court in Swiss Ribbons (supra), wherein the concept of ‘financial creditor’ has been explicated to mean and include a person who has direct engagement in the functioning of corporate debtor right from the beginning, while assessing the viability of corporate debtor; and who would also engage in restructuring of debts and reorganising the corporate business in case of financial stress. With reference to the case at hand, it is submitted that mere holding of security interest, not meant for direct disbursement of any credit to corporate debtor JIL, cannot convert the lenders of JAL E into the financial creditors of JIL. 36.2.¹. It is also contended that the respondents, the lenders of JAL to whom mortgages were extended by the corporate debtor JIL, could at best be construed as plain creditors, who are entitled to file Form F and to specify their security in column 8 thereof; and in any case, they cannot become financial creditors of JIL. 36.2.2. It is further contended that a secured creditor under the Code can be a financial creditor under two circumstances i.e., (i) when corporate debtor directly avails a debt from the creditor and such a debt is a secured debt; and (ii) if corporate debtor furnishes a guarantee to any person. Learned counsel for the appellant submits that a mortgagee, who has not disbursed any debt to the corporate debtor, may be a secured creditor because of the corporate debtor creating a security to secure the payment of a third party but cannot be a financial creditor of the corporate debtor within the meaning of Section 5(8) of the Code. H

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A 36.3. Elaborating on the submissions relating to the nature of transactions, learned counsel for the appellant has strenuously argued that ‘mortgage’ is not included within the framework of Section 5(8) of the Code and its sub-clauses (a) to (i); and that ‘financial debt’ is limited only to the transactions enumerated thereunder and its coverage cannot be enlarged while interpreting the provision. It is also argued that B ‘mortgage’ cannot be deemed to mean ‘guarantee’, for a mortgagor has no intentions to undertake to discharge the liability of a third person in case of his default in repayment of debts. In other words, only where the debtor and the mortgagor are the same person that the mortgagor would be liable to pay his debts and else, the mortgage itself does not create a pecuniary liability. Moreover, in the present case, when there is a tri-partite contract wherein, the mortgagor and debtor are different, the impugned transactions do not satisfy the ingredients of Section 126 of the Contract Act, as JIL has not undertaken specifically to discharge the liability of JAL nor has entered into a ‘contract of guarantee’ with the lenders of JAL nor has provided any indemnity; and therefore, the corporate debtor JIL is not bound by any liabilities and obligations incurred by JAL. To support the contention that liability always flows from debt and not from the security created under the mortgage, learned counsel for the appellant has also relied on several decisions including that in Ramchand Sur v. Ishwar Chandra Giri: 61 Ind Cases 539. E 36.4. It is submitted that a general reference to the transaction documents would not be sufficient to fasten liability for JIL to pay any outstanding debt of JAL because any payment obligation has to be unequivocal and ought to be of specific undertaking to discharge such obligations; and that general words of incorporation or general covenant in some mortgage deeds cannot bind JIL to all the terms and conditions of the documents, particularly any liability to incur JAL’s indebtedness by fastening payment obligations. It is further submitted that when the intention of parties is ascertained with reference to the terms of documents and all the surrounding factors, it cannot be inferred that JIL undertook the liability to discharge the indebtedness of JAL when it was itself reeling under financial stress, was declared NPA and had surmounting liabilities towards home buyers and its own lenders. With reference to the financial statements of JIL, it is pointed out that therein, it was specifically disclosed that the mortgages had been provided as a security for the financial assistance availed by JAL but such mortgages were not declared either as contingent or as direct liability. It is also submitted that the common

