ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE INFRATECH LIMITED versus AXIS BANK LIMITED ETC. ETC. on 26 February 2020

[2020] 8 S.C.R. 291

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FORJAYPEE INFRATECH LIMITED

v.

AXIS BANK LIMITED ETC. ETC.

(Civil Appeal Nos. 8512-8527 of 2019 Etc.)

FEBRUARY 26, 2020

[A. M. KHANWILKAR AND DINESH MAHESHWARI, JJ.]

Insolvency and Bankruptcy Code, 2016:

Sections 5(7), 5(8), 7, 43, 45 and 66 – Corporate insolvencyresolution process against corporate-debtor company – The claimof lenders of the holding Company of corporate-debtor for beingrecognized as financial creditors of the corporate-debtor on thestrength of transactions whereby the corporate-debtor hadmortgaged its properties as collateral securities for the loan to theholding company of the corporate-debtor – The claim rejected byInterim Resolution Professional (IRP) – Application by IRP seekingavoidance of the mortgage transactions as being preferential,undervalued and fraudulent u/ss. 43, 45 and 46 – National CompanyLaw Tribunal (NCLT) allowed the application of IRP – AppellateTribunal (NCLAT) set aside the order of NCLT – Appeal to SupremeCourt – Held: If a transaction entered into by a corporate-debtor isnot falling in either of the exceptions provided in sub-section (3) ofs. 43, and satisfies the threefold requirements of sub-sections (2)and (4) thereof, it would be deemed to be a preference during arelevant time, whether or not, it were so and whether or not it wereintended or anticipated to be so – The transactions in question wereof deemed preference to related party during the look-back periodof two years – The transactions also cannot be said to have beendone in the ordinary course of business and hence are not exceptedtransfers in terms of sub-section (3) – Thus, the transactions are hitby s. 43 – The questions as to whether the transactions wereundervalued or fraudulent in terms of ss. 45 and 66, are left open –For a debt to become ‘financial debt’, the basic elements are that itought to be a disbursal against the consideration for time value ofmoney – Therefore, for a person to be designated as ‘financialcreditor’ of the corporate-debtor, the corporate-debtor needs to owe

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Aa financial debt to such person – Thus, a third party to whom thecorporate-debtor does not owe a ‘financial debt’ cannot become its‘financial creditor’ for the purpose of insolvency and liquidationprocess of corporate persons – In the present case, the mortgagetransactions in questions since were neither towards any loan,facility or advance to the corporate-debtor nor towards protectingBany facility or security of the corporate-debtor, the lenders of theholding company of the corporate-debtor, may fall in the categoryof ‘secured creditors’, but not in the category of ‘financial creditors’within meaning of s. 5(8) – Therefore the claim of the lenders ofholding company rightly rejected by IRP.CInterpretation of Statutes:

Definition clause – Interpretation of – Where a word is definedto ‘mean’ something, the definition is prima facie restrictive – Wherethe word defined is declared to ‘include’ something more, thedefinition is prima facie extensive.D

Mortgage -

Re-mortgage – Legality of – Held: There is no concept of re-mortgage – On release by mortgagee, a mortgage ceases to exist –The so-called re-mortgage can only be regarded as fresh mortgage.

EJudgment:

Observations in a judgment are required to be read in thecontext in which they appear.

Words and Phrases:

FExpressions ‘financial debt’ ‘financial creditors’, ‘operationalcreditor’, ‘secured creditor’ and ‘unsecured creditor’ – Meaning ofin the context of Insolvency and Bankruptcy Code, 2016.

Allowing the appeals, the Court

HELD: 1.1. The Insolvency and Bankruptcy Code, 2016Gcame to be enacted to consolidate and amend the laws relating toreorganisation and insolvency resolution of corporate personsand even of partnership firms and individuals in a time boundmanner; the objectives, inter alia, being for maximisation of valueof assets of such persons and balance of interest of all theHstakeholders. [Para 16.1][356-C]

Conclusion

Swiss Ribbons Private Limited and Anr. v. Union of Indiaand Ors.: (2019) 4 SCC 17 : [2019] 3 SCR 535 –referred to.

1.2 Though the provisions relating to ‘preferentialtransactions and relevant time’ (in Section 43 of the Code) occurin Chapter III of Part II, relating to liquidation process, but suchprovisions being for avoidance of certain transactions and havingbearing on the resolution process too, by their very nature, equallyoperate over the corporate insolvency resolution process (CIRP),and hence, the resolution professional is obligated, by virtue ofclause (j) of sub-section (2) of Section 25 of the Code, to fileapplication for avoidance of the stated transactions in accordancewith Chapter III. That being the position, Section 43 of the Codecomes into full effect in CIRP too. [Para 16.3][358-F-H]

2.1 The basic concept of ‘preference’ as per the lawdictionaries and lexicons is the act of ‘paying or securing to oneor more of his creditors, by an insolvent debtor, the whole or part oftheir claims, to the exclusion of the rest’. Various jurisdictions havedefined, described and dealt with ‘preferential transfer’ as beingthe transaction where an insolvent debtor makes transfer to orfor the benefit of a creditor so that such beneficiary would receivemore than what it would have otherwise received through thedistribution of bankruptcy estate. Section 547 of US BankruptcyCode provides for the circumstances in which a bankruptcytrustee may, for the benefit of the estate in question, recover apreferential transfer from the transferee. Section 239 of the UKInsolvency Act, 1986 also provides for the same measures foravoidance of preference given to any person at the relevant time.The time factor also plays a crucial role in such measures ofavoidance. This ‘relevant time’ for the purpose of avoidance ofpreferential transactions is now commonly referred to as the‘look-back’ period. Significantly, when the preferential transactionis with an unconnected party, the look-back period iscomparatively lesser than that of the transaction with a connectedparty, who is referred to as ‘insider’ or ‘related party’.[Paras 17.1 and 17.2][359-B; 360-C-F]

Advanced Law Lexicon by P. Ramanatha Aiyar (5[th] Ed.-Vol 3, p.4002) – referred to.

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A2.2. The provisions contained in Section 43 of the Code,however, indicate the intention of legislature that when atransaction falls within the co-ordinates defined therein, the sameshall be deemed to be a preference given at a relevant time andshall not be countenanced. Therefore, intent may not be of adefence or support of any preferential transaction that falls withinBthe ambit of Section 43 of the Code. [Para 17.4][362-A-B]

UNCITRAL Legislative Guide on Insolvency Law –referred to.

3.1 The consequences of offending preferential transactionCare, obviously, drastic and practically operate towards annullingthe effect of such transaction. These provisions need to be strictlyconstrued. However, even if Section 43 of the Code is strictlyconstrued, the underlying principles and the object cannot belost sight of. In other words, the construction has to be such thatleads towards achieving the object of these provisions. [ParaD18][364-E-G]

Devinder Singh & Ors v. State of Punjab & Ors: (2008)1 SCC 728 : [2007] 11 SCR 475; Nareshbhai v. Unionof India (2019) SCC Online SC 1027 – referred to.

E3.2 If twin conditions specified in sub-section (2) of Section43 are satisfied, the transaction would be deemed to be ofpreference. As per clause (a) of sub-section (2) of Section 43, thetransaction, of transfer of property or an interest thereof of thecorporate debtor, ought to be for the benefit of a creditor or asurety or a guarantor for or on account of an antecedent financialFdebt or operational debt or other liabilities owed by the corporatedebtor; and as per clause (b) thereof, such transfer ought to be ofthe effect of putting such creditor or surety or guarantor inbeneficial position than it would have been in the event ofdistribution of assets under Section 53 of the case. [Para18.1][365-B-C]

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3.3 However, merely giving of the preference and puttingthe beneficiary in a better position is not enough. For a preferenceto become an offending one for the purpose of Section 43 of theCode, another essential and rather prime requirement is to be H

satisfied that such event, of giving preference, ought to havehappened within and during the specified time, referred to as“relevant time”. The relevant time is reckoned, as per sub-section (4) of Section 43 of the Code, in two ways: (a) if thepreference is given to a related party (other than an employee),the relevant time is a period of two years preceding theinsolvency commencement date. [Para 18.2][365-D-E]

3.4 However, even if a transaction of transfer otherwiseanswers to and comes within the scope of sub-sections (4) and(2) of Section 43 of the Code, it may yet remain outside the ambitof sub-section (2) because of the exclusion provided in sub-section(3) of Section 43. Such exclusion is provided to: (a) a transfermade in the ordinary course of business or financial affairs of thecorporate debtor or transferee; (b) a transfer creating securityinterest in a property acquired by the corporate debtor to theextent that such security interest secures new value and wasgiven at the time specified in sub-clause (i) of clause (b) of Section43(3) and subject to fulfilment of other requirements of sub-clause(ii) thereof. The meaning of the expression “new value” has alsobeen explained in this provision. [Paras 18.3 and 18.4][365-G;366-A-C]

3.5 By way of these statutory provisions, legal fictions arecreated whereby preference is deemed to have been given; andis deemed to have been given at a relevant time, if the statedrequirements are satisfied. The word ‘deemed’ in essence, is todeem what may or may not be in reality, thereby requiring thesubject-matter to be treated as if real. Applying the principles tothe provision in Section 43 of the Code, it could reasonably beconcluded that any transaction that answers to the descriptionscontained in sub-sections (4) and (2) is presumed to be apreferential transaction at a relevant time, even though it maynot be so in reality. In other words, since sub-sections (4) and (2)are deeming provisions, upon existence of the ingredients statedtherein, the legal fiction would come into play; and suchtransaction entered into by a corporate debtor would be regardedas preferential transaction with the attendant consequences asper Section 44 of the Code, irrespective whether the transaction AB

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Pioneer Urban Land and Infrastructure Ltd. & Anr. v.Union of India & Ors.: (2019) 8 SCC 416 : [2019] 10SCR 381; Hindustan Cooperative Housing BuildingBSociety Limited v. Registrar, Cooperative Societies andAnr. (2009) 14 SCC 302 : [2009] 2 SCR 331 - relied on.

3.6 Thus, if a transaction entered into by a corporate debtoris not falling in either of the exceptions provided by sub-sectionC(3) and satisfies the three-fold requirements of sub-sections (4)and (2) of Section 43 of the Code, it would be deemed to be apreference during a relevant time, whether or not in fact it wereso; and whether or not it were intended or anticipated to be so.[Para 19.5][370-E-F]

D3.7 In order to find as to whether a transaction, of transferof property or an interest thereof of the corporate debtor, fallssquarely within the ambit of Section 43 of the Code, ordinarily,the following questions shall have to be examined in a given case:(I) As to whether such transfer is for the benefit of a creditor ora surety or a guarantor? (ii) As to whether such transfer is for orEon account of an antecedent financial debt or operational debt orother liabilities owed by the corporate debtor? (iii) As to whethersuch transfer has the effect of putting such creditor or surety orguarantor in a beneficial position than it would have been in theevent of distribution of assets being made in accordance withFSection 53? (iv) If such transfer had been for the benefit of arelated party (other than an employee), as to whether the samewas made during the period of two years preceding the insolvencycommencement date; and if such transfer had been for the benefitof an unrelated party, as to whether the same was made duringthe period of one year preceding the insolvency commencementGdate? (v) As to whether such transfer is not an excludedtransaction in terms of sub-section (3) of Section 43? [Para20][370-F-G; 371-A-D]

3.8 09.08.2017 is the insolvency commencement date inthe present case. The transactions in question, even if of puttingH

the concerned properties under mortgage with the lenders, carrythe ultimate effect of working towards the benefit and advantageof the borrower i.e., the holding company who obtained loans andfinances by virtue of such transactions. It is true that there hadnot been any creditor-debtor relationship between the lenderbanks and corporate debtor but that will not be decisive of thequestion of the ultimate beneficiary of these transactions. Themortgage deeds in question, entered by the corporate debtor tosecure the debts of its holding company obviously, amount tocreation of security interest to the benefit of the holding company.[Para 22.2.1][373-D-F]

3.9 The corporate debtor owed antecedent financial debtsas also operational debts and other liabilities towards the holdingcompany . This puts the holding company in such capacity that itis a related party to the corporate debtor and is a creditor as alsoits surety. In this scenario there is nothing to doubt that thecorporate debtor has given a preference by way of the mortgagetransactions in question for the benefit of its related person i.e.its holding company (who has been the creditor as also surety forthe corporate debtor) for and on account of antecedent financialdebts, operational debts and other liabilities owed to such relatedperson. In the given fact situation, it is plain and clear that thetransactions in question meet with all the requirements of clause(a) of sub-section (2) of Section 43. [Paras 22.2.2 and 22.3][374-A-C]

3.10 In the given scenario, the requirements of clause (b)of sub-section (2) of Section 43 are also met fair and square. Byway of the impugned transfers, the holding company is put in amuch beneficial position than it would have been in the absenceof such transfers vis-à-vis other creditors. The applicability ofclauses (a) and (b) of sub-section (2) of Section 43 of the Code isclear and complete in relation to the impugned six transactions.[Para 22.4][374-D-E; 375-A]

4.1 Even when all the requirements of sub-section (2) ofSection 43 of the Code are satisfied, in order to fall within themischief sought to be remedied by Section 43, the questionedpreference ought to have been given at a relevant time i.e. withinthe period specified in sub-section (4) of Section 43. The extent AB

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Aof ‘relevant time’ is different with reference to the relationshipof the beneficiary with the corporate debtor inasmuch as, for thepersons falling within the expression ‘related party’ within themeaning of Section 5 (24) of the Code, such period is of two yearsbefore the insolvency commencement date whereas it is one yearin relation to the person other than a related party. [Para 23][375D-BF]

4.2. The scheme of the Code is to disapprove and disregardsuch preferential transaction which falls within the ambit of Section43 and to ensure that any property likely to have been lost due tosuch transaction is brought back to the corporate debtor; and ifCany encumbrance is created, to remove such encumbrance so asto bring the corporate debtor back on its wheels or in other event(of liquidation), to ensure pro rata, equitable and just distributionof its assets. The provisions contained in Section 43, however,indicate the intention of legislature that when a preference isDgiven at a relevant time and thereby, the beneficiary of preferenceacquires unwarranted better position in the event of distributionof assets, the same may not be countenanced. Looking to thescheme of the Code and the principles applicable for the conductof the affairs of a corporate person, it cannot be said that anythingof a new liability has been imposed or a new right has been created.EMaximisation of value of assets of corporate persons andbalancing the interests of all the stakeholders being the objectivesof the Code, the provisions therein need to be given fuller effectin conformity with the intention of the legislature. [Para23.1.1][376-F-G; 377-C-E]FPurbanchal Cables & Conductors Pvt. Ltd. & Ors v.Assam State Electricity Board & Ors. (2012) 7 SCC 462: [2012] 6 SCR 905 — distinguished.

4.3 By virtue of proviso to sub-section (3) of Section 1 ofthe Code, different dates can be provided for enforcement ofGdifferent provisions of the Code; and in fact, different provisionshave been brought into effect on different dates. However, aftercoming into force of the provisions, if a look-back period isprovided for the purpose of any particular enquiry, it cannot besaid that the operation of the provision itself would remain inHhibernation until such look-back period from the date of commencement of the provision comes to an end. There isnothing in the Code to indicate that any provision in Chapter IIor Chapter III be taken out and put in operation at a later datethan the date notified. [Para 23.1.2][377-F-H; 378-A]

4.4. The preference was given to the holding company whowas a related party of the corporate debtor. Hence, the look-back period is two years preceding insolvency commencementdate i.e., 09.08.2017 per clause (a) of sub-section (4) of Section43; and accordingly, the point of enquiry would be as to whetherthe preference had been given during the period of two yearspreceding 09.08.2017. Therefore, the transactions commencingfrom 10.08.2015 until the date of insolvency commencement shallfall under the scanner. [Para 24][378-B-C]

4.5 The plea that most of the impugned transactions werenot of creation of any new encumbrance by the corporate debtorand in fact, the transaction in respect of the 5 properties inquestion had been of so-called re-mortgage/s cannot be accepted.In the first place, on release by the mortgagee, the mortgageceases to exist and it is difficult to countenance the concept of aso-called re-mortgage. The so-called re-mortgage, on all its legaleffects and connotations, could only be regarded as a freshmortgage; and it obviously befalls on the mortgagor to considerat the time of creating any fresh mortgage as whether such atransaction is expedient and whether it should be entered into atall. [Para 24.3.1.][379-C-E]

4.6 Thus, the transactions in question had been of deemedpreference to related party i.e. the holding company by thecorporate debtor during the look-back period of two years andhave rightly been held covered within the period envisaged bysub-section (4) of Section 43 of the Code. [Para 24.5][381-B-C]

IDBI Bank Ltd. v. The Administrator, Kothari OrientFinance Ltd., the Official Liquidator & S. Ramaiah :(2009) 152 Comp Case 282 (Mad); MonarchEnterprises v. Kishan Tulpule & Ors : (1992) 74 CompCase 89 (Bom) – distinguished.

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A5.1 In the scheme of provisions contained in s. 43 of theCode, the underlying concept is to disregard and practically annulsuch transactions which appear, in the course of insolvencyresolution or liquidation, to be preferential so as to minimise thepotential loss to other stakeholders in the affairs of the corporatedebtor, particularly its creditors. What is to be examined for theBpurpose of Section 43 is the conduct and affairs of the corporatedebtor. If the beneficiary of the transaction in question is a relatedparty of the corporate debtor, the period of enquiry is enlargedto two years whereas this period is one year in other cases. Duringsuch scanning, by virtue of sub-section (3) of Section 43, twoCtypes of transfers are kept out of the purview of sub-section (2),which would not be treated as preference. [Para 25.2][382-C-E]

5.2 The whole of conspectus of sub-section (3) is that onlyif any transfer is found to have been made by the corporate debtor,either in the ordinary course of its business or financial affairs orDin the process of acquiring any enhancement in its value or worth,that might be considered as having been done without any tingeof favour to any person in preference to others and thus, mightstand excluded from the purview of being preferential, subject tofulfilment of other requirements of sub-section (3) of Section 43.[Para 25.2.2][383-C-D]

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5.3 If the transfer is examined with reference to the ordinarycourse of business or financial affairs of the transferee alone, itmay conveniently get excluded from the rigour of sub-section (2)of Section 43, even if not standing within the scope of ordinarycourse of business or financial affairs of the corporate debtor.FSuch had never been the scheme of the Code nor the intent ofSection 43 thereof. For the purpose of exception under clause(a) of sub-section (3) of Section 43, the intent of legislature isrequired to be kept in view. If the ordinary course of business orfinancial affairs of the transferee (lenders of the holding companyGin the present case) would itself be decisive for exclusion, almostevery transfer made to the transferees like the lender-banks/financial institutions would be taken out of the net, which wouldpractically result in frustrating the provision itself. [Para25.3][383-D-F]

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5.4 It remains trite that an interpretation that defeats thescheme, intent and object of the statutory provision is to beeschewed and for that matter, if necessary, by applying theprinciples of purposive interpretation rather than literal. Wellknown cannons of construction of statutes permit the Court toread the word “or” as “and” after looking at the clear intentionof the legislature. The contents of clause (a) of sub-section (3) ofSection 43 call for purposive interpretation so as to ensure thatthe provision operates in sync with the intention of legislatureand achieves the avowed objectives. Therefore, the expression“or”, appearing as disjunctive between the expressions“corporate debtor” and “transferee”, ought to be read as “and”;so as to be conjunctive of the two expressions i.e., “corporatedebtor” 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 ordinarycourse of the business or financial affairs of the corporate debtorandthe transferee. Only by way of such reading of “or” as “and”,it could be ensured that the principal focus of the enquiry ondealings and affairs of the corporate debtor is not distracted andremains on its trajectory, so as to reach to the final answer of thecore question as to whether corporate debtor has done anythingwhich falls foul of its corporate responsibilities. [Paras 25.4 and25.5][383-G-H; 384-A; 384-D-G]

State of Bombay v. R.M.D. Chamarbaugwala and Anr.[1957] SCR 874 – followed.

Mazagaon Dock Ltd v. Commissioner of Income-Taxand Excess Profits Tax [1959] SCR 848 – relied on.

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

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[2020] 8 S.C.R.

AState of Andhra Pradesh v. H. Abdul Bakshi and Bros.1964 STC 644; Downs Distributing Co Pty Ltd v.Associated Blue Star Stores Pty Ltd (in liq) (1948) 76CLR 463; Macquarie Bank Ltd. v. Shilpi CableTechnologies Ltd. (2018) 2 SCC 674: [2017] 13 SCR751 – referred to.B5.6 Though it can be assumed that the transactions inquestion were entered in the ordinary course of business ofbankers and financial institutions like the present respondentsbut on the given set of facts, there is no doubt that the impugnedtransactions do not fall within the ordinary course of business ofCthe corporate debtor. The corporate debtor had been promotedas a special purpose vehicle by its holding company. It is difficultto even surmise that the business of the corporate debtor, ofensuring execution of the works assigned to its holding companyand for execution of housing/building projects, in its ordinary Dcourse, had inflated itself to the extent of routinely mortgagingits assets and/or inventories to secure the debts of its holdingcompany. It had also not been the ordinary course of financialaffairs of the corporate debtor that it would create encumbrancesover its properties to secure the debts of its holding company.The ordinary course of business or financial affairs of theEcorporate debtor cannot be taken to be that of providingmortgages to secure the loans and facilities obtained by its holdingcompany; and that too at the cost of its own financial health.[Para 25.6.2][386-B-E]

5.7 The impugned transactions had not been in the ordinaryFcourse of business or financial affairs of the corporate debtor.The impugned transactions are not of excepted transfers in termsof sub-section (3) of Section 43 of the Code. [Paras 25.7 and25.8][387-B-C]

Keshavlal Khemchand & Sons Pvt. Ltd. & Ors v. UnionGof India & Ors: (2015) 4 SCC 770 : [2015] 2 SCR 51;State Bank of India v. Jah Developers Pvt. Ltd. & Ors.:(2019) 6 SCC 787 : [2019] 7 SCR 701 – heldinapplicable.

6. In the ordinary course of business, when the bankers orHfinancial institutions examine any proposal for loan or advance or akin facility, they are supposed to, and they indeed, take up theexercise commonly termed as ‘due diligence’ so as to study theviability of the proposed enterprise as also to ensure, inter alia,that the security against such loan/advance/facility is genuine andadequate; and would be available for enforcement at any point oftime. Given the nature of transaction, the lenders must prefer aclean security to justify the transaction as being in the ordinarycourse of their business. In the same exercise, in the ordinarycourse of their business, if they are at all entering into a transactionwhereby a third party security, including that of a subsidiarycompany, is to be taken as collateral, they are obliged to undertakefurther due diligence so as to ensure that such third party securityis a prudent and viable one and is not likely to be hit by any law.In that sequence, they remain under obligation to assurethemselves that such third party whose security is being taken,is not already indebted or in red and is not likely to fail in dealingwith its own indebtedness. In the context of the Code, suchrequirement is moreover imperative on a bare look at theprovisions contained in Part II thereof. On the facts of the presentcase that in fact, several of the respondent lenders are shown tobe the direct creditors of the corporate debtor too, to the extentof the advances made to the corporate debtor, they and the co-respondents cannot plead ignorance about the actual state ofaffairs and financial position of the corporate debtor. Despite suchknowledge, if they chose to take the business risk of acceptingsecurity from the corporate debtor and that too, for securing theloans/advances/facilities made over to the holding company, whowas a directly related party for being its holding company, theythemselves remain responsible for present legal consequences.[Para 26.1][387-E-F; 388-A-D]

Advanced Law Lexicon by P. Ramanatha Aiyar –referred to.

7. The transactions in question are hit by Section 43 of theCode and the Adjudicating Authority, having rightly held so, hadbeen justified in issuing necessary directions in terms of Section44 of the Code in relation to the transactions concerning PropertyNos. 1 to 6. NCLAT, had not been right in interfering with thewell-considered and justified order passed by NCLT in this regard.[Para 27][388-E]

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A8. Having approved the order passed by NCLT as regardsthe aspect of the transactions being preferential, the Court doesnot consider it necessary to deal with the questions as to whetherthe transactions are undervalued and/or fraudulent too. In thetotality of circumstances, the said questions are left at that only,while also leaving all the related questions of law open; to beBexamined in an appropriate case. [Para 29][391-A-C]

9. In the present case, the IRP moved one compositeapplication purportedly under Sections 43, 45 and 66 of the Codewhile alleging that the transactions in question were preferentialas also undervalued and fraudulent. In the scheme of the Code,Cthe parameters and the requisite enquiries as also theconsequences in relation to these aspects are different and suchdifference is explicit in the related provisions. The arena andscope of the requisite enquiries, to find if the transaction isundervalued or is intended to defraud the creditors or had beenDof wrongful/fraudulent trading are entirely different. Specificmaterial facts are required to be pleaded if a transaction is soughtto be brought under the mischief sought to be remedied bySections 45/46/47 or Section 66 of the Code. The scope of enquiryin relation to the questions as to whether a transaction is of givingpreference at a relevant time, is entirely different. Hence, it wouldEbe expected of any resolution professional to keep suchrequirements in view while making a motion to the AdjudicatingAuthority. It would also have been appropriate for NCLT to dealwith all these aspects separately and distinctively, rather thangiving a combined findings on all these three aspects that theFimpugned transactions were preferential, undervalued andfraudulent. [Para 29.1, 29.2][391-C-D; G-H; 392-A-C]

10.1 In the Code, the significant expressions “financialcreditor” and “financial debt” have been defined with the words“means” and “includes”. The law remains settled that where aGword is defined to ‘mean’ something, the definition is prime facierestrictive and exhaustive. On the other hand, where the worddefined is declared to ‘include’ something more, the definition isprima facie extensive. However, a little difficulty arises when the definition contains both the words ‘means’ and ‘includes’.[Para 42][422-H; 423-A-B]

P. Kasilingam & Ors. v. P.S.G. College of Technology &Ors. (1995) Suppl. 2 SCC 348 : [1995] 2 SCR 1061;Krishi Utapadan Mandi Samiti & Anr v. M/s ShankarIndustries & Ors. (1993) Suppl. 3 SCC 361 : [1993] 1SCR 1037; Delhi Development Authority v. Bhola NathSharma (Dead) by LRs & Ors. (2011) 2 SCC 54; BlackDiamond Beverages & Anr. v. Commercial Tax Office,Central Section, Assessment Wing, Calcutta & Ors.(1998) 1 SCC 458 : [1997] 4 Suppl. SCR 133 – referredto.

10.2 For a debt to become ‘financial debt’ for the purposeof Part II of the Code, the basic elements are that it ought to bea disbursal against the consideration for time value of money. Itmay include any of the methods for raising money or incurringliability by the modes prescribed in sub-clauses (a) to (f) of Section5(8); it may also include any derivative transaction or counter-indemnity obligation as per sub-clauses (g) and (h) of Section5(8); and it may also be the amount of any liability in respect ofany of the guarantee or indemnity for any of the items referred toin sub-clauses (a) to (h). The requirement of existence of a debt,which is disbursed against the consideration for the time value ofmoney remains an essential part even in respect of any of thetransactions/dealings stated in sub-clauses (a) to (i) of Section5(8), even if it is not necessarily stated therein. In any case, thedefinition, by its very frame, cannot be read so expansive, ratherinfinitely wide, that the root requirements of ‘disbursement’against ‘the consideration for the time value of money’ could beforsaken in the manner that any transaction could stand alone tobecome a financial debt. In other words, any of the transactionsstated in the said sub-clauses (a) to (i) of Section 5(8) would befalling within the ambit of ‘financial debt’ only if it carries theessential elements stated in the principal clause or at least hasthe features which could be traced to such essential elements inthe principal clause. The essential element of disbursal, and thattoo against the consideration for time value of money, needs tobe found in the genesis of any debt before it may be treated as A

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A‘financial debt’ within the meaning of Section 5(8) of the Code.This debt may be of any nature but a part of it is always requiredto be carrying, or corresponding to, or at least having some tracesof disbursal against consideration for the time value of money.[Para 43][427-E-H; 428-A-C]

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10.3 The root requirement for a creditor to become financialcreditor for the purpose of Part II of the Code, there must be afinancial debt which is owed to that person. He may be the principalcreditor to whom the financial debt is owed or he may be anassignee in terms of extended meaning of this definition but, andCnevertheless, the requirement of existence of a debt being owedis not forsaken. [Para 44][428-D]

10.4 Therefore, for a person to be designated as a financialcreditor of the corporate debtor, it has to be shown that thecorporate debtor owes a financial debt to such person. Understoodthis way, it becomes clear that a third party to whom the corporateDdebtor does not owe a financial debt cannot become its financialcreditor for the purpose of Part II of the Code. [Para 45][428-E-F]

10.5 The peculiar elements of the expressions “financialcreditor” and “financial debt”, as occurring in Sections 5(7) andE5(8), when visualised and compared with the generic expressions“creditor” and “debt” respectively, as occurring in Sections 3(10)and 3(11) of the Code, the scheme of things envisaged by theCode becomes clearer. The generic term “creditor” is definedto mean any person to whom the debt is owed and then, it hasFalso been made clear that it includes a ‘financial creditor’, a‘secured creditor’, an ‘unsecured creditor’, an ‘operationalcreditor’, and a ‘decree-holder’. Similarly, a “debt” means aliability or obligation in respect of a claim which is due from anyperson and this expression has also been given an extendedmeaning to include a ‘financial debt’ and an ‘operational debt’.G[Para 46][428-F-H; 429-A]

10.6 The use of the expression “means and includes” inthese clauses makes it clear that for a person to become a creditor,there has to be a debt i.e., a liability or obligation in respect of aclaim which may be due from any person. A “secured creditor”H

in terms of Section 3(30) means a creditor in whose favour asecurity interest is created; and “security interest”, in terms ofSection 3(31), means a right, title or interest or claim of propertycreated in favour of or provided for a secured creditor by atransaction which secures payment for the purpose of anobligation and it includes, amongst others, a mortgage. Thus,any mortgage created in favour of a creditor leads to a securityinterest being created and thereby, the creditor becomes asecured creditor. [Para 46.1][429-A-C]

10.7 However, when all the defining clauses are readtogether and harmoniously, it is clear that the legislature hasmaintained a distinction amongst the expressions ‘financialcreditor’, ‘operational creditor’, ‘secured creditor’ and ‘unsecuredcreditor’. Every secured creditor would be a creditor; and everyfinancial creditor would also be a creditor but every securedcreditor may not be a financial creditor. The expressions “financialdebt” and “financial creditor”, having their specific and distinctconnotations and roles in insolvency and liquidation process ofcorporate persons, have only been defined in Part II whereasthe expressions “secured creditor” and “security interest” aredefined in Part I. [Para 46.1][429-C-E]

10.8 In the scheme of the IBC, what is intended by theexpression ‘financial creditor’ is a person who has directengagement in the functioning of the corporate debtor; who isinvolved right from the beginning while assessing the viability ofthe corporate debtor; who would engage in restructuring of theloan as well as in reorganisation of the corporate debtor’s businesswhen there is financial stress. In other words, the financialcreditor, by its own direct involvement in a functional existenceof corporate debtor, acquires unique position, who could beentrusted with the task of ensuring the sustenance and growth ofthe corporate debtor, akin to that of a guardian. In the context ofinsolvency resolution process, this class of stakeholders namely,financial creditors, is entrusted by the legislature with such arole that it would look forward to ensure that the corporate debtoris rejuvenated and gets back to its wheels with reasonable capacityof repaying its debts and to attend on its other obligations.Protection of the rights of all other stakeholders, including other AB

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Acreditors, would obviously be concomitant of such resurgence ofthe corporate debtor. [Para 47][429-F-H; 430-A]

10.9 Keeping the objectives of the Code in view, theposition and role of a person having only security interest overthe assets of the corporate debtor could easily be contrasted withBthe role of a financial creditor because the former shall have onlythe interest of realising the value of its security (there being noother stakes involved and least any stake in the corporate debtor’sgrowth or equitable liquidation) while the latter would, apart fromlooking at safeguards of its own interests, would also andsimultaneously be interested in rejuvenation, revival and growthCof the corporate debtor. Thus understood, it is clear that if theformer i.e., a person having only security interest over the assetsof the corporate debtor is also included as a financial creditorand thereby allowed to have its say in the processes contemplatedby Part II of the Code, the growth and revival of the corporateDdebtor may be the casualty. Such result would defeat the veryobjective and purpose of the Code, particularly of the provisionsaimed at corporate insolvency resolution. [Para 47.1][430-B-D]

10.10Therefore, a person having only security interestover the assets of corporate debtor (like the instant third partyEsecurities), even if falling within the description of ‘securedcreditor’ by virtue of collateral security extended by the corporatedebtor, would nevertheless stand outside the sect of ‘financialcreditors’ as per the definitions contained in sub-sections (7) and(8) of Section 5 of the Code. Differently put, if a corporate debtorhas given its property in mortgage to secure the debts of a thirdFparty, it may lead to a mortgage debt and, therefore, it may fallwithin the definition of ‘debt’ under Section 3(10) of the Code.However, it would remain a debt alone and cannot partake thecharacter of a ‘financial debt’ within the meaning of Section 5(8)of the Code. [Para 47.2][430-E-G]G

10.11 Indisputably, the debts in question are in the form ofthird party security; said to have been given by the corporatedebtor so as to secure the loans/advances/facilities obtained byits holding company from the respondent-lenders. Such a ‘debt’is not and cannot be a ‘financial debt’ within the meaning of Section H

5(8) of the Code; and hence, the respondent-lenders, themortgagees, are not the ‘financial creditors’ of the corporatedebtor. [Para 48][430-G-H; 431-A]

10.12 The lenders of the holding company of the corporatedebtor, on the strength of the mortgages in question, may fall inthe category of secured creditors, but such mortgages beingneither towards any loan, facility or advance to the corporatedebtor nor towards protecting any facility or security of thecorporate debtor, it cannot be said that the corporate debtor owesthem any ‘financial debt’ within the meaning of Section 5(8) ofthe Code; and hence, such lenders do not fall in the category ofthe ‘financial creditors’ of the corporate debtor. [Para 54][441- C-D]

Swiss Ribbons Private Limited and Anr. v. Union of Indiaand Ors.: (2019) 4 SCC 17 : [2019] 3 SCR 535;Committee of Creditors of Essar Steel India Limitedthrough Authorised Signatory v. Satish Kumar Gupta(2019) SCC OnLine SC 1478 – distinguished.

Rajkumari Kaushalya Devi v. Bawa Pritam Singh & Anr.AIR 1960 SC 1030 : [1960] SCR 570 – heldinapplicable.

