ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE INFRATECH VS AXIS BANK LTD. : CASE SUMMARY
The Supreme Court in Anuj Jain Interim Resolution Professional for Jaypee Infratech Vs Axis Bank Ltd (2021 ) 2 SCC 799 held that mortgage transactions of the Corporate Debtor with lenders of its holding company Jaiprakash Associates Ltd (JAL) are preferential transaction under Section 43 of the IBC. The Supreme Court also held that disbursement against consideration of time value of money is essential element of Financial Debt.
FACTS OF THE CASE
JAL is a public listed company with more than 5 lakh individual shareholders. In 2003, JAL was awarded right to construct expressway from NOIDA to Agra. A concession agreement was entered into with Yamuna Expressway Industrial Development Authority. Jaypee Infratech Limited (JIL) was set up as special purpose vehicle. Finance was obtained from consortium of banks against partial mortgage of land acquired and a pledge of 51% of shareholding held by JAL. Housing Plans were envisaged for construction of real estate projects at two places of the land acquired – wish town, NOIDA and Mirzapur.
IDBI Bank filed Application under Section 7 of the Code for initiating CIRP against JIL for committing a default of Rs. 525.11 Crore. On 09.08.2019, the NCLT admitted the Application.
The Corporate Debtor has created several security interest in favour of lenders of JAL i.e. – (i) mortgage deed dated 29.12.2016 for 167.229 acres in favour of Axis Trustee Services Limited to provide an additional security for term loans of Rs. 21081.5 crore sanctioned by consortium to JAL (ii) another mortgage deed dated 29.12.2016 for 167.9615 acres favour of Axis Trustee Services Limited (iii) mortgage deed dated 07.03.2017 for 158.1739 acres executed by JIL in favour of IDBI Trustee-ship Services Ltd for term loan of Rs. 1200 Crores granted by ICICI Bank to JAL (iv) mortgage deed dated 07.03.2017 for 151.0039 acres executed by JIL in favour of IDBI Trustee-ship Services Ltd for term loan of Rs. 1200 Crores granted by ICICI Bank to JAL (v) Mortgage deed dated 24.05.2016 for 25.0040 acres of land (Property No. 5) executed by JIL in favour of IDBI Trustee-ship Services Limited, as additional security against the facility agreement dated 29.08.2012 between Standard Chartered Bank and JAL for Rs.400 crores and other facilities, respectively for Rs.450 crores, Rs.538.16 crores and Rs.81.84 crores as also for working capital facility of Rs.297 crores (vi) 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 Loan Facility to JAL to the tune of Rs.1000 crores.
The Interim Resolution Professional filed Application under Section 66, 43 and 45 of IBC before NCLT for declaring transaction fraudulent, preferential and undervalued which was allowed by NCLT. An appeal was filed before the NCLAT, which set aside order of the NCLT and allowed the appeal.
FINDINGS OF THE SUPREME COURT
The Supreme Court decided two major issues in this matter – (i) whether the transaction is a preferential transaction under Section 43 ? (ii) Whether Lenders of JAL could be categorized as Financial Creditors ?
Whether transaction is a preferential transaction under Section 43 ?
The Supreme Court noted that Section 43 occurs in Chapter III of Part II which deals with liquidation process, but it equally operates over Corporate Insolvency Resolution Process.
The Supreme Court while analyzing Section 43 observed that Corporate Debtor is deemed to have given preference at a relevant time if (i) the transaction is of transfer of property or the interest thereof of the Corporate Debtor, for the benefit of the Creditor or surety or guarantor for or on account of antecedent financial debt or operational debt or other liability (ii) Such transfer has the effect of putting such creditor or surety or guarantor in a beneficial position that it would have been in the event of distribution of assets in accordance with Section 53, (iii) preference is given either during the period of two years preceding the insolvency commencement date when beneficiary is a related party or during period of one year preceding insolvency commencement date when beneficiary is a unrelated party.
The Supreme Court observed that one of the purposes of deeming provisions is to deem what may be or may not be in reality, thereby requiring the subject matter to be real. Any transactions which answer to the descriptions contained in 43 (2) and (4) is presumed to be preferential transaction at a relevant time even though it may not be so in reality and will incur consequences under Section 44.