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 401 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

loan agreement between JIL and its lenders, including the appellant, contained negative covenants prohibiting JIL from creating, assuming or incurring any additional indebtedness or from encumbering any property or creating any security on the assets of JIL. The sum and substance of such submissions had been that the corporate debtor JIL could have neither incurred a liability to discharge the indebtedness of JAL nor it had done so under the mortgages in question. 36.5. As regards the decision of this Court in Committee of Creditors of Essar Steel India Limited through Authorised Signatory v. Satish Kumar Gupta : 2019 SCC OnLine SC 147847, as relied upon by the respondents, learned counsel for the appellant has submitted that the generalised assertion on the part of the respondents, that per the force of the said decision, a secured creditor ipso facto becomes financial creditor, is not a correct appreciation of the ratio thereof. It is submitted that in the scheme of the Code, a secured creditor could also be a financial creditor under two circumstances: First, when the corporate debtor directly avails a debt from the creditor and such debt is secured by a security interest like in the form of a charge or mortgage or hypothecation; and such a creditor, the secured one, is regarded as financial creditor because of direct disbursement of debt to the corporate debtor; and secondly, when the corporate debtor furnishes guarantee to any person, such person would also become a financial creditor and a secured creditor by virtue of sub-clause (i) of Section 5(8) of the Code, of course, such guarantee may even be to secure the debt obligation of a third party. However, according to the counsel for the appellant, when the corporate debtor creates mortgage to secure payment obligation of a third party, without disbursement of any debt to itself (the corporate debtor), the mortgagee, even if becoming a secured creditor because of creation of mortgage, could only be described as ‘indirect secured creditor’ and cannot be treated as a ‘direct secured creditor’ so as to become a ‘financial creditor’ because, the mortgage transaction is not envisaged to be a ‘financial debt’ in Section 5(8) with its sub-clauses (a) to (i). 36.5.¹. It is submitted that Essar Steel judgment envisages the position and priorities of secured creditors, mainly in the context of a creditor who has disbursed direct debt to the corporate debtor and has secured its debt by a security interest, who should have priority over unsecured creditors of the corporate debtor. However, the said decision, 47 Hereinafter also referred to as the case of ‘Essar Steel’. H

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A according to the learned counsel, cannot be read to the effect that even the indirect secured creditor be also necessarily construed as financial creditor. It is submitted that the crux of the said decision is that creditors not similarly situated cannot be at par; that the arrangements of the corporate debtor with its creditors must be taken into consideration; and that the aim of equitable treatment is based on the notion that creditors with similar legal rights should be treated evenly while receiving distribution in accordance with their relative ranking and interest. It is submitted that Essar Steel cannot be read as laying down the law that even the lenders of third party, who hold mortgages from the corporate debtor, be also treated as such secured creditors who would fall within the sect of ‘financial creditors’. 36.6. Learned counsel for the appellant would further submit that existence of a security interest is not relevant while construing whether a creditor is financial creditor or not because, in the composition of CoC, even a non-secured creditor could also be a financial creditor, if the ingredients of Section 5(8) of the Code are satisfied. It is also argued that the financial facilities availed by JAL from the respondents were not utilized for any business operation of JIL and hence, the respondents cannot be construed as financial creditors of JIL. Submissions on behalf of respondents

37Copy pinpoint37. Learned counsel for the contesting respondents have made elaborate submissions in support of the counter-assertion that on account of security provided by the corporate debtor JIL, the respective lenders have become financial creditors of JIL for the purpose of proceedings under the Code. We may briefly summarise the principal facets of the F contentions urged on behalf of the main contesting respondents in this regard as infra. Axis Bank 37.¹. It has been strenuously argued on behalf of this respondent that the nature and character of a ‘mortgage’ is such that it secures a G debt; and in the present case, the mortgage in question, as made by JIL, had been to secure the debt obligations of its holding company JAL. With reference to Section 58 of the Transfer of Property Act and the decision of this Court in Prithvi Nath Singh & Ors. v. Suraj Ahir & Ors. : (1963) 3 SCR 302 as also the decision of Mysore High Court in Dassappa & Ors v. Jogaiah & Ors : (1964) ILR 545, it is submitted H