Order dated 13.03.2019 in M.A. No. 1584/2019 in CPNo. 402 of 2018 as passed by NCLT (Mumbai Bench) inthe case of SREI Infrastructure Finance Limited v. SterlingInternational Enterprises Ltd – disapproved.

Dr. B.V.S. Lakshmi v. Geometrix Laser Solutions (P) Ltd.Company Appeal (AT) (Insolvency) No. 38 of 2017;Ramchand Sur v. Ishwar Chandra Giri 61 Ind Cases539; Prithvi Nath Singh & Ors. v. Suraj Ahir & Ors.[1963] 3 SCR 302; State Bank of India v. SamneelEngineering Co. & Ors. 1995 (35) DRJ 485; Dassappa& Ors v. Jogaiah & Ors. (1964) ILR 545; Manik ChandRaut v. Baldeo Chaudhary & Ors. (1949) SCC OnlinePat 64; State Bank of India v. Smt. Kusum VallabhdasThakkar (1991) SCC Online GUJ 14; Nikhil Mehtaand Sons (HUF) v. AMR Infrastructure Limited (2017)SCC Online NCLAT 859; Pomal Khanji Govindji &

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AOrs. v. Brajlal Karsandas Purohit & Ors. (1989) 1 SCC458 : [1988] 3 Suppl. SCR 826; K. Sashidhar v. IndianOverseas Bank and Ors. (2019) SCC OnLine SC 257;Bikram Chatterjee v. Union of India (2019) 8 SCC 527;Haryana Financial Corporation and Anr. v. JagdambaOil Mills and Anr. (2002) 3 SCC 496 : [2002] 1 SCRB621 – referred to.

Report of Banking Law Reform Committee; Craise onStatue Law (Seventh Ed.—Indian reprint 1999 page213; Bankruptcy Law Reforms Committee (February2015) – referred to.

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Case Law Reference

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEEINFRATECH LTD. v. AXIS BANK LTD.

[1997] 4 Suppl. SCR 133referred toPara 42.3[2019] 3 SCR 535distinguishedPara 50.5

[1960] SCR 570held inapplicablePara 52

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 8512-8527 of 2019.

From the Judgment and Order dated 01.08.2019 of the NationalCompany Law Appellate Tribunal, New Delhi in Company Appeal (AT)(Ins) Nos. 243, 244, 245, 249, 276, 343, 370, 374, 376, 411, 424, 436, 458,492, 511 & 524 of 2018.

With

Civil Appeal Nos. 6777-6797 and 9357-9377 of 2019.

Ms. Maninder Acharya, ASG, V. Giri, Jaideep Gupta, Ritin Rai,C.U. Singh, Shyam Divan, Amit Sibal, Siddharth Bhatnagar, AnupamLal Das, Sr. Advs., Sanjay Bhatt, Ms. Niharika Sharma, Ms. Svadha,Rabin Majumdar, Amit Kumar Mishra, Aditya Shankar, Shashank Manish,Gaurav Priyadarshi, Ms. Smriti Shah, Ms. Twinkle Kataria, Ms. NidhiSahay, Ms. Anindita Mitra, Ms. Gunjan Mathur, Mridul Godha, ShivamPandey, Sidhartha Barua, Adity Gupta, Sharan Thakur, Praful Jindal,Viplav Acharya, Aishwarya Kaushique, Harshul Choudhary, Ms. IkshitaSingh, Ms. Jasmine Damkewala, Ms. Anindita Roy Chowdhary, AbhijnanJha, Shivam, Abhishek Singh, Bharat Makkar,. Anannya Ghosh,Ms. Misha, Shantanu Chaturvedi, Nikhil Mathur, Shardul. S. Shroff,Ms. Jasveen Kaur, Tushar Singh, Parag Maini, Abhimanyu Chopra,Saksham Dhingra, Ms. Pankhuri, Parthasarathy, Varun Singh,Ms. Archana Singh, Arjun Raghuvanshi, Aditya Sidhra, Sumeet Sharma,Daksh Pandit (for Vishal Gupta), Divyanshu Goyal, Ms. Swati Jain, VijayKumar, Ram Naresh Yadav, Mohit K. Singh, Rajiv S. Roy, Ms. AvrojyotiChatterjee, Abhijit S. Roy, Ms. Jayshree Saha, Udayan Agarwal,R. Sanmay Rath, Rajesh Kumar-I, Anant Gautam, Ms. Sakshi Gaur,Ms. Khushboo Aggarwal, Sorabh Dahiya, Vibhu Sharma, Anmol Mehta,Umesh Kr. Khaitan, Jatin Julka, Arsalan Syed, Prateek Khaitan,Jaswinder Singh, Ms. Niraj Jha, Ms. Pratima Singh, Vinod Sharma, Advs.for the appearing parties.

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312SUPREME COURT REPORTS

[2020] 8 S.C.R.

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

H*The Index is as per the Original Judgment.

WHETHER LENDERS OF JAL COULD BE CATEGORISEDAS FINANCIAL CREDITORS OF JIL

Acknowledgment

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314SUPREME COURT REPORTS

[2020] 8 S.C.R.

AThe Judgment of the Court was delivered byDINESH MAHESHWARI, J.

Introductory

1. These appeals are essentially directed against the common orderBdated 01.08.2019 as passed by the National Company Law AppellateTribunal, New Delhi[1] in a batch of appeals preferred by various banksand financial institutions whereby, the Appellate Tribunal set aside theorder dated 16.05.2018, passed by the Adjudicating Authority, the NationalCompany Law Tribunal, Allahabad Bench[2] on the application moved bythe Interim Resolution Professional[3] in the Corporate InsolvencyCResolution Process[4] concerning the Corporate Debtor Company viz.,Jaypee Infratech Limited[5] seeking avoidance of certain transactions,whereby the corporate debtor had mortgaged its properties as collateralsecurities for the loans and advances made by the lender banks andfinancial institutions to Jaiprakash Associates Limited[6], the holdingDcompany of JIL, as being preferential, undervalued and fraudulent, interms of Sections 43, 45 and 66 of the Insolvency and Bankruptcy Code,2016[7].

1.1. It may be noticed at the outset that the batch of appealsdecided by the impugned common order dated 01.08.2019 also comprisedEof two appeals filed by the lenders of JAL, being Comp. App (AT) (Ins)No. 353 of 2018 and Comp. App (AT) (Ins) No. 301 of 2018 that werepreferred against the orders passed by NCLT on 09.05.2018 and15.05.2018 respectively, whereby NCLT approved the decision of IRPrejecting the claims of such lenders of JAL to be recognized as financialcreditors of the corporate debtor JIL on the strength of the mortgageFcreated by the corporate debtor, as collateral security of the debt of itsholding company JAL. These two appeals also came to be allowed asper the result recorded in the impugned order dated 01.08.2019, thoughthe entire discussion and the final conclusion therein had only been inrelation to the order dated 16.05.2018 that was passed by NCLT on the G

1 Hereinafter also referred to as ‘the Appellate Tribunal’ or ‘NCLAT’

2 Hereinafter also referred to as ‘the Tribunal’ or ‘NCLT’ or ‘the Adjudicating Authority’.

3 ‘IRP’ for short.

4 ‘CIRP’ for short.

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

6 ‘JAL’ for short.

H7 Hereinafter also referred to as ‘the Code’ or ‘IBC’.

application for avoidance filed by IRP. The appellant of Civil Appeal D.No. 32881 of 2019[8], IIFCL, apart from raising other contentions, hasalso questioned this aspect of the order impugned that the aforesaid twoappeals, involving the question as to whether the lenders of JAL couldbe categorised as financial creditors of JIL for the purpose of IBC, havebeen allowed by NCLAT without recording any findings and withoutany discussion in that regard.

Brief Outline and the Issues Involved

2. Before proceeding further, we may draw up a brief outline ofthe subject-matter and the issues involved in these appeals.

2.1. As shall be noticed hereafter later, the CIRP concerning thecorporate debtor JIL has already undergone several rounds and circlesof proceedings in NCLT, NCLAT and at least twice over in this Court.

2.2. For what has been indicated in the introduction, it is evidentthat two major issues would arise in these appeals. One, as to whetherthe transactions in question deserve to be avoided as being preferential,undervalued and fraudulent, in terms of Sections 43, 45 and 66 of theCode; and second, as to whether the respondents (lender of JAL) couldbe recognized as financial creditors of the corporate debtor JIL on thestrength of the mortgage created by the corporate debtor, as collateralsecurity of the debt of its holding company JAL.

2.3. For a preliminary insight into the first issue, suffice would beto notice that during CIRP, the Interim Resolution Professional preferredan application before the Adjudicating Authority seeking orders foravoidance of the impugned transactions, whereby several parcels ofland were put under mortgage with the lenders of JAL, the holdingcompany of JIL. The contention of IRP, that the transactions in questionwere preferential, undervalued and fraudulent within the meaning ofSections 43, 45 and 66 of the Code, were accepted in part by theAdjudicating Authority, the NCLT, in its order dated 16.05.2018 andnecessary directions were issued for avoidance of at least six of suchtransactions. In other words, in relation to such six transactions, thesecurity interest was ordered to be discharged and the properties involvedtherein were vested in the corporate debtor, with release ofencumbrances. The NCLAT, however, took an entirely opposite view ofthe matter and upturned the order so passed by NCLT, while holding 8 Now numbered as Civil Appeal Nos. 009357-77 of 2019

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Athat the transactions in question do not fall within the mischief of beingpreferential or undervalued or fraudulent; and that the lenders in question(the lenders of JAL) were entitled to exercise their rights under theCode. Aggrieved, the IRP, one of the creditors of the corporate debtorJIL and the associations of home buyers, who have invested in theproposed projects of JIL and JAL, have preferred these appeals.B

2.4. As regards the second issue, noticeable it is that during CIRP,two of the respondent banks namely, ICICI Bank Limited and Axis BankLimited, sought inclusion in the category of financial creditors of JIL butIRP did not agree and declined to recognize them as such. Being aggrievedby the decisions so taken by IRP, the said banks preferred separateCapplications under Section 60(5) of the Code before NCLT whileasserting their claim to be recognized as financial creditors of the corporatedebtor JIL, on account of the securities provided by JIL for the facilitiesgranted to JAL. The NCLT rejected the applications so filed by the saidbanks, by way of its orders dated 09.05.2018 and 15.05.2018 respectively,Dwhile concluding that on the strength of the mortgage created by thecorporate debtor JIL, as collateral security of the debt of its holdingcompany JAL, the lenders of JAL could not be categorised as financialcreditors of JIL for the purpose of the Code. As already noticed, theappeals against the said orders dated 09.05.2018 and 15.05.2018 arepurportedly allowed as per the result recorded in the impugned orderEdated 01.08.2019, but without any discussion in that regard. Aggrieved,one of the lenders of the corporate debtor JIL, IIFCL (appellant of CivilAppeal D. No. 32881 of 2019) has also questioned this aspect of theorder impugned while asserting that such mortgagees cannot be takenas financial creditors of the corporate debtor JIL.F

Parties and their respective roles and interest in the matter

3. In view of the issues arising for determination in these appeals,with several parties carrying different roles, status and interests,worthwhile it would be to narrate at the outset, in brief, the relevantparticulars of the key parties involved as follows:G

3.1. Jaypee Infratech Limited (JIL):

It is the corporate debtor company in whose relation CIRP ispending; and the mortgage transactions concerning its properties werequestioned in the application filed by the Interim Resolution Professional.Such transactions form the subject-matter of these appeals.H

3.2. Jaiprakash Associates Limited (JAL):

It is the holding company of JIL; it had approximately 71.64%equity shareholding in JIL as on 31.03.2017. The impugned mortgagetransactions were entered into in favour of its lenders.

3.3. Shri Anuj Jain:

He is the Interim Resolution Professional in CIRP concerning JILwho moved the application for avoidance of the transactions in question.He is the appellant in Civil Appeal Nos. 8512-27 of 2019.

3.4. Jaypee Greens Krescent Home Buyers Welfare Association;Jaypee Kasa Isles Welfare Association; Jaypee Kensington BoulevardApartments Welfare Association; Garden Isle Welfare Association;Jaypee Klassic Apartment Welfare Association; Jaypee Kube BuyersWelfare Association; Wish Town Property Owners Welfare Society;KRH Buyers Association ABL Workplace:

They are the associations of home buyers who have invested inthe projects of JIL and JAL. They are the appellants in Civil AppealNos. 6777-97 of 2019; and they also support the assertion of IRP thatthe transactions in question cannot be countenanced.

3.5 India Infrastructure Finance Company Limited:

It is the financial creditor of the corporate debtor JIL and has filedCivil Appeal in Diary No. 32881 of 2019 while asserting that thetransactions in question need to be avoided; and that the lenders of JALrelated with such transactions cannot be the financial creditors of JILfor the purpose of CIRP in question.

3.6 Axis Bank Limited; Standard Chartered Bank Limited; ICICIBank Limited; State Bank of India; United Bank of India; UCO Bank;The Karur Vyasa Bank (P) Limited; L&T Infrastructure FinanceCompany Limited; Central Bank of India; Canara Bank; Karnataka BankLimited; IFCI Limited; Allahabad Bank; Jammu & Kashmir Bank; SouthIndian Bank Limited; Bank of Maharashtra and other banks and financialinstitutions:

They are the lenders of JAL in whose favour the properties ofJIL were put under mortgage by way of the impugned transactions.They oppose the assertions of appellants while maintaining that thetransactions in question are not avoidable and are valid, investing them A

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Awith the capacity of financial creditors of JIL. They are the principalcontesting respondents in these appeals.

The transactions in question

4. Having taken note of the principal contesting parties and theirrespective interests, it would also be worthwhile to take note of theBrelevant particulars of the properties and the transactions involved inthis dispute. It may be usefully noticed that out of seven transactionsthat were questioned by IRP, the Adjudicating Authority held that six ofthem were preferential, undervalued and fraudulent and passed the ordersfor their avoidance while accepting the contentions of IRP. It may alsoCbe observed that five out of these six transactions were preceded byprevious mortgage transactions for securing the loans/facilities to JAL.The transactions in question, with previous transactions and flow thereof,as given out during the course of submissions, could be comprehensivelyviewed as under: - 4.1. The transactions in favour of the Consortium of Banks andDFinancial Institutions:

9 Hereinafter also referred to as ‘Property No. 1’H10 Hereinafter also referred to as ‘Property No. 2’

4.2. The exclusive mortgage transactions in favour of ICICI BankLimited:

4.3. The exclusive mortgage transaction in favour of the StandardChartered Bank Limited:

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

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

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4.4. The sixth transaction in question had been the exclusivemortgage transaction in favour of State Bank of India that was notFpreceded by any earlier transaction; the same had been as under:- Mortgage deed dated 04.03.2016 for 90 acres of land situated atVillage Chaugan Tehsil Elmadpur, District Agra, Uttar Pradesh,executed by JIL in favour of State Bank of India against the facilityagreement dated 26.03.2015 granting Short Term Loan Facility toJAL of Rs.1000 crores.[14]G

4.5. Yet another transaction was questioned by IRP as beingavoidable but the Adjudicating Authority held the same to be not falling 13 Hereinafter also referred to as ‘Property No. 5’H14 Hereinafter also referred to as ‘Property No. 6’

within the relevant time as provided under Section 43 of the Code. Theparticulars of this transaction are as follows:

Mortgage deed dated 12.05.2014 for 100 acres of land situated atVillage Tappal, Tehsil Khair, District Aligarh, Uttar Pradeshexecuted by JIL in favour of ICICI Bank Limited against thefacility agreement dated 12.12.2013 granting Term Loan of Rs.1500 crores and overdraft amount of Rs. 175 crores to JAL.[15]

The relevant factual and background aspects

5. Having taken note of the principal parties to the dispute and thetransactions/properties involved, but before dilating on the issues, wemay briefly narrate the background in which the present CIRP isunderway as also the orders passed by this Court, for ensuring itscompletion in accordance with law and towards the larger benefit ofstakeholders.

6. JAL is stated to be a public listed company with more than 5lakh individual shareholders. In the year 2003, JAL was awarded therights for construction of an expressway from Noida to Agra. Aconcession agreement was entered into with the Yamuna ExpresswayIndustrial Development Authority. Coming on the heels of this project,JIL was set up as a special purpose vehicle. Finance was obtained froma consortium of banks against the partial mortgage of land acquired anda pledge of 51% of the shareholding held by JAL. Housing plans wereenvisaged for the construction of real estate projects in two locations ofthe land acquired, one in Wish Town, Noida and another in Mirzapur.Several other aspects of the dealings by these companies, their creditorsand other stakeholders need not be dilated for the present purpose.

6.1. The crucial and relevant part of the matter is that IDBI BankLimited instituted a petition under Section 7 of the Code before the NCLT,seeking initiation of Corporate Insolvency Resolution Process againstJIL, while alleging that JIL had committed a default in repayment of itsdues to the tune of Rs. 526.11 crores. JIL filed its objections to thepetition but later on, withdrew the objections and furnished consent forresolution plan under the provisions of the Code. On 09.08.2017, NCLT

15 Hereinafter also referred to as ‘Property No. 7’ (As regards this description, it ispointed out on behalf of the respondent ICICI Bank that it had been of ‘Term Loan ofRs. 1500 crores under the Corporate Rupee Loan Facility agreement and GeneralConditions dated 12.12.2013 and mortgage deed was dated 10.03.2014’)

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Ainitiated the CIRP in respect of JIL. An order of moratorium was issuedunder Section 14 by which, the institution of suits and continuation ofpending proceedings, including execution proceedings were prohibitedand an Interim Resolution Professional was appointed. On 14.08.2017,IRP, in pursuance of the order of NCLT, called for submissions of claimsby financial creditors in Form-C, by operational creditors in Form-B, byBthe workmen and employees in Form-E and by other creditors in Form-F. On 16.08.2017, the Insolvency and Bankruptcy Board of India madean amendment to its regulations and Regulation 9(a) was inserted toinclude the claims by other creditors. On 18.08.2017, the Board releaseda press note that the home buyers could fill in Form-F as they could notCbe treated at par with financial and operationalcreditors.

6.2. The aforesaid position led to the proceedings in this Courtthat were dealt with in a batch of petitions led by Writ Petition (Civil)No. 744 of 2017: Chitra Sharma and Ors. v. Union of India andOrs. Several orders were passed by this Court in the said batch of petitionsDfrom time to time, inter alia, to the effect that IRP was permitted totake over management of JIL and was directed to ensure that necessaryprovisions were made to protect the interests of home buyers. Variousorders were also made with directions to JAL, as holding company ofJIL, for making deposits in the Court, particularly looking to the claim ofrefund being made by some of the home buyers. This Court also tookEnote of the facts that CIRP commenced on 09.08.2017; the statutoryperiod of 180 days for concluding the CIRP had come to an end; andeven the extended statutory period of 90 days also ended on 12.05.2018but then, by way of the Amendment Ordinance, 2018, the home buyerswere accorded the statutory recognition as financial creditors w.e.f.F06.06.2018. While finally disposing of the matters on 09.08.2018, thisCourt took note of the interest of home buyers as also the creditors ofJIL and JAL, the status of proceedings and the statutory provisions asthen obtaining and ultimately issued the following directions: - “(i) In exercise of the power vested in this Court under ArticleG142 of the Constitution, we direct that the initial period of 180days for the conclusion of the CIRP in respect of JIL shallcommence from the date of this order. If it becomes necessary toapply for a further extension of 90 days, we permit the NCLT topass appropriate orders in accordance with the provisions of theIBC;H

(ii) We direct that a CoC shall be constituted afresh in accordancewith the provisions of the Insolvency and Bankruptcy(Amendment) Ordinance, 2018, more particularly the amendeddefinition of the expression “financial creditors”;

(iii) We permit the IRP to invite fresh expressions of interest forthe submission of resolution plans by applicants, in addition to thethree short-listed bidders whose bids or, as the case may be, revisedbids may also be considered;

(iv) JIL/JAL and their promoters shall be ineligible to participatein the CIRP by virtue of the provisions of Section 29A;

(v) RBI is allowed, in terms of its application to this Court todirect the banks to initiate corporate insolvency resolutionproceedings against JAL under the IBC;

(vi) The amount of Rs 750 crores which has been deposited inthis Court by JAL/JIL shall together with the interest accruedthereon be transferred to the NCLT and continue to remaininvested and shall abide by such directions as may be issued bythe NCLT.”

6.3. It had been during pendency of the aforesaid proceedingsthat the application leading to present appeals came to be filed by IRPon 06.02.2018, complaining against the transactions in question. However,before taking note of the matters involved in such application filed byIRP and, for completion of the narration about the orders passed by thisCourt, we may also point out that during the CIRP of JIL, an applicationcame to be made by IDBI bank, for excluding the period of pendency ofthe application for clarification regarding the manner of counting of thevotes of the concerned financial creditors, for the purpose of the periodof 270 days for completion of corporate insolvency resolution processbut, during the pendency of such application, NCLT, by its order dated06.05.2019, called upon the authorities and the representatives of allotteesand others to file reply on the necessity to proceed further with CIRPfor considering the resolution plan received from the concerned bidder.The IDBI Bank assailed this order of NCLT by way of an appeal beforethe NCLAT that came to be decided on 30.07.2019 whereby, NCLATgranted relief to exclude the period from 17.09.2018 to 04.06.2019 forthe purpose of counting 270 days of CIRP period and issued consequential A

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Adirections. This led to further appeals in this Court[16], which wereconsidered and decided on 06.11.2019.

6.3.1. In the order dated 06.11.2019, we took note of the fact thatCIRP in relation to JIL stood revived in view of the directions in ChitraSharma (supra) as also the amendments brought about in IBC. In theBpeculiar, rather extraordinary, situation obtaining in the matter, we passedthe orders under the plenary powers so as to ensure that an attempt wasmade for revival of the corporate debtor JIL, lest it was exposed toliquidation process while taking note of the unanimity amongst the partiesthat liquidation of JIL must be eschewed; and while also taking note ofthe time limit for completion of Insolvency Resolution Process as perCthird proviso to Section 12(3), which came into effect from 16.08.2019.In the given circumstances, we passed the following order for the purposeof substantial and complete justice to the parties and in the interest of allthe stakeholders:

“i) We direct the IRP to complete the CIRP within 90 days fromDtoday. In the first 45 days, it will be open to the IRP to inviterevised resolution plan only from Suraksha Realty and NBCCrespectively, who were the final bidders and had submittedresolution plan on the earlier occasion and place the revised plan(s)before the CoC, if so required, after negotiations and submit reportEto the adjudicating authority NCLT within such time. In the secondphase of 45 days commencing from 21[st ]December, 2019, marginis provided for removing any difficulty and to pass appropriateorders thereon by the Adjudicating Authority.

ii) The pendency of any other application before the NCLT orFNCLAT, as the case may be, including any interim direction giventhere in shall be no impediment for the IRP to receive and processthe revised resolution plan from the above-named two biddersand take it to its logical end as per the provisions of the I & BCode within the extended timeline prescribed in terms of this order.

Giii) We direct that the IRP shall not entertain any expression ofinterest (improved) resolution plan individually or jointly or in concertwith any other person, much less ineligible in terms of Section29A of the I & BCode.

16 Being Civil Appeal No. 8437 of 2019 [@ D No. 27229 of 2019]: Jaiprakash AssociatesHLtd. & Anr. v. IDBI Bank Ltd. and connected case

iv) These directions are issued in exceptional situation in the factsof the present case and shall not be treated as a precedent.

v) This order may not be construed as having answered thequestions of law raised in both the appeals, including as recognitionof the power of the NCLT / NCLAT to issue direction or ordernot consistent with thestatutory timelines and stipulations specifiedin the I & B Code and Regulations framed thereunder.”[17]

7. Having thus referred to the orders previously passed in relationto the CIRP in question, we may, for complete narration of the orderspassed by this Court, also refer to the fact that in this batch of appeals,the extensive arguments were finally concluded on 10.12.2019. Evenwhile reserving the orders, looking to the facts and circumstances of thecase, we stayed the operation of the order passed by NCLAT, insofarrelating to the prayer of the lender-banks of JAL for treating them asfinancial creditors of JIL. The relevant part of the order dated 10.12.2019reads as under: - “Civil Appeal @ Diary No(s). 32881/2019

These appeals take exception to the decision of the NationalCompany Law Appellate Tribunal allowing the appeal(s) filed bythe lender-Banks of Jayprakash Associates Limited (JAL) claimingto be financial creditors(s) of Jaypee Infratech Limited (JIL). TheNational Company Law Tribunal had rejected that claim but wefind that in the impugned judgment, without dealing with the reasonsrecorded by the National Company Law Tribunal, the AppellateTribunal allowed the appeal(s) filed by the stated lender-Banks(s),who were claiming to be the financial creditor(s) of JIL.

After fully hearing counsel for the parties, prima facie, weare of view that lender-Banks of JAL cannot be regarded asfinancial creditor(s) of JIL. We would elaborate on this aspect inour final judgment. Be that as it may, it is appropriate that wemust stay the operation of the impugned judgment(s) of theAppellate Tribunal lest any confusion occurs in the revival process 17 It may also be noticed that by another order dated 03.02.2020, while accepting thereasons stated in an application filed by the IRP pointing out various difficulties andunavoidable circumstances which have delayed the culmination of proposal for approvalof resolution plan, though submitted within the time frame prescribed by this Court,we had extended the time by four weeks for approval of the resolution plan, in theproceedings now being dealt with by the Principal Bench of NCLT at New Delhi.

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Aof JIL and the constitution of Committee of Creditors thereof, inview of the impugned order passed by the National CompanyLaw Appellate Tribunal. Ordered accordingly.

We clarify that the stay of operation is only in respect oforder passed on the application(s) moved by the lender-Bank(s)Bof JAL before the National Company Law Appellate Tribunal fora declaration that they be regarded as financial creditor(s) of JILand included in the Committee of Creditors of JIL.”

The Application by Interim Resolution Professional and theorder passed by NCLT

C8. Having thus referred to the orders already passed in relation tothe CIRP in question, we may now advert to the application filed by IRPforming subject-matter of the first issue involved in these appeals.

9. The IRP, in terms of his duties under clause (j) of Section 25(2)of the Code[18], made the application under consideration before theDAdjudicating Authority stating, inter alia, that the corporate debtor wasitself in dire need of funds; and was facing severe liquidity crunch tocomplete the construction of projects and deliver flats to home buyersas well as to honour the payment obligations to financial creditors,including the Fixed Deposit Holders. It was contended that JIL couldEhave sold/mortgaged its unencumbered land to raise funds to completethe construction of flats in a timely manner and fulfil its obligation to itscreditors and prevent value deterioration or erosion or insolvency butthen, the mortgages in question were created in a highly questionablemanner and in complete disregard to the interests of the creditors andstakeholders of the corporate debtor. Also, that the mortgage of landFwas in nature of assetstripping and was entered with intent to defraudthe creditors of the corporate debtor without obtaining the approval ofshareholders.

18 The relevant parts of Section 25 read as under:

“Duties of resolution professional. - (1) It shall be the duty of the resolutionGprofessional to preserve and protect the assets of the corporate debtor, including thecontinued business operations of the corporate debtor.(2) For the purposes of sub-section (1), the resolution professionalshall undertake the following actions, namely:- ***

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

9.1. In opposition to the application, it was contended that thefinancial position of the corporate debtor was very strong notwithstandingthe temporary financial crunch; that JAL was helping JIL in variousways and hence, creation of impugned mortgages was not unusual, butmerely reciprocal; and such reciprocal accommodation cannot be termedwithout consideration. It was also contended that no transaction whichwas permitted by law and entered into transparently could amount to‘carrying on business for a fraudulent purpose’. It was further contendedthat the impugned mortgages had not been created on account of anyantecedent debt liability owed by the corporate debtor; they had beenwithin the ordinary course of business of corporate debtor and thetransferees; and were not within the statutory period of one year and,therefore, Section 43 of IBC would not apply. It was maintained that thetransactions in question were reciprocal and could not be termed aswithout consideration or undervalued. According to the contesting parties,when the essential jurisdictional conditions were not satisfied, the provisionsof Section 66 of IBC were not attracted.

10. The NCLT, after having heard the parties and having scannedthrough the record, held that the transactions in question were to defraudthe lenders of the corporate debtor JIL, as 858 acres of unencumberedland owned by the corporate debtor to secure the debt of the relatedparty JAL was mortgaged in the midst of the corporate debtor’s immensefinancial crunch, while continuing with default towards the home buyersand financial creditors and after it had been declared as Non PerformingAsset[19], in utter disregard to fiduciary duties and duty of care to thecreditors; and further that the mortgage of land was created without anycounter guarantee from the related party and with no other considerationbeing paid to the corporate debtor. The Tribunal was of the view that atthe time when the mortgage was created, the corporate debtor wasalready in default to its lenders and it was unlikely that its lenders wouldhave provided no-objection for creation of mortgages to secure the debtof a related party as that would have compromised not only the recoveryof their dues but also the interests of thousands of home buyers waitingfor their homes with investment of their hard earned money. The Tribunalalso observed that even though the nominees of lenders attended theBoard Meeting of the corporate debtor in which decision to mortgagethe land was taken, but that cannot be treated as approval or no-objectionof lenders, as the lenders invariably have covenants in the loan agreement 19 ‘NPA’ for short AB

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Athat require their approval for creating interest in favor of any one of theunencumbered assets of the borrower. Moreover, directors of thecorporate debtor (JIL) and the related party (JAL) were well aware ofthe fact that the corporate debtor was in default and had been declaredas NPA by several creditors. The Tribunal, thus, formed the opinion thatwhen the directors of the corporate debtor were fully aware that theyBwere in the twilight zone and insolvency was imminent, they ought tohave exercised due diligence in minimizing the potential loss to the creditorsbut they entered into such transactions which ex facie gave benefits tothe related party JAL, with a clear intent to defraud the creditors of JIL.The Tribunal further observed that the land in question could have beenCsold to generate cash that would have been sufficient to complete theconstruction of flats and the home buyers are directly and adverselyaffected by such a decision.

10.1. With respect to Section 43 of IBC, the NCLT held that thetransaction of creating a security interest by way of mortgage in favourDof lenders of the third party (JAL) on the unencumbered land of thecorporate debtorwithout any consideration or counter guarantee cannotbe treated as transfer in the ordinary course of business or financialaffairs of the corporate debtor. Further, it did not benefit either thebusiness or finances of the corporate debtor in any way and hence, wasnot covered under ‘financial affairs’. The Tribunal held that the phraseEunder consideration cannot be interpreted to mean that the ordinary courseof business also includes the transferee’s ordinary course of businessbecause transferee can never do the transfer himself; and that the words‘the transfer made’ indicate that they relate to the transfer or and notthe transferee. As regards ‘relevant time’ for the purpose of sub-sectionF(4) of Section 43 of the Code[20], the Tribunal observed that the Codeitself has provided a retrospective effect to the provisions of Section43(4)(a) wherein it is stated that ‘it is given to a related party, during twoyears preceding the insolvency commencement date’. This, accordingto NCLT, indicates that the retrospective effect is laid down in the legislation itself and thus, the look-back period for the transactions wasGmade dependent on the insolvency commencement date and not on thedate when the Insolvency and Bankruptcy Code came into effect(01.12.2016). The Tribunal, therefore, held that for transactions of arelated party, the look-back period was two years preceding the insolvency 20 This “relevant time” for the purpose of avoidance of preferential transactions is nowHcommonly referred to as “look-back period”.

commencement date and hence, the relevant period for examining thetransactions in question would be from 10.08.2015 to 09.08.2017 (dateof commencement of CIRP).

10.2. The Tribunal made in-depth analysis of the facts of the case,particularly those related with the transactions in question as also theprovisions of law applicable and, while rejecting the contentions urgedon behalf of the opposing parties, including JAL, observed and held asunder:

“After the elaborate discussion, we have decided that impugnedtransactions are preferential transactions as defined in thesubsection (2)(a) of Section 43 of insolvency and bankruptcy code2016. We have found that corporate debtor Jaypee Infratech Ltd(JIL) has by way of mortgage of unencumbered land createdsecurity interest in favour of lenders of the Jaiprakash AssociatesLtd. (JAL), which happens to be the holding company of JIL,without any consideration. We have also found that the corporatedebtor was facing liquidity crunch and their accounts were declaredas NPA and even after formation of Joint Lender Forum, withoutobtaining approval from Joint Lender Forum, unencumbered landof the corporate debtor has been mortgaged in favour of lendersof JAL. There by this transfer has the effect of putting the JAL,one of the creditors of JIL in a beneficial position than it wouldhave been in the event of distribution of assets being made bysection 53 of the code.

The said mortgage of immovable properties, i.e. of theunencumbered land of the corporate debtor has been made withoutany consideration to the corporate debtor. Therefore the saidtransaction is covered under the umbrella of Sec 45(1) of theCode and will be treated as an undervalued transaction as definedunder section 45 of the Code.

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In this case, we have found that impugned transactions are coveredunder preferential transactions as defined in section 43(2)(a) ofthe Code. Therefore, it cannot be said that section 45 does notapply for these transactions.

The impugned mortgage of unencumbered land parcels of theCorporate Debtor in favour of lenders of the JAL to create a A

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security interest are transactions between the Corporate Debtor,lenders of JAL and JAL, who happens to be an OperationalCreditor of the Corporate Debtor.

It is true that the collateral security is common practice in loantransactions. It is on record that in this case, the Corporate Debtorwas under liquidity crunch and its accounts were declared NPAby LIC and other creditors. The Joint Lender Forum was formedto deal with the situation. But the Corporate Debtor entered intothe transaction even without taking prior approval of Joint LenderForum and mortgaged its unencumbered land in favour of thelenders of the JAL.

In the circumstances stated above it is clear that the impugnedpreferential transactions are also undervalued transactions andcovered under section 45(1) of the Code. It is also clear thatthese transactions are undertaken during the relevant period of 2years from the date of initiation of Corporate Insolvency Processas provided under section 46(1)(ii) of the Code. Therefore, thisissue is also decided in positive, in favour of applicant ResolutionProfessional and against the Corporate Debtor.

In view of the above, it is clear that the mortgage of land of JIL infavour of lenders of JAL, amounts to transfer of interest in propertyof JIL for the benefit of its creditor i.e. JAL and putting it in abeneficial position vis-à-vis other creditors is a preferentialtransactions U/s 43(2)(a) & (b).

The transactions were executed within the look back period oftwo years before the commencement of Insolvency proceedingand is therefore covered U/s 43(4)(a). Further, transaction cannotbe treated is in ordinary course of business or financial affairs ofCorporate Debtor and is not excluded U/s 43(3).”

10.3. The Tribunal concluded in its order as follows:

“On the above basis, it is clear that the company application filedby the Resolution Applicant deserves to be allowed. Hence, isallowed.