Deemed preference may not be offending preference it falls into any or both of the exclusions provided by sub-seciton 3 i.e. having entered into during ordinary course of business of the Corporate Debtor or transferee or resulting in acquisition of new value of Corporate Debtor.
The Supreme Court observed that for determining whether a transaction falls within ambit of Section 43, following questions have to be asked.
(i) Whether such transfer is for the benefit of a creditor or a surety or a guarantor?
(ii) Whether such transfer is for or on account of an antecedent financial debt or operational debt or other liabilities owed by the Corporate Debtor ?
(iii) Whether such transfer has effect of putting such creditor or surety or guarantor in a beneficial position that it would have been in the event of distribution of assets being made in accordance 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 made during the period of two years preceding the insolvency commencement date and if such transfer had been for the benefit of an unrelated party as to whether the same was made during the period of one year preceding the insolvency commencement date ?
(v) Whether such transfer is not an excluded transaction in terms of sub-section (3) of Section 43 ?
The mortgage deeds in question, entered by the corporate debtor JIL to secure the debts of JAL, obviously, amount to creation of security interest to the benefit of JAL.
The Supreme Court observed that JIL is holding company of the Corporate Debtor having equity shareholding of 71.64%. JAL is also operational creditor of JIL for an amount of approximately Rs. 261.77 Crore. JAL itself maintains that it had been providing financial, technical and strategic support to JIL in various ways. It is the assertion that apart from making investment in terms of equity shareholding to the tune of Rs. 995 crores, JAL had pledged its 70,83,56,087 equity shares held in JIL in favour of the lenders of JIL; had also entered into Promoter Support Agreement to the lenders of JIL to meet the DSRA obligation of JIL towards its lenders; and had further extended Bank Guarantees of Rs. 212 crores to meet the DSRA obligation of JIL. These assertions, in our view, put JAL in such capacity that it is a related party to JIL and is a creditor as also surety of JIL. In other words, the corporate debtor JIL owed antecedent financial debts as also operational debts and other liabilities towards JAL.
The Supreme Concluded that the corporate debtor JIL has given a preference by way of the mortgage transactions in question for the benefit of its related person JAL (who has been the creditor as also surety for JIL) for and on account of antecedent financial debts, operational debts and other liabilities owed to such related person.
The Supreme Court observed that JAL is a related party as look back period will be two years preceding insolvency commencement date which is 09.08.2017 is this case. Transactions starting from 10.08.2015 up to 09.08.2017 will fall under the scanner. It has been contended that most of properties had been already under mortgage and only re-mortgage has been done. The Supreme Court observed that once mortgage is released it ceases to exist. Re-mortgage can only be treated as fresh mortgage. The Supreme Court observed that these mortgages have been created within look back period.
Whether Lenders of JAL could be categorized as Financial Creditors ?
It is the financial creditor who lends finance on term loan or for working capital that enables a Corporate Debtor to set up or operate business. Financial Creditor from the very beginning is involved in assessing the viability of the Corporate Debtor and engage in restructuring of loan as well as reorganization of Corporate Debtor’s business when there is financial stress. Thus, Financial Creditor is not only about in terrorem clauses for repayment of dues but also nursing roles too.
The Supreme Court observed that the basic element of Financial Debt is that it ought to be disbursal against the consideration of time value of money. The requirement of existence of debt which is disbursed against the consideration of time value of money remain an essential part even in respect of any of the transactions/dealings stated in sub-clauses (a) to (i) of Section 5 (8) even if it is not necessarily stated therein.
A person only having security interest over assets of the Corporate Debtor, even if falling within description of “secured creditor” by virtue of collateral security extended by Corporate Debtor would stand outside category of Financial Creditor.
The Supreme Court held that debts in question are in form of third party security given by the Corporate Debtor to secure the loan/advances/facilities obtained by JAL from the respondent lenders. Such debt cannot be a “financial debt” within meaning of Section 5 (8) of the Code and hence mortgagees are not Financial Creditors of the Corporate Debtor.
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Mukesh Kumar Suman is an advocate and legal author based at Delhi. He regularly appears before various Judicial Forums including NCLT, NCLAT, High Courts and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.