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 403 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

that the purpose of ‘mortgage’ is to secure a debt; and with reference to A the decision in Manik Chand Raut v. BaldeoChaudhary & Ors: (1949) SCC Online Pat 64, it is also contended that mortgage, by its very nature, presupposes existence of a debt and the transaction by which a debt is extinguished is not a mortgage but a sale. Further, with reference to the aforementioned decision of this Court in case of B Rajkumari Kaushalya Devi v. Bawa Pritam Singh & Anr: AIR 1960 SC 1030, it is contended that a mortgage debt creates pecuniary liability upon the mortgagor; and that a mortgagor who transfers an interest in immovable property so as to secure a debt, incurs a mortgage debt. With reference to the decision of Delhi High Court in the case of State Bank of India v. Samneel Engineering Co. & Ors: 1995 (35) DRJ 485, it C is further submitted that a mortgage is both a promise by a debtor to repay the loan as well as a real property right; of course, the right being intended to secure the due payment of the debt; and a suit on a mortgage is essentially a suit for recovery of a debt. 37.¹.¹. With reference to principles aforesaid, it is contended that D a mortgage debt is a ‘debt’ within the meaning of Section 3(11) of the Code; that a debt can be classified to be a debt due from ‘any person’ and not necessarily restricted to the borrower alone. The aforementioned decision of Gujarat High Court in State Bank of India v. Smt. Kusum Vallabhdas Thakkar: 1991 SCCOnline GUJ 14 has again been referred to submit that Indian Law recognizes that a person, other than E the borrower, can also execute a mortgage to secure the debt of the borrower. In this context, learned counsel for the respondent has also relied upon the provisions contained in Section 126 of the Contract Act, to contend that JIL stands in the position of a guarantor for the debts owed by JAL. The learned counsel has also referred to an order dated F 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., wherein it is held that a third party mortgagor, who mortgages the property to secure the financial obligation of another party, stands in the position of a guarantor; and the mortgagee is a financial creditor of the third party mortgagor.In G the case at hand, it is submitted, the corporate debtor JIL stands in the position of a guarantor with respect to the security provided to this respondent and hence, the impugned mortgage transactions are covered within the meaning of Section 5(8)(i) of the Code. H

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A 37.¹.2. It is also submitted that looking to the nature of transaction in question, the question whether JAL has defaulted on repayment and consequently, the security is to be invoked is irrelevant for the purposes of the issue at hand; and whether JAL committed default or not is not decisive of the question as to whether the mortgage debt in question is financial debt or not. B 37.¹.3. It is further submitted that in the present case, the mortgage transactions were executed to secure the payment of debts/liabilities of JAL; and that such creation of mortgage undoubtedly is a ‘security interest’ as defined in Section 3(31) of the Code inasmuch as, a security interest includes any creation of right/title/interest/claim in property for the purpose of securing the payment or performance of an obligation; and also includes a mortgage. Hence it is contended that the respondent bank comes within the ambit of ‘secured creditor’ per Section 3(30) of the Code. 37.¹.4. It is emphasised by learned counsel for this respondent that a mortgage debt constitutes a ‘financial debt’ within the meaning of Section 5(8) of the Code even if no amount is directly disbursed to the corporate debtor. While relying on the decision of this Court in Pioneer Urban Land and Infrastructure Ltd. & Anr. v. Union of India & Ors.: (2019) 8 SCC 41648, it is contended thatthe definition of ‘financial debt’ under Section 5(8) of Code has been given an extended meaning so as to include the situations which may not directly involve disbursal against the consideration for time value money. 37.¹.5. Further, with reference to the aforementioned UNCITRAL Legislative Guide on Insolvency Law and the decisions of this Court in the cases of Essar Steel and Swiss Ribbons, it is submitted that a holistic interpretation of the Code would support the position that the respondent, being a secured creditor and a financial creditor, should be included in CoC so as to protect its security interest. 37.2. The submissions and contentions made on behalf of this respondent largely cover the stand of other respondents too. Hence, we may only notice, in brief, the other or additional part of major submissions on behalf of other respondents, while avoiding repetition. Standard Chartered Bank

H 48 Hereinafter also referred to as the case of ‘Pioneer Urban’