ORDER

The company application filed by the Resolution Professional underSec. 66, 43 & 45 of the Insolvency and Bankruptcy 2016 is allowed.

The impugned transactions, details of which are given in theschedule of the judgment are declared as fraudulent, preferentialand undervalued transactions as defined under section 66, 43 and45 of the Code respectively.

Transactions given in the following schedule of property havebeen found as preferential, undervalued and fraudulent, therefore,we pass the order for release and discharge of the security interestcreated by the Corporate Debtor in favour of lenders of theJaiprakash Associates Ltd. under the provision of Section 44(c)of the Insolvency and Bankruptcy Code 2016. We also pass anorder under Section 48(a) of the Code that the propertiesmortgaged by way of preferential and undervalued transactionsshall from now on be deemed to be vested in the CorporateDebtor.”[21]

Appeals before NCLAT: the impugned order

11. Assailing the aforesaid order passed by NCLT accepting theapplication of IRP in relation to six of the mortgage transactions, theaggrieved parties filed separate appeals before the Appellate Tribunal,the NCLAT. The Appellate Tribunal took note of the facts of the caseand the rival contentions and proceeded to upturn the order passed byNCLT on the considerations as indicated infra.

11.1. As regards the assertion of IRP that the transactions inquestion were preferential transactions within the relevant time asenvisaged by Section 43 of the Code, the NCLAT observed that thecorporate debtor had created interest over its property, but such interesthad not been created in favour of any creditor or a surety or a guarantorfor or on account of an antecedent financial debt or operational debt orother liabilities owed by the corporate debtor and hence, Section 43(2)(a)of the Code was not attracted. It was further observed that the mortgagesin question were made in the ordinary course of business and financialaffairs of the transferees, ruling out the applicability of Section 43 assuch and hence, the Adjudicating Authority had no power to pass the 21 In the schedule to the order aforesaid, NCLT gave out the description of six transactionwith particulars of the properties which were treated as preferential, undervalued andfraudulent and also gave the description of one transaction that was not coming withinthe ambit of ‘relevant time’ per Section 43 of the Code. (as fully taken note of inparagraph 4 and its sub-paragraphs under the heading ‘Transactions in question’ ibid.).

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Aorder under Section 44 of the Code. The Appellate Tribunal observedand held, inter alia, as follows:

“62. In the present case, the ‘Corporate Debtor’ has createdinterest on the property of the ‘Corporate Debtor’, but such interesthas not been created in favour of any creditor or a surety or aguarantor for or on account of an antecedent financial debtor operational debt or other liabilities owed by the ‘CorporateDebtor’.

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

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

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65. Clause (b) of sub-section(2) of Section 43 relates to transferunder clause (a) of sub-section (2) of Section 43, which in effectputs such creditor or a surety or a guarantor in a beneficial positionthan it would have been in the event of a distribution of assetsbeing made in accordance with Section 53. As clause (a) of sub-section (2) of Section 43 is not attracted, the question ofapplicability of clause (b) of sub-section (2) of Section 43 doesnot arise.

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

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

67. Therefore, we hold that Section 43 is not attracted to any ofthe transaction/mortgage(s) made in favour of the Appellants.”

11.2. The Appellate Tribunal further proceeded to hold that theprovisions of Section 45 of Code, for avoidance of undervaluedtransactions, were not applicable in relation to the transactions in questionwhile observing as under:- “71. For holding a transaction undervalued, the ‘ResolutionProfessional’/‘Liquidator’ is required to examine the transactionswhich were made during ‘the relevant period’ as prescribed underSection 46, if any of it is undervalued. As per sub-section (2) ofSection 45, the transaction shall be considered ‘undervalued’‘where the ‘Corporate Debtor’ makes a gift to a person orenters into a transaction with a person which involves thetransfer of one or more assets by the ‘Corporate Debtor’ fora consideration the value of which is significantly less thanthe value of the consideration provided by the ‘CorporateDebtor’ and such transaction has not taken place in theordinary course of business of the ‘Corporate Debtor’.’

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

73. As Section 44 is not attracted, it is not necessary to noticeSection 46 which is not attracted and, therefore, the AdjudicatingAuthority has no power to pass any order under Section 48 of the‘I&B Code’. “

11.3. With respect to Section 66 of the Code dealing with fraudulenttrading or wrongful trading, the Appellate Tribunal observed that the A

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Acorporate debtor, being one of the group company, like a guarantor, hadexecuted mortgage deeds in favour of the lender banks and financialinstitutions; and the transactions were in the ordinary course of businessof the corporate debtor. Thus, according to NCLAT, in the absence ofany contrary evidence to show that they were made to defraud thecreditors of the corporate debtor or for any fraudulent purpose, it wasBnot open to the Adjudicating Authority to hold that the mortgage deeds inquestion were made by way of transactions within the meaning of‘fraudulent trading’ or ‘wrongful trading’ under Section 66. The AppellateTribunal held,- “76. In the present case, we have noticed that the transactions inCquestion i.e. mortgage(s) were made in favour of the ‘Banks andFinancial Institutions’ by the ‘Corporate Debtor’ (‘Jaypee InfratechLimited’) in the ordinary course of business of the ‘CorporateDebtor’. The Appellants-Banks and Financial Institutions havegiven loans to the holding Company namely-‘Jaiprakash AssociatesDLimited’. The ‘Corporate Debtor’ being one of the group company,like a guarantor, executed mortgage deed(s) in favour of theAppellants-‘Banks and Financial Institutions’. We have seen thatnone of the transactions were ‘preferential transaction’ or‘undervalued transaction’. It has not been alleged that thetransactions, in question, were made to defraud the creditors inEterms of Section 49 so allegation has been made that suchtransactions amount to ‘extortionate credit’ as defined underSection 50. Therefore, the Adjudicating Authority in absence ofany such finding is not empowered to pass order under Section51. Further, as we have held that the transactions were made in Fthe ordinary course of business in absence of any contraryevidence to show that they were made to defraud the creditors ofthe ‘Corporate Debtor’ or for any fraudulent purpose, on mereallegation made by the ‘Resolution Professional’, it was not opento the Adjudicating Authority to hold that mortgage deeds, inquestion, were made by way of transactions which come withinGthe meaning of ‘fraudulent trading’ or ‘wrongful trading’ underSection 66.”

11.4. The Appellate Tribunal, therefore, allowed the appeals andset aside the impugned order passed by NCLT on 16.05.2018 in so farrelating to the lenders in question in the following:-H

“80. For the reasons aforesaid, we set aside the impugned orderdated 16[th] May, 2018 so far it relates to the Appellants. In view ofsuch findings, the Appellants-‘Axis Bank Ltd’, ‘Standard CharteredBank’, ‘ICICI Bank Ltd.’, ‘State Bank of India’, ‘Jai PrakashAssociates Ltd.’, ‘Bank of Maharashtra’, ‘United Bank of India’,‘Central Bank of India’, ‘UCO Bank’, ‘Karur Vyasa Bank (P)Ltd.’, ‘L&T Infrastructure Finance Company Ltd.’, ‘CanaraBank’, ‘Karnataka Bank Ltd.’, ‘IFCI Ltd.’, ‘ Allahabad Bank’,‘Jammu & Kashmir Bank’, and ‘The South Indian Bank Ltd.’ areentitled to exercise their rights under the ‘I&B Code’.

81. All the appeals are allowed. However, we make it clear thatwe have not made any observations with regard to the Promotersor Directors in absence of any appeal preferred on their behalf.No costs.”

The relevant provisions

12. For comprehension of the subject-matter and appropriatedealing with the issues involved, before proceeding further, suitable itwould be to take note of the relevant statutory provisions.

12.1. It may be observed that while generally, the expressionsused in the Code are defined in Section 3 thereof but then, the expressionsemployed for the purpose of Part II of the Code, dealing with insolvencyresolution and liquidation of corporate persons, are defined in Section 5thereof. The relevant definitions as occurring in Sections 3 and 5 are asunder:- “Section 3(4): “charge” means an interest or lien created on theproperty or assets of any person or any of its undertakings orboth, as the case may be, as security and includes a mortgage; Section 3(6): “claim” means—

(a) a right to payment, whether or not such right is reduced tojudgment, fixed, disputed, undisputed, legal, equitable, secured orunsecured; (b) right to remedy for breach of contract under any law for thetime being in force, if such breach gives rise to a right to payment,whether or not such right is reduced to judgment, fixed, matured,unmatured, disputed, undisputed, secured or unsecured; AB

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Section 3(8): “corporate debtor” means a corporate person whoowes a debt to any person; Section 3(10): “creditor” means any person to whom a debt isowed and includes a financial creditor, an operational creditor, asecured creditor, an unsecured creditor and a decree-holder; Section 3(11): “debt” means a liability or obligation in respect ofa claim which is due from any person and includes a financialdebt and operational debt; Section 3(12): “default” means non-payment of debt when wholeor any part or instalment of the amount of debt has become dueand payable and is not paid by the debtor or the corporate debtor,as the case may be; Section 3(30): “secured creditor” means a creditor in favour ofwhom security interest is created; Section 3(31): “security interest” means right, title or interestor a claim to property, created in favour of, or provided for asecured creditor by a transaction which secures payment orperformance of an obligation and includes mortgage, charge,hypothecation, assignment and encumbrance or any otheragreement or arrangement securing payment or performance ofany obligation of any person:

Provided that security interest shall not include a performanceguarantee; Section 3(33): “transaction” includes a agreement orarrangement in writing for the transfer of assets, or funds, goodsor services, from or to the corporate debtor; Section 3(34): “transfer” includes sale, purchase, exchange,mortgage, pledge, gift, loan or any other form of transfer of right,title, possession or lien; Section 3(35): “transfer of property” means transfer of anyproperty and includes a transfer of any interest in the propertyand creation of any charge upon such property; Section 5(5A): “corporate guarantor” means a corporate personwho is the surety in a contract of guarantee to a corporate debtor; Section 5(7): “financial creditor” means any person to whom afinancial debt is owed and includes a person to whom such debthas been legally assigned or transferred to; Section 5(8): “financial debt” means a debt alongwith interest, ifany, which is disbursed against the consideration for the time valueof money and includes- (a) money borrowed against the payment of interest; (b) any amount raised by acceptance under any acceptance creditfacility or its de-materialised equivalent;

(c) any amount raised pursuant to any note purchase facility orthe issue of bonds, notes, debentures, loan stock or any similarinstrument;

(d) the amount of any liability in respect of any lease or hirepurchase contract which is deemed as a finance or capital leaseunder the Indian Accounting Standards or such other accountingstandards as may be prescribed; (e) receivables sold or discounted other than any receivables soldon non-recourse basis; (f) any amount raised under any other transaction, including anyforward sale or purchase agreement, having the commercial effectof a borrowing; Explanation.— For the purposes of this sub-clause,—

(i) any amount raised from an allottee under a real estate projectshall be deemed to be an amount having the commercial effect ofa borrowing; and

(ii) the expressions, “allottee” and “real estate project” shall havethe meanings respectively assigned to them in clauses (d) and(zn) of section 2 of the Real Estate (Regulation and Development)Act, 2016 (16 of 2016);[22]

(g) any derivative transaction entered into in connection withprotection against or benefit from fluctuation in any rate or priceand for calculating the value of any derivative transaction, onlythe market value of such transaction shall be taken into account; A

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(h) any counter-indemnity obligation in respect of a guarantee,indemnity, bond, documentary letter of credit or any other instrumentissued by a bank or financial institution;

(i) the amount of any liability in respect of any of the guarantee orindemnity for any of the items referred to in sub-clauses (a) to (h)Bof this clause; Section 5(20): “operational creditor” means a person to whoman operational debt is owed and includes any person to whomsuch debt has been legally assigned or transferred; Section 5(21): “operational debt” means a claim in respect ofthe provision of goods or services including employment or a debtin respect of the payment of dues arising under any law for thetime being in force and payable to the Central Government, anyState Government or any local authority; C

Section 5(24): “related party”, in relation to a corporate debtor,Dmeans –

(a) a director or partner of the corporate debtor or a relative of adirector or partner of the corporate debtor; (b) a key managerial personnel of the corporate debtor or a relativeof a key managerial personnel of the corporate debtor; E

(c) a limited liability partnership or a partnership firm in which adirector, partner, or manager of the corporate debtor or his relativeis a partner; (d) a private company in which a director, partner or manager ofFthe corporate debtor is a director and holds along with his relatives,more than two per cent of its share capital; (e) a public company in which a director, partner or manager ofthe corporate debtor is a director and holds along with relatives,more than two per cent of its paid-up share capital; G

(f) anybody corporate whose board of directors, managing directoror manager, in the ordinary course of business, acts on the advice,directions or instructions of a director, partner or manager of thecorporate debtor; (g) any limited liability partnership or a partnership firm whoseHpartners or employees in the ordinary course of business, acts on the advice, directions or instructions of a director, partner ormanager of the corporate debtor; (h) any person on whose advice, directions or instructions, adirector, partner or manager of the corporate debtor is accustomedto act;

(i) a body corporate which is a holding, subsidiary or an associatecompany of the corporate debtor, or a subsidiary of a holdingcompany to which the corporate debtor is a subsidiary;

(j) any person who controls more than twenty per cent of votingrights in the corporate debtor on account of ownership or a votingagreement; (k) any person in whom the corporate debtor controls more thantwenty per cent of voting rights on account of ownership or avoting agreement;

(l) any person who can control the composition of the board ofdirectors or corresponding governing body of the corporate debtor; (m) any person who is associated with the corporate debtor onaccount of —

(i) participation in policy making process of the corporatedebtor; or

(ii) having more than two directors in common between thecorporate debtor and such person; or

(iii) interchange of managerial personnel between thecorporate debtor and such person; or

(iv) provision of essential technical information to, or from,the corporate debtor;”

12.2. The concept and consequences of preferential transactionsat a relevant time are provided in Sections 43 and 44 of the Code, whichmay also be usefully extracted as follows:- “Section 43. Preferential transactions and relevant time.-

(1) Where the liquidator or the resolution professional, as the casemay be, is of the opinion that the corporate debtor has at a relevanttime given a preference in such transactions and in such manneras laid down in sub-section (2) to any persons as referred to in A

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sub-section (4), he shall apply to the Adjudicating Authority foravoidance of preferential transactions and for, one or more of theorders referred to in section 44.

(2) A corporate debtor shall be deemed to have given a preference,if—

(a) there is a transfer of property or an interest thereof of thecorporate debtor for the benefit of a creditor or a surety or aguarantor for or on account of an antecedent financial debt oroperational debt or other liabilities owed by the corporate debtor;and (b) the transfer under clause (a) has the effect of putting suchcreditor or a surety or a guarantor in a beneficial position than itwould have been in the event of a distribution of assets beingmade in accordance with section 53.

(3) For the purposes of sub-section (2), a preference shall notinclude the following transfers—

(a) transfer made in the ordinary course of the business or financialaffairs of the corporate debtor or the transferee; (b) any transfer creating a security interest in property acquiredby the corporate debtor to the extent that—

(i) such security interest secures new value and was given atthe time of or after the signing of a security agreement thatcontains a description of such property as security interest,and was used by corporate debtor to acquire such property;and

(ii) such transfer was registered with an information utility onor before thirty days after the corporate debtor receivespossession of such property:

Provided that any transfer made in pursuance of the order of acourt shall not, preclude such transfer to be deemed as giving ofpreference by the corporate debtor.

Explanation.—For the purpose of sub-section (3) of this section,“new value” means money or its worth in goods, services, or newcredit, or release by the transferee of property previouslytransferred to such transferee in a transaction that is neither void

nor voidable by the liquidator or the resolution professional underthis Code, including proceeds of such property, but does not includea financial debt or operational debt substituted for existing financialdebt or operational debt.

(4) A preference shall be deemed to be given at a relevant time,if—

(a) It is given to a related party (other than by reason only ofbeing an employee), during the period of two years preceding theinsolvency commencement date; or (b) a preference is given to a person other than a related partyduring the period of one year preceding the insolvencycommencement date.

Section 44. Orders in case of preferential transactions.-

(1) The Adjudicating Authority, may, on an application made bythe resolution professional or liquidator under sub-section (1) ofsection 43, by an order:

(a) require any property transferred in connection with the givingof the preference to be vested in the corporate debtor; (b) require any property to be so vested if it represents theapplication either of the proceeds of sale of property so transferredor of money so transferred;

(c) release or discharge (in whole or in part) of any security interestcreated by the corporate debtor; (d) require any person to pay such sums in respect of benefitsreceived by him from the corporate debtor, such sums to theliquidator or the resolution professional, as the AdjudicatingAuthority may direct; (e) direct any guarantor, whose financial debts or operational debtsowed to any person were released or discharged (in whole or inpart) by the giving of the preference, to be under such new orrevived financial debts or operational debts to that person as theAdjudicating Authority deems appropriate; (f) direct for providing security or charge on any property for thedischarge of any financial debt or operational debt under the order, A

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and such security or charge to have the same priority as a securityor charge released or discharged wholly or in part by the giving ofthe preference; and (g) direct for providing the extent to which any person whoseproperty is so vested in the corporate debtor, or on whom financialdebts or operational debts are imposed by the order, are to beproved in the liquidation or the corporate insolvency resolutionprocess for financial debts or operational debts which arose from,or were released or discharged wholly or in part by the giving ofthe preference:

Provided that an order under this section shall not—

(a) affect any interest in property which was acquired from aperson other than the corporate debtor or any interest derivedfrom such interest and was acquired in good faith and for value; (b) require a person, who received a benefit from the preferentialtransaction in good faith and for value to pay a sum to the liquidatoror the resolution professional.

Explanation I.-For the purpose of this section, it is clarified thatwhere a person, who has acquired an interest in property fromanother person other than the corporate debtor, or who hasreceived a benefit from the preference or such another person towhom the corporate debtor gave the preference, —

(i) had sufficient information of the initiation or commencementof insolvency resolution process of the corporate debtor;

(ii) is a related party,

it shall be presumed that the interest was acquired or the benefitwas received otherwise than in good faith unless the contrary isshown.

Explanation II.-A person shall be deemed to have sufficientinformation or opportunity to avail such information if a publicannouncement regarding the corporate insolvency resolutionprocess has been made under section 13.”

12.3. As the transactions in question are the mortgage(s) of theassets of corporate debtor JIL, the concept and connotations of mortgage, as occurring in Section 58 of the Transfer of Property Act, 1882[23], couldalso be usefully noticed as under:-

“58. “Mortgage”, “mortgagor”, “mortgagee”, “mortgage-money” and “mortgage-deed” defined.- (a) A mortgage is the transfer of an interest in specific immoveableproperty for the purpose of securing the payment of moneyadvanced or to be advanced by way of loan, an existing or futuredebt, or the performance of an engagement which may give riseto a pecuniary liability.

The transferor is called a mortgagor, the transferee a mortgagee;the principal money and interest of which payment is secured forthe time being are called the mortgage-money, and the instrument(if any) by which the transfer is effected is called a mortgage-deed.

(b) Simple mortgage.-Where, without delivering possession ofthe mortgaged property, the mortgagor binds himself personallyto pay the mortgage-money, and agrees, expressly or impliedly,that, in the event of his failing to pay according to his contract, themortgagee shall have a right to cause the mortgaged property tobe sold and the proceeds of sale to be applied, so far as may benecessary, in payment of the mortgage-money, the transaction iscalled a simple mortgage and the mortgagee a simple mortgagee.

(c) Mortgage by conditional sale.-Where, the mortgagorostensibly sells the mortgaged property- on condition that on default of payment of the mortgage-money on a certain date the sale shall become absolute, or on condition that on such payment being made the sale shallbecome void, or on condition that on such payment being made the buyershall transfer the property to the seller, the transaction is called a mortgage by conditional sale andthe mortgagee a mortgagee by conditional sale:

23 Hereinafter also referred to as ’the Transfer of Property Act’.

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Provided that no such transaction shall be deemed to be amortgage, unless the condition is embodied in the document whicheffects or purports to effect the sale.

(d) Usufructuary mortgage.-Where the mortgagor deliverspossession or expressly or by implication binds himself to deliverpossession of the mortgaged property to the mortgagee, andauthorises him to retain such possession until payment of themortgage-money, and to receive the rents and profits accruingfrom the property or any part of such rents and profits and toappropriate the same in lieu of interest, or in payment of themortgage-money, or partly in lieu of interest or partly in paymentof the mortgage-money, the transaction is called an usufructuarymortgage and the mortgagee an usufructuary mortgagee.

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(e) English mortgage.-Where the mortgagor binds himself torepay the mortgage-money on a certain date, and transfers themortgaged property absolutely to the mortgagee, but subject to aproviso that he will re-transfer it to the mortgagor upon paymentof the mortgage-money as agreed, the transaction is called anEnglish mortgage.

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(f) Mortgage by deposit of title-deeds.-Where a person inany of the following towns, namely, the towns of Calcutta, Madras,and Bombay, and in any other town which the State Governmentconcerned may, by notification in the Official Gazette, specify inthis behalf, delivers to a creditor or his agent documents of title toimmoveable property, with intent to create a security thereon, thetransaction is called a mortgage by deposit of title-deeds.

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(g) Anomalous mortgage.- A mortgage which is not a simplemortgage, a mortgage by conditional sale, an usufructuarymortgage, an English mortgage or a mortgage by deposit of title-deeds within the meaning of this section is called an anomalousmortgage.”

G12.4. The provisions contained in Sections 124, 126 and 127 ofthe Indian Contract Act, 1872[24] shall also have bearing on the issues athand and hence, the same may also be noted as follows:- “124. “Contract of indemnity” defined.- A contract by which one partypromises to save the other from loss caused to him by H24 Hereinafter also referred to as ‘the Contract Act’.

the conduct of the promisor himself, or by the conduct of anyother person, is called a “contract of indemnity.”

126. ‘Contract of guarantee’, ‘surety’, ‘principal debtor’and ‘creditor’ – A ‘contract of guarantee’ is a contract to performthe promise, or discharge the liability, of a third person in case ofhis default. The person who gives the guarantee is called the‘surety’; the person in respect of whose default the guarantee isgiven is called the ‘principal debtor’, and the person to whom theguarantee is given is called the ‘creditor’. A guarantee may beeither oral or written.

127. Consideration for guarantee.- Anything done, or anypromise made, for the benefit of the principal debtor, may be asufficient consideration to the surety for giving the guarantee.”

WHETHER THE TRANSACTIONS IN QUESTION AREPREFERENTIAL

Broad features of rival contentions and submissions

13. As noticed, being aggrieved by the order so passed by NCLAT,three sets of parties have preferred these appeals. Multidimensional andwide-ranging submissions have been made by learned counsel for therespective parties, raising the issues as to whether the transactions inquestion could be said to be preferential and/or undervalued and/orfraudulent, essentially within the meaning of Sections 43, 45, 49 and 66of the Code. Elaborate submissions have also been made raising theissue as to whether the lenders of JAL, in whose favour the securityinterest by way of impugned transactions were created, would fall in thecategory of ‘financial creditors’ of the corporate debtor JIL.

14. Having regard to the overall circumstances, appropriate itwould be to deal, at the first, with the contentions related with the issueas to whether the transactions in question are preferential transactionswithin the meaning of Section 43 of the Code. We may briefly summarizethe contentions of the appellants, with particular focus on this issue asinfra:

Interim Resolution Professional for Jaypee Infratech Limited– the appellant In C.A. No. 8512-8527 of 2019

14.1. It has been contended on behalf of the appellant InterimResolution Professional, who moved the application for avoidance of A

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Athe transactions in question, that the impugned transactions have theeffect of putting JAL, which is an equity shareholder and an operationalcreditor (for an amount of Rs. 261.77 crores) of the corporate debtorJIL, in a beneficial position than it would have been in the event ofdistribution of assets under Section 53 of the Code vis-à-vis othercreditors; and that if the transactions are held to be valid, the liability ofBJAL towards its own creditors gets secured and becomes realisablefrom the value of the mortgaged properties whereby, JAL’s liabilitiesare reduced and JAL gets benefitted in exclusion of creditors of thecorporate debtor JIL. It is submitted that, in the event of distribution ofassets in terms of Section 53 of IBC, for the sake of argument, even ifCJAL is to get full value of its shares (Rs. 995 crores), such amount issignificantly less than the value of assets which have been mortgagedby way of impugned transactions for satisfaction of debts owed by JALto its lenders.

14.1.1. It is submitted on behalf of the appellant Interim ResolutionDProfession that the assets in question were released from the earliermortgages and fresh mortgages were created during the look-back periodwith increased/enhanced amount of facilities as provided under eachindividual transaction. The said so-called re-mortgage essentially amountsto a fresh mortgage within the relevant time of two years before thedate of commencement of CIRP and was not done in the ordinary courseEof business of JIL and hence, is hit by Section 43 of the Code.

14.1.2. It is further urged that in the exclusionary clause underSection 43(3)(a), which pertains to the transfer being made in the ordinarycourse of the business or financial affairs of the corporate debtor orthetransferee, the expression “or” will have to be read conjunctively andFnot in the alternative. That is to say, the word “or” will have to be readas “and”. This is because if “or” is read textually, it would mean that anoverwhelming majority of transactions like the present one, wherebybanks who would accept the security interest over properties belongingto a third party, after disbursing financial facilities to its loan, would getGout of the net of “preferential transactions”, even if the transfer in questionis not made in the ordinary course of business of the corporate debtor. Itis submitted that the intention of legislature behind enacting a provisionlike Section 43 is that preferential transactions are avoided so that suchassets would be available either with the resolution professional or withthe liquidator, as the case may be, to put the corporate debtor back on itsH

wheels or if that is not possible, to ensure that the creditors of thecorporate debtor get a fair deal. With reference to the decisions of thisCourt in State of Bombay v. R.M.D. Chamarbaugwala and Anr.:1957 SCR 874 and Mazagaon Dock Ltd v. Commissioner of Income-Tax and Excess Profits Tax: 1959 SCR 848, it is submitted that onthe well-known cannons of interpretation, “or” could be read as “and” ifit is warranted to bring the provision in question in sync with the intentionof the legislature which is to be discerned.

14.1.3. It is contended that Section 43 ought to be read keeping inmind the intention of the legislature in introducing such provision, whichhad been to protect the creditors against siphoning away of corporateassets by the management of the company, who have special knowledgeof the company’s financial troubles by virtue of its position.

India Infrastructure Finance Company Limited – the appellantin C.A.@ D No. 32881 of 2019.

14.2. This appellant is one of the entities who has advanced loanto JIL and has preferred appeal with permission, assailing the order passedby NCLAT and maintaining, inter alia, that in any case, the lenders ofJAL cannot be taken as ‘financial creditors’ of JIL. While referring tothe theory behind the provisions for avoidance of certain transactions, itis submitted on behalf of this appellant that the Court should considersubstance rather than legal form in evaluating the true economic effectof a transaction or a set of transactions in applying the relevant provisions.On behalf of this appellant, the following submissions have been made inregard to the relevant expressions and phrases occurring in the provisionsunder consideration:

Ordinary Course of Business

14.2.1. It is submitted that mortgages could not have been madein the ordinary course of business of the corporate debtor JIL, as it isdifficult to fathom why a subsidiary would furnish security to its parentcompany in the ordinary course and, on the contrary, it is the parentcompany which at times furnishes security on behalf of its subsidiarysince it derives economic value from the subsidiary. According to theappellant, it is difficult to appreciate that when the corporate debtor JILwas itself reeling under financial stress, why it would routinely undertaketo secure the indebtedness of JAL by furnishing such high valuedsecurities and that too when the amount of debt secured by way of AB

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Amortgaging the assets of the corporate debtor increased from Rs. 3,000crores to approximately Rs. 24,000 crores and the number of creditorsalso went up from 2 to 24 with respect to the consortium mortgage. It issubmitted that even though creation of third party security is a normalpractice, the creation of every third party security cannot be alwaysdeemed to have been done in the ordinary course of business; that suchB‘ordinary course’ has to be determined under the circumstances whensuch transactions were entered into; and, considering that JIL wasdeclared NPA and had defaulted on its indebtedness to some of its lenders,securing of JAL’s indebtedness under such circumstances cannot beconstrued to have been done in the ordinary course of business of theCcorporate debtor JIL. The learned counsel for the appellant has referred,inter alia, to the decision in Downs Distributing Co Pty Ltd v.Associated Blue Star Stores Pty Ltd (in liq): (1948) 76 CLR 463.

Relevant Period and Related Party

14.2.2. It is further submitted that the term ‘transaction’ underDthe Code includes an agreement or arrangement in writing for the transferof assets, or funds, goods or services from or to the corporate debtor.The use of the word ‘include’ would signify its natural import and is tobe given a wide interpretation. It is submitted that as JAL was not onlyad idem to the terms of the transaction but was also the beneficiaryEthereof, it cannot be said that the transaction was only between thecorporate debtor and the lenders of JAL; rather, the transaction waswith a ‘related party’ and the look-back period would be two years.

Home buyers – the appellants in C.A. No. 6777-97/2019

14.3. On behalf of the home buyers, who have invested in theFprojects of the corporate debtor and whose interests would be diluted ifthe impugned transactions are upheld, the flow of transactions in questionhas been referred and essentially, the same contentions have been urgedwith respect to Section 43 of the Code, with reliance on the decision inDowns Distributing Co (supra), that the impugned transactions wereGnot made in the ordinary course of business of the corporate debtor JIL;and had been preferential transactions, putting JAL in a beneficial positionat the cost of bona fide creditors of JIL, including the home buyers. Weare not re-narrating all their contentions to avoid repetition. However,we may observe that to substantiate their arguments with respect toSection 43 of the Code, on behalf of these appellants, reliance is alsoH

placed on the interim report of the Bankruptcy Law Reforms Committee(February 2015) and the decision of this Court in Macquarie BankLtd. v. Shilpi Cable Technologies Ltd.: (2018) 2 SCC 674.

The respondents

15. The contesting respondents have refuted the contentions ofthe appellants with essentially similar submissions that the transactionsin question cannot be termed as preferential transactions within themeaning of Section 43 of the Code.

15.1. The respondents, particularly the lenders of JAL, whilemaintaining a consistent stand that the transactions in question are notpreferential and do not fall under Section 43 of the Code, have submittedthat they being the bankers and financial institutions, are regularly engagedin the business of extending loans and other facilities which form thebackbone of economic growth; and taking of such securities, includingthird party security, is one of the normal and ordinary feature of theirbusiness and dealings, particularly that of corporate money lending.According to these respondents, if at all such third party securities areavoided on the allegation of being preferential, it is likely to have adevastating effect on the entire economy because the bankers andfinancial institutions would then be left high and dry; and for futuredealings, they shall have no alternative but to restrict their activities onlyto the direct party securities which would, in turn, result in retardationand regression. It is submitted that in a given case, the borrower maynot be able to offer matching security to secure the entire advancerequisite for its business and growth; and legally it is not impermissiblebetween the related companies that one may provide security towardsthe loan/advance/facility obtained by the other. According to therespondents, the scheme of the Code, and particularly its Part II, hasnever been to allow the processes of insolvency resolution or liquidationto operate detrimental to the interests of the financers like themselves(lenders of JAL). It is contended that on the true scope of the provisionscontained under Section 43 of the Code, with reference to the intent andobject, the transactions in question, representing the security andguarantee extended by the corporate debtor JIL, cannot be construed aspreferential, particularly when they were entered into in the ordinarycourse of business and financial affairs of the corporate debtor as alsothe transferees.

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A15.2. Apart from expressing such concerns about likely prejudiceto themselves and to the economy if the transactions in question are heldpreferential, a variety of contentions have been advanced on behalf ofthe respondents, while refuting those of the appellants. We may brieflysummarize the leading contentions on behalf of the contesting respondentswhile omitting repetitions.

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Axis Bank

15.3. While maintaining that the impugned transactions cannot beconsidered as preferential within the meaning of Section 43 of the Code,the principal contentions on behalf of this respondent are as under: - C

‘’a. The transactions did not occur within the relevant time.

15.3.1. It is contended that the ‘relevant time’ in the presentcircumstances could be only one year as the transfer of property interestwas to this respondent, which is a Bank and an unrelated party. It isfurther contended that, in any event, the land parcels were mortgagedDon 24.02.2015, which is beyond even the two years formulation, therelevant time being from 10.08.2015 to 09.08.2017. The subsequent re-execution of the mortgage deeds on 15.09.2015 and then again on29.12.2016 cannot be considered to be a substantive event since thenature and identity of the security remained the same and no freshEencumbrances were created. The re-mortgage was done to reflect theincrease in the amount of facilities and number of members in theconsortium. It is not the case that the existing facilities were paid, themortgage satisfied, and fresh facilities were created for which a freshmortgage was required.

Fb. Without prejudice to the above, the ingredients of Section43(2) are not met.

15.3.2. It is further submitted that Sections 43/44 of the Code areexpropriating provisions as they affect concluded transactions and havethe potential to render void the transfers of property done through thetransactions which are otherwise legitimate and hence, such provisionsGmust be strictly construed. The decisions of this Court in Devinder Singh& Ors v. State of Punjab & Ors: (2008) 1 SCC 728 and Nareshbhaiv. Union of India : (2019) SCC Online SC 1027 have been reliedupon.

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15.3.3. It is submitted that the requirements set out under Section43(2) must be strictly construed and in the instant case, the two prongsunder Section 43(2) have not been satisfied. With reference toUNCITRAL Legislative Guide on Insolvency Law at para 177, itis submitted that as per Section 43(2)(a), a preference could only begiven to an existing creditor such that he is preferred over other creditorsbut in this matter, the security was provided for the benefit of therespondent bank, which did not have a pre-existing creditor-debtorrelationship with the corporate debtor. Further, the security was providedon account of the debt obligations of JAL, and not any antecedent debtobligations of the corporate debtor.

15.3.4. It is further submitted, without prejudice to the above, thateven if JAL is taken to be a creditor within the meaning of Section43(2)(a), then the requirements of Section 43(2)(b), the second prong ofthe two-fold requirement for a transaction to be a preference, are notmet. It is submitted that the transfer in the instant case has no effectwhatsoever on the relative position of JAL in the distribution waterfall –it remains an operational creditor without any security interest.

c. Without prejudice to the above, security was provided inthe ordinary course of business.

15.3.5. While pointing out that Section 43(3)(a) carves outexception for the transactions made in the ordinary course of businessor financial affairs of either the corporate debtor or the transferee, it iscontended that no material particulars/evidence have been produced toshow that the provision of the security was not in the ordinary course ofbusiness of the corporate debtor. On the contrary, according to therespondent, (i) creation of third party security is an established commercialbusiness practice; (ii) the corporate debtor has continuously discloseddetails of the security in its annual reports beginning from the financialyear ending 31.03.2015 and thus, creation of security was known to alland disclosed in public documents; and (iii) no evidence of dissent fromany existing creditor of the corporate debtor has been shown at the timeof creation of the security. The transaction in question, according to therespondent, had been in the ordinary course of business of the corporatedebtor and remains unexceptionable.