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 405 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

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A under the Code, for the transaction being akin to that of a ‘guarantee’ as defined under Section 126 of the Contract Act. Again, with reference to the decision in Smt. Kusum (supra), it is submitted that even a third party mortgage leads to creation of an implied guarantee with an obligation to pay the mortgage debt. In other words, since the definition of ‘financial debt’ is not exhaustive, any transaction which is akin to creation of a B guarantee would come under the purview of the definition of ‘financial debt’ and as such, the mortgage provided by the corporate debtor JIL, being akin to the guarantee, would be squarely within the definition of ‘financial debt’. It is further submitted that in the given scenario, this respondent takes on the role of a ‘financial creditor’ of the corporate debtor JIL within the meaning of Section 5(8)(i) of the Code and hence, ought to be admitted as a member of the CoC. 37.4.¹.It is submitted on behalf of this respondent that on a holistic reading of the mortgage deeds, it is clear that ‘exclusive mortgages’ were executed in favour of this respondent with express clauses whereby, the corporate debtor JIL had undertaken to either discharge the debt or to ensure repayment of facilities extended to JAL and in the event of default, this respondent shall have the right to sell the mortgaged properties. Such stipulations, it is contended, clearly put the respondent in the category of ‘financial creditors’. E 37.4.2.With reference to the duties of IRP as laid out in the Code, and with analysis of the definition of ‘claim’ as found in Section 3(6) of the Code, it is submitted that the definition of ‘claim’ is wide enough to include all stakeholders of the corporate debtor, even if a claim had not matured on the date of insolvency commencement. The Report of Banking Law Reform Committee has also been referred in this regard. F 37.4.3.It is further submitted that Regulations 12, 13 and 14 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 require the IRP to admit all claims, including contingent claims, as on the insolvency commencement date; that as per Section 29 of the Code, the IRP ought G to prepare an information memorandum for formulating a resolution plan; that as per Regulation 37 of CIRP Regulations, the insolvency resolution of the corporate debtor should include sale of all or part of the assets, irrespective of whether they are subject to security interest and satisfaction or modification of any security interest; and that sub-section H (4) of Section 30 of the Insolvency and Bankruptcy (Amendment) Act,

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 407 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

2019 clarifies that priority of secured creditors has to be considered. A With reference to the processes so envisaged by the Code, it is contended that the secured creditors like the respondent cannot be kept away from the class of financial creditors. Central Bank of India 37.5. Apart from the submissions carrying essentially the substance as above-noted, it is also contended that this respondent, being a secured creditor, would be entitled to enforce its security interest in the mortgaged property upon vacation of the order of moratorium in terms of the Securitisation and Reconstruction Of Financial Assets and Enforcement of Security Interest Act, 200250; and that the resolution plan, without including the secured creditors, would be unenforceable, as the secured creditors will then seek enforcement against mortgage property under the SARFAESI Act. It is, therefore, contended that the secured creditor, like the respondent, needs to be recognized as financial creditor, and thereby a participant in CoC of the corporate debtor JIL. D Bank of Maharashtra 37.6. While going in tandem with the submissions aforesaid, it is asserted on behalf of this respondent that the corporate debtor JIL is under a pecuniary obligation to discharge the liability in view of the Indenture of Mortgage (IOM) dated 29.12.2016, which is a contract of E guarantee and, therefore, the relationship between the parties cannot be classified merely as that of mortgagor and mortgagee, but is also of a guarantor and guarantee which, in turn, is covered under Section 5(8) of the Code and thereby, this respondent is a ‘financial creditor’ within the meaning of Section 5(7) of the Code. F Unique position of financial creditor- as explained in Swiss Ribbons

38Copy pinpoint38. Having taken note of the rival contentions on the issue as to whether the lenders of JAL could be categorised as ‘financial creditors’ of JIL for the purpose of CIRP in question, gist of the matter is as to G whether the subject transactions could be categorised as ‘financial debts’ within the meaning of Section 5(8) of the Code so as to confer the status of ‘financial creditors’ upon the respondents, lenders of JAL.