15.3.6. It is further contended that the provision of security wasalso in the ordinary course of business of the respondent who is a AB

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Ascheduled commercial bank and is duly authorized by statute to carryout the business of commercial lending on a secured basis [per Section6(1)(a) of the Banking Regulation Act, 1949]; and is statutorily entitledto seek credit enhancement on account of outstanding debts by way ofcreation of security interests by borrowers or their related entities. Forthis reason too, with the transaction being in the ordinary course ofBbusiness of the transferee i.e., the respondent, it cannot be termed as apreferential transaction.

15.3.7. It is yet further submitted that the contention of IRP thatthe corporate debtor ought not to have given the security as its accountshad turned NPA with certain banks is fallacious as it conflates theCconcepts of ‘NPA’ and ‘willful defaulter’ and ignores that the securitywas given to the respondent even before the account turned NPA quacertain banks. With reference to the interim report of the BankruptcyLaw Reforms Committee issued in February 2015, it is submitted that asper the said report, avoidance transactions relate to ‘willful defaulters’Dand not ‘NPAs’. It is further argued that the distinctive position of awillful defaulter and an NPA is also indicated in Section 29A of Code,where Section 29A(b) provides that a willful defaulter can never be aresolution applicant whereas, Section 29A(c) provides that a companywhose account has become non-performing may only be disqualified ifthe account has remained non-performing for a period of one year. It isEsubmitted that RBI Master Circular on asset classification issued in July2015 and June 2019 set out that an account may turn NPA qua a particularbank if the debts are not being serviced regularly but this does not meanthat a particular company’s accounts would have turned non-performingqua all its lenders. It is also submitted that the other account of corporateFdebtor with this respondent turned NPA only in 2017, i.e., much after thecreation of security in question. It is further contended that a company’saccount may easily become standard if, inter alia, the companyregularizes its payment timelines or if lenders decide to revise thecompany’s repayment obligations. Reliance is placed on the decisions ofthis Court in Keshavlal Khemchand & Sons Pvt. Ltd. & Ors v. UnionGof India & Ors: (2015) 4 SCC 770 and State Bank of India v. JahDevelopers Pvt. Ltd. & Ors.: (2019) 6 SCC 787.

d. Section 44 does not come into operation unless atransaction is made out to be preferential under Section 43.

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15.3.8. It is further submitted that the jurisdictional condition ofexercising power under Section 44 is the finding that a transaction ispreferential under Section 43, as is evident from the heading of Section44 i.e., ‘Orders in cases of preferential transactions’; and, for thetransaction in question being not preferential under Section 43, no orderscould be made under Section 44.

Standard Chartered Bank

15.4. Most of the contentions urged on behalf of this respondentare analogous to the contentions noticed in the preceding paragraphsand, therefore, we are not repeating the same. It is maintained on behalfof this respondent that in whatever way the relevant time is reckonedfor the purpose of Section 43 of the Code, its transactions would not falltherein because the initial mortgage in favour of this respondent wasmade in the year 2012, which is beyond the two years formulation. Thefurther submission is that the subsequent conversion of registeredmortgage into an equitable mortgage on 04.11.2015 and thereafter, re-conversion from equitable mortgage to registered mortgage on24.05.2016, in relation to the same subject property as a security, cannotbe considered as a fresh creation of mortgage and hence, the transactionin question does not fall within relevant time.

ICICI Bank

ICICI Bank

15.5. Again, for most of the contentions on behalf of this respondentbeing similar in nature, we are not repeating the same. However, wemay notice that with reference to Section 43(4) of the Code, it has beencontended that since this respondent bank is an unrelated party to boththe corporate debtor and JAL, the relevant look-back period would beone year and not two years. It is submitted that the mortgages werecreated on 15.09.2015 and the same property was re-mortgaged on29.12.2016, which is much before the look-back period of one year andthereby, this transaction could not be challenged as being preferential.The decisions of the Bombay High Court in Monarch Enterprises v.Kishan Tulpule & Ors : (1992) 74 Comp Case 89 (Bom) and that ofMadras High Court in IDBI Bank Ltd. v. The Administrator, KothariOrient Finance Ltd., the Official Liquidator & S. Ramaiah : (2009)152 Comp Case 282 (Mad) have been referred while submitting thata mere transfer of the assets within the look-back period would notmake the transaction preferential except when it is coupled with theintent to prefer one creditor over the other. Further, for contending that A

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Athe impugned transactions were made in the ordinary course of businessof both the respondent Bank and the corporate debtor, the Annual Reportsof corporate debtor JIL have been referred with the submissions thatthe mortgaged properties were disclosed as ‘inventories’ for the corporatedebtor being a real estate company; and hence, dealing with the‘inventories’/‘stock-in-trade’ is in the ordinary course of business.B

15.5.1. It is further submitted that there is no relation between thefinancial position of the corporate debtor and the impugned transactionfor another reason that as on the date of commencement of insolvencyproceedings, the corporate debtor had 740 acres of unencumbered land,which could have been used to create security for the creditors ofCcorporate debtor. While pointing out that 11 out of 13 lenders of thecorporate debtor JIL are also a part of the consortium of JAL lenderswhose loans were secured by mortgages made by the corporate debtor,it is submitted that prior to 15.09.2015, when the questioned Consortiumof Mortgages was created, only Jammu and Kashmir Bank had declaredDthe corporate debtor as NPA, which was followed by the other lendersdeclaring the corporate debtor as NPA. It is contended that prior to thesaid declaration, the transactions with this respondent had been made asalso the mortgages created on 15.09.2015, which had also secured theinterests of Jammu and Kashmir Bank and, therefore, the impugnedtransactions could not be said to be preferential.E

Other respondent-lenders

15.6. Broadly speaking, similar submissions as noted above havebeen made on behalf of other respondent-lenders while maintaining thatthe impugned transactions are covered by the exclusion clause underFSection 43 inasmuch as the transfers had been made in the ordinarycourse of business of the corporate debtor as also the transferees; andthat for the purpose of Section 43 of the Code, the relationship betweenthe respondent-lenders and JIL ought to be looked into rather thanassuming JAL to be the primary transferee. It has also been argued,while relying on the decision of this Court in Purbanchal Cables &GConductors Pvt. Ltd. & Ors v. Assam State Electricity Board & Ors: (2012) 7 SCC 462, that the provisions of Section 43 of the Code, bytheir very nature, would come into operation at least one year after theenactment of the Code i.e., it would have only the prospective effectand cannot be given retrospective effect so as to operate over any periodHprior to the enactment.

Jaiprakash Associates Ltd. (JAL)

Jaiprakash Associates Ltd. (JAL)

15.7. As noticed, this respondent JAL is the holding company ofcorporate debtor JIL; and the transactions in question had been forsecuring the loans/facilities obtained by this respondent. Even whilebroadly adopting the contentions advanced by other respondents, furthersubmissions have been made on behalf of this respondent to assert onthe credence of the transactions in question. With reference to itsrelationship with JIL, it is contended on behalf of this respondent thatbeing the holding company, JAL had been providing financial, technicaland strategic support to JIL in various ways being: (i) Investment madein 99,50,00,000 shares of JIL (paid up value Rs. 995 crores) at its verynascent stage, which means contribution of substantial funds for thebusiness of JIL without interest; (ii) Pledge of its 70,83,56,087 equityshares held in JIL in favour of the lender of JIL; (iii) Promoter SupportAgreement to meet the Debt Service Reserve Account (DSRA)obligation of JIL towards its lenders; and (iv) Bank Guarantees of Rs.212 crores in aggregate to meet the DSRA obligation of JIL for thefinancial assistance obtained by JIL. It is submitted that such dealings/transactions by JAL in favour of JIL depict the nature of businessrelationship between JAL and JIL and makes it amply clear that theimpugned transactions were done in the ordinary course of business andfinancial affairs of JIL. It is further submitted that the mortgage of 858acres of land made in favour of lenders of JAL fall within the ambit ofSection 186 of Companies Act, 2013[25] and is not unauthorized.

15.7.1. It is contended that avoidance of preferential transactionsapplies to a case where the company’s accounts has become stressedand there is a strong likelihood of it going into liquidation but in the presentcase, it is a matter of record that the accounts of JIL had been categorisedas NPA only to an extent of 29.04% whereas the remaining accountswere still ‘standard’. According to the respondent JAL, this fact wasspecifically pleaded at the stage of opposing the application filed beforethe NCLT for initiating CIRP against JIL but JIL gave its consent forCIRP on the bona fide belief that it would be able to restructure its loansand get back the management of JIL. The submission is that, in thegiven economic scenario, JIL was not in any such stress or problem thatit could not have continued with the existing mortgages for securing thefacilities advanced to JAL by the lender banks and financial institutions.

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AInsolvency and Bankruptcy Code, 2016: historicalbackground, objects, scheme and structure of the relevant parts

16. The basic issue raised in the matter being related with theeffect and operation of Section 43 of the Code, concerning ‘Preferentialtransactions and relevant time’, appropriate it shall be to comprehendBthe principles underlying the concept of ‘preferential transactions’. Alittle insight into the objects sought to be achieved by the Insolvency andBankruptcy Code, 2016 and its historical background shall be apposite.

16.1. As noticed from Preamble, the Code came to be enacted toconsolidate and amend the laws relating to reorganisation and insolvencyCresolution of corporate persons and even of partnership firms andindividuals in a time bound manner; the objectives, inter alia, being formaximisation of value of assets of such persons and balance of interestof all the stakeholders.

16.1.1. In the case of Swiss Ribbons Private Limited and Anr.Dv. Union of India and Ors.: (2019) 4 SCC 17[26], this Court had theoccasion to traverse through the historical background and scheme ofthe Code in the wake of challenge to the constitutional validity of variousprovisions therein. One part of such challenge had also been founded onthe ground that classification between ‘financial creditor’ and ‘operationalcreditor’ was discriminatory and violative of Article 14 of the ConstitutionEof India.[27] This ground as also several other grounds pertaining to variousprovisions of the Code were rejected by this Court after elaborate dilationon the vast variety of rival contentions and the provisions so contained inthe Code were upheld as valid. In the course of such distillation, thisCourt took note, inter alia, of the pre-existing state of law as also theFobjects and reasons for enactment of the Code. While observing thatthe focus of the Code was to ensure revival and continuation of thecorporate debtor, where liquidation is to be availed of only as a lastresort, this Court pointed out that on its scheme and frame work, theCode was a beneficial legislation to put the corporate debtor on its feet,and not a mere recovery legislation for the creditors. This Court said,-G

26 Hereinafter also referred to as the case of ‘Swiss Ribbons’.

27 The law declared by this Court in this case of Swiss Ribbons, while rejecting thecontentions that the classification between ‘financial creditor’ and ‘operational creditor’was discriminatory and violative of Article 14, shall have some bearing on the issues athand, particularly in relation to the second issue on the claim of the respondent-lendersHfor being treated a financial creditors of JIL, as shall be noticed hereafter later.

“27. As is discernible, the Preamble gives an insight into what issought to be achieved by the Code. The Code is first and foremost,a Code for reorganisation and insolvency resolution of corporatedebtors. Unless such reorganisation is effected in a time-boundmanner, the value of the assets of such persons will deplete.Therefore, maximisation of value of the assets of such persons sothat they are efficiently run as going concerns is another veryimportant objective of the Code. This, in turn, will promoteentrepreneurship as the persons in management of the corporatedebtor are removed and replaced by entrepreneurs. When,therefore, a resolution plan takes off and the corporate debtor isbrought back into the economic mainstream, it is able to repay itsdebts, which, in turn, enhances the viability of credit in the handsof banks and financial institutions. Above all, ultimately, theinterests of all stakeholders are looked after as the corporate debtoritself becomes a beneficiary of the resolution scheme—workersare paid, the creditors in the long run will be repaid in full, andshareholders/investors are able to maximise their investment.Timely resolution of a corporate debtor who is in the red, by aneffective legal framework, would go a long way to support thedevelopment of credit markets. Since more investment can bemade with funds that have come back into the economy, businessthen eases up, which leads, overall, to higher economic growthand development of the Indian economy. What is interesting tonote is that the Preamble does not, in any manner, refer toliquidation, which is only availed of as a last resort if there iseither no resolution plan or the resolution plans submitted are notup to the mark. Even in liquidation, the liquidator can sell thebusiness of the corporate debtor as a going concern. (SeeArcelorMittal[28] at para 83, fn 3)

28. It can thus be seen that the primary focus of the legislation isto ensure revival and continuation of the corporate debtor byprotecting the corporate debtor from its own management andfrom a corporate death by liquidation. The Code is thus a beneficiallegislation which puts the corporate debtor back on its feet, notbeing a mere recovery legislation for creditors. The interests ofthe corporate debtor have, therefore, been bifurcated and 28 ArcelorMittal India (P) Ltd. v. Satish Kumar Gupta & Ors: (2019) 2 SCC 1

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Aseparated from that of its promoters/those who are in management.Thus, the resolution process is not adversarial to the corporatedebtor but, in fact, protective of its interests. The moratoriumimposed by Section 14 is in the interest of the corporate debtoritself, thereby preserving the assets of the corporate debtor duringthe resolution process. The timelines within which the resolutionBprocess is to take place again protects the corporate debtor’sassets from further dilution, and also protects all its creditors andworkers by seeing that the resolution process goes through asfast as possible so that another management can, through itsentrepreneurial skills, resuscitate the corporate debtor to achieveCall these ends.”

16.2. Keeping in view the objectives, discernible from the Preambleas also from the Statement of Objects and Reasons of the Code and theobservations of this Court, we may now take an overview of the schemeand structure of the relevant parts of the Code. Part I thereof containsDthe provisions regarding title, extent, commencement and application ofthe Code as also defines various expressions used and employed in theCode. Different provisions have come into force on different dates, aspermissible under proviso to sub-section (3) of Section 1. Part II of theCode deals with insolvency resolution and liquidation for corporatepersons. Chapter I of Part II makes provision for its applicability andEalso defines various expressions used in this Part (Sections 4 and 5).Chapter II of Part II contains the provisions for corporate insolvencyresolution process in Sections 6 to 32 whereas Chapter III of this Part IIcontains the provisions for liquidation process in Sections 33 to 54[29].

16.3. Though the provisions relating to ‘preferential transactionsFand relevant time’ (in Section 43 of the Code) occur in Chapter III ofPart II, relating to liquidation process, but such provisions being foravoidance of certain transactions and having bearing on the resolutionprocess too, by their very nature, equally operate over the corporateinsolvency resolution process, and hence, the resolution professional isGobligated, by virtue of clause (j) of sub-section (2) of Section 25 of theCode, to file application for avoidance of the stated transactions inaccordance with Chapter III. That being the position, Section 43 of theCode comes into full effect in CIRP too.

29 Sections 4 to 33 came into force on 01.12.2016 whereas Section 33 to 54 came intoHforce on 15.12.2016.

Preferential transaction at a relevant time: concept andconnotations

17. Having regard to the questions involved, a brief insight intothe theory relating to avoidance of certain transactions as beingpreferential would be pertinent at this stage.

17.1. The basic concept of ‘preference’ as per the law dictionariesand lexicons is the act of ‘paying or securing to one or more of hiscreditors, by an insolvent debtor, the whole or part of their claims,to the exclusion of the rest’.[30] We may usefully take note of the meaning,definition and basic ingredients of ‘preference’ and ‘preferential transfer’,as defined in Black’s Law Dictionary[31]:

“preference. (15c) 1. The favouring of one person or thing overanother. 2. The person or thing so favoured. 3. The quality, state,or condition of treating some persons or things moreadvantageously than others. 4. Priority of payment given to oneor more creditors by a debtor; a creditor’s right to receive suchpriority. 5. Bankruptcy.

PREFERENTIAL TRANSFER.

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insider preference. (1981) A transfer of property by abankruptcy debtor to an insider more than 90 days before butwithin one year after the filing of the bankruptcy petition.

liquidation preference. (1936) A preferred shareholder’sright, once the corporation is liquidated, to receive a specifieddistribution before common shareholders receive anything.

voidable preference .See PREFERENTIAL TRANSFER”

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“preferential transfer. (1874) Bankruptcy. A prebankruptcytransfer made by an insolvent debtor to or for the benefit of acreditor, thereby allowing the creditor to receive more than itsproportionate share of the debtor’s assets; specif., an insolventdebtor’s transfer of a property interest for the benefit of a creditorwho is owed on an earlier debt, when the transfer occurs no morethan 90 days before the date when the bankruptcy petition is filed 30 P. Ramanatha Aiyar’s Advanced Law Lexicon (5th Ed.-Vol 3, p.4002)

31 10th Edition – pp. 1369 and 1370

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Aor (if the creditor is an insider) within one year of the filing, so thatthe creditor receives more than it would otherwise receive throughthe distribution of the bankruptcy estate.

Under the circumstances described in 11 USCA §547, thebankruptcy trustee may, for the estate’s benefit, recover aBpreferential transfer from the transferee. – Also termedpreference; voidable preference; voidable transfer;preferential assignment; preferential debt payment….”

17.2. It could be readily noticed that as far back as from 15[th]century, the concept of ‘preference’ has been taken note of and theCprinciples relating to avoidance of certain preferences have evolved,particularly in the fields of mercantile laws and more particularly in thelaws governing insolvency and bankruptcy[32]; and definitively from 1874,various jurisdictions have defined, described and dealt with ‘preferentialtransfer’ as being the transaction where an insolvent debtor makestransfer to or for the benefit of a creditor so that such beneficiary wouldDreceive more than what it would have otherwise received through thedistribution of bankruptcy estate. Section 547 of US Bankruptcy Codeprovides for the circumstances in which a bankruptcy trustee may, forthe benefit of the estate in question, recover a preferential transfer fromthe transferee. Section 239 of the UK Insolvency Act, 1986 also providesEfor the same measures for avoidance of preference given to any personat the relevant time. The time factor also plays a crucial role in suchmeasures of avoidance. This ‘relevant time’ for the purpose of avoidanceof preferential transactions is now commonly referred to as the ‘look-back’ period. Significantly, when the preferential transaction is with anunconnected party, the look-back period is comparatively lesser thanFthat of the transaction with a connected party, who is referred to as‘insider’ or ‘related party’[33]

32 It may in the passing be observed that ‘an insolvency’ essentially refers to financialdistress, i.e., financial state in which a person or entity is unable to pay its dues or meetwith other akin obligations. Insolvency may be temporary in character. ‘A bankruptcy’,Gon the other hand, essentially refers to the legal process to regulate as to how aninsolvent entity shall pay off his dues.As noticed, the primary focus of IBC is ‘to ensure revival and continuation of thecorporate debtor by protecting the corporate debtor from its own management andfrom a corporate death by liquidation ’. In other words, insolvency resolution is themain object; and liquidation with bankruptcy is the last resort.

33 We may also indicate that any attempt by an insolvent, of alienating or encumberingHthe assets in favour of one person so as to cause harm to the interest of a bona fide 17.3. Coming now to the corporate personalities, it is elementarythat by the very nature and legal implications of incorporation, ordinarily,several individuals and entities are involved in the affairs of a corporateperson; and impact of the activities of a corporate person reaches farand wide, with the creditors being one of the important set of stakeholders.If the corporate person is in crisis, where either insolvency resolution isto take place or liquidation is imminent; and the transactions by suchcorporate person are under scanner, any such transaction, which has anadverse bearing on the financial health of the distressed corporate personor turns the scales in favour of one or a few of its creditors or thirdparties, at the cost of the other stakeholders, has always been viewedwith considerable disfavour[34].

creditor had been sternly dealt with by the legislature even in relation to the individuals,ascould be readily noticed from the provisions contained in the erstwhile Presidency- Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920. These enactmentsstand repealed by IBC but the relevant provisions therein give an insight into theconcepts. Section 56 of the Act of 1909 provided thus:

“56. Avoidance of preference in certain cases. - (1) Every transfer of property, every payment made, every obligation incurred, and every judicial proceeding taken orsuffered by any person unable to pay his debts as they became due from his ownmoney in favour of any creditor, with a view of giving that creditor a preference overthe other creditors, shall, if such person is adjudged insolvent on a petition presentedwithin three months after the date thereof, be deemed fraudulent and void as against theofficial assignee.

(2) This section shall not affect the rights of any person making title in goodfaith and for valuable consideration through or under a creditor of the insolvent.”

The relevant part of Section 69 of the Act of 1920 had been as under:

“69. Offences by debtors. – If a debtor, whether before or after the making ofan order of adjudication, - *********

(c) fraudulently with intent to diminish the sum to be divided among his creditorsor to give an undue preference to any of his creditors, -

(i) has discharged or concealed any debt due to or from him, or

(ii) has made away with, charged, mortgaged or concealed any part of hisproperty of any kind whatsoever, he shall be punishable on conviction withimprisonment which may extend to one year.”

34 In relation to the corporate personalities, the concept of ‘fraudulent preference’,earlier embodied in Section 531 of the Companies Act, 1956 now occurs in its modifiedform in Sections 328 and 329 of the Companies Act, 2013. Tersely put, fraudulentpreference means parting with assets of the corporate person in favour of one or a fewof its creditors, which has the effect of defeating the claim of other creditors. PerSection 329 of the Act of 2013, any transfer of property by a company, other than thatin the ordinary course of business, if made within a period of one year before presentationof a petition for winding up by the Tribunal and not in good faith and for valuableconsideration, is regarded as void against the liquidator. Per Section 328 of the Act of A

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A17.4. Noteworthy distinctive features, in the scheme of theCompanies Act, 2013 and Insolvency and Bankruptcy Code, 2016,asregards preferences in relation to the corporate personalities, are thatwhile Section 328 of the Act of 2013 deals with fraudulent preferenceand Section 329 thereof deals with transfers not in good faith but, on theother hand, in the Code, separate provisions are made as regards theBtransactions intended at defrauding the creditors (Section 49 IBC) asalso for fraudulent trading or wrongful trading (Section 66 IBC). Theprovisions contained in Section 43 of the Code, however, indicate theintention of legislature that when a transaction falls within the coordinatesdefined therein, the same shall be deemed to be a preference given at aCrelevant time and shall not be countenanced. Therefore, intent may notbe of a defence or support of any preferential transaction that falls withinthe ambit of Section 43 of the Code.

17.5. At this juncture, we may usefully refer to paragraph 177 ofUNCITRAL Legislative Guide on Insolvency Law, as referred to andDrelied upon by learned counsel for the respondent as also paragraphs178 and 179 thereof, to indicate the basic theory and principles governingthe provisions under consideration. In the said Guide, while dealing withthe topic of treatment of assets on commencement of insolvencyproceedings, it is stated broadly on the theory of avoidance of preferentialtransactions as follows:E

“(c) Preferential transactions

(i) Criteria

177. Preferential transactions may be subject to avoidance where:(a) the transaction took place within the specified suspect period;F(b) the transaction involved a transfer to a creditor on account ofa pre-existing debt; and (c) as a result of the transaction, thecreditor received a larger percentage of its claim from the debtor’s 2013, if a company has given preference to one of its creditors or a surety or aguarantor for any of the debts or other liabilities and the company does or suffersanything which has the effect of putting that person in a better position in the event ofGcompany going into liquidation than the position he would have been in but for suchpreference prior to six months of making winding up application, the Tribunal, on beingsatisfied that the transaction was of a fraudulent preference, may order for restoring theposition to what it would have been if the preference had not been given. Moreparticularly, as regards transfer of property, it is provided in sub-section (2) of Section328 that if the transaction is made six months before winding up application, theHTribunal may declare such transaction invalid and restore the position.

assets than other creditors of the same rank or class (in otherwords, a preference). Many insolvency laws also require that thedebtor was insolvent or close to insolvent when the transactiontook place and some further require that the debtor have anintention to create a preference. The rationale for including thesetypes of transaction within the scope of avoidance provisions isthat, when they occur very close to the commencement ofproceedings, a state of insolvency is likely to exist and they breachthe key objective of equitable treatment of similarly situatedcreditors by giving one member of a class more than they wouldotherwise legally be entitled to receive.

178. Examples of preferential transactions may include paymentor set-off of debts not yet due; performance of acts that the debtorwas under no obligation to perform; granting of a security interestto secure existing unsecured debts; unusual methods of payment,for example, other than in money, of debts that are due; paymentof a debt of considerable size in comparison to the assets of thedebtor; and, in some circumstances, payment of debts in responseto extreme pressure from a creditor, such as litigation orattachment, where that pressure has a doubtful basis. A set-off,while not avoidable as such, may be considered prejudicial whenit occurs within a short period of time before the application forcommencement of the insolvency proceedings and has the effectof altering the balance of the debt between the parties in such away as to create a preference or where it involves transfer orassignment of claims between creditors to build up set-offs. Aset-off may also be subject to avoidance where it occurs inirregular circumstances, such as where there is no contractbetween the parties to the set-off.

(ii) Defences

179. One defence to an allegation that a transaction waspreferential may be to show that, although containing the elementsof a preference, the transaction was in fact consistent with normalcommercial practice and, in particular, with the ordinary courseof business between the parties to the transaction. For example, apayment made on receipt of goods that are regularly deliveredand paid for may not be preferential, even if made within proximityto the commencement of insolvency proceedings. This approach AB

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Analysing Section 43 of the Code

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18. In the backdrop of the foregoing, we may now scrutiniseSections 43 and 44 of the Code. Section 44 provides for the consequencesof an offending[35] preferential transaction i.e., when the preference isgiven at a relevant time. Under Section 44, the Adjudicating Authoritymay pass such orders as to reverse the effect of an offending preferentialEtransaction. Amongst others, the Adjudicating Authority may require anyproperty transferred in connection with giving of preference to be vestedin the corporate debtor; it may also release or discharge (wholly or inpart) any security interest created by the corporate debtor. Theconsequences of offending preferential transaction are, obviously, drasticand practically operate towards annulling the effect of such transaction.FLooking to the contents, context and consequences, we are at one withthe contentions urged on behalf of the respondents with reference to thedecisions in Devinder Singh (supra) and other cited cases, that theseprovisions need to be strictly construed. However, even if we proceedon strict construction of Section 43 of the Code, the underlying principlesGand the object cannot be lost sight of. In other words, the constructionhas to be such that leads towards achieving the object of these provisions.

18.1. Looking at the broad features of Section 43 of the Code, it isnoticed that as per sub-section (1) thereof, when the liquidator or the 35 Note: Here the expression ‘offending’ is only to denote the unacceptability of suchHtransaction and not any criminality.

resolution professional, as the case may be, is of the opinion that thecorporate debtor has, at a relevant time, given a preference in suchtransactions and in such manner as specified in sub-section (2), to anyperson/persons as referred to in sub-section (4), he is required to applyto the Adjudicating Authority for avoidance of preferential transactionsand for one or more of the orders referred to in Section 44. If twinconditions specified in sub-section (2) of Section 43 are satisfied, thetransaction would be deemed to be of preference. As per clause (a) ofsub-section (2) of Section 43, the transaction, of transfer of property oran interest thereof of the corporate debtor, ought to be for the benefit[36]of a creditor or a surety or a guarantor for or on account of an antecedentfinancial debt or operational debt or other liabilities owed by the corporatedebtor; and as per clause (b) thereof, such transfer ought to be of theeffect of putting such creditor or surety or guarantor in beneficial positionthan it would have been in the event of distribution of assets under Section53.[37]

18.2. However, merely giving of the preference and putting thebeneficiary in a better position is not enough. For a preference to becomean offending one for the purpose of Section 43 of the Code, anotheressential and rather prime requirement is to be satisfied that such event,of giving preference, ought to have happened within and during thespecified time, referred to as “relevant time”. The relevant time isreckoned, as per sub-section (4) of Section 43 of the Code, in two ways:(a) if the preference is given to a related party (other than an employee),the relevant time is a period of two years preceding the insolvencycommencement date; and (b) if the preference is given to a personother than a related party, the relevant time is a period of one yearpreceding such commencement date. In other words, for a transactionto fall within the mischief sought to be remedied by Sections 43 and 44of the Code, it ought to be a preferential one answering to therequirements of sub-section (2) of Section 43; and the preference oughtto have been given at a relevant time, as specified in sub-section (4) ofSection 43.

18.3. However, even if a transaction of transfer otherwise answersto and comes within the scope of sub-sections (4) and (2) of Section 43

36 It may be intended benefit or may even be unintended benefit37 Section 53 IBC makes provision for distribution of the proceeds from sale of theliquidation assets, in case of liquidation of the corporate debtor.

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Aof the Code, it may yet remain outside the ambit of sub-section (2) becauseof the exclusion provided in sub-section (3) of Section 43.

18.4. Sub-section (3) of Section 43 specifically excludes some ofthe transfers from the ambit of sub-section (2). Such exclusion is providedto: (a) a transfer made in the ordinary course of business or financialBaffairs of the corporate debtor or transferee[38]; (b) a transfer creatingsecurity interest in a property acquired by the corporate debtor to theextent that such security interest secures new value and was given atthe time specified in sub-clause (i) of clause (b) of Section 43(3) andsubject to fulfilment of other requirements of sub-clause (ii) thereof.The meaning of the expression “new value” has also been explained inCthis provision.

–Indicting parts deemed preference at a relevant time

–Indicting parts deemed preference at a relevant time

19. In order to understand and imbibe the provisions concerningpreference at a relevant time, it is necessary to notice that as per theDcharging parts of Section 43 of the Code i.e., sub-sections (4) and (2)thereof, a corporate debtor shall be deemed to have given preference ata relevant timeif 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 case may be, are satisfied.

E19.1. To put it more explicit, the sum total of sub-sections (2) and(4) is that a corporate debtor shall be deemed to have given a preferenceat a relevant time if: (i) the transaction is of transfer of property or theinterest thereof of the corporate debtor, for the benefit of a creditor orsurety or guarantor for or on account of an antecedent financial debt oroperational debt or other liability; (ii) such transfer has the effect ofFputting such creditor or surety or guarantor in a beneficial position thanit would have been in the event of distribution of assets in accordancewith Section 53; and (iii) preference is given, either during the period oftwo years preceding the insolvency commencement date when thebeneficiary is a related party (other than an employee), or during theGperiod of one year preceding the insolvency commencement date whenthe beneficiary is an unrelated party.

38 Whether the expression “or”, as occurring in between the expressions ‘corporatedebtor’ and ‘transferee’ in clause (a) of sub-section (3) of Section 43, is to be read as“and” has been one of the significant questions raised in this matter and shall be dealtHwith hereafter later.

19.2. By way of these statutory provisions, legal fictions are createdwhereby preference is deemed to have been given; and is deemed tohave been given at a relevant time, if the stated requirements are satisfied.Variegated features of a deeming provision have been discussed by thisCourt in the case of Pioneer Urban (supra) with reference to severalof the past decisions, albeit in the context of such deeming expressionoccurring in the Explanation added to sub-clause (f) of Section 5(8) ofthe Code[39]. We may usefully extract some of the relevant passagesfrom the said decision in Pioneer Urban as follows:

19.2.1. As regards construction of a deeming fiction, this Courtpointed out the basic and settled principles in the following:

“88. In every case in which a deeming fiction is to be construed,the observations of Lord Asquith in a concurring judgment in EastEnd Dwellings Co. Ltd. v. Finsbury Borough Council: 1952AC 109 (HL) are cited. These observations read as follows: (ACpp. 132-133)

“If you are bidden to treat an imaginary state of affairs asreal, you must surely, unless prohibited from doing so, also imagineas real the consequences and incidents which, if the putative stateof affairs had in fact existed, must inevitably have flowed from oraccompanied it.... The statute says that you must imagine a certainstate of affairs. It does not say that, having done so, you mustcause or permit your imagination to boggle when it comes to theinevitable corollaries of that state of affairs.”

These observations have been followed time out of number bythe decisions of this Court. (See, for example, M. Venugopal v.Divisional Manager, LIC: (1994) 2 SCC 323 at page 329).

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94. Although a deeming provision is to deem what is not there inreality, thereby requiring the subject-matter to be treated as if itwere real, yet several authorities and judgments show that a

39 Such discussion in Pioneer Urban essentially led to this Court holding that the saiddeeming provision was clarificatory of the true legal position as it already obtained; andwas to put beyond the pale of doubt the fact that allottees are to be regarded as financialcreditors within the meaning of the enacting part contained in Section 5(8)(f) of theCode. The crucial aspects relating to Section 5(8) of the Code shall be dilated hereafterduring the discussion on the second issue involved in these matters.

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deeming fiction can also be used to put beyond doubt a particularconstruction that might otherwise be uncertain. Thus, Stroud’sJudicial Dictionary of Words and Phrases (7[th] Edition, 2008),defines “deemed” as follows:

“Deemed”- as used in statutory definitions “to extend thedenotation of the defined term to things it would not in ordinaryparlance denote”, is often a convenient device for reducing theverbiage or an enactment, but that does not mean that whereverit is used it has that effect; to deem means simply to judge orreach a conclusion about something, and the words “deem” and“deemed” when used in a statute thus simply state the effect ormeaning which some matter or things has-the way in which it isto be adjudged; this need not import artificiality or fiction; it maysimply be the statement of an indisputable conclusion.”

19.2.2. In Pioneer Urban, this Court further extracted extensivelyfrom the decision in Hindustan Cooperative Housing Building SocietyLimited v. Registrar, Cooperative Societies and Anr.: (2009) 14 SCC302 on various features of the processes of construction of differentdeeming provisions in different contexts. Some of the relevant parts ofsuch extraction (as occurring in paragraph 95 of PioneerUrban) readas follows (in SCC at pp. 524):

“ ‘… The word “deemed” is used a great deal in modernlegislation. Sometimes it is used to impose for the purposes of astatute an artificial construction of a word or phrase that wouldnot otherwise prevail. Sometimes it is used to put beyond doubt aparticular construction that might otherwise be uncertain.Sometimes it is used to give a comprehensive description thatincludes what is obvious, what is uncertain and what is, in theordinary sense, impossible.’

(Per Lord Radcliffe in St. Aubyn v. Attorney General:1952 AC15 (HL), AC p. 53)

14. ‘Deemed’, as used in statutory definitions [is meant]

‘to extend the denotation of the defined term to things it would notin ordinary parlance denote, is often a convenient devise forreducing the verbiage of an enactment, but that does not meanthat wherever it is used it has that effect; to deem means simply to judge or reach a conclusion about something, and the words“deem” and “deemed” when used in a statute thus simply statethe effect or meaning which some matter or thing has — the wayin which it is to be adjudged; this need not import artificiality orfiction; it may simply be the statement of an undisputableconclusion.’

(Per Windener, J. in Hunter Douglas Australia Pty. v. PermaBlinds: (1970) 44 Aust LJ R 257)

15. When a thing is to be “deemed” something else, it is tobe treated as that something else with the attendant consequences,but it is not that something else (per Cave, J., in R. v. NorfolkCounty Court: (1891) 60 LJ QB 379).

‘When a statute gives a definition and then adds that certainthings shall be “deemed” to be covered by the definition, it mattersnot whether without that addition the definition would have coveredthem or not.’ (Per Lord President Cooper in Ferguson v. McMillan: 1954 SLT 109 (Scot))

16. Whether the word “deemed” when used in a statuteestablished a conclusive or a rebuttable presumption dependedupon the context (see St. Leon Village Consolidated SchoolDistrict v. Ronceray: (1960) 23 DLR (2d) 32 (Can)).

‘…. I … regard its primary function as to bring in somethingwhich would otherwise be excluded.’

(Per Viscount Simonds in Barclays Bank Ltd. v. IRC: 1961 AC509 at AC p. 523.)

‘ “Deems” means “is of opinion” or “considers” or“decides” and there is no implication of steps to be taken beforethe opinion is formed or the decision is taken.’

[See R. v. Brixton Prison (Governor), ex p Soblen: (1963) 2QB 243 at QB p. 315.]’”

19.3. On a conspectus of the principles so enunciated, it is clearthat although the word ‘deemed’ is employed for different purposes indifferent contexts but one of its principal purpose, in essence, is to deemwhat may or may not be in reality, thereby requiring the subject-matterto be treated as if real. Applying the principles to the provision at hand A

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Ai.e., Section 43 of the Code, it could reasonably be concluded that anytransaction that answers to the descriptions contained in sub-sections(4) and (2) is presumed to be a preferential transaction at a relevanttime, even though it may not be so in reality. In other words, since sub-sections (4) and (2) are deeming provisions, upon existence of theingredients stated therein, the legal fiction would come into play; andBsuch transaction entered into by a corporate debtor would be regardedas preferential transaction with the attendant consequences as perSection 44 of the Code, irrespective whether the transaction was in factintended or even anticipated to be so.

Exclusion partC

19.4. Even when the above-stated indicting parts of Section 43 asoccurring in sub-sections (4) and (2) are satisfied and the corporatedebtor is deemed to have given preference at a relevant time to a relatedparty or unrelated party, as the case may be, such deemed preferencemay yet not be an offending preference, if it falls into any or both of theDexclusions provided by sub-section (3) i.e., having been entered intoduring the ordinary course of business of the corporate debtor or[40]transferee or resulting in acquisition of new value for the corporate debtor.

Net concentrate of Section 43

E19.5. Thus, the net concentrate of Section 43 is that if a transactionentered into by a corporate debtor is not falling in either of the exceptionsprovided by sub-section (3) and satisfies the three-fold requirements ofsub-sections (4) and (2), it would be deemed to be a preference during arelevant time, whether or not in fact it were so; and whether or not itwere intended or anticipated to be so.F

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20. The analysis foregoing leads to the position that in order tofind as to whether a transaction, of transfer of property or an interestthereof of the corporate debtor, falls squarely within the ambit of Section43 of the Code, ordinarily, the following questions shall have to beexamined in a given case:

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(i) . As to whether such transfer is for the benefit of a creditor ora surety or a guarantor?

40 As noticed, whether this expression “or”, as occurring in between the expressions‘corporate debtor’ and ‘transferee’ in clause (a) of sub-section (3) of Section 43, is to beHread as “and” remains a question to be dealt with.

(ii) . As to whether such transfer is for or on account of anantecedent financial debt or operational debt or other liabilitiesowed by the corporate debtor?

(iii) . As to whether such transfer has the effect of putting suchcreditor or surety or guarantor in a beneficial position than it wouldhave been in the event of distribution of assets being made inaccordance with Section 53?

(iv) . If such transfer had been for the benefit of a related party(other than an employee), as to whether the same was madeduring the period of two years preceding the insolvencycommencement date; and if such transfer had been for the benefitof an unrelated party, as to whether the same was made duringthe period of one year preceding the insolvency commencementdate?

(v) As to whether such transfer is not an excluded transaction interms of sub-section (3) of Section 43?

21. Having taken note of the salient features of Section 43 of theCode and the questions germane for its applicability over any transaction,we may now examine the questions calling for determination in theseappeals. Obviously, if the transactions in question are to fall squarelywithin the mischief of Section 43, they must satisfy all the specificationsand ingredients of sub-sections (2) and (4) of Section 43 and ought notto be within the exclusion provided in sub-section (3) thereof.

Whether impugned transactions are preferential, fallingwithin the ambit of sub-section (2) of Section 43 IBC

22. For the purpose of dealing with the crucial question as towhether the impugned transactions are preferential and fall within theprescription of sub-section (2) of Section 43 of the Code, appropriate itshall be to recapitulate and summarize the overall scenario of this case.

22.1. The fact that JAL, a public listed company with more than 5lakh individual shareholders, is the holding company of the corporatedebtor JIL is neither of any doubt nor of any dispute. As on 31.03.2017,JAL owned 71.64% of shares of JIL, having a value of Rupees 995crores. The background had been that when in the year 2003, JAL wasawarded the rights for construction of an expressway and a concessionagreement was entered into with the Yamuna Expressway Industrial A

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ADevelopment Authority, JIL was set up as a special purpose vehicle.Finance was obtained from a consortium of banks against partialmortgage of land acquired and pledge of 51% of the shareholding ofJAL. Housing plans were envisaged for construction of real estate projectsin two locations of the land acquired, one in Wish Town, Noida andanother in Mirzapur.B

22.1.1. Shorn of other details which may not be necessary for thepresent purpose, relevant it is to notice that JIL was declared NPA byLife Insurance Corporation of India on 30.09.2015 and by some of itsother lenders on 31.03.2016. Then, IDBI Bank Limited instituted a petitionunder Section 7 of the Code before NCLT, seeking initiation of CorporateCInsolvency Resolution Process against JIL, while alleging that JIL hadcommitted a default to the tune of Rs. 526.11 crores in repayment of itsdues. On 09.08.2017, NCLTpassed an order under Section 7 of the Codeand appointed an Interim Resolution Professional[41]-[42]. The IRP madean application on 06.02.2018, seeking directions that the transactionsDentered into by the directors and promoters of corporate debtor creatingmortgages of 858 acres of immovable property owned by it to securethe debts of JAL are preferential, undervalued, wrongful, and fraudulent;and hence, the security interest created by corporate debtor JIL in favourof the lenders of JAL be discharged and such properties be deemed tobe vested in corporate debtor. The NCLT allowed the said applicationEon 16.05.2018 with respect to six of the impugned transactions coveringabout 758 acres of land. On the appeals filed by lenders of JAL,NCLAT,by its impugned order dated 01.08.2019, set aside the orderpassed by NCLT and held that such lenders of JAL were entitled toexercise their rights under the Code.F

22.2. At this juncture, we may again take note of the transactionsthat were questioned by IRP for the purpose of the application foravoidance, which had been the following: 1. Mortgage deed dated29.12.2016 for 167.229 acres of land (Property No. 1) executed by JILin favour of Axis Trustee Services Limited to provide an additionalGsecurity for term loans of Rs. 21081.5 crores sanctioned as a consortiumto JAL; 2. Mortgage deed dated 29.12.2016 for 167.9615 acres of land(Property No. 2), again executed by JIL in favour of Axis Trustee 41 CIRP in relation to JIL is underway by virtue of the orders passed by this Court on09.08.2018 and 06.11.2019 (as referred to in paragraphs 6.2 and 6.3.1 - supra)

42 This date i.e., 09.08.2017 is the “insolvency commencement date” for the purpose ofHthe questions under consideration Services Limited to provide an additional security for term loans ofRs.21081.5 crores sanctioned by the consortium to JAL; 3. Mortgagedeed dated 07.03.2017 for 158.1739 acres of land (Property No. 3)executed by JIL in favour of IDBI Trustee-ship Services Limited forterm loan of Rs.1200 crores granted by ICICI Bank to JAL; 4. Mortgagedeed dated 07.03.2017 for 151.0063 acres of land (Property No. 4),again executed by JIL in favour of IDBI Trustee-ship Services Limitedfor term loan of Rs.1200 crores granted by ICICI Bank to JAL; 5.Mortgage deed dated 24.05.2016 for 25.0040 acres of land (PropertyNo. 5) executed by JIL in favour of IDBI Trustee-ship Services Limited,as additional security against the facility agreement dated 29.08.2012between Standard Chartered Bank and JAL for Rs.400 crores and otherfacilities, respectively for Rs.450 crores, Rs.538.16 crores and Rs.81.84crores as also for working capital facility of Rs.297 crores; and 6.Mortgage deed dated 04.03.2016 for 90 acres of land (Property No. 6),executed by JIL in favour of State Bank of India for Short Term LoanFacility to JAL to the tune of Rs.1000 crores.

22.2.1. As noticed, 09.08.2017 is the insolvency commencementdate in this case. The transactions in question, even if of putting theconcerned properties under mortgage with the lenders, carry the ultimateeffect of working towards the benefit and advantage of the borroweri.e., JAL who obtained loans and finances by virtue of such transactions.It is true that there had not been any creditor-debtor relationship betweenthe lender banks and corporate debtor JIL but that will not be decisive ofthe question of the ultimate beneficiary of these transactions. Themortgage deeds in question, entered by the corporate debtor JIL to securethe debts of JAL, obviously, amount to creation of security interest tothe benefit of JAL.

22.2.2. Now, the capacity of JAL is admittedly that of the holdingcompany of JIL as its largest equity shareholder (with approximately71.64% shareholding). Moreover, JAL had admittedly been theoperational creditor of JIL, for an amount of approximately Rs. 261.77crores. JAL itself maintains that it had been providing financial, technicaland strategic support to JIL in various ways. It is the assertion that apartfrom making investment in terms of equity shareholding to the tune ofRs. 995 crores, JAL had pledged its 70,83,56,087 equity shares held inJIL in favour of the lenders of JIL; had also entered into Promoter SupportAgreement to the lenders of JIL to meet the DSRA obligation of JIL

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Atowards its lenders; and had further extended Bank Guarantees of Rs.212 crores to meet the DSRA obligation of JIL. These assertions, in ourview, put JAL in such capacity that it is a related party to JIL and is acreditor as also surety of JIL. In other words, the corporate debtor JILowed antecedent financial debts as also operational debts and otherliabilities towards JAL.B

22.3. In the scenario taken into comprehension hereinabove, thereis nothing to doubt that the corporate debtor JIL has given a preferenceby way of the mortgage transactions in question for the benefit of itsrelated person JAL (who has been the creditor as also surety for JIL)for and on account of antecedent financial debts, operational debts andCother liabilities owed to such related person. In the given fact situation, itis plain and clear that the transactions in question meet with all therequirements of clause (a) of sub-section (2) of Section 43.

22.4. It is also not far to seek that in the given scenario, therequirements of clause (b) of sub-section (2) of Section 43 are also metDfair and square. On behalf of the respondents, emphasis is laid on thefact that in the distribution waterfall in case of liquidation (per Section 53of the Code), JAL, as an operational creditor, stands much lower inpriority than the other creditors and stakeholders. Such submissions, inour view, only strengthen the position that by way of the impugnedEtransfers, JAL is put in a much beneficial position than it would havebeen in the absence of such transfers. It has rightly been contended onbehalf of the appellants that with the transactions in question, JAL hasbeen put in an advantageous position vis-à-vis other creditors on thecounts that: a) JAL received a huge working capital (approx. Rupees30000 crores), by way of loans and facilities extended to it by theFrespondent-lenders; and b) by way of the transactions in question, JAL’sliability towards its own creditors shall be reduced, in so far as the valueof the mortgaged properties is concerned, which is said to beapproximately Rs. 6000 crores. As a necessary corollary of the beneficialand advantageous position of the related party JAL with creation ofGsuch security interest over the properties of JIL, in the eventuality ofdistribution of assets under Section 53, the other creditors andstakeholders of JIL shall have to bear the brunt of the correspondingdisadvantage because such heavily encumbered assets will not form thepart of available estate of the corporate debtor. Obviously, JAL standsdearly benefited and has derivedsuch benefits at the cost, and in exclusion,H

of the other creditors and stakeholders of the corporate debtor JIL. Theapplicability of clauses (a) and (b) of sub-section (2) of Section 43 of theCode is clear and complete in relation to the impugned six transactions.

22.5. Therefore, in relation to the present case, the answers toquestions (i), (ii) and (iii) as referred in paragraph 20 are that: theimpugned transactions had been of transfers for the benefit of JAL,who is a related party of the corporate debtor JIL and is its creditor andsurety by virtue of antecedent operational debts as also other facilitiesextended by it; and the impugned transactions have the effect of puttingJAL in a beneficial position than it would have been in the event ofdistribution of assets being made in accordance with Section 53 of theCode. Thus, the corporate debtor JIL has given a preference in themanner laid down in sub-section (2) of Section 43 of the Code.

The requirements of sub-section (4) of Section 43 IBC -related party and look-back period

23. Even when all the requirements of sub-section (2) of Section43 of the Code are satisfied, in order to fall within the mischief sought tobe remedied by Section 43, the questioned preference ought to havebeen given at a relevant time. In other words, for a preference to becomean avoidable one, it ought to have been given within the period specifiedin sub-section (4) of Section 43. The extent of ‘relevant time’ is differentwith reference to the relationship of the beneficiary with the corporatedebtor inasmuch as, for the persons falling within the expression ‘relatedparty’ within the meaning of Section 5 (24) of the Code, such period is oftwo years before the insolvency commencement date whereas it is oneyear in relation to the person other than a related party. The conceptionsof, and rationale behind, such provisions could be noticed in the excerptsfrom the interim report of Law Reforms Committee, as referred onbehalf of the appellants. We may usefully extract the same as under: - “c. TRANSACTIONS WITH RELATED PARTIES

The law on avoidance in the UK provides for close scrutinyof transactions entered into with persons connected with thecompany (other than employees) by incorporating longer timeperiods in relation to which such transactions can be challenged.Thus, while the relevant time period for avoiding preferences issix months prior to the onset of insolvency, the time period isincreased to two years in the case of persons connected with the A

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Acompany. Similarly, for late floating charges other than for newvalue, the vulnerability period for non-connected persons is twelvemonths while it is two years in the case of connected persons.The avoidance provisions under the CA 2013 does not provide forlonger time periods in case the transactions are with connectedBpersons. It is submitted that providing for longer time periods forvulnerability would be significant in improving the efficacy of theseprovisions. This is because a wider range of transactionsdiminishing creditor wealth entered into with insiders occur not inthe ‘zone of insolvency’ but as soon as early signals of trouble arevisible. Such insiders have superior information of the company’sCdeteriorating financial position and may raid corporate assetsknowing that the company may become insolvent. Theseprovisions are of special significance in the Indian context whereeven the larger corporates are often promoter/family controlledwith such insiders often enjoying significant informationalDadvantages over even well-advised secured lenders.”

23.1. Before examining as to whether the questioned preferenceswere given at the relevant time as specified in sub-section (4) of Section43, we may deal with one part of the submissions made on behalf ofsome of the respondents that in view of the look-back periods providedin sub-section (4), the provisions of Section 43 of the Code, by their veryEnature, would come into operation at least one year after the enactmentof the Code and else, it would be giving retrospective effect to theseprovisions which is not permissible. The submissions, in our view, remainbereft of substance.

23.1.1. The scheme of IBC is to disapprove and disregard suchFpreferential transaction which falls within the ambit of Section 43 and toensure that any property likely to have been lost due to such transactionis brought back to the corporate debtor; and if any encumbrance iscreated, to remove such encumbrance so as to bring the corporate debtorback on its wheels or in other event (of liquidation), to ensure pro rata,Gequitable and just distribution of its assets. Such provisions as containedin Sections 43 and 44 came into operation as the comprehensive schemeof corporate insolvency resolution and liquidation from the date of beingmade effective; and merely because look-back period is envisaged, forthe purpose of finding ‘relevant time’, it cannot be said that the provisionitself is retrospective in operation. Reference to the decision of this CourtH

in the case of Purbanchal Cables (supra) is entirely inapt. In the saidcase, by virtue of the enactment in question, i.e., Interest on DelayedPayments to Small Scale and Ancillary Industrial Undertakings Act, 1993,a new liability of high rate of interest was created against the buyer indisplacement of the general principles of Section 34 of the Code of CivilProcedure. Hence, this Court found that the enactment creating newliability would only be prospective in operation. As noticed, fraudulentpreferences in the affairs of corporate persons had been dealt with bythe legislature in the Companies Act, 1956 and have also been dealt within the Act of 2013. Though therein, essentially, the fraudulent preferencesand transfers not in good faith are dealt with whereas, in the scheme ofIBC, separate provisions are made as regards the transactions intendedat defrauding the creditors (Section 49 IBC) as also for fraudulent tradingor wrongful trading (Section 66 IBC). The provisions contained in Section43, however, indicate the intention of legislature that when a preferenceis given at a relevant time and thereby, the beneficiary of preferenceacquires unwarranted better position in the event of distribution of assets,the same may not be countenanced. Looking to the scheme of IBC andthe principles applicable for the conduct of the affairs of a corporateperson, it cannot be said that anything of a new liability has been imposedor a new right has been created. Maximisation of value of assets ofcorporate persons and balancing the interests of all the stakeholdersbeing the objectives of the Code, the provisions therein need to be givenfuller effect in conformity with the intention of the legislature.

23.1.2. We may also observe that if the contentions urged onbehalf of the respondents were to be accepted, the result would be ofpostponing the effective date of operation of sub-section (4) of Section43 by two years in the case of related party and to one year in the caseof unrelated party, and thereby, effectively postponing the application ofentire Section 43 for a period of two years! That cannot be and hadnever been the intention of legislature. It is also noteworthy that by virtueof proviso to sub-section (3) of Section 1 of the Code, different datescan be provided for enforcement of different provisions of the Code;and in fact, different provisions have been brought into effect on differentdates. However, after coming into force of the provisions, if a look-backperiod is provided for the purpose of any particular enquiry, it cannot besaid that the operation of the provision itself would remain in hibernationuntil such look-back period from the date of commencement of theprovision comes to an end. There is nothing in the Code to indicate that ABCD

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Aany provision in Chapter II or Chapter III be taken out and put in operationat a later date than the date notified. Such contentions being totally devoidof substance, deserve to be, and are, rejected.

24. We may now take up the question as to which of thetransactions in question would entail in giving preference at a relevantBtime or otherwise. As noticed, the preference is given to JAL who is arelated party of JIL. Hence, the look-back period is two years precedinginsolvency commencement date i.e., 09.08.2017 per clause (a) of sub-section (4) of Section 43; and accordingly, the point of enquiry would beas to whether the preference had been given during the period of twoyears preceding 09.08.2017. Therefore, the transactions commencingCfrom 10.08.2015 until the date of insolvency commencement shall fallunder the scanner. As noticed, it has been one of the major contentionsof the respondents that most of the impugned transactions were not ofcreation of any new encumbrance by JIL and in fact, most of the propertiesin question had already been under mortgage with the respective lendersDmuch 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 clearlyfalling beyond the period under consideration was, in fact, kept out ofthe purview of Section 43 of the Code by NCLT itself, being that relatingto Property No. 7 (as mentioned in paragraph 4.5 hereinbefore).

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24.2. So far as the transaction relating to Property No. 6 isconcerned, 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 hadallegedly entered into the facility agreement with this lender bank onF26.03.2015, this date is hardly of any bearing so far as transaction by thecorporate debtor JIL is concerned, which was made only on 04.03.2016.

24.3. In relation to the transactions concerning Property No. 1and Property No. 2, for securing loans by the Consortium to JAL, it issubmitted that there had been initial mortgage dated 24.02.2015 thatGwas released on 15.09.2015 and a so-called re-mortgage was made on15.09.2015 and thereafter, this was also released on 29.12.2016 andagain the so-called re-mortgage was made on 29.12.2016. It is sought tobe 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 isalleged that there had been initial mortgage dated 12.05.2014 for 433.35H

acres of land of which, 240 acres was released on 30.12.2015, 35.05acres was released on 24.06.2016 and the remaining 158.1739 acres ofland was also released on 07.03.2017 but was re-mortgaged on this verydate 07.03.2017. As regards Property No. 4, it is alleged that the samewas put under mortgage initially on 12.05.2014, was released on07.03.2017 and was re-mortgaged on this very date 07.03.2017. Asregards Property No. 5, it is alleged that the same was put under mortgageinitially on 24.06.2009, the mortgage was extended on 27.11.2012 andon 23.03.2013; it was released on 04.11.2015 and was re-mortgaged on24.05.2016.

24.3.1. It has been one of the major contentions of the respondentsthat most of the impugned transactions were not of creation of any newencumbrance by JIL and in fact, most of the properties in question hadalready been under mortgage with the respective lenders. Thesubmissions of respondents in relation to the aforesaid five transactions,that they had been of so-called re-mortgage/s, carry their ownshortcomings and cannot be accepted. In the first place, we are clearlyof the view that on release by the mortgagee, the mortgage ceases toexist and it is difficult to countenance the concept of a so-called re-mortgage. The so-called re-mortgage, on all its legal effects andconnotations, could only be regarded as a fresh mortgage; and it obviouslybefalls on the mortgagor to consider at the time of creating any freshmortgage as whether such a transaction is expedient and whether itshould be entered into at all. Noticeable it is that in relation to PropertyNo. 1 and 2, even if the initial mortgage had been dated 24.02.2015falling beyond the look-back period, it was released on 15.09.2015 andthis 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 sameday of release, the same cannot be countenanced for the transactionoperates towards extending unwarranted preference to JAL by thecorporate debtor JIL. Significant it is to notice that while making thismortgage dated 15.09.2015, the facility amount being obtained by JALgot swelled from Rs. 3250 crores to a whopping Rs. 24109 crores andthe number of creditors went up from 2 to 24. Such a transaction, in ourview, had only been of a fresh mortgage to secure extra facilities obtainedby JAL and thereby, extending unwarranted advantage to JAL at thecost of the estate of JIL. In the other transaction dated 29.12.2016, bywhich the properties in question were again put under mortgage with thelender/s, the facility amount was shown as Rs. 23491 crores. The AB

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Atransactions on 15.09.2015 and 29.12.2016 cannot be given credencewith reference to the previous mortgage deed dated 24.02.2015. Similaris the case in relation to Property No. 3. Even when the previousmortgage 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 regardscertain parcels of land. So far the release of land to JIL is concerned,Bthe same causes no problem and only works to the benefit of JIL and itsstakeholders. However, when the remaining land was also released on07.03.2017, its fresh mortgage, even if on the same date, cannot becountenanced and is hit by Section 43, being a deemed preference. Thevery same considerations apply in relation to the Property No. 4 too. AsCregards Property No. 5, even if there had been certain previous mortgagetransactions falling beyond the look-back period, the property got releasedon 04.11.2015; and thereafter, the fresh mortgage on 24.05.2016, withincreased facility amount from Rs. 1470 crores to Rs. 1767 crores, suffersfrom the same vice, of being a deemed preference to a related partyduring the period of two years preceding the insolvency commencementDdate.

24.4. For what has been discussed hereinabove, the conclusion isinevitable that the impugned preference was given to a related partyduring a relevant time. However, before concluding on this part ofdiscussion, we may also observe that reference to the decisions of MadrasEand Bombay High Courts in the case of IDBI Bank Ltd and MonarchEnterprises respectively, is neither apposite nor advances the cause ofthe respondents for the reason that the said decisions had essentiallybeen on the question/s as to whether the impugned transactions were offraudulent preference per Section 531 or lacking in good faith per SectionF531A of the Companies Act, 1956. In fact, in the case of IDBI Bank(supra) the corporate debtor attempted to transfer one of its property tothe appellant bank, who was one of its creditors and in that regard,certain transactions like agreement for sale and handing over possessionwere suggested and it was alleged that the contract for sale was partlyperformed about one year and four months prior to the winding-upGproceedings; and such being beyond the look-back period of six monthsas envisaged by Section 531 of the Companies Act, 1956, it was arguedthat it had not been a fraudulent transfer. The contentions were notaccepted by the Single Judge and by the Division Bench of the HighCourt for the reason that mere handing over of possession or documentsHdid not complete the sale; rather the Court was of the view that such documents were created only in order to avoid the transaction beingcalled a fraudulent preference. Apart that the element of fraud is not theessential ingredient of Section 43 of the Code, the said decision in IDBIBank, on the approach of the Courts towards corporate transactionsmakes it clear that any transaction favouring one stakeholder at the costof the other is viewed with disfavour and is disapproved, particularly if ittakes place during the prescribed look-back period.

24.5. For what has been discussed hereinabove, the answer toquestion (iv) as referred in paragraph 20 is that the transactions in questionhad been of deemed preference to related party JAL by the corporatedebtor JIL during the look-back period of two years and have rightlybeen held covered within the period envisaged by sub-section (4) ofSection 43 of the Code.

Ordinary course of business or financial affairs

25. Even when it is held that the impugned transactions answer tothe requirements of sub-section (2) of Section 43 and fall within theperiod specified in sub-section (4) thereof, the question still remains asto whether the impugned transactions do or do not fall within the exclusionprovided by sub-section (3) of Section 43 of the Code? As noticed, twotypes 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 anycase, the transfers in question were made in the ordinary course of theirbusiness and hence, fall within clause (a) of Section 43(3) that excludesthe transfer made in the ordinary course of business or financial affairsof the corporate debtor or the transferee. It has been forcefully arguedthat the lenders of JAL are the transferees in the transactions in questionand their ordinary course of business being of providing financial supportwith 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 ofthe appellants has been that the expression “or” occurring in clause (a)of sub-section (3) of Section 43, seemingly disjunctive of corporate debtoron 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 theordinary course of business or financial affairs of the corporate debtorand the transferee. It is submitted on behalf of the appellants that suchmortgage transactions had neither been in the ordinary course of business A

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Aor financial affairs of the corporate debtor JIL nor secure new value inthe property acquired by the corporate debtor and hence, are not exceptedtransactions within the meaning of sub-section (3) of Section 43 of theCode.

25.1. Having taken into comprehension the scheme of the CodeBand the purpose and purport of the provisions contained in Section 43,we find force and substance in the submissions made on behalf of theappellants.

25.2. As noticed, in the scheme of such provisions in the Code,the underlying concept is to disregard and practically annul suchCtransactions which appear, in the course of insolvency resolution orliquidation, to be preferential so as to minimise the potential loss to otherstakeholders in the affairs of the corporate debtor, particularly itscreditors. What is to be examined for the purpose of Section 43 is theconduct and affairs of the corporate debtor. If the beneficiary of thetransaction in question is a related party of the corporate debtor, theDperiod of enquiry is enlarged to two years whereas this period is oneyear 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 thepresent case, we are concerned only with the phraseology occurring inEclause (a) of sub-section (3) but, we may usefully refer to clause (b)thereof, for an insight into the underlying concept for providing exceptionin 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 withFExplanation thereto], any transfer creating a security interest in theproperty ‘acquired’ by the corporate debtor is not to be treated aspreference to the extent that such security interest secures new value inmonetary terms or in terms of goods, services or new credit or in releaseof a previously transferred property. Any micro dissection of clause (b)of sub-section (3) of Section 43 is not required in the present case.GSuffice it to notice that even a bare look at the provision brings forth theconcept that value enhancement or strengthening of the corporate debtorought to be the result of a transfer, if it is to remain out of the ambit ofsub-section (2) and not to fall within the mischief of being preferential.

25.2.2. Another feature of vital importance is that the matter isHexamined with reference to the dealing and conduct of the corporate debtor; and qua the health and prospects of the corporate debtor.Applying the well-known principles of noscitur a sociis, whereunderthe questionable meaning of a doubtful word could be derived andunderstood from its associates and context; and usefully recapping thatthe scheme of Section 43 of the Code is essentially of scanning throughthe affairs of the corporate debtor and to discredit and disregard suchtransaction by the corporate debtor which tends to give unwarrantedbenefit 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 principallydirected towards the corporate debtor’s dealings. In other words, thewhole of conspectus of sub-section (3) is that only if any transfer isfound to have been made by the corporate debtor, either in the ordinarycourse of its business or financial affairs or in the process of acquiringany enhancement in its value or worth, that might be considered as havingbeen done without any tinge of favour to any person in preference toothers and thus, might stand excluded from the purview of beingpreferential, subject to fulfilment of other requirements of sub-section(3) of Section 43.

25.3. Needless to reiterate that if the transfer is examined withreference to the ordinary course of business or financial affairs of thetransferee alone, it may conveniently get excluded from the rigour ofsub-section (2) of Section 43, even if not standing within the scope ofordinary course of business or financial affairs of the corporate debtor.Such had never been the scheme of the Code nor the intent of Section43 thereof. It has rightly been contended on behalf of the appellants thatfor the purpose of exception under clause (a) of sub-section (3) of Section43, the intent of legislature is required to be kept in view. If the ordinarycourse of business or financial affairs of the transferee (lenders of JALin the present case) would itself be decisive for exclusion, almost everytransfer made to the transferees like the lender-banks/financial institutionswould be taken out of the net, which would practically result in frustratingthe provision itself.

25.4. It remains trite that an interpretation that defeats the scheme,intent and object of the statutory provision is to be eschewed and forthat matter, if necessary, by applying the principles of purposiveinterpretation rather than literal. In the case of R.M.D.Chamarbaugwala (supra), the Constitution Bench of this Court hasheld that well known cannons of construction of statutes permit the Court AB

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Ato read the word “or” as “and” after looking at the clear intention of thelegislature. In the case of Mazagaon Dock Ltd (supra), when theexpression “or” occurring in sub-section (2) of Section 42 of the IncomeTax Act, 1922 did appear bringing out the result which could not havebeen intended, the same was read in the context as meaning “and”. ThisCourt said:B

“10. The word “or” in the clause would appear to be ratherinappropriate, as it is susceptible of the interpretation that whensome profits are made but they are less than normal profits, taxcould only be imposed either on the one or on the other, and thataccordingly a tax on the actual profits earned would bar theCimposition 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 questionand applying the principles aforesaid, we have no hesitation in acceptingDthe submissions made on behalf of the appellants that the said contentsof clause (a) of sub-section (3) of Section 43 call for purposiveinterpretation so as to ensure that the provision operates in sync with theintention of legislature and achieves the avowed objectives. Therefore,the expression “or”, appearing as disjunctive between the expressionsE“corporate debtor” and “transferee”, ought to be read as “and”; so as tobe conjunctive of the two expressions i.e., “corporate debtor” and“transferee”. Thus read, clause (a) of sub-section (3) of Section 43 shallmean that, for the purposes of sub-section (2), a preference shall notinclude the transfer made in the ordinary course of the business orfinancial affairs of the corporate debtor andthe transferee. OnlyFby way of such reading of “or” as “and”, it could be ensured that theprincipal focus of the enquiry on dealings and affairs of the corporatedebtor is not distracted and remains on its trajectory, so as to reach tothe final answer of the core question as to whether corporate debtor hasdone anything which falls foul of its corporate responsibilities.G

25.6. The result of discussion in the foregoing paragraphs is thatthe 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 samewere made in the ‘ordinary course of business or financial affairs’ of thecorporate debtor JIL and the transferees. Even if transferees submit H

that such transfers had been in the ordinary course of their business, thequestion would still remain if the transfers were made in the ordinarycourse of business or financial affairs of the corporate debtor JIL so asto fall within the exception provided by clause (a) of sub-section (3) ofSection 43 of the Code.

25.6.1. Thus, the enquiry now boils down to the question as towhether the impugned transfers were made in the ordinary course ofbusiness or financial affairs of the corporate debtor JIL. It remains tritethat an activity could be regarded as‘business’ if there is a courseofdealings,which are either actually continued or contemplated to becontinued with a profit motive.[43] As regards the meaning and essenceof the expression ‘ordinary course of business’, reference made by theappellants to the decision of the High Court of Australia in DownsDistributing 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) goodfaith; (2) valuable consideration; and (3) ordinary course ofbusiness.” This last expression it was said “does not require aninvestigation of the course pursued in any particular trade orvocation and it does not refer to what is normal or usual in thebusiness of the debtor or that of the creditor.” It is an additionalrequirement and is cumulative upon good faith and valuableconsideration. It is, therefore, not so much a question of fairnessand absence of symptoms of bankruptcy as of the everyday usualor normal character of the transaction. The provision does notrequire that the transaction shall be in the course of any particulartrade, vocation or business. It speaks of the course of business ingeneral. But it does suppose that according to the ordinary andcommon flow of transactions in affairs of business there is a course,an ordinary course. It means that the transaction must fallinto place as part of the undistinguished common flow ofbusiness done, that it should form part of the ordinarycourse of business as carried on, calling for no remark andarising out of no special or particular situation.”

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

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A25.6.2. Taking up the transactions in question, we are clearly ofthe view that even when furnishing a security may be one of normalbusiness 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 ‘theundistinguished common flow of business done’; and is not arising out of‘any special or particular situation’, as rightly expressed in DownsBDistributing Co (supra). Though we may assume that the transactionsin question were entered in the ordinary course of business of bankersand financial institutions like the present respondents but on the givenset 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 debtorCJIL. As noticed, the corporate debtor has been promoted as a specialpurpose vehicle by JAL for construction and operation of YamunaExpressway and for development of the parcels of land along with theexpressway for residential, commercial and other use. It is difficult toeven surmise that the business of JIL, of ensuring execution of the worksassigned to its holding company and for execution of housing/buildingDprojects, in its ordinary course, had inflated itself to the extent of routinelymortgaging its assets and/or inventories to secure the debts of its holdingcompany. It had also not been the ordinary course of financial affairs ofJIL that it would create encumbrances over its properties to secure thedebts of its holding company. In other words, we are clearly of the viewEthat the ordinary course of business or financial affairs of the corporatedebtor JIL cannot be taken to be that of providing mortgages to securethe loans and facilities obtained by its holding company; and that too atthe cost of its own financial health. As noticed, JIL was already reelingunder debts with its accounts with some of the lenders having beendeclared NPA; and it was also under heavy pressure to honour itsFcommitment to the home buyers. In the given circumstances, we haveno hesitation in concluding that the transfers in questions were not madein ordinary course of business or financial affairs of the corporate debtorJIL.