50 Herein after also referred to as ‘the SARFAESI Act’ H

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A 38.¹. The expressions “financial creditor” and “financial debt” as occurring in the Code have come up for consideration before this Court in several decisions, including those in the above-mentioned cases of Swiss Ribbons (decided on 25.¹.2019), Pioneer Urban (decided on 09.08.2019) and Essar Steel (decided on 15.11.2019), which have been referred to and relied upon by learned counsel for the parties for one proposition or another. In fact, the observations as occurring in the last of the said decisions, in the case of Essar Steel, as relied upon by the learned counsel for the respondents, are based on those occurring in the decision in Swiss Ribbons51.

39Copy pinpoint39. As indicated hereinbefore, the law declared by this Court in the case of Swiss Ribbons, while rejecting the contentions that classification between financial creditor and operational creditor was discriminatory and violative of Article 14, shall have some bearing on the claim of the respondent-lenders for being treated as financial creditors of JIL. Having regard to the submissions made, it shall now be pertinent to take note of the relevant aspects from the said decision in requisite details. 39.¹. The broad features of the expressions used in Sections 5(7) and 5(8) of the Code in defining the terms “financial creditor” and “financial debt” were indicated by this Court in the case of Swiss Ribbons E in the following: “42. A perusal of the definition of “financial creditor” and “financial debt” makes it clear that a financial debt is a debt together with interest, if any, which is disbursed against the consideration for time value of money. It may further be money that is borrowed or F raised in any of the manners prescribed in Section 5(8) or otherwise, as Section 5(8) is an inclusive definition. On the other hand, an “operational debt” would include a claim in respect of the provision of goods or services, including employment, or a debt in respect

G 51We have referred to the case of Swiss Ribbons in paragraph 16.¹.¹ hereinbefore while pointing out that in Swiss Ribbons, this Court had traversed through the historical background and scheme of the Code in the wake of challenge to the constitutional validity of various provisions of the Code and while rejecting such challenge, this Court had observed that the focus of the Code was to ensure revival and continuation of the corporate debtor, where liquidation is to be availed of only as a last resort; and that the Code was a beneficial legislation to put the corporate debtor on its feet, and not a mere H recovery legislation for the creditors.

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 409 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

of payment of dues arising under any law and payable to the A Government or any local authority.” 39.2. The unique position assigned to a ‘financial creditor’, who plays a crucial role in insolvency resolution process as against the role of other creditors, has been extensively explained by this Court in the case of Swiss Ribbons, albeit in the context of its differentiation with the category of ‘operational creditor’, in the following: “50. According to us, it is clear that most financial creditors, particularly banks and financial institutions, are secured creditors whereas most operational creditors are unsecured, payments for goods and services as well as payments to workers not being secured by mortgaged documents and the like. The distinction between secured and unsecured creditors is a distinction which has obtained since the earliest of the Companies Acts both in the United Kingdom and in this country. Apart from the above, the nature of loan agreements with financial creditors is different from contracts with operational creditors for supplying goods and services. Financial creditors generally lend finance on a term loan or for working capital that enables the corporate debtor to either set up and/or operate its business. On the other hand, contracts with operational creditors are relatable to supply of goods and services in the operation of business. Financial E contracts generally involve large sums of money. By way of contrast, operational contracts have dues whose quantum is generally less. In the running of a business, operational creditors can be many as opposed to financial creditors, who lend finance for the set-up or working of business. Also, financial creditors have specified repayment schedules, and defaults entitle F financial creditors to recall a loan in totality. Contracts with operational creditors do not have any such stipulations. Also, the forum in which dispute resolution takes place is completely different. Contracts with operational creditors can and do have arbitration clauses where dispute resolution is done privately. G Operational debts also tend to be recurring in nature and the possibility of genuine disputes in case of operational debts is much higher when compared to financial debts. A simple example will suffice. Goods that are supplied may be substandard. Services that are provided may be substandard. Goods may not have been H

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A supplied at all. All these qua operational debts are matters to be proved in arbitration or in the courts of law. On the other hand, financial debts made to banks and financial institutions are well documented and defaults made are easily verifiable.