25.7. The submissions that security was disclosed in the AnnualGReports or that none of the creditors expressed dissent are of no effectbecause such disclosure or want of objection by creditors, by themselves,do not operate as estoppel against anybody nor would take the transactionout of the purview of the legal fiction predicated in Section 43, if it isotherwise of a preference at a relevant time. Similarly, the distinctionHbetween ‘NPA’ and ‘wilful default’; the submission that NPA could be

regularised; and further the submission that the mortgages were createdbefore JIL was declared NPA, are hardly of any bearing on the questionas to whether the impugned transactions had been in the ordinary courseof business or financial affairs of JIL. Thus, reference to the decisionslike that in Keshavlal Khemchand and Jah Developers (supra) is notof any consequence and need not be dilated upon. The answer to thisquestion, in our view, could only be in the negative. That is to say that theimpugned transactions had not been in the ordinary course of businessor financial affairs of JIL.

25.8. Therefore, the answer to question (v) as referred in paragraph20 is that the impugned transactions are not of excepted transfers interms of sub-section (3) of Section 43 of the Code.

The concern expressed by lenders of JAL is legallyuntenable

26. The argument of lenders, that holding the transactions inquestion as preferential would result in impacting large number oftransactions undertaken by the bankers/financial institutions, of financingin the ordinary course of their business; and the consequences may bedevastating and irreversible on the economy, has only been noted to berejected.

26.1. It needs hardly any emphasis that in the ordinary course oftheir business, when the bankers or financial institutions examine anyproposal for loan or advance or akin facility, they are supposed to, andthey 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 genuineand adequate; and would be available for enforcement at any point oftime. Given the nature of transaction, the lenders must prefer a cleansecurity to justify the transaction as being in the ordinary course of theirbusiness. 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, 44 As regards the present context, the term ‘due diligence’ is explained in P. RamanathaAiyar’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 inconjunction with the preparation of legal documentation.

Analysis of the financial status and prospects of company beforeit receives a major investment of capital. It is usually carried out by anindependent accountant.”

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Aincluding that of a subsidiary company, is to be taken as collateral, theyare obliged to undertake further due diligence so as to ensure that suchthird party security is a prudent and viable one and is not likely to be hitby any law. In that sequence, they remain under obligation to assurethemselves that such third party whose security is being taken, is notalready indebted or in red and is not likely to fail in dealing with its ownBindebtedness. In the context of IBC, such requirement is moreoverimperative 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 ofJIL too, to the extent of the advances made to JIL. They and the co-Crespondents cannot plead ignorance about the actual state of affairs andfinancial position of JIL. Despite such knowledge, if they chose to takethe business risk of accepting security from JIL and that too, for securingthe loans/advances/facilities made over to JAL, who was a directlyrelated party of JIL for being its holding company, they themselves remainresponsible for present legal consequences.DSummation: The transactions in question are hit by Section43 IBC

27. For what has been discussed hereinabove, we are clearly ofthe view that the transactions in question are hit by Section 43 of theECode and the Adjudicating Authority, having rightly held so, had beenjustified in issuing necessary directions in terms of Section 44 of theCode 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.

FSearch and commandeering of preference at a relevant time

FSearch and commandeering of preference at a relevant time

28. Although we have analysed the transactions in question onthe anvil of Section 43 with reference to the submissions made and thefacts of the present case but, before moving on to other aspects, wedeem it appropriate to point out the manner in which the provisionsGconcerning preference at a relevant time are expected to be applied,particularly by the resolution professional, in a given case. It could bereadily recapitulated that as per the charging parts of Section 43 i.e.,sub-sections (4) and (2) thereof, a corporate debtor shall be deemed tohave given preference at a relevant time if the twin requirements ofclauses (a) and (b) of sub-section (2) coupled with the applicableHrequirements of either clause (a) or clause (b) of sub-section (4), as the case may be, are satisfied. However, even if the requirements of sub-sections (4) and (2) are satisfied, a transaction may not be regarded asan offending preference if it falls in either or both of the exceptionsprovided by sub-section (3) of Section 43.

28.1. Looking to the legal fictions created by Section 43 and lookingto the duties and responsibilities per Section 25, in our view, for thepurpose of application of Section 43 of the Code in any insolvencyresolution process, what a resolution professional is ordinarily requiredto do could be illustrated as follows:

1. In the first place, the resolution professional shall have to taketwo major but distinct steps. One shall be of sifting through theentire cargo of transactions relating to the property or an interestthereof of the corporate debtor backwards from the date ofcommencement of insolvency and up to the preceding two years.The other distinct step shall be of identifying the persons involvedin such transactions and of putting them in two categories; onebeing of the persons who fall within the definition of ‘related party’in terms of Section 5(24) of the Code and another of the remainingpersons.

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

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

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4. In the next step, the said shortlisted transactions would bescrutinised to find if the transfer in question is made for or onaccount of an antecedent financial debt or operational debt orother liability owed by the corporate debtor. The transactions whichare 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 scrutinisedtransactions that are found covered by clause (a) of sub-section(2) of Section 43 shall have to be examined on another touchstoneas to whether the transfer in question has the effect of puttingsuch creditor or surety or guarantor in a beneficial position than itwould have been in the event of distribution of assets per Section53 of the Code. If answer to this question is in the affirmative, thetransaction under examination shall be deemed to be of preferencewithin a relevant time, provided it does not fall within the exclusionprovided by sub-section (3) of Section 43.

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6. In the next and equally necessary step, the transaction whichotherwise is to be of deemed preference, will have to pass throughanother 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 aforesaidvolumetric as also gravimetric analysis of the transactions on thedefined coordinates, he shall be required to apply to theAdjudicating Authority for necessary order/s in relation to thetransaction/s that had passed through all the positive tests of sub-section (4) and sub-section (2) as also negative test of sub-section(3).

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28.2. On a motion made by the resolution professional after andin terms of the exercise aforesaid, the Adjudicating Authority, in its turn,shall have to examine if the referred transaction answers to all thedescriptions noted above and shall then decide as to what order is requiredGto be passed, for avoidance of the impugned transaction or otherwise.

28.3. In our view, looking to the legal fictions created by Section43 and looking to the duties and responsibilities of the resolutionprofessional and the Adjudicating Authority, ordinarily an adherence tothe process illustrated hereinabove shall ensure reasonable clarity andless confusion; and would aid in optimum utilization of time in anyHinsolvency resolution process.

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

29. Having found that the transactions in question cannot becountenanced, for being of preference during a relevant time to a relatedparty; and having approved the order passed by NCLT in that regard,we do not consider it necessary to deal with the other length of argumentsadvanced by the learned counsel for parties on the questions as to whetherthe transactions are undervalued and/or fraudulent too. In the totality ofcircumstances, we would prefer leaving the said questions at that only,while also leaving all the related questions of law open; to be examinedin an appropriate case.

29.1. However, we are impelled to make one comment as regardsthe application made by IRP. It is noticed that in the present case, theIRP moved one composite application purportedly under Sections 43, 45and 66 of the Code while alleging that the transactions in question werepreferential as also undervalued and fraudulent. In our view, in the schemeof the Code, the parameters and the requisite enquiries as also theconsequences in relation to these aspects are different and suchdifference is explicit in the related provisions. As noticed, the question ofintent is not involved in Section 43 and by virtue of legal fiction, uponexistence of the given ingredients, a transaction is deemed to be of givingpreference at a relevant time. However, whether a transaction isundervalued requires a different enquiry as per Sections 45 and 46 ofthe Code and significantly, such application can also be made by thecreditor under Section 47 of the Code. The consequences ofundervaluation are contained in Sections 48 and 49. Per Section 49, ifthe undervalued transaction is referable to sub-section (2) of Section 45,the Adjudicating Authority may look at the intent to examine if suchundervaluation was to defraud the creditors. On the other hand, theprovisions of Section 66 related to fraudulent trading and wrongful tradingentail the liabilities on the persons responsible therefor. We are notelaborating on all these aspects for being not necessary as the transactionsin question are already held preferential and hence, the order for theiravoidance is required to be approved; but it appears expedient to observethat the arena and scope of the requisite enquiries, to find if the transactionis undervalued or is intended to defraud the creditors or had been ofwrongful/fraudulent trading are entirely different. Specific material factsare required to be pleaded if a transaction is sought to be brought under A

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Athe mischief sought to be remedied by Sections 45/46/47 or Section 66of the Code. As noticed, the scope of enquiry in relation to the questionsas to whether a transaction is of giving preference at a relevant time, isentirely different. Hence, it would be expected of any resolutionprofessional to keep such requirements in view while making a motionto the Adjudicating Authority.B

29.2. In the present case, it is noticed that NCLT in its detailedand considered order essentially dealt with the features of the transactionin question being preferential at a relevant time but recorded combinedfindings on all these three aspects that the impugned transactions werepreferential, undervalued and fraudulent. Appropriate it would have beenCto deal with all these aspects separately and distinctively.

29.3. We are conscious of the fact that IBC is comparatively anew legislation and various aspects expected therein are in the progressionof taking proper shape, particularly in the adjudicatory processesenvisaged. Having said so, we would leave this aspect at that only, whileDexpecting all the concerned to be more attentive to the scheme, objectand requirements of the provisions contained in the Code.

SECOND ISSUE: WHETHER LENDERS OF JAL COULDBE CATEGORISED AS FINANCIAL CREDITORS OF JIL

EPreliminary and background

30. The discussion and summation in the foregoing paragraphsand conclusion on the first issue itself would have been the end of thematter because the transactions in question stand disapproved as beingpreferential. However, there remains another significant issue to beFadjudicated herein, which, though not adverted to by NCLAT, is indeedinvolved in these matters.

30.1. The issue is as to whether the lenders of JAL could becategorised as financial creditors of JIL for the purpose of IBC?

31. The issue aforesaid was raised before NCLT by two of theGrespondent banks namely, ICICI Bank Limited and Axis Bank Limitedby way of separate applications under Section 60(5) of the Code, seekingto question the decision of IRP rejecting their claims to be recognized asfinancial creditors of the corporate debtor JIL on account of the securitiesprovided by JIL for the facilities granted to JAL. The NCLT rejectedthe applications so filed, by way of its orders dated 09.05.2018 andH

15.05.2018 respectively, while concluding that on the strength of themortgages created by the corporate debtor JIL, as collateral security ofthe debts of its holding company JAL, the applicants cannot be treatedas financial creditors of the corporate debtor JIL.

31.1. The aforesaid orders dated 09.05.2018 and 15.05.2018 werequestioned before NCLAT by the said lenders of JAL in Comp. App(AT) (Ins) No. 353 of 2018 and Comp. App (AT) (Ins) No. 301 of 2018respectively. These appeals formed part of the bunch of appeals decidedby NCLAT by way of the impugned common order dated 01.08.2019and, as per the final result recorded therein, these two appeals also standallowed. However, fact of the matter remains that nothing has beendiscussed by NCLAT in the impugned order dated 01.08.2019 as regardsthe subject-matter of these two appeals i.e., as to whether the said lendersof JAL could be categorised as financial creditors of JIL or not; and theentire discussion in the impugned order and the final conclusion thereinhad only been in relation to the order dated 16.05.2018 that was passedby NCLT on the application for avoidance filed by IRP.

31.2. The appellant of Civil Appeal D. No. 32881 of 2019, IIFCL,apart from raising other contentions, has also questioned this aspect ofthe order impugned that the aforesaid two appeals, involving the issue asto whether the mortgagees of the corporate debtor could be taken asfinancial creditors, have been allowed by NCLAT without recording anyfindings and without any discussion in that regard.

31.3. Though, ordinarily, such omission in the impugned order dated01.08.2019 might have resulted in the matter being remitted to theAppellate Tribunal for appropriate consideration and finding but, asaforesaid, in the entire process, adherence to the time limit is also ofsignificance; and in view of the fact that learned counsel for the respectiveparties have advanced elaborate submissions on the merits of the issueas to whether such lenders of JAL could be treated as financial creditorsof the corporate debtor JIL and have invited the decision of this Court,we deem it just, proper and expedient to finally decide the relevantquestions in this regard.

31.4. We may, of course, reiterate that in view of the conclusionthat we have reached in relation to the principal issue, the transactions inquestion are denuded of their value and worth, per the force of the orderby NCLT under Section 44 of the Code, which has been approved by A

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

32. Before proceeding further, apposite it would be to take noteCof the reasons assigned by NCLT in its impugned orders for rejectingthe claim of two of the lender banks to be treated as financial creditorsof JIL.

Reasoning and Findings of NCLT

33. The Adjudicating Authority, NCLT, in its order dated 09.05.2018Das passed on the application moved by ICICI Bank Limited, withreference to the nature of transaction in question, whereby JIL hadextended collateral security towards the facility extended to its holdingcompany JAL as also with reference to the definition and connotationsof the expressions ‘financial debt’ and ‘financial creditor’ as occurringEin IBC, essentially proceeded to find that in such a transaction, as regardsthe corporate debtor JIL, no consideration for time value for money wasinvolved; and hence, the transaction in question did not qualify as ‘financialdebt’ qua the corporate debtor JIL. The NCLT, interalia, observed asunder:- “9. In the present case undisputedly corporate debtor hasFmortgaged its property for creating collateral security for the debtof its holding company JAL. The Corporate debtor is not aborrower, it has created a mortgage in favour of financial institutionsfor creating collateral security for the money borrowed by itsholding company JAL. In the said transaction time value of moneyGis not involved. The corporate debtor’s liability is not regardingthe debt owed by its holding company JAL. In case of default inmaking payment by the principal borrower, for which securityinterest has been created by the corporate debtor by mortgagingits property in favour of Applicant bank, the debt amount can berealized from the sale of the mortgaged property but not from theHcorporate debtor, i.e. Jaypee Infratech Ltd.*********

9.2 In this case, the applicant has not disbursed the debt alongwith interest against the consideration for the time value of money.It is also not the case of the applicant that the corporate debtorhas borrowed money against payment of interest from theapplicant. It is also not the case that the corporate debtor hasraised any amount from the applicant under any credit facility. Itis not the case of the applicant that there is any liability towardsthe corporate debtor in respect of any lease or higher purchasecontract. It is further not the case of an applicant that anyreceivables been sold or discounted. It is further not the case ofthe applicant that any amount has been raised for the corporatedebtor under any other transaction having the commercial effectof borrowing to the corporate debtor. It is not the case of theapplicant that any derivative transaction has been entered withthe corporate debtor. It is also not the case of the applicant thatany counter indemnity obligation in respect of a guarantee,indemnity, bond, documentary, letter of credit or any otherinstrument issued by a bank or a financial institution for thecorporate debtor. Further, no amount of any liability in respect ofany of the guarantee or indemnity for any of the items referred toabove has been issued by the corporate debtor.”

33.1. The NCLT also distinguished the decision of this Court inthe case of Rajkumari Kaushalya Devi v. Bawa Pritam Singh &Anr.: AIR 1960 SC 1030, as relied upon by the learned counsel for theapplicant, while pointing out the distinct context of the said decision andwhile observing that the connotations of the expressions ‘debt’, ‘financialdebt’, ‘financial creditor’ and ‘creditor’ in the present context would belimited to the definitions given in the Code. The NCLT furtherdistinguished the decision of Gujarat High Court in the case of StateBank of India v. Smt. Kusum Vallabhdas Thakkar: 1991 SCCOnline Guj 14, while again pointing out that in the present case, thecorporate debtor has created a mortgage of its property in favour ofthird party without any consideration for time value of money.

33.2. Yet further, the NCLT rejected the contentions that thetransaction 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 thecorporate debtor can be termed as either a guarantee or indemnity AB

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is not tenable. In terms of the mortgage deeds the corporate debtorhas created a mortgage over its immovable properties, which iseither money borrowed against payment of interest nor indemnityor a guarantee as claimed by the applicant and therefore, thesame does not fall within the definition of the financial debt interms of Sec. 5 (8) of IBC. It is stated that the corporate debtorhas neither issued any guarantee nor has provided an indemnityto the applicant in respect of the financial assistance granted toJAL.

14. The Resolution Professional further submitted that the mortgagedeed shows that the corporate debtor has only agreed to create amortgage in favour of the applicant towards the financial assistancegranted to its holding company, i.e. JAL. On perusal of mortgageit is clear that the corporate debtor has neither given any guaranteeto repay or any indemnity qua the repayment of the loans grantedby the applicant to JAL. The definition of Mortgage Debt as perthe mortgage deed dated 7[th] March 2017 is as under : - “Mortgage debt shall mean the principal amount of the facility,all interest therein additional interest, default interest, liquidateddamages, fees, costs, charges, expenses, any other amountsdue and payable to secured parties under the transactiondocuments, premia on prepayment, costs, charges, andexpenses and other monies whatsoever stipulated in or payabletogether with other debts and liabilities of JAL to lender underthe transaction document and/or these presents.”

It is important to point out that sec. 124 of the Indian Contract Actdefines a “Contract of Indemnity” as being a contract by whichone party promises to save the other from loss caused to him bythe conduct of the promisor himself or by the conduct of anyother person. In the instant case, as per the Mortgage deed therepayment obligation of the loan granted to JAL by the applicantis upon JAL as stated above and therefore, no contract ofindemnity as claimed by the applicant has been entered even byconduct of the corporate debtor, and therefore, the contention ofthe applicant that the applicant is a financial creditor of thecorporate debtor is completely untenable in law.”

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

of the corporate debtor i.e., financial creditors, operational creditorsand other creditors, and not from any person or creditors of theholding company of the corporate debtor; and while furtherobserving that the resolution professional had righty observed thatthe mortgages in questions were not like guarantee or indemnity,NCLT observed that the basic ingredient of financial debt i.e.,‘debt alongwith interest disbursed against time value of money’was lacking in the impugned transactions. NCLT also referred tothe interpretation of the expression ‘financial creditors’ by NCLATin the case of Nikhil Mehta and Sons v. AMR InfrastructureLtd. Company: Appeal (AT) (Insolvency) No. 07 of2017andendorsed the decision of IRP while holding that,- “15. ….On the above basis, we are of the view that TheResolution Professional has correctly rejected the claim of theapplicant on the ground that the Applicant is not a financialcreditor of the corporate debtor concerning the Mortgages andthe Mortgaged Debt. The resolution professional has rightlyobserved that guarantee and indemnity are distinct documentsunder the relevant laws and the mortgages executed by thecorporate debtor are not like guarantee and indemnity. Thebasic ingredient of the financial debt as defined under the Codeis that debt along with interest disbursed against time value ofmoney lacks in the impugned transaction….”

33.4. Accordingly, NCLT rejected the application of ICICI BankLimited 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 Applicanti.e. ICICI Bank, the applicant cannot be treated as FinancialCreditor of the Corporate Debtor. Therefore in our view, ResolutionProfessional has rightly rejected the claim of the applicant, whichwas filed by the Applicant in the capacity of Financial Creditorsof the corporate debtor, i.e. Jaypee Infratech Ltd. (“JIL”)”.

33.4.1. Thereafter, the other application filed by Axis Bank Limitedwas rejected by NCLT on 15.05.2018, while following the earlier orderdated 09.05.2018.

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A34. As noticed, the aforesaid orders dated 09.05.2018 and15.05.2018 were questioned in two appeals before NCLAT by the saidlenders of JAL; and the said appeals stand allowed in the impugnedorder dated 01.08.2019 without any discussion as regards the issueinvolved therein. We have heard learned counsel for the parties at lengthin relation to this issue too, and, in the circumstances of the case, asBnoticed, we had indicated prima facie view in the order dated10.12.2019[45], that such lenders of JAL cannot be categorised as financialcreditors of JIL and had stayed the operation of impugned order to thatextent.

Rival submissionsC35. Having noticed the relevant background, we may now takenote of the contentions of learned counsel for the parties in regard to theissue under consideration.

Submissions on behalf of the appellant

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Arguments

36. It has essentially been argued on behalf of the appellant IIFCLthat as per sub-section (7) of Section 5 of the Code, only such creditorcould 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 isE‘disbursal against the consideration for the time value of money’,which includes the events or modes of disbursement as enumerated insub-clauses (a) to (i) of Section 5(8). It is submitted that in the presentcase, the lenders of JAL having not disbursed any debt against theconsideration for the time value of money to the corporate debtor JIL,the corporate debtor does not owe any ‘financial debt’ to such lenders;Fand the transactions in question do not fall within the brackets of ‘financialdebt’ only for the reason that the corporate debtor JIL created mortgagesas collateral security in favour of lender banks for the money borrowedby JAL. Concisely put, the submission is that in the said mortgagetransactions, disbursal against the consideration for the time value ofGmoney qua the corporate debtor JIL being not involved, the lenders ofJAL are not the ‘financial creditors’ of JIL and cannot be included in theCommittee of Creditors[46], as to be constituted per Section 21 of theCode.

45 Reproduced in paragraph 7 hereinbefore.H46 ‘CoC’ for short 36.1. It is further submitted that the said lenders of JAL have noright to demand the mortgage money from the corporate debtor nor isthe corporate debtor JIL under any liability to pay the same; and mereholding of security interest, which too had not been extended for directdisbursement of any credit to JIL, cannot make the JAL lenders asfinancial creditors of JIL within the meaning of IBC. Learned counselfor the appellant has referred to the judgment and order dated 22.12.2017by the NCLAT in Dr. B.V.S. Lakshmi v. Geometrix Laser Solutions(P) Ltd.:Company Appeal (AT) (Insolvency) No. 38 of 2017, tosubstantiate this submission.

36.2. It is contended on behalf of the appellant that though thedefinition of ‘financial debt’ extends to include various types oftransactions, yet it does not include a mortgage, as could be gatheredfrom a plain and simple reading of the said provision. The counsel forthe appellant has further relied on the judgment of this Court in SwissRibbons (supra), wherein the concept of ‘financial creditor’ has beenexplicated to mean and include a person who has direct engagement inthe functioning of corporate debtor right from the beginning, whileassessing the viability of corporate debtor; and who would also engagein restructuring of debts and reorganising the corporate business in caseof financial stress. With reference to the case at hand, it is submittedthat mere holding of security interest, not meant for direct disbursementof any credit to corporate debtor JIL, cannot convert the lenders of JALinto the financial creditors of JIL.

36.2.1. It is also contended that the respondents, the lenders ofJAL to whom mortgages were extended by the corporate debtor JIL,could at best be construed as plain creditors, who are entitled to fileForm F and to specify their security in column 8 thereof; and in anycase, they cannot become financial creditors of JIL.

36.2.2. It is further contended that a secured creditor under theCode can be a financial creditor under two circumstances i.e., (i) whencorporate debtor directly avails a debt from the creditor and such a debtis a secured debt; and (ii) if corporate debtor furnishes a guarantee toany person. Learned counsel for the appellant submits that a mortgagee,who has not disbursed any debt to the corporate debtor, may be a securedcreditor because of the corporate debtor creating a security to securethe payment of a third party but cannot be a financial creditor of thecorporate debtor within the meaning of Section 5(8) of the Code.

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A36.3. Elaborating on the submissions relating to the nature oftransactions, learned counsel for the appellant has strenuously arguedthat ‘mortgage’ is not included within the framework of Section 5(8) ofthe Code and its sub-clauses (a) to (i); and that ‘financial debt’ is limitedonly to the transactions enumerated thereunder and its coverage cannotbe enlarged while interpreting the provision. It is also argued thatB‘mortgage’ cannot be deemed to mean ‘guarantee’, for a mortgagor hasno intentions to undertake to discharge the liability of a third person incase of his default in repayment of debts. In other words, only wherethe debtor and the mortgagor are the same person that the mortgagorwould be liable to pay his debts and else, the mortgage itself does notCcreate a pecuniary liability. Moreover, in the present case, when there isa tri-partite contract wherein, the mortgagor and debtor are different,the impugned transactions do not satisfy the ingredients of Section 126of the Contract Act, as JIL has not undertaken specifically to dischargethe liability of JAL nor has entered into a ‘contract of guarantee’ withthe lenders of JAL nor has provided any indemnity; and therefore, theDcorporate debtor JIL is not bound by any liabilities and obligations incurredby JAL. To support the contention that liability always flows from debtand not from the security created under the mortgage, learned counselfor the appellant has also relied on several decisions including that inRamchand Sur v. Ishwar Chandra Giri: 61 Ind Cases 539.E

36.4. It is submitted that a general reference to the transactiondocuments would not be sufficient to fasten liability for JIL to pay anyoutstanding debt of JAL because any payment obligation has to beunequivocal and ought to be of specific undertaking to discharge suchobligations; and that general words of incorporation or general covenantFin some mortgage deeds cannot bind JIL to all the terms and conditionsof the documents, particularly any liability to incur JAL’s indebtednessby fastening payment obligations. It is further submitted that when theintention of parties is ascertained with reference to the terms of documentsand all the surrounding factors, it cannot be inferred that JIL undertook the liability to discharge the indebtedness of JAL when it was itself reelingGunder financial stress, was declared NPA and had surmounting liabilitiestowards home buyers and its own lenders. With reference to the financialstatements of JIL, it is pointed out that therein, it was specifically disclosedthat the mortgages had been provided as a security for the financialassistance availed by JAL but such mortgages were not declared eitherHas contingent or as direct liability. It is also submitted that the common

loan agreement between JIL and its lenders, including the appellant,contained negative covenants prohibiting JIL from creating, assuming orincurring any additional indebtedness or from encumbering any propertyor creating any security on the assets of JIL. The sum and substance ofsuch submissions had been that the corporate debtor JIL could haveneither incurred a liability to discharge the indebtedness of JAL nor ithad done so under the mortgages in question.

36.5. As regards the decision of this Court in Committee ofCreditors of Essar Steel India Limited through Authorised Signatoryv. Satish Kumar Gupta : 2019 SCC OnLine SC 1478[47], as reliedupon by the respondents, learned counsel for the appellant has submittedthat the generalised assertion on the part of the respondents, that per theforce of the said decision, a secured creditor ipso facto becomes financialcreditor, is not a correct appreciation of the ratio thereof. It is submittedthat in the scheme of the Code, a secured creditor could also be a financialcreditor under two circumstances: First, when the corporate debtor directlyavails a debt from the creditor and such debt is secured by a securityinterest like in the form of a charge or mortgage or hypothecation; andsuch a creditor, the secured one, is regarded as financial creditor becauseof direct disbursement of debt to the corporate debtor; and secondly,when the corporate debtor furnishes guarantee to any person, such personwould also become a financial creditor and a secured creditor by virtueof sub-clause (i) of Section 5(8) of the Code, of course, such guaranteemay even be to secure the debt obligation of a third party. However,according to the counsel for the appellant, when the corporate debtorcreates mortgage to secure payment obligation of a third party, withoutdisbursement 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 betreated as a ‘direct secured creditor’ so as to become a ‘financial creditor’because, the mortgage transaction is not envisaged to be a ‘financialdebt’ in Section 5(8) with its sub-clauses (a) to (i).

36.5.1. It is submitted that Essar Steel judgment envisages theposition and priorities of secured creditors, mainly in the context of acreditor who has disbursed direct debt to the corporate debtor and hassecured its debt by a security interest, who should have priority overunsecured creditors of the corporate debtor. However, the said decision, 47 Hereinafter also referred to as the case of ‘Essar Steel’.

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Aaccording to the learned counsel, cannot be read to the effect that eventhe indirect secured creditor be also necessarily construed as financialcreditor. It is submitted that the crux of the said decision is that creditorsnot similarly situated cannot be at par; that the arrangements of thecorporate debtor with its creditors must be taken into consideration; andthat the aim of equitable treatment is based on the notion that creditorsBwith similar legal rights should be treated evenly while receivingdistribution in accordance with their relative ranking and interest. It issubmitted that Essar Steel cannot be read as laying down the law thateven the lenders of third party, who hold mortgages from the corporatedebtor, be also treated as such secured creditors who would fall withinCthe sect of ‘financial creditors’.

36.6. Learned counsel for the appellant would further submit thatexistence of a security interest is not relevant while construing whethera creditor is financial creditor or not because, in the composition of CoC,even a non-secured creditor could also be a financial creditor, if theDingredients of Section 5(8) of the Code are satisfied. It is also arguedthat the financial facilities availed by JAL from the respondents werenot utilized for any business operation of JIL and hence, the respondentscannot be construed as financial creditors of JIL.

Submissions on behalf of respondentsE

Submissions on behalf of respondentsE

37. Learned counsel for the contesting respondents have madeelaborate submissions in support of the counter-assertion that on accountof security provided by the corporate debtor JIL, the respective lendershave become financial creditors of JIL for the purpose of proceedingsunder the Code. We may briefly summarise the principal facets of theFcontentions urged on behalf of the main contesting respondents in thisregard as infra.

Axis Bank

37.1. It has been strenuously argued on behalf of this respondentthat the nature and character of a ‘mortgage’ is such that it secures aGdebt; 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 thedecision of this Court in Prithvi Nath Singh & Ors. v. Suraj Ahir &Ors. : (1963) 3 SCR 302 as also the decision of Mysore High Court inDassappa & Ors v. Jogaiah & Ors : (1964) ILR 545, it is submittedH

that the purpose of ‘mortgage’ is to secure a debt; and with reference tothe decision in Manik Chand Raut v. BaldeoChaudhary & Ors:(1949) SCC Online Pat 64, it is also contended that mortgage, by itsvery nature, presupposes existence of a debt and the transaction bywhich a debt is extinguished is not a mortgage but a sale. Further, withreference to the aforementioned decision of this Court in case ofRajkumari Kaushalya Devi v. Bawa Pritam Singh & Anr: AIR 1960SC 1030, it is contended that a mortgage debt creates pecuniary liabilityupon the mortgagor; and that a mortgagor who transfers an interest inimmovable property so as to secure a debt, incurs a mortgage debt. Withreference to the decision of Delhi High Court in the case of State Bankof India v. Samneel Engineering Co. & Ors: 1995 (35) DRJ 485, itis further submitted that a mortgage is both a promise by a debtor torepay the loan as well as a real property right; of course, the right beingintended to secure the due payment of the debt; and a suit on a mortgageis essentially a suit for recovery of a debt.

37.1.1. With reference to principles aforesaid, it is contended thata mortgage debt is a ‘debt’ within the meaning of Section 3(11) of theCode; that a debt can be classified to be a debt due from ‘any person’and not necessarily restricted to the borrower alone. The aforementioneddecision of Gujarat High Court in State Bank of India v. Smt. KusumVallabhdas Thakkar: 1991 SCCOnline GUJ 14 has again beenreferred to submit that Indian Law recognizes that a person, other thanthe borrower, can also execute a mortgage to secure the debt of theborrower. In this context, learned counsel for the respondent has alsorelied upon the provisions contained in Section 126 of the Contract Act,to contend that JIL stands in the position of a guarantor for the debtsowed by JAL. The learned counsel has also referred to an order dated13.03.2019 in M.A. No. 1584/2019 in CP No. 402 of 2018 as passedby NCLT (Mumbai Bench) in the case of SREI Infrastructure FinanceLimited v. Sterling International Enterprises Ltd., wherein it is heldthat a third party mortgagor, who mortgages the property to secure thefinancial obligation of another party, stands in the position of a guarantor;and the mortgagee is a financial creditor of the third party mortgagor.Inthe case at hand, it is submitted, the corporate debtor JIL stands in theposition of a guarantor with respect to the security provided to thisrespondent and hence, the impugned mortgage transactions are coveredwithin the meaning of Section 5(8)(i) of the Code.

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A37.1.2. It is also submitted that looking to the nature of transactionin question, the question whether JAL has defaulted on repayment andconsequently, the security is to be invoked is irrelevant for the purposesof the issue at hand; and whether JAL committed default or not is notdecisive of the question as to whether the mortgage debt in question isfinancial debt or not.B

37.1.3. It is further submitted that in the present case, the mortgagetransactions were executed to secure the payment of debts/liabilities ofJAL; and that such creation of mortgage undoubtedly is a ‘securityinterest’ as defined in Section 3(31) of the Code inasmuch as, a securityinterest includes any creation of right/title/interest/claim in property forCthe purpose of securing the payment or performance of an obligation;and also includes a mortgage. Hence it is contended that the respondentbank comes within the ambit of ‘secured creditor’ per Section 3(30) ofthe Code.

37.1.4. It is emphasised by learned counsel for this respondentDthat a mortgage debt constitutes a ‘financial debt’ within the meaning ofSection 5(8) of the Code even if no amount is directly disbursed to thecorporate debtor. While relying on the decision of this Court in PioneerUrban Land and Infrastructure Ltd. & Anr. v. Union of India &Ors.: (2019) 8 SCC 416[48], it is contended thatthe definition of ‘financialEdebt’ under Section 5(8) of Code has been given an extended meaningso as to include the situations which may not directly involve disbursalagainst the consideration for time value money.

37.1.5. Further, with reference to the aforementioned UNCITRALLegislative Guide on Insolvency Law and the decisions of this Court inFthe cases of Essar Steel and Swiss Ribbons, it is submitted that a holisticinterpretation of the Code would support the position that the respondent,being a secured creditor and a financial creditor, should be included inCoC so as to protect its security interest.

37.2. The submissions and contentions made on behalf of thisGrespondent largely cover the stand of other respondents too. Hence, wemay only notice, in brief, the other or additional part of major submissionson behalf of other respondents, while avoiding repetition.

Standard Chartered Bank

H48 Hereinafter also referred to as the case of ‘Pioneer Urban’

37.3. It is submitted on behalf of this respondent that the termsenvisaged in the mortgage deed dated 24.05.2016 make it abundantlyclear that the corporate debtor JIL had unequivocally promised to pay tothis respondent the debts/liabilities owed by JAL in accordance with theterms and conditions of the secured financing documents executedbetween this respondent and JAL[49]. Hence, it is contended that thoughthe claim of this respondent is limited to the extent of the value of theproperties mentioned in the Schedule to the Mortgage Deed but, to thatextent, it remains a financial creditor of JIL.

37.3.1. As regards similar arguments with respect to Section 58of the Transfer of Property Act, that a mortgage presupposes thesubsistence of a debt and hence it is a secured debt, apart from abovereferred decisions, learned counsel has also referred to the decision inPomal Khanji Govindji & Ors. v. Brajlal Karsandas Purohit & Ors:(1989) 1 SCC 458.

37.3.2. It is contended that when the objective of the Code is torevive the corporate debtor, the resolution plan ought to contain all claimsagainst the corporate debtor, whether matured or not, so that if the liabilityagain creeps in, the Company may be prevented from being draggedinto insolvency or liquidation proceedings. It is further submitted that thisrespondent, who is holding public money, ought to be a part of CoC; andits absence in CoC would be defeating the very object of the Codebecause the resolution plan may provide for various measures whichmight take away the security interest created in favor of this respondent;and without its participation, the entire process would be prejudicial tothe interest of this respondent. It is submitted that as per the ratio in K.Sashidhar v. Indian Overseas Bank and Ors. : 2019 SCC OnLineSC 257 read with the decision in the case of Essar Steel, once a resolutionplan is approved by the wisdom of the CoC, the same cannot bechallenged and looking to the scheme of the Code, presence of themortgagees like this respondent in the CoC of JIL is necessary and israther unavoidable.

ICICI Bank

37.4. On behalf of this respondent, it is maintained that in view ofSection 5(8)(i) read with Section 5(8)(a) of the Code, the creation ofimpugned mortgage had resulted in creation of a ‘financial debt’ as defined 49 Clause B & B(a) of the Mortgage Deed produced as Annexure-1 at Pg. 8-43

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Aunder the Code, for the transaction being akin to that of a ‘guarantee’ asdefined under Section 126 of the Contract Act. Again, with reference tothe decision in Smt. Kusum (supra), it is submitted that even a third partymortgage leads to creation of an implied guarantee with an obligation topay the mortgage debt. In other words, since the definition of ‘financialdebt’ is not exhaustive, any transaction which is akin to creation of aBguarantee would come under the purview of the definition of ‘financialdebt’ 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, thisrespondent takes on the role of a ‘financial creditor’ of the corporateCdebtor 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 holisticreading of the mortgage deeds, it is clear that ‘exclusive mortgages’were executed in favour of this respondent with express clauses whereby,Dthe corporate debtor JIL had undertaken to either discharge the debt orto ensure repayment of facilities extended to JAL and in the event ofdefault, this respondent shall have the right to sell the mortgagedproperties. Such stipulations, it is contended, clearly put the respondentin the category of ‘financial creditors’.

E37.4.2.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) ofthe Code, it is submitted that the definition of ‘claim’ is wide enough toinclude all stakeholders of the corporate debtor, even if a claim had notmatured on the date of insolvency commencement. The Report ofBanking 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 theInsolvency and Bankruptcy Board of India (Insolvency ResolutionProcess for Corporate Persons) Regulations, 2016 require the IRP toadmit all claims, including contingent claims, as on the insolvencycommencement date; that as per Section 29 of the Code, the IRP oughtGto prepare an information memorandum for formulating a resolution plan;that as per Regulation 37 of CIRP Regulations, the insolvency resolutionof the corporate debtor should include sale of all or part of the assets,irrespective of whether they are subject to security interest andsatisfaction or modification of any security interest; and that sub-sectionH(4) of Section 30 of the Insolvency and Bankruptcy (Amendment) Act,

2019 clarifies that priority of secured creditors has to be considered.With reference to the processes so envisaged by the Code, it is contendedthat the secured creditors like the respondent cannot be kept away fromthe class of financial creditors.

Central Bank of India

37.5. Apart from the submissions carrying essentially the substanceas above-noted, it is also contended that this respondent, being a securedcreditor, would be entitled to enforce its security interest in the mortgagedproperty upon vacation of the order of moratorium in terms of theSecuritisation and Reconstruction Of Financial Assets and Enforcementof Security Interest Act, 2002[50]; and that the resolution plan, withoutincluding the secured creditors, would be unenforceable, as the securedcreditors will then seek enforcement against mortgage property underthe SARFAESI Act. It is, therefore, contended that the secured creditor,like the respondent, needs to be recognized as financial creditor, andthereby a participant in CoC of the corporate debtor JIL.

Bank of Maharashtra

37.6. While going in tandem with the submissions aforesaid, it isasserted on behalf of this respondent that the corporate debtor JIL isunder a pecuniary obligation to discharge the liability in view of theIndenture of Mortgage (IOM) dated 29.12.2016, which is a contract ofguarantee and, therefore, the relationship between the parties cannot beclassified merely as that of mortgagor and mortgagee, but is also of aguarantor and guarantee which, in turn, is covered under Section 5(8) ofthe Code and thereby, this respondent is a ‘financial creditor’ within themeaning of Section 5(7) of the Code.

Unique position of financial creditor- as explained in SwissRibbons

38. Having taken note of the rival contentions on the issue as towhether 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 towhether the subject transactions could be categorised as ‘financial debts’within the meaning of Section 5(8) of the Code so as to confer the statusof ‘financial creditors’ upon the respondents, lenders of JAL.

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

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A38.1. The expressions “financial creditor” and “financial debt” asoccurring in the Code have come up for consideration before this Courtin several decisions, including those in the above-mentioned cases ofSwiss Ribbons (decided on 25.01.2019), Pioneer Urban (decided on09.08.2019) and Essar Steel (decided on 15.11.2019), which have beenreferred to and relied upon by learned counsel for the parties for oneBproposition or another. In fact, the observations as occurring in the lastof the said decisions, in the case of Essar Steel, as relied upon by thelearned counsel for the respondents, are based on those occurring in thedecision in Swiss Ribbons[51].39. As indicated hereinbefore, the law declared by this Court inCthe case of Swiss Ribbons, while rejecting the contentions thatclassification between financial creditor and operational creditor wasdiscriminatory and violative of Article 14, shall have some bearing on theclaim of the respondent-lenders for being treated as financial creditorsof JIL. Having regard to the submissions made, it shall now be pertinentDto take note of the relevant aspects from the said decision in requisitedetails.

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 RibbonsEin the following:

“42. A perusal of the definition of “financial creditor” and “financialdebt” makes it clear that a financial debt is a debt together withinterest, if any, which is disbursed against the consideration fortime value of money. It may further be money that is borrowed orFraised 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 provisionof goods or services, including employment, or a debt in respect G51 We have referred to the case of Swiss Ribbons in paragraph 16.1.1 hereinbefore whilepointing out that in Swiss Ribbons, this Court had traversed through the historicalbackground and scheme of the Code in the wake of challenge to the constitutionalvalidity of various provisions of the Code and while rejecting such challenge, this Courthad observed that the focus of the Code was to ensure revival and continuation of thecorporate debtor, where liquidation is to be availed of only as a last resort; and that theCode was a beneficial legislation to put the corporate debtor on its feet, and not a mereHrecovery legislation for the creditors.

of payment of dues arising under any law and payable to theGovernment or any local authority.”

39.2. The unique position assigned to a ‘financial creditor’, whoplays a crucial role in insolvency resolution process as against the role ofother creditors, has been extensively explained by this Court in the caseof Swiss Ribbons, albeit in the context of its differentiation with thecategory of ‘operational creditor’, in the following:

“50. According to us, it is clear that most financial creditors,particularly banks and financial institutions, are secured creditorswhereas most operational creditors are unsecured, payments forgoods and services as well as payments to workers not beingsecured by mortgaged documents and the like. The distinctionbetween secured and unsecured creditors is a distinction whichhas obtained since the earliest of the Companies Acts both in theUnited Kingdom and in this country. Apart from the above, thenature of loan agreements with financial creditors is different fromcontracts with operational creditors for supplying goods andservices. Financial creditors generally lend finance on a termloan or for working capital that enables the corporate debtorto either set up and/or operate its business. On the otherhand, contracts with operational creditors are relatable to supplyof goods and services in the operation of business. Financialcontracts generally involve large sums of money. By way ofcontrast, operational contracts have dues whose quantum isgenerally less. In the running of a business, operational creditorscan be many as opposed to financial creditors, who lend financefor the set-up or working of business. Also, financial creditorshave specified repayment schedules, and defaults entitlefinancial creditors to recall a loan in totality. Contracts withoperational creditors do not have any such stipulations. Also, theforum in which dispute resolution takes place is completelydifferent. Contracts with operational creditors can and do havearbitration clauses where dispute resolution is done privately.Operational debts also tend to be recurring in nature and thepossibility of genuine disputes in case of operational debts is muchhigher when compared to financial debts. A simple example willsuffice. Goods that are supplied may be substandard. Servicesthat are provided may be substandard. Goods may not have been A

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

51. Most importantly, financial creditors are, from the verybeginning, involved with assessing the viability of thecorporate debtor. They can, and therefore do, engage inrestructuring of the loan as well as reorganisation of thecorporate 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 ensuringmaximum recovery for all creditors being the objective of theCode, financial creditors are clearly different from operationalcreditors and therefore, there is obviously an intelligible differentiabetween the two which has a direct relation to the objects soughtto be achieved by the Code.

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75. Since the financial creditors are in the business ofmoneylending, banks and financial institutions are best equippedto assess viability and feasibility of the business of the corporatedebtor. Even at the time of granting loans, these banks and financialinstitutions undertake a detailed market study which includes atechno-economic valuation report, evaluation of business, financialprojection, etc. Since this detailed study has already beenundertaken before sanctioning a loan, and since financial creditorshave trained employees to assess viability and feasibility, they arein a good position to evaluate the contents of a resolution plan. Onthe other hand, operational creditors, who provide goods andservices, are involved only in recovering amounts that are paidfor such goods and services, and are typically unable to assessviability and feasibility of business. The BLRC Report, alreadyquoted above, makes this abundantly clear.”

39.3. The enunciation aforementioned illuminates the reasons asto 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 thefinancial creditor who lends finance on a term loan or for working capital 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 financialcreditor is, from the very beginning, involved in assessing the viability ofthe corporate debtor who can, and indeed, engage in restructuring of theloan as well as reorganisation of the corporate debtor’s business whenthere is financial stress. Hence, a financial creditor is not only about interrorem clauses for repayment of dues; it has the unique parental andnursing roles too. In short, the financial creditor is the one whose stakesare intrinsically inter-woven with the well-being of the corporate debtor.

Financial debt - ratio of Pioneer Urban

40. Having imbibed the basic features associated with a ‘financialcreditor’, 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 connotationsof the expression “financial debt”, as defined in Section 5(8) of the Codeis, obviously, necessary. As noticed, while defining ‘financial creditor’and ‘financial debt’ in Section 5(7) and Section 5(8) of the Code, boththe expressions “means” and “includes” have been used. As per thedefinition, while “financial creditor” means a person to whom a “financialdebt” is owed, it also includes a person to whom such debt has beenlegally assigned or transferred to. Obviously, a comprehension of thisdefinition of “financial creditor” cannot be complete without taking intoaccount as to what is the meaning assigned to the expression “financialdebt”. Again, the term “financial debt” has also been defined with theexpressions “means” and “includes”. A “financial debt” means a debtalong with interest, if any, which is disbursed against the considerationfor the time value of money; and it includes the money borrowed orraised or protected in any of the manners prescribed in sub-clauses (a)to (i) of Section 5(8).

41. The larger parts of the expressions employed in the definitionof “financial debt” in sub-section (8) of Section 5 of the Code with theirconnotations were explicated in Pioneer Urban bya three-Judge Benchof this Court; and, in view of the contentions urged, it would beappropriate 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 theCourt is required to be understood in the context of the facts and issuesinvolved therein.

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A41.1. In the case of Pioneer Urban, this Court was concernedwith the challenge to the constitutional validity of amendments made tothe Code pursuant to a report dated 26.03.2018 prepared by theInsolvency and Bankruptcy Law Committee. The amendments wereessentially to the effect of putting the allottees of real estate projectsinto the sect of ‘financial creditors’ and thereby investing them with theBrights and entitlement to trigger the proceedings under Section 7 of theCode against the real estate developers and to be represented in theCommittee of Creditors. In the background of such amendments hadbeen 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 ofCNikhil Mehta and Sons (HUF) v. AMR Infrastructure Limited:(2017) SCC Online NCLAT 859, where it was held that the amountraised by the developers had the commercial effect of a borrowing andthe allottees of such developers were financial creditors within themeaning of Section 5(7) of the Code. The other one had been the orderdated 11.09.2017 passed by this Court in Chitra Sharma (supra) whereby,Da representative of the home buyers was appointed to participate in themeetings of the Committee of Creditors for protection of their interests.Yet another order was passed by this Court on 22.11.2017, on practicallythe same lines, qua another group of builders in the case of BikramChatterjee v. Union of India: 2019 (8) SCC 527. In the wake of suchEorders, the Insolvency Committee Report suggested for amendment tothe Code that ultimately culminated into the Insolvency and Bankruptcy(Second Amendment) Act, 2018. The amendments were made, interalia, with insertion of Explanation to sub-clause (f) of Section 5(8) ofthe Code and with the co-related insertion of sub-section (6A) to Section21 as also with further insertion of Section 25-A in the Code. TheseFamendments were under challenge in Pioneer Urban. Severalcontentions were urged before this Court questioning the treatment ofallottees as financial creditors. In this context and in the wake of suchissues this Court dealt with the contentions related with Section 5(8),particularly sub-clause (f) thereof. The relevant part of the considerationGof this Court in Pioneer Urban under the heading ‘Interpretation ofSection 5(8)(f) of the Code’ needs to be noticed and is extracted asunder:- “66. Section 5(8)(f) of the Code has been set out in the beginningof this judgment. What has been argued by learned counsel onHbehalf of the petitioners is that Section 5(8)(f), as it originally stood, is an exhaustive provision which must be read noscitur asociis, and if so read, sub-clause (f) must take colour from theother clauses of the provision, all of which show that the sine quanon of a “financial debt” is a loan of money made with or withoutinterest, which must then be returned as money. This, accordingto the learned counsel for the petitioners, is clear from even acursory reading of Section 5(8). Secondly, according to learnedcounsel for the petitioners, by no stretch of imagination, could anallottee under a real estate project fall within Section 5(8)(f), as itoriginally stood and the Explanation must then be read prospectivelyi.e. only on and from the date of the Amendment Act. Severalsub-arguments were made on the effect of deeming fictionsgenerally and on the functions of an explanation to a section. Letus address all of these arguments.

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68. Thus, in order to be a “debt”, there ought to be a liability orobligation in respect of a “claim” which is due from any person.“Claim” then means either a right to payment or a right to paymentarising out of breach of contract, and this claim can be madewhether or not such right to payment is reduced to judgment.Then comes “default”, which in turn refers to non-payment ofdebt when whole or any part of the debt has become due andpayable and is not paid by the corporate debtor. Learned counselfor the petitioners relied upon the judgment in Union of India v.Raman Iron Foundry: (1974) 2 SCC 231, and, in particular reliedstrongly upon the sentence reading: (SCC p.243, para 11)

“11....Now the law is well settled that a claim for unliquidateddamages does not give rise to a debt until the liability isadjudicated and damages assessed by a decree or order of acourt or other adjudicatory authority.”

69. It is precisely to do away with judgments such as Raman IronFoundry (supra) that “claim” is defined to mean a right to paymentor a right to remedy for breach of contract whether or not suchright is reduced to judgment. What is clear, therefore, is that adebt 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 anyperson, notwithstanding that there is no adjudication of the saidbreach, followed by a judgment or decree or order. The expression A

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“payment” is again an expression which is elastic enough to include“recompense”, and includes repayment. For this purpose, seeH.P.Housing and Urban Development Authority v. Ranjit SinghRana: (2012) 4 SCC 505 (at paragraphs 13 and 14 therein), wherethe Webster’s Comprehensive Dictionary (International Edn.)Vol. 2 and the Law Lexicon by P. Ramanatha Aiyar (2nd Edn.,Reprint) are quoted.

70. The definition of “financial debt” in Section 5(8)then goes onto state that a “debt” must be “disbursed” against the considerationfor time value of money. “Disbursement” is defined in Black’sLaw Dictionary (10th Edn.) to mean:

“1. The act of paying out money, commonly from a fund or insettlement of a debt or account payable. 2. The money so paid;an amount of money given for a particular purpose.”

71. In the present context, it is clear that the expression “disburse”would refer to the payment of instalments by the allottee to thereal estate developer for the particular purpose of funding thereal estate project in which the allottee is to be allotted a flat/apartment. The expression “disbursed” refers to money whichhas been paid against consideration for the “time value of money”.In short, the “disbursal” must be money and must be againstconsideration for the “time value of money”, meaning thereby,the fact that such money is now no longer with the lender, but iswith the borrower, who then utilises the money. Thus far, it isclear that an allottee “disburses” money in the form of advancepayments made towards construction of the real estate project.We were shown the Dictionary of Banking Terms (2nd Edn.)by Thomas P. Fitch in which “time value for money” was definedthus:

“present value: today’s value of a payment or a stream ofpayment amount due and payable at some specified future date,discounted by a compound interest rate of DISCOUNT RATE.Also called the time value of money. Today’s value of a streamof cash flows is worth less than the sum of the cash flows tobe received or saved over time. Present value accounting iswidely used in DISCOUNTED CASH FLOW analysis.”

That this is against consideration for the time value of money isalso clear as the money that is “disbursed” is no longer with theallottee, but, as has just been stated, is with the real estate developerwho is legally obliged to give money’s equivalent back to theallottee, having used it in the construction of the project, and beingat a discounted value so far as the allottee is concerned (in thesense of the allottee having to pay less by way of instalments thanhe would if he were to pay for the ultimate price of the flat/apartment).

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74. What is clear from what Shri Venugopal has read to us is thata wide range of transactions are subsumed by para (f) and thatthe precise scope of para (f) is uncertain. Equally, para (f) seemsto be a “catch all” provision which is really residuary in nature,and which would subsume within it transactions which do not, infact, fall under any of the other sub-clauses of Section 5(8).

75. And now to the precise language of Section 5(8)(f). First andforemost, the sub-clause does appear to be a residuary provisionwhich is “catch all” in nature. This is clear from the words “anyamount” and “any other transaction” which means that amountsthat are “raised” under “transactions” not covered by any of theother clauses, would amount to a financial debt if they had thecommercial effect of a borrowing. The expression “transaction”is defined by Section 3(33) of the Code as follows:

3. (33) “transaction” includes an agreement or arrangement inwriting for the transfer of assets, or funds, goods or services,from or to the corporate debtor; As correctly argued by the learned Additional Solicitor General,the expression “any other transaction” would include anarrangement in writing for the transfer of funds to the corporatedebtor and would thus clearly include the kind of financingarrangement by allottees to real estate developers when they payinstalments at various stages of construction, so that theythemselves then fund the project either partially or completely.

76. Sub-clause (f) Section 5(8)thus read would subsume within itamounts raised under transactions which are not necessarily loantransactions, so long as they have the commercial effect of a A

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borrowing. We were referred to Collins English Dictionary &Thesaurus (2nd Edn., 2000) for the meaning of the expression“borrow” and the meaning of the expression “commercial”. Theyare set out hereinbelow:

“borrow-vb 1. to obtain or receive (something, such as money)on loan for temporary use, intending to give it, or somethingequivalent back to the lender. 2. to adopt (ideas, words, etc.) fromanother source; appropriate. 3. Not standard. to lend. 4. (intr)Golf. To putt the ball uphill of the direct path to the hole: makesure you borrow enough.”

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“commercial. -adj. 1. of or engaged in commerce. 2. sponsoredor paid for by an advertiser: commercial television. 3. havingprofit as the main aim: commercial music. 4. (of chemicals, etc.)unrefined and produced in bulk for use in industry. 5. a commerciallysponsored advertisement on radio or television.”

77. A perusal of these definitions would show that even thoughthe petitioners may be right in stating that a “borrowing” is a loanof money for temporary use, they are not necessarily right instating that the transaction must culminate in money being givenback to the lender. The expression “borrow” is wide enough toinclude an advance given by the homebuyers to a real estatedeveloper for “temporary use” i.e. for use in the constructionproject so long as it is intended by the agreement to give “somethingequivalent” to money back to the homebuyers. The “somethingequivalent” in these matters is obviously the flat/apartment. Alsoof importance is the expression “commercial effect”.“Commercial” would generally involve transactions having profitas their main aim. Piecing the threads together, therefore, so longas an amount is “raised” under a real estate agreement, which isdone with profit as the main aim, such amount would be subsumedwithin Section 5(8)(f)as the sale agreement between developerand home buyer would have the “commercial effect” of aborrowing, in that, money is paid in advance for temporary use sothat a flat/apartment is given back to the lender. Both parties have“commercial” interests in the same – the real estate developerseeking to make a profit on the sale of the apartment, and the flat/

apartment purchaser profiting by the sale of the apartment. Thusconstrued, there can be no difficulty in stating that the amountsraised from allottees under real estate projects would, in fact, besubsumed within Section 5(8)(f)even without adverting to theexplanation introduced by the Amendment Act.

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79. That this amendment is in fact clarificatory is also made clearby the Insolvency Committee Report, which expressly uses theword “clarify”, indicating that the Insolvency Law Committee alsothought that since there were differing judgments and doubts raisedon whether homebuyers would or would not be included withinSection 5(8)(f), it was best to set these doubts at rest by explicitlystating that they would be so covered by adding an explanation toSection 5(8)(f). Incidentally, the Insolvency Law Committee itselfhad no doubt that given the “financing” of the project by theallottees, they would fall within Section 5(8)(f) of the Code asoriginally enacted.”

41.1.1. It is, therefore, evident that this Court, even whileinterpreting sub-clause (f) of Section 5(8) on the question as to whetheran allottee under a real estate project could fall thereunder, analysed thegamut of the relevant expressions of ‘disbursement’, ‘borrowing’ and‘time value of money’, being the root ingredients of ‘financial debt’ withinthe meaning of the Code.

41.1.2. It is significant to notice that in the case of Pioneer Urban,one line of arguments on behalf of the petitioners, who led challenge tothe amendments, had been that the use of expression “means andincludes” in Section 5(8) was indicative that the provision was exhaustiveand in that position, alien subject-matter such as home buyers could nothave been inserted therein. The decision of this Court in the case ofP. Kasilingam & Ors. v. P.S.G. College of Technology & Ors : (1995)Suppl. 2 SCC 348 was relied upon by the petitioners wherein, thisCourt had rejected an argument that the expression “means and includes”indicated that the definition was inclusive in nature and would also coverthe categories which were not mentioned therein. In P. Kasilingam, thisCourt had said that the use of the word ‘means’ indicates that thedefinition is a hard and fast definition and no other meaning could beassigned to the expression than is put down in the definition. As regards A

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Athe word ‘includes’, this Court said that it enlarges the meaning of theexpression defined so as to comprehend not only such things as theysignify according to their natural import but also those things which theclause declares that they shall include. Further, this Court said that thewords ‘means and includes’, on the other hand, indicate ‘an exhaustiveexplanation’ of the meaning which, for the purposes of the Act, mustBinvariably be attached to these words or expressions. On the other hand,another decision of this Court in Krishi Utapadan Mandi Samiti &Anr v. M/s Shankar Industries & Ors: 1993 Suppl. (3) SCC 361was referred on behalf of the respondents wherein, the Court hadconsidered a definition clause whereby the expression “agriculturalCproduce” was defined to mean such items of produce of agriculture,horticulture, viticulture, apiculture, sericulture, pisciculture, animalhusbandry, or forest as specified in the Schedule and then, the definitionincluded therein admixture of two or more of such items, and furtherincluded any such item in processed form and yet further included specificitems like gur, rub, shakkar, khandsari and jaggery. While examining suchDdefinition in Krishi Utapadan Mandi Samiti, the Court proceeded tosay that under the rules of interpretation, when the words ‘means andincludes’ are used in a definition, they are to be given a wider meaningand are not exhaustive or restricted to the items contained therein. Thisstatement of law in Krishi Utapadan Mandi Samitiwas held by theEthree-Judge Bench of this Court in Pioneer Urban to be not that ofgood law for it ignored the earlier precedents of larger and coordinateBenches and was also out of sync with the later decisions on the samepoint. However, and at the same time, the arguments on behalf of thepetitioners, that sub-clauses (a) to (i) of Section 5(8) of the Code mustnecessarily reflect the fact that the financial debt could only be a debtFdisbursed against the consideration for the time value of money andwhich permeates sub-clauses (a) to (i), was also not accepted as a matterof statutory interpretation while observing that the expression “andincludes” speaks of the subject matter which may not necessarily bereflected in the main part of the definition. These observations of theGCourt, after reproduction of the relevant extracts from the referreddecisions, read as under:

“82. This statement of the law, as can be seen from the quotationhereinabove, is without citation of any authority. In fact, in JagirSingh. v. State of Bihar.: (1976) 2 SCC 942 at paras 11 and 19 to H

21 and Mahalakshmi Oil Mills v. State of A.P.: (1989) 1 SCC164, at paras 8 and 11 (which has been cited in P. Kasilingam :1995 Supp (2) SCC 348) this Court set out definition sectionswhere the expression “means” was followed by some words, afterwhich came the expression “and includes” followed by otherwords, just as in the Krishi Utpadan Mandi Samiti case : 1993Supp (3) SCC 361 (2). In two other recent judgments, BharatCoop. Bank (Mumbai) Ltd. v. Employees Union: (2007) 4 SCC685, at paras 12 and 23 and State of W.B. v. AssociatedContractors : (2015) 1 SCC 32 at para 14, this Court has heldthat wherever the expression “means” is followed by the expression“and includes” whether with or without additional words separating“means” from “includes”, these expressions indicate that thedefinition provision is exhaustive as a matter of statutoryinterpretation. It has also been held that the expression “andincludes” is an expression which extends the definition containedin words which follow the expression “means”. From thisdiscussion, two things follow. Krishi Utpadan Mandi Samiticannot be said to be good law insofar as its exposition on“means” and “includes” is concerned, as it ignores earlierprecedents of larger and coordinate Benches and is out of syncwith later decisions on the same point. Equally, Dr. Singhvi’sargument that clauses (a) to (i) of Section 5(8) of the Codemust all necessarily reflect the fact that a financial debt canonly be a debt which is disbursed against the considerationfor the time value of money, and which permeates clauses(a) to (i), cannot be accepted as a matter of statutoryinterpretation, as the expression “and includes” speaks ofsubject-matters which may not necessarily be reflected inthe main part of the definition.”

41.1.3. In the end, however, this Court rejected the contentionsurged on behalf of the petitioners while accepting other line of submissionson behalf of the respondents that the legislature is not precluded by wayof amendment from inserting words into what may even be an exhaustivedefinition and while observing that an exhaustive definition is exhaustiveonly for the purposes of interpretation of a statute by the Courts. ThisCourt said,- AB

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A“83. In any event, as was correctly argued by learned AdditionalSolicitor General Mrs. Madhavi Divan, the legislature is notprecluded by way of amendment from inserting words into whatmay even be an exhaustive definition. What is an exhaustivedefinition is exhaustive for purposes of interpretation of a statuteby the courts, which cannot bind the legislature when it addsBsomething to the statute by way of amendment. On this scorealso, there is no substance in the aforesaid argument.”

41.1.4. This Court ultimately found that the Explanation wasadded by the Amendment Act only to clarify the doubt that had arisen asto whether home buyers/allottees were subsumed within Section 5(8)(f)Cof the Code. In essence, the amendment in question was interpreted tobe clarificatory in nature so as to put beyond doubt that allottees are tobe regarded as financial creditors within the enacting part of Section5(8)(f) of the Code. The Amendment Act was upheld with this Courtholding as under:D

“96. In the present case, it is clear that the deeming fiction that isused by the Explanation is to put beyond doubt the fact that allotteesare to be regarded as financial creditors within the enacting partcontained in Section 5(8)(f) of the Code.

97. It was also argued that an explanation does not enlarge theEscope of the original section and for this purpose S. SundaramPillai : (1985) 1 SCC 591 was relied upon. This very judgmentrecognises, in para 46, that an explanation does not ordinarily enlargethe scope of the original section. But if it does, effect must begiven to the legislative intent notwithstanding the fact that theFlegislature has named a provision as an explanation. [See HiralalRatanlal v. State of U.P.: (1973) 1 SCC 216 at p. 225, followed inpara 51 of Sundram Pillai]. In any case, it has been found byus that the Explanation was added by the Amendment Actonly to clarify doubts that had arisen as to whetherhomebuyers/allottees were subsumed within Section 5(8)(f).GThe Explanation added to Section 5(8)(f) of the Code bythe Amendment Act does not in fact enlarge the scope ofthe original section as homebuyers/allottees would besubsumed within Section 5(8)(f) as it originally stood as hasbeen held by us hereinabove. As a matter of statutory interpretation,Hthat interpretation, which accords with the objects of the statute

in question, particularly when we are dealing with a beneficiallegislation, is always the better interpretation or the “creativeinterpretation” which is the modern trend of authority, and whichis reflected in the concurring judgment of Eera v. State (NCT ofDelhi) : (2017) 15 SCC 133 paras 122 and 127. This argumentmust, therefore, also be rejected.

98. We, therefore, hold that allottees/homebuyers wereincluded in the main provision, i.e. Section 5(8)(f) with effectfrom the inception of the Code, the explanation being addedin 2018 merely to clarify doubts that had arisen.”

41.1.5. For taking into comprehension the ratio of Pioneer Urban(supra) and for its application to the question at hand, appropriate itwould be to recount the basic principles expounded and explained by athree-Judge Bench in the case of Haryana Financial Corporationand Anr. v. Jagdamba Oil Mills and Anr.: (2002) 3 SCC 496 thatthe observations of the Court in a judgment are always required to beread in the context in which they appear. This Court has said,- “19. Courts should not place reliance on decisions withoutdiscussing as to how the factual situation fits in with the factsituation of the decision on which reliance is placed. Observationsof courts are not to be read as Euclid’s theorems nor as provisionsof the statute. These observations must be read in the context inwhich they appear. Judgments of courts are not to be construedas statutes. To interpret words, phrases and provisions of a statute,it may become necessary for Judges to embark upon lengthydiscussions but the discussion is meant to explain and not to define.Judges interpret statutes, they do not interpret judgments. Theyinterpret words of statutes, their words are not to be interpretedas statutes. In London Graving Dock Co. Ltd. v. Horton : 1951AC 737 (at p. 761) Lord MacDermot observed: (All ER p. 14C-D)

“The matter cannot, of course, be settled merely by treatingthe ipsissima verba of Willes, J., as though they were part ofan Act of Parliament and applying the rules of interpretationappropriate thereto. This is not to detract from the great weightto be given to the language actually used by that mostdistinguished Judge.”

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A20. In Home Office v. Dorset Yacht Co. : (1970) 2 All ER 294Lord Reid said (at All ER p. 297g-h), “Lord Atkin’s speech … isnot to be treated as if it were a statutory definition. It will requirequalification in new circumstances”. Megarry, J. in (1971) 1 WLR1062 observed: “One must not, of course, construe even a reservedjudgment of even Russell, L.J. as if it were an Act of Parliament.”BAnd, in Herrington v. British Railways Board: (1972) 2 WLR537 Lord Morris said: (All ER p. 761c)

“There is always peril in treating the words of a speech or ajudgment as though they were words in a legislative enactment,and it is to be remembered that judicial utterances are made inthe setting of the facts of a particular case.”

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41.1.6. Read as a whole and with reference to its context, it is butclear that in Pioneer Urban this Court has not enunciated that the scopeof the expression ‘financial debt’ be read as if to encompass any debt ofwhatsoever nature. Rather, a submission made therein, with referenceto the decision in Krishi Utapadan Mandi Samiti, that ‘and includes’Epart in a definition may lead to it being extensive, was rejected by thisCourt while holding that the said decision was not a good law. However,the other extreme of submissions, seeking restrictive interpretation withreference to ‘means’ part of the definition, was also not accepted and, inthat context, the Court observed that the expression ‘and includes’ speaksFof subject-matters which may not necessarily be reflected in themain part of the definition. Obviously, there could be several subject-matters which may not, as such, be found squarely manifested in theexpressions employed in the ‘means’ part of a definition and could bereasonably found in the ‘includes’ part. However, it has not been laiddown as a rule of statutory interpretation that the ‘includes’ part couldGstand alone, disjunct from and totally alien to the ‘means’ part.The expressions “means and includes” in the definitionclauses - effect

42. Looking to the frame of the Code, where the significantexpressions “financial creditor” and “financial debt” have been definedH

with the words “means” and “includes”, we may further refer to theprinciples of construction of such a definition clause in a statute. Terselyput, the law remains settled that where a word is defined to ‘mean’something, the definition is prime facie restrictive and exhaustive. Onthe other hand, where the word defined is declared to ‘include’ somethingmore, the definition is prima facie extensive. However, a little difficultyarises when the definition contains both the words ‘means’ and‘includes’[52].

42.1. As noticed, in the case of Pioneer Urban, a suggestionmade on behalf of the respondents with reference to the decision inKrishi Utapadan Mandi Samiti,that when the words ‘means andincludes’ are used in a definition, they are to be given a wider meaningand are not exhaustive or restricted to the items contained therein, wasnot accepted by this Court; and the statement of law in Krishi UtapadanMandi Samiti was held to be not that of good law for it ignored theearlier precedents of larger and coordinate Benches and was also out ofsync with the later decisions on the same point. However, the otherextreme of interpretation, as canvassed by the petitioners, that a financialdebt could only be a debt which is disbursed against the considerationfor the time value of money, and such requirement pervades all sub-clauses (a) to (i), was also not accepted as a matter of statutoryinterpretation by this Court while observing that the expression ‘andincludes’ speaks of subject matters which may not necessarily bereflected in the main part of the definition. Thus, it is evident that thisCourt did not accept either of the extremities suggested by the parties inPioneer Urban for interpretation and implication of the expressions‘means and includes’ in a definition clause of the statute. Significantly, inPioneer Urban, none of the extremities had any bearing on theconclusion because, eventually, the amendment in question was held tobe only clarificatory in nature; and this Court held that the Explanationadded to Section 5(8)(f) of the Code by the Amendment Act did notenlarge the scope of the original Section.

52 Craise on Statue Law ( Seventh Ed.-Indian reprint 1999 page 213) has stated this feature as follows:

There are two forms of interpretation clause. In one, where the word defined isdeclared to “mean” so and so, the definition is explanatory and prima facie restrictive.In the other, where the word defined is declared to “include” so and so, the definition isextensive, e.g. “sheriff” includes “under-sheriff”. Sometimes the definition contains thewords “mean and include”,” which in evitably raises a doubt as to interpretation.