51. Most importantly, financial creditors are, from the very beginning, involved with assessing the viability of the corporate debtor. They can, and therefore do, engage in restructuring of the loan as well as reorganisation of the corporate debtor’s business when there is financial stress, which are things operational creditors do not and cannot do. Thus, preserving the corporate debtor as a going concern, while ensuring maximum recovery for all creditors being the objective of the Code, financial creditors are clearly different from operational creditors and therefore, there is obviously an intelligible differentia between the two which has a direct relation to the objects sought to be achieved by the Code. D *** *** ***

75. Since the financial creditors are in the business of moneylending, banks and financial institutions are best equipped to assess viability and feasibility of the business of the corporate debtor. Even at the time of granting loans, these banks and financial institutions undertake a detailed market study which includes a techno-economic valuation report, evaluation of business, financial projection, etc. Since this detailed study has already been undertaken before sanctioning a loan, and since financial creditors have trained employees to assess viability and feasibility, they are in a good position to evaluate the contents of a resolution plan. On the other hand, operational creditors, who provide goods and services, are involved only in recovering amounts that are paid for such goods and services, and are typically unable to assess viability and feasibility of business. The BLRC Report, already quoted above, makes this abundantly clear.” G (emphasis supplied) 39.3. The enunciation aforementioned illuminates the reasons as to why at all a financial creditor is conferred with a major, rather pivotal, role in the processes contemplated by Part II of the Code. It is the financial creditor who lends finance on a term loan or for working capital H

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 411 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

that enables the corporate debtor to set up and/or operate its business; and who has specified repayment schedules with default consequences. The most important feature, as this Court has said, is that a financial creditor is, from the very beginning, involved in assessing the viability of the corporate debtor who can, and indeed, engage in restructuring of the loan as well as reorganisation of the corporate debtor’s business when there is financial stress. Hence, a financial creditor is not only about in terrorem clauses for repayment of dues; it has the unique parental and nursing roles too. In short, the financial creditor is the one whose stakes are intrinsically inter-woven with the well-being of the corporate debtor. Financial debt - ratio of Pioneer Urban C

40Copy pinpoint40. Having imbibed the basic features associated with a ‘financial creditor’, we need to examine as to who could at all fall in this category. In order to address this core question, delving into the finer connotations of the expression “financial debt”, as defined in Section 5(8) of the Code is, obviously, necessary. As noticed, while defining ‘financial creditor’ and ‘financial debt’ in Section 5(7) and Section 5(8) of the Code, both the expressions “means” and “includes” have been used. As per the definition, while “financial creditor” means a person to whom a “financial debt” is owed, it also includes a person to whom such debt has been legally assigned or transferred to. Obviously, a comprehension of this definition of “financial creditor” cannot be complete without taking into account as to what is the meaning assigned to the expression “financial debt”. Again, the term “financial debt” has also been defined with the expressions “means” and “includes”. A “financial debt” means a debt along with interest, if any, which is disbursed against the consideration for the time value of money; and it includes the money borrowed or raised or protected in any of the manners prescribed in sub-clauses (a) F to (i) of Section 5(8).

41Copy pinpoint41. The larger parts of the expressions employed in the definition of “financial debt” in sub-section (8) of Section 5 of the Code with their connotations were explicated in Pioneer Urban bya three-Judge Bench of this Court; and, in view of the contentions urged, it would be G appropriate to take a deeper look into the exposition of law by this Court, while also keeping in view the plain basic principle that a decision of the Court is required to be understood in the context of the facts and issues involved therein. H