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A42.2. Various features of the process of interpretation while dealingwith such definition clauses were explained by this Court in the case ofDelhi Development Authority v. Bhola Nath Sharma (Dead) by LRs& Ors: (2011) 2 SCC 54 in the following:

“25. The definition of the expressions “local authority” and “personinterested” are inclusive and not exhaustive. The differencebetween exhaustive and inclusive definitions has been explainedin P. Kasilingam v. P.S.G. College of Technology : 1995 Supp(2) SCC 348 in the following words: (SCC p. 356, para 19)

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“19. … A particular expression is often defined by thelegislature by using the word ‘means’ or the word ‘includes’.Sometimes the words ‘means and includes’ are used. The useof the word ‘means’ indicates that ‘definition is a hard-and-fast definition, and no other meaning can be assigned to theexpression than is put down in definition’. (See Gough v. Gough: (1891) 2 QB 665 (CA); Punjab Land Development andReclamation Corpn. Ltd. v. Labour Court : (1990) 3 SCC682, SCC p. 717, para 72.) The word ‘includes’ when used,enlarges the meaning of the expression defined so as tocomprehend not only such things as they signify according totheir natural import but also those things which the clausedeclares that they shall include. The words ‘means and includes’,on the other hand, indicate ‘an exhaustive explanation of themeaning which, for the purposes of the Act, must invariably beattached to these words or expressions’. [See Dilworth v.Commr. of Stamps : 1899 AC 99 (Lord Watson); MahalakshmiOil Mills v. State of A.P. : (1989) 1 SCC 164, SCC p. 170,para 11.] The use of the words ‘means and includes’ in Rule2(b) would, therefore, suggest that the definition of ‘college’ isintended to be exhaustive and not extensive and would coveronly the educational institutions falling in the categories specifiedin Rule 2(b) and other educational institutions are notcomprehended. Insofar as engineering colleges are concerned,their exclusion may be for the reason that the opening andrunning of the private engineering colleges are controlledthrough the Board of Technical Education and Training andthe Director of Technical Education in accordance with thedirections issued by the AICTE from time to time.”

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26. In Bharat Coop. Bank (Mumbai) Ltd. v. Employees Union: (2007) 4 SCC 685 this Court again considered the differencebetween the inclusive and exhaustive definitions and observed:(SCC p. 695, para 23)

“23. … when in the definition clause given in any statute theword ‘means’ is used, what follows is intended to speakexhaustively. When the word ‘means’ is used in the definition… it is a ‘hard-and-fast’ definition and no meaning other thanthat which is put in the definition can be assigned to the same.… On the other hand, when the word ‘includes’ is used in thedefinition, the legislature does not intend to restrict the definition:it makes the definition enumerative but not exhaustive. That isto say, the term defined will retain its ordinary meaning but itsscope would be extended to bring within it matters, which in itsordinary meaning may or may not comprise. Therefore, theuse of the word ‘means’ followed by the word ‘includes’ in[the definition of ‘banking company’ in] Section 2(bb) of theID Act is clearly indicative of the legislative intent to make thedefinition exhaustive and would cover only those bankingcompanies which fall within the purview of the definition andno other.”

27. In N.D.P. Namboodripad v. Union of India : (2007) 4 SCC502 the Court observed: (SCC p. 509, para 18)

“18. The word ‘includes’ has different meanings in differentcontexts. Standard dictionaries assign more than one meaningto the word ‘include’. Webster’s Dictionary defines the word‘include’ as synonymous with ‘comprise’ or ‘contain’.Illustrated Oxford Dictionary defines the word ‘include’ as:(i) comprise or reckon in as a part of a whole; (ii) treat orregard as so included. Collins Dictionary of EnglishLanguage defines the word ‘includes’ as: (i) to have ascontents or part of the contents; be made up of or contain; (ii)to add as part of something else; put in as part of a set, groupor a category; (iii) to contain as a secondary or minor ingredientor element. It is no doubt true that generally when the word‘include’ is used in a definition clause, it is used as a word ofenlargement, that is to make the definition extensive and notrestrictive. But the word ‘includes’ is also used to connote a A

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specific meaning, that is, as ‘means and includes’ or ‘comprises’or ‘consists of’.”

(emphasis in original)

28. In Hamdard (Wakf) Laboratories v. Labour Commr. : (2007)5 SCC 281 it was held as under: (SCC p. 294, para 33)

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“33. When an interpretation clause uses the word ‘includes’,it is prima facie extensive. When it uses the word ‘means andincludes’, it will afford an exhaustive explanation to the meaningwhich for the purposes of the Act must invariably be attachedto the word or expression.”

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42.3. In the case of Black Diamond Beverages & Anr. v.Commercial Tax Office, Central Section, Assessment Wing, Calcutta& Ors.: (1998) 1 SCC 458, while examining a definition that carriedboth ‘means’ and ‘includes’ expressions, this Court pointed out that thenatural meaning of the ‘means’ part of the definition is not narrowedDdown by the ‘includes’ part. This Court extracted the definition in questionand said,- “5. The 1954 Act generally provides for levy of a single-point taxat the first stage on commodities notified under Section 25 of thatAct. On the other hand, the 1941 Act is a general statute providingEfor multipoint levy of sales tax on commodities not covered by the1954 Act. Sub-clause (d) of Section 2 of the 1954 Act reads asfollows:

“2. (d) ‘sale-price’ used in relation to a dealer means the amountof the money consideration for the sale of notified commoditiesFmanufactured, made or processed by him in West Bengal, orbrought by him into West Bengal from any place outside WestBengal, for the purpose of sale in West Bengal, less any sumallowed as cash discount according to trade practice, butincludes any sum charged for containers or other materialsfor the packaging of notified commodities;”

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6. We shall first deal with the contention of the appellants’ counselbased upon the non-inclusion of “freight charges” in the definitionof sale price in Section 2(d) of the 1954 Act.

7. It is clear that the definition of “sale price” in Section 2(d) usesthe words “means” and “includes”. The first part of the definitiondefines the meaning of the word “sale price” and must, in ourview, be given its ordinary, popular or natural meaning. Theinterpretation thereof is in no way controlled or affected by thesecond part which “includes” certain other things in the definition.This is a well-settled principle of construction. Craies on StatuteLaw (7th Edn., 1.214) says:

“An interpretation clause which extends the meaning of a worddoes not take away its ordinary meaning…. Lord Selbornesaid in Robinson v. Barton-Eccles Local Board : (1883) 8AC 798, AC at p. 801:

‘An interpretation clause of this kind is not meant to preventthe word receiving its ordinary, popular, and natural sensewhenever that would be properly applicable, but to enablethe word as used in the Act … to be applied to somethingto which it would not ordinarily be applicable.’ “

Therefore, the inclusive part of the definition cannot prevent themain provision from receiving its natural meaning.”

The essentials for financial debt and financial creditor

43. Applying the aforementioned fundamental principles to thedefinition occurring in Section 5(8) of the Code, we have not an iota ofdoubt that for a debt to become ‘financial debt’ for the purpose of PartII of the Code, the basic elements are that it ought to be a disbursalagainst the consideration for time value of money. It may include any ofthe methods for raising money or incurring liability by the modesprescribed in sub-clauses (a) to (f) of Section 5(8); it may also includeany derivative transaction or counter-indemnity obligation as per sub-clauses (g) and (h) of Section 5(8); and it may also be the amount of anyliability in respect of any of the guarantee or indemnity for any of theitems referred to in sub-clauses (a) to (h). The requirement of existenceof a debt, which is disbursed against the consideration for the time valueof money, in our view, remains an essential part even in respect of anyof the transactions/dealings stated in sub-clauses (a) to (i) of Section5(8), even if it is not necessarily stated therein. In any case, the definition,by its very frame, cannot be read so expansive, rather infinitely wide, AB

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Athat the root requirements of ‘disbursement’ against ‘the considerationfor the time value of money’ could be forsaken in the manner that anytransaction could stand alone to become a financial debt. In other words,any of the transactions stated in the said sub-clauses (a) to (i) of Section5(8) would be falling within the ambit of ‘financial debt’ only if it carriesthe essential elements stated in the principal clause or at least has theBfeatures which could be traced to such essential elements in the principalclause. In yet other words, the essential element of disbursal, and thattoo against the consideration for time value of money, needs to be foundin the genesis of any debt before it may be treated as ‘financial debt’within the meaning of Section 5(8) of the Code. This debt may be of anyCnature but a part of it is always required to be carrying, or correspondingto, or at least having some traces of disbursal against consideration forthe time value of money.

44. As noticed, the root requirement for a creditor to becomefinancial creditor for the purpose of Part II of the Code, there must be aDfinancial debt which is owed to that person. He may be the principalcreditor to whom the financial debt is owed or he may be an assignee interms of extended meaning of this definition but, and nevertheless, therequirement of existence of a debt being owed is not forsaken.

45. It is also evident that what is being dealt with and described inESection 5(7) and in Section 5(8) is the transaction vis-à-vis the corporatedebtor. Therefore, for a person to be designated as a financial creditorof the corporate debtor, it has to be shown that the corporate debtorowes a financial debt to such person. Understood this way, it becomesclear that a third party to whom the corporate debtor does not owe afinancial debt cannot become its financial creditor for the purpose ofFPart II of the Code.

46. Expounding yet further, in our view, the peculiar elements ofthese expressions “financial creditor” and “ financial debt”, as occurringin Sections 5(7) and 5(8), when visualised and compared with the genericexpressions “creditor” and “debt” respectively, as occurring in SectionsG3(10) and 3(11) of the Code, the scheme of things envisaged by theCode becomes clearer. The generic term “creditor” is defined to meanany person to whom the debt is owed and then, it has also been madeclear that it includes a ‘financial creditor’, a ‘secured creditor’, an‘unsecured creditor’, an ‘operational creditor’, and a ‘decree-holder’.HSimilarly, a “debt” means a liability or obligation in respect of a claim which is due from any person and this expression has also been given anextended meaning to include a ‘financial debt’ and an ‘operational debt’.

46.1. The use of the expression “means and includes” in theseclauses, on the very same principles of interpretation as indicated above,makes it clear that for a person to become a creditor, there has to be adebt i.e., a liability or obligation in respect of a claim which may be duefrom any person. A “secured creditor” in terms of Section 3(30) meansa creditor in whose favour a security interest is created; and “securityinterest”, in terms of Section 3(31), means a right, title or interest orclaim of property created in favour of or provided for a secured creditorby a transaction which secures payment for the purpose of an obligationand it includes, amongst others, a mortgage. Thus, any mortgage createdin favour of a creditor leads to a security interest being created andthereby, the creditor becomes a secured creditor. However, when all thedefining clauses are read together and harmoniously, it is clear that thelegislature has maintained a distinction amongst the expressions ‘financialcreditor’, ‘operational creditor’, ‘secured creditor’ and ‘unsecuredcreditor’. Every secured creditor would be a creditor; and every financialcreditor would also be a creditor but every secured creditor may not bea financial creditor. As noticed, the expressions “financial debt” and“financial creditor”, having their specific and distinct connotations androles in insolvency and liquidation process of corporate persons, haveonly been defined in Part II whereas the expressions “secured creditor”and “security interest” are defined in Part I.

47. A conjoint reading of the statutory provisions with theenunciation of this Court in Swiss Ribbons (supra), leaves nothing todoubt that in the scheme of the IBC, what is intended by the expression‘financial creditor’ is a person who has direct engagement in thefunctioning of the corporate debtor; who is involved right from thebeginning while assessing the viability of the corporate debtor; who wouldengage in restructuring of the loan as well as in reorganisation of thecorporate debtor’s business when there is financial stress. In otherwords, the financial creditor, by its own direct involvement in a functionalexistence of corporate debtor, acquires unique position, who could beentrusted with the task of ensuring the sustenance and growth of thecorporate debtor, akin to that of a guardian. In the context of insolvencyresolution process, this class of stakeholders namely, financial creditors,is entrusted by the legislature with such a role that it would look forward A

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Ato ensure that the corporate debtor is rejuvenated and gets back to itswheels with reasonable capacity of repaying its debts and to attend onits other obligations. Protection of the rights of all other stakeholders,including other creditors, would obviously be concomitant of suchresurgence of the corporate debtor.B47.1. Keeping the objectives of the Code in view, the position and

B47.1. Keeping the objectives of the Code in view, the position androle of a person having only security interest over the assets of thecorporate debtor could easily be contrasted with the role of a financialcreditor because the former shall have only the interest of realising thevalue of its security (there being no other stakes involved and least anystake in the corporate debtor’s growth or equitable liquidation) while theClatter would, apart from looking at safeguards of its own interests, wouldalso and simultaneously be interested in rejuvenation, revival and growthof the corporate debtor. Thus understood, it is clear that if the formeri.e., a person having only security interest over the assets of the corporatedebtor is also included as a financial creditor and thereby allowed toDhave its say in the processes contemplated by Part II of the Code, thegrowth and revival of the corporate debtor may be the casualty. Suchresult would defeat the very objective and purpose of the Code, particularlyof the provisions aimed at corporate insolvency resolution.

47.2. Therefore, we have no hesitation in saying that a personEhaving only security interest over the assets of corporate debtor (like theinstant third party securities), even if falling within the description of‘secured creditor’ by virtue of collateral security extended by thecorporate debtor, would nevertheless stand outside the sect of ‘financialcreditors’ as per the definitions contained in sub-sections (7) and (8) ofSection 5 of the Code. Differently put, if a corporate debtor has given itsFproperty in mortgage to secure the debts of a third party, it may lead toa mortgage debt and, therefore, it may fall within the definition of ‘debt’under Section 3(10) of the Code. However, it would remain a debt aloneand cannot partake the character of a ‘financial debt’ within the meaningof Section 5(8) of the Code.GThe respondent mortgagees are not the financial creditorsof corporate debtor JIL

48. Indisputably, the debts in question are in the form of thirdparty security; said to have been given by the corporate debtor JIL so asto secure the loans/advances/facilities obtained by JAL from theHrespondent-lenders. Such a ‘debt’ is not and cannot be a ‘financial debt’

within the meaning of Section 5(8) of the Code; and hence, therespondent-lenders, the mortgagees, are not the ‘financial creditors’ ofthe corporate debtor JIL.

49. Though several decisions have been cited on behalf of therespondent-lenders to contend that they do fall within the definition of‘financial creditor’ but for what has been discussed hereinabove, it doesnot appear necessary to dilate upon all of them. However, it would beappropriate to take note of the relevant decisions strongly relied upon bythe respondents as infra.

50. Much emphasis is laid on behalf of the respondents on theobservations occurring in another three-Judge Bench decision of thisCourt in the case of Essar Steel and predominantly on the observationtherein, that “secured creditors as a class are subsumed in the classof financial creditors”. Again, the decisions of the Court are requiredto be understood with reference to the context. In the case of EssarSteel, the questions before the Court related to the roles of resolutionapplicant, resolution professional and Committee of Creditors constitutedunder the Code and the jurisdiction of Adjudicating Authority as also theAppellate Tribunal in questioning the resolution plans. The constitutionalvalidity of the Insolvency and Bankruptcy (Amendment) Act, 2019 wasalso under challenge. The problem arose essentially with the decision ofNCLAT holding that in a resolution plan, there could be no differenceamongst the creditors in that, a financial creditor and operational creditordeserve equal treatment under a resolution plan. It was in the setup ofsuch background that in Essar Steel, this Court made the observationsrelied upon by the respondents.

50.1. The referred observations in the case of Essar Steel areessentially based on the earlier observations occurring in the case ofSwiss Ribbons. As noticed, the decision in Swiss Ribbons was renderedby this Court when constitutional validity of various provisions of theCode was put to challenge. In Essar Steel, this Court reiterated theenunciations in Swiss Ribbons in paragraph 55 in the following:

“55. Financial creditors are in the business of lending money. TheRBI report on Trend and Progress of Banking in India, 2017-2018reflects that the net interest margin of Indian banks for the financialyear 2017-2018 is averaged at 2.5%. Likewise, the global trendfor net interest margin was at 3.3% for banks in the USA and1.6% for banks in the UK in the year 2016, as per the data published A

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Aon the website of the bank. Thus, it is clear that financial creditorsearn profit by earning interest on money lent with low margins,generally being between 1 to 4%. Also, financial creditors arecapital providers for companies, who in turn are able to purchaseassets and provide a working capital to enable such companies torun their business operation, whereas operational creditors areBbeneficiaries of amounts lent by financial creditors which are thenused as working capital, and often get paid for goods and servicesprovided by them to the corporate debtor, out of such workingcapital. On the other hand, market research carried out by IndiaBrand Equity Foundation, a trust established by the Ministry ofCCommerce and Industry, as regards the Oil and Gas sector, hasstated that the business risk of operational creditors who operatewith higher profit margins and shorter cyclical repayments mustneeds be higher. Also, operational creditors have an immediateexit option, by stopping supply to the corporate debtor, oncecorporate debtors start defaulting in payment. Financial creditorsDmay exit on their long-term loans, either upon repayment of thefull amount or upon default, by recalling the entire loan facilityand/or enforcing the security interest which is a time consumingand lengthy process which usually involves litigation. Financialcreditors are also part of a regulated banking system which involvesEnot merely declaring defaulters as non-performing assets but alsoinvolves restructuring such loans which often results in foregoingunpaid amounts of interest either wholly or partially. All thesedifferences between financial and operational creditors have beenreflected, albeit differently, in the judgment of Swiss Ribbons(supra)…..”

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50.2. In the relevant part, the Court found that NCLAT had fallenin grave error in reading paragraph 77 in Swiss Ribbonsdehors theearlier paragraphs. In that context this Court said,- “56. By reading paragraph 77 de hors the earlier paragraphs, theAppellate Tribunal has fallen into grave error. Paragraph 76 clearlyrefers to the UNCITRAL Legislative Guide which makes it clearbeyond any doubt that equitable treatment is only of similarlysituated creditors.This being so, the observation in paragraph 77cannot be read to mean that financial and operational creditorsmust be paid the same amounts in any resolution plan before it G

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can pass muster. On the contrary, paragraph 77 itself makes itclear that there is a difference in payment of the debts of financialand operational creditors, operational creditors having to receivea minimum payment, being not less than liquidation value, whichdoes not apply to financial creditors. The amended Regulation 38set out in paragraph 77 again does not lead to the conclusion thatfinancial and operational creditors, or secured and unsecuredcreditors, must be paid the same amounts, percentage wise, underthe resolution plan before it can pass muster. Fair and equitabledealing of operational creditors’ rights under the said Regulationinvolves the resolution plan stating as to how it has dealt with theinterests of operational creditors, which is not the same thing assaying that they must be paid the same amount of their debtproportionately. Also, the fact that the operational creditors aregiven priority in payment over all financial creditors does not leadto the conclusion that such payment must necessarily be the samerecovery percentage as financial creditors. So long as the provisionsof the Code and the Regulations have been met, it is thecommercial wisdom of the requisite majority of the Committee ofCreditors which is to negotiate and accept a resolution plan, whichmay involve differential payment to different classes of creditors,together with negotiating with a prospective resolution applicantfor better or different terms which may also involve differencesin distribution of amounts between different classes of creditors.

57. Indeed, by vesting the Committee of Creditors with thediscretion of accepting resolution plans only with financial creditors,operational creditors having no vote, the Code itself differentiatesbetween the two types of creditors for the reasons given above.Further, as has been reflected in Swiss Ribbons (supra), mostfinancial creditors are secured creditors, whose security interestsmust be protected in order that they do not go ahead and realisetheir security in legal proceedings, but instead are incentivised toact within the framework of the Code as persons who will resolvestressed assets and bring a corporate debtor back to its feet. ShriSibal’s argument that the expression “secured creditor” does notfind mention in Chapter II of the Code, which deals with theresolution process, and is only found in Chapter III, which dealswith liquidation, is for the reason that secured creditors as a classare subsumed in the class of financial creditors, as has been held AB

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Ain Swiss Ribbons (supra). Indeed, Regulation 13(1) of the 2016Regulations mandates that when the resolution professional verifiesclaims, the security interest of secured creditors is also looked atand gets taken care of….”

50.3. While strongly relying upon one of the observations occurringBin Essar Steel, that secured creditors as a class are subsumed in theclass of financial creditors, learned counsel for the respondents wouldassert that secured creditors do become financial creditors. Thesubmission remains untenable for more than one reason. First, thesubmission itself proceeds on the same shortcoming as was existing inthe NCLAT’s decision that was disapproved by this Court in Essar SteelCi.e., reading of a line in a judgment disjunct from the context. Secondly,in the decisions above-referred, this Court has never expanded the scopeof ‘financial debt’ as envisaged by Section 5(8) of the Code. Thirdly, thecase of an indirect secured creditor i.e., the person having in its handonly the security interest over the property of the corporate debtor butDwith no corresponding involvement in the finances and growth of thecorporate debtor, was never under consideration in the said decisions.

50.4. We may usefully elaborate a little. On a contextual readingof the expositions in Essar Steel and Swiss Ribbons, it is but clear thatthe Court had examined the status of direct secured creditor of theEcorporate debtor and there had not been any occasion to examine thefeatures related with an indirect secured creditor, who is neither involvedin assessing the viability of the corporate debtor nor in lending financesto the corporate debtor for setting up the business. As noticed, the prime,rather only, area of interest of such indirect secured creditor is in recoveryof its debt and not in reorganization of the corporate debtor’s business.FThus understood, it is absolutely clear that the class of secured creditorsindicated by this Court in Essar Steel and Swiss Ribbons, as beingsubsumed in financial creditors, is only that of such secured creditorswho are directly engaged in advancing credit to the corporate debtorand not the indirect creditors who had extended any loan or facility to aGthird party but had taken a security from the corporate debtor, whoseresolution is under consideration.

50.5. Hence, we are undoubtedly of the view that the decisions inSwiss Ribbons and Essar Steel do not enure to the benefit of therespondents; rather on the principles enunciated therein, they only operateHagainst the respondents.

51. The case of Smt. Kusum (supra) has also been repeatedlyreferred by the respondents in support of their contentions that becauseof the transactions of mortgage, the corporate debtor JIL owes them themortgage debt as a guarantee obligation and hence, it falls within theambit of ‘financial debt’ within the meaning of Section 5(8) of the Code.

51.1. We may have a close look at the relevant background aspectsof the said case of Smt. Kusum. Therein, the appellant-bank hadadvanced a loan to the firm of which, husband of the respondent wasthe proprietor. The respondent had executed an agreement in favour ofthe appellant-bank to the effect that so long as her husband’s firm wasindebted to the bank, she would execute, by way of collateral security, alegal mortgage of the immoveable property, being a flat belonging to her,with or without possession, in favour of the bank within 14 days ofissuance of written requisition for such execution. Later on, when thebank called upon the respondent to execute the mortgage as per theagreement, she declined to do so and hence, a suit for specificperformance and in the alternative for damages was filed by the appellant-bank. The Trial Court, however, dismissed the suit while holding, interalia, that the agreement in question was without consideration. The suitwas dismissed on certain other grounds too with which we are notconcerned herein.

51.2. In appeal by the bank, the High Court, while holding thatthe agreement to create a mortgage was specifically enforceable,proceeded to examine the question as to whether the promise to createmortgage, if given by a third party and not by the borrower, is forconsideration and is valid. The High Court held that by making thepromise, the respondent had agreed to provide collateral security andthereby to discharge the liability to a third party in case of his default.The Court observed that such guarantee was limited to the securityoffered and no personal liability by the promisor; and thus, the promisorbecame a surety and referred to Sections 126, 127 and 128 of the ContractAct.

51.3. With reference to Section 128 of the Contract Act, the Courtpointed out that the liability of a surety is ordinarily coextensive with thatof the debtor but in the case at hand, such liability of the surety was asotherwise provided by the contract; and such liability of the respondentwas to the extent of securing the dues by creation of mortgage. TheCourt said that as the principal debtor could create a mortgage of his A

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Aimmoveable property, a third person could also agree to create a mortgageso as to secure the dues of the principal debtor. As regards theconsideration, the Court said that though no direct consideration hadflowed from the appellant to the respondent but, in such tripartiteagreement, anything done for the benefit of the principal debtor issufficient consideration to the surety for giving guarantee. For theirBrelevance, we may notice the relevant parts of paragraphs 12,13,14,17and 21 of the said decision in Smt. Kusum as follows:- “12.The next question that arises is whether such promise to createa mortgage, if given by a third party and not by the borrower orthe principle debtor, is for consideration and is valid. The learnedtrial Judge has held that for creating mortgage, the mortgagormust be a debtor and must have right to redeem mortgage onpayment of the debt and since the present defendant was not thedebtor, she could not create a mortgage in respect of that debtand that the mortgagor should be a debtor and there must be arelationship of debtor and creditor, the mortgage being a securityfor the debt. The learned trial Judge has also held that there wasno consideration for giving this promise of executing the mortgage.Both these aspects are interrelated. By making the promise byEx. 20, defendant has agreed to provide collateral security of alegal mortgage to secure repayment of all the moneys due fromNitin Pharmaceuticals. Thus, the defendant has promised todischarge the liability of a third person (the debtor) in case of hisdefault. This guarantee is limited to the security offered by thepromisor, namely, the mortgage and no further personal liability istaken by the promisor. Thus, the promisor has became a suretyand this would be an agreement to offer security for dueperformance of that promise and to that extent. Sections 126, 127and 128 of the Contract Act read as follows:

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13. The liability of the surety is co-extensive with that of - thedebtors. However, in the present case, the liability of the surety isas otherwise provided by the contract Ex. 20. Therefore, theliability of the defendant is as provided in the agreement and tothat extent of securing dues by a creation of mortgage, no personalliability is accepted by the surety. It is, therefore, fallacious to saythat the defendant is not a debtor and, therefore, the defendant G

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could not have created a mortgage in favour of the creditor. Thedefendant has rendered himself liable to the dues of NitinPharmaceuticals by agreeing to provide security in the form ofmortgage for the dues. Just as the principal debtor can create amortgage of his immovable properties, a third person can alsoagree to create a mortgage so as to secure the dues of the principaldebtor. In that manner, he becomes a surety to the extent of thesecurity or the mortgage. If that were not so, the presentcommercial and banking transactions would not be possible andwould be hampered to a great extent. In the present day world ofcommerce, a person may not have sufficient security to offer forobtaining advances from financial institutions even though satisfyingthe requirements. In such cases, he draws upon resources of othersby asking them to give guarantee and also security for theperformance of that guarantee and it is a perfectly legitimatedand legal way of conducting such commercial transactions. Infact, Chapter VIII of the Contract Act deals with indemnity andguarantee and provides for this kind of tripartite arrangement.

14. As regards consideration, it is true that no direct considerationhas flowed from the plaintiff to the defendant who has made thepromise to create a mortgage. But in such tripartite arrangement,anything done for the benefit of the principal debtor is a sufficientconsideration to the survey for giving guarantee as expresslyprovided in Section 127 of the Contract Act. Thus, even thoughthere is no consideration to the third party-surety for mortgages,the consideration of having done anything for the benefit of theprincipal debtor is a sufficient consideration.

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17. In the present case, the consideration that anything done forthe benefit of the principal debtor is a sufficient consideration tothe surety. Anything done in the present case is that the loansadvanced to the principal debtor who is the husband of the presentdefendant. She has agreed to give collateral security to securethe dues in default of payment by her husband. Apart from theclose relationship of husband and wife, there is substantialconsideration by having advanced the loan.************

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21. Thus, the plaintiff not enforcing the claim against the principaldebtor or even the third person may be sufficient consideration bythe debtor or third person to give security for the debt and theconsideration for such promise is that by such forbearance, thecreditor is delayed and the debtor or third party is benefited. It isalso seen that even in absence of express promise to forbear, asimple forbearance from enforcing the claim can be held to havebeen implied in the present case. This promise and agreementwas given in 1975 and it is clear that thereafter for two years, theclaim was not pressed which shows that there is actual forbearanceagainst the principal debtor after this Ex. 20 was executed. Thus,even under the English Law, this consideration is held to be goodand sufficient consideration. Under Indian Law, which issignificantly different from English Law of Contract, pastconsideration or the consideration towards third person is statutorilyheld to be good consideration as defined in Section 2(d) and asmentioned in Section 127 of the Contract Act. The observation ofthe learned trial Judge that as the husband of the defendant had topay Rs. 5 lacs to the plaintiff, the writing Ex. 20 which issubsequently obtained is without consideration, is patentlyerroneous. In the present case, it is amply clear that the principaldebtor was a defaulter in meeting his financial obligations to thebank and the bank had noticed the irregularities in his accountsand the, bank could have proceeded against the principal debtorto effect recovery. At that stage, at the instance of the principaldebtor-husband, wife comes forward and agrees to give collateralsecurity obviously to secure forbearance against the principaldebtor. Thus, at the desire of the promisor (defendant) the bankhas abstained from enforcing its claim against the principal debtorand has forborne itself from suing the husband. Such forbearanceis sufficient and valid consideration for the promise made by thedefendant to agree to create mortgage and give collateral security.The learned Trial Judge is in error in observing that “an act doneat the desire of third party is not a consideration.” It must, therefore,be held that the suit agreement Ex. 20 is for sufficient and validconsideration and is valid and enforceable.”

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51.4. The said decision in Smt. Kusum, at best, leads to the positionthat a promise to create a mortgage, even if given by a third party andHnot by the borrower would be deemed to be for consideration; that even if no direct consideration had flown from the plaintiff to the defendantwho made the promise to create the mortgage, anything done for thebenefit of the principal debtor would be sufficient consideration to thesurety for giving guarantee as provided under Section 127 of the ContractAct. When the creditor abstained from enforcing the claim against theprincipal debtor because of such promise to create mortgage by thedefendant, such forbearance was held to be sufficient and validconsideration. It is difficult to stretch the ratio of the said decision so asto be applied to the issue at hand concerning the definition of “financialdebt” under Section 5(8) of the Code, which conspicuously omitsmortgage; and which requires “disbursement” against “the considerationfor the time value of money” as the lead elements. As said, the respondent-lenders of JAL, while holding the mortgages in their hands, as said tohave been executed by the corporate debtor JIL, may be carrying asecurity interest and may be the creditors who may claim to be fallingwithin the terminology ‘secured creditors’, yet cannot become ‘financialcreditors’ of the corporate debtor JIL who is not owing any ‘financialdebt’ to them. The decision in Smt. Kusum does not make out a case infavour of the respondents, the lenders of JAL.

52. Another decision forming the mainstay of the respondentshad been that in the case of Rajkumari Kaushalya Devi (supra). Therelevant background aspects of the said case had been that the appellanthad executed two usufructuary mortgages with respect to the twoproperties situated in Feroozepore city in favour of the respondent whilealso taking the same property on lease on the very same date in 1946.On default in effecting payments by the appellant, the respondents filedan application under Section 13 of the Displaced Persons (DebtsAdjustment) Act 70 of 1951[53] seeking recovery of the principal amounttogether with arrears of rental. While omitting other aspects which maynot be relevant, noticeable it is for the present purpose that one of thepoints for consideration in the case had been as to whether the liabilitycreated under the said mortgage was a ‘debt’ within the meaning ofSection 2(6) of the Act 70 of 1951. It was contended on behalf of theappellant that such liability under the mortgage was not a pecuniaryliability and, therefore, Section 2(6) did not apply to a mortgage debt.

52.1. The argument aforesaid was rejected by this Court aftertaking note of the definition of ‘debt’ as occurring in the said enactment.

53 ‘Act 70 of 1951’ for short

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AThe principal part of the said definition, relevant for the present purposeread as under:- “ ‘Debt’ means any pecuniary liability, whether payable presentlyor in future, or under a decree or order of civil or revenue court orotherwise, or whether ascertained or to be ascertained, which—

B***

******”

52.2. This Court, inter alia, observed, with reference to thedefinition aforesaid as occurring in Act 70 of 1951 and the definition of‘mortgage’ as occurring in the Transfer of Property Act, as under:

C“3….The main contention of the appellant in this connection isthat a mortgage debt is not a pecuniary liability and thereforedoes not fall within the definition of debt at all. We are of opinionthat there is no force in this contention. The words “pecuniaryliability” will cover any liability which is of a monetary nature.Now the definition of a mortgage in Section 58 of the Transfer ofDProperty Act 4 of 1882, shows that though it is the transfer of aninterest in specific immovable property, the purpose of the transferis to secure the payment of money advanced or to be advancedby way of loan or to secure an existing or future debt or theperformance of an engagement which may give rise to a pecuniaryEliability. The money advanced by way of loan, for example, whichis secured by a mortgage, obviously creates a pecuniary liability.It is true that a mortgage in addition to creating the pecuniaryliability also transfers interest in the specific immovable propertyto secure that liability; none the less the loan or debt to securewhich the mortgage is created will remain a pecuniary liability ofFthe person creating the mortgage. Therefore a mortgage debtwould create a pecuniary liability upon the mortgagor and wouldbe covered by the definition of the word “debt” in Section 2(6)….”

52.3. The proposition aforesaid, being related with the definitionof ‘debt’ as occurring in the said enactment (Act 70 of 1951), cannotGhave a direct application in the present case. In any event, the saiddecision cannot be taken as an authority governing the transaction wherethere is no direct debt of the mortgagor himself.

53. The other citations, on various terminologies related withmercantile law and mortgage transactions, do not advance the cause ofHthe respondents because of distinct and rather peculiar requirements of

Section 5(8) of the Code. Of course, the decision of NCLAT in SREIInfrastructure Finance Limited (supra) stands disapproved for whatwe have held hereinabove. Equally, the other submissions about thecontents of the documents in question as also the entitlement ofrespondent-lenders to invoke the security or to take up the proceedingsunder SARFAESI Act etc. do not, in any event, make the transactions inquestion ‘financial debts’ within the meaning of Section 5(8) of the Code.Such submissions have only been noted to be rejected.

Summation on second issue

54. For what has been discussed hereinabove, on the issue as towhether lenders of JAL could be treated as financial creditors, we holdthat such lenders of JAL, on the strength of the mortgages in question,may fall in the category of secured creditors, but such mortgages beingneither towards any loan, facility or advance to the corporate debtor nortowards protecting any facility or security of the corporate debtor, itcannot be said that the corporate debtor owes them any ‘financial debt’within the meaning of Section 5(8) of the Code; and hence, such lendersof JAL do not fall in the category of the ‘financial creditors’ of thecorporate debtor JIL.

Conclusion

55. Accordingly, and in view of the above, these appeals are allowedto the extent and in the manner that:

1) The impugned order dated 01.08.2019 as passed by NCLAT inthe batch of appeals is reversed and is set aside.

2) The appeals preferred before NCLAT against the order dated16.05.2018, as passed by NCLT on the application filed by IRP, aredismissed; and consequently, the order dated 16.05.2018 so passed byNCLT is upheld in regard to the findings that the transactions in questionare preferential within the meaning of Section 43 of the Code. Thedirections by NCLT for avoidance of such transactions are also upheldaccordingly.

3) The appeals preferred before NCLAT against the orders passedby NCLT dated 09.05.2018 and 15.05.2018 on the applications filed bythe lender banks are also dismissed and the respective orders passed byNCLT are restored with the findings that the applicants are not thefinancial creditors of the corporate debtor Jaypee Infratech Limited.

A

B

C

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E

F

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H

AAcknowledgement

56. While closing on these appeals, we put on record our thanksand compliments to the learned counsel for the respective parties asalso their associates and researchers for erudite and scholarly presentationof their respective view-points, in oral as also in written submissions andBin rendering invaluable assistance to the Court in dealing with the vastvariety of questions involved in these matters.

Kalpana K. Tripathy

Appeals allowed

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F

G

H