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A 41.¹. In the case of Pioneer Urban, this Court was concerned with the challenge to the constitutional validity of amendments made to the Code pursuant to a report dated 26.03.2018 prepared by the Insolvency and Bankruptcy Law Committee. The amendments were essentially to the effect of putting the allottees of real estate projects into the sect of ‘financial creditors’ and thereby investing them with the B rights and entitlement to trigger the proceedings under Section 7 of the Code against the real estate developers and to be represented in the Committee of Creditors. In the background of such amendments had been certain important decisions/orders by NCLAT and by this Court. One had been the order dated 21.07.2017 by the NCLAT in the case of C Nikhil Mehta and Sons (HUF) v. AMR Infrastructure Limited: (2017) SCC Online NCLAT 859, where it was held that the amount raised by the developers had the commercial effect of a borrowing and the allottees of such developers were financial creditors within the meaning of Section 5(7) of the Code. The other one had been the order dated 11.09.2017 passed by this Court in Chitra Sharma (supra) whereby, D a representative of the home buyers was appointed to participate in the meetings of the Committee of Creditors for protection of their interests. Yet another order was passed by this Court on 22.11.2017, on practically the same lines, qua another group of builders in the case of Bikram Chatterjee v. Union of India: 2019 (8) SCC 527. In the wake of such E orders, the Insolvency Committee Report suggested for amendment to the Code that ultimately culminated into the Insolvency and Bankruptcy (Second Amendment) Act, 2018. The amendments were made, inter alia, with insertion of Explanation to sub-clause (f) of Section 5(8) of the Code and with the co-related insertion of sub-section (6A) to Section 21 as also with further insertion of Section 25-A in the Code. These F amendments were under challenge in Pioneer Urban. Several contentions were urged before this Court questioning the treatment of allottees as financial creditors. In this context and in the wake of such issues this Court dealt with the contentions related with Section 5(8), particularly sub-clause (f) thereof. The relevant part of the consideration of this Court in Pioneer Urban under the heading ‘Interpretation of Section 5(8)(f) of the Code’ needs to be noticed and is extracted as under:- “66. Section 5(8)(f) of the Code has been set out in the beginning of this judgment. What has been argued by learned counsel on behalf of the petitioners is that Section 5(8)(f), as it originally

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 413 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

stood, is an exhaustive provision which must be read noscitur a A sociis, and if so read, sub-clause (f) must take colour from the other clauses of the provision, all of which show that the sine qua non of a “financial debt” is a loan of money made with or without interest, which must then be returned as money. This, according to the learned counsel for the petitioners, is clear from even a B cursory reading of Section 5(8). Secondly, according to learned counsel for the petitioners, by no stretch of imagination, could an allottee under a real estate project fall within Section 5(8)(f), as it originally stood and the Explanation must then be read prospectively i.e. only on and from the date of the Amendment Act. Several sub-arguments were made on the effect of deeming fictions C generally and on the functions of an explanation to a section. Let us address all of these arguments. *** *** ***

68. Thus, in order to be a “debt”, there ought to be a liability or obligation in respect of a “claim” which is due from any person. D “Claim” then means either a right to payment or a right to payment arising out of breach of contract, and this claim can be made whether or not such right to payment is reduced to judgment. Then comes “default”, which in turn refers to non-payment of debt when whole or any part of the debt has become due and payable and is not paid by the corporate debtor. Learned counsel for the petitioners relied upon the judgment in Union of India v. Raman Iron Foundry : (1974) 2 SCC 231, and, in particular relied strongly upon the sentence reading: (SCC p.243, para 11) “11....Now the law is well settled that a claim for unliquidated damages does not give rise to a debt until the liability is adjudicated and damages assessed by a decree or order of a court or other adjudicatory authority.”

69. It is precisely to do away with judgments such as Raman Iron Foundry (supra) that “claim” is defined to mean a right to payment or a right to remedy for breach of contract whether or not such right is reduced to judgment. What is clear, therefore, is that a debt is a liability or obligation in respect of a right to payment, even if it arises out of breach of contract, which is due from any person, notwithstanding that there is no adjudication of the said breach, followed by a judgment or decree or order. The expression H

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