CHINA DEVELOPMENT BANK VS. DOHA BANK Q.P.S.C. : CASE SUMMARY

The Supreme Court in China Development Bank Vs Doha Bank Q.P.S.C. (Civil Appeal No. 7298/2022) held that held that that Appellants, in favor of whom  Corporate Debtor has executed guarantee, were Financial Creditors. The Supreme Court also observed that for submitting claim by a Financial Creditor, there is no requirement of actual default.

FACTS OF THE CASE

Doha Bank was lender and secured creditor of Reliance Infratel  Ltd (RITL). CIRP was initiated against RITL.

Deed of Hypothecation (DOH) was executed between the Appellants and each of R Com entities (Reliance Communications Infrastructure Ltd (RCIL)., Reliance Communication Ltd (RCL), Reliance Telecom Ltd.  (RTL) and Reliance Infratel Ltd (RITL)  whereby a charge was created by RCom entities over their property for securing repayment of the facilities advanced by Appellants. RCom entities agreed to provide their assets as security and further undertook to pay any shortfall of debts owed by each of the RCom entities. All the RCom entities pooled their resources to provide security for the facilities availed by any of the entities ensuring that each entity was individually liable to pay the debt of all the entities. In terms of DOH, if there was any default by any entity, all the R Com entities were liable to make good the shortfall in recovery of the amounts after realization of hypothecated assets.

Appellants filed their claims in the category of Financial Creditors, which were admitted. Appellants were made part of CoC.

Doha Bank challenged before NCLT  treatment of Appellants  as Financial Creditors as they were not direct lenders but only deed of hypothecation has been executed by them. 

During pendency of the Application, Resolution Plan was approved without determining the application of Doha Bank. Resolution Plan was challenged before the NCLAT wherein the NCLAT directed NCLT for determination of Application of Doha Bank. NCLT held them as Financial Creditors. NCLAT reversed the order of the NCLT and held that they are not Financial Creditors as  only object of DOH was to create a charge on property of the Appellants  and they can not be treated as Financial Creditors.

The Appellants filed appeal before the Supreme Court.

FINDINGS OF THE SURPEME COURT

The Supreme Court observed that Appellants had vested authority in Security Trustee by executing Master Security Trustee Agreement (MSTA) to execute hypothecation deed with Appellants. Under the MSTA, Appellants were original lenders, who were also  treated as secured lenders. R. Com entities are shown as chargors. The Chargors executed Deed of Hypothecation in favour of Secured Trustee.

The issue before the Supreme Court was whether Corporate Debtor is a guarantor who has guaranteed the repayment of loan amount by the borrowers of the appellant.

Appellants had advanced credit facility to other R Com entities ( R Com and RTL) but no credit facility has been advanced to the RTIL (Corproate Debtor).

The Supreme Court observed that the Appellants claimed their case of being Financial Creditor under Section 5 (8) (i) IBC which provides that  the amount of any liability in respect of any guarantee of the items referred to in clauses (a) to (h) becomes financial debt. It was contended that when Section 5 (8) (i) is applicable, it is not necessary that the Financial Creditor tenders any amount to the Corporate Debtor. It was contended that the amount of liability covered by clause (i) is in respect of money borrowed by the RCom. entities (excluding Corporate Debtor) against payment of interest under facility agreements. There is no dispute that facilities were granted by the appellants to RCom entities. The amount of any liability in respect of any of the guarantees for money borrowed against the payment of interest is a financial debt under Section 5 (8) of IBC.

The Supreme Court observed that the name of the document is not a decisive factor. Only because the title of the document contains the word hypothecation, it can not be concluded that the guarantee is not a part of this document. The Security Trustee has been appointed to act as trustee for the benefit of secured parties which included Secured Lenders. The Secured Lenders have authorized and directed the Security Trustee to execute and deliver security documents to which the Security Trustee is to be a party and to accept the security, all related deeds and documents as may be required to be submitted by the Obligors for the benefit of secured parties. It was duty of the Security Trustee to enforce the security in accordance with the provisions of the agreement and to receive and apply all money in accordance with the security documents. Therefore, the Secured Lenders have authorized the Security Trustee to accept the security on their behalf.

The Supreme Court noted that under deed of hypothecation all four RCom entities, including Corporate Debtor, hypothecated assets by way of first ranking pari passu charge to Security Trustee, who was in trust and for the benefit of the secured parties for the purpose of securing due discharge of the Obligor’s obligations in connection with secured facilities. The Security Trustee acted on behalf of the appellants by accepting the security of hypothecation.  Therefore, the DOH is a document on behalf of the appellants.  The effect of  DOH is that for the discharge of liabilities of the R Com entities, all four R Com entities hypothecated their properties for securing repayment of the facilities extended by the appellants to RCom and RTL.

Deed of Hypothecation provides that in the event of default committed by the borrowers ( in the case of the appellants, the borrowers are R Com and RTL), the Security Trustee is entitled to take charge and/or possession of seize, recover, receive and remove the hypothecated goods and/or sell by public auction or private contract, dispatch or consign for realization or otherwise despose of or deal with any part of the hypothecated property. The security of hypothecation can be enforced by the Security Trustee on behalf of the appellants.  The DOH further provided that each of the Chargors agree to accept the Security Trustee’s account of sales and realization as sufficient proof of the amount realized and relative expenses and to pay on demand by the Security Trustee and/or receiver any shortfall or deficiency thereby shown. Under the DOH, even the Corporate Debtor hypothecated its goods. If after the sale of hypothecated assets, there is any shortfall in discharge of the liabilities of R Com or RTL, the Corporate Debtor is under an obligation to pay the shortfall or deficiency.  It is indicated that RITL (Corporate Debtor), who is not the borrower of the appellants, agreed to discharge the liability of the third parties ( R Com and RTL) to the appellants in the case of the default of R Com and RTL, which amounts to a guarantee provided by the Corporate Debtor to the appellants in terms of Section 126 of the Contract Act.

The Supreme Court observed that the definition of “default” becomes relevant only while invoking the provisions of Section 7 (1) of the IBC when the CIRP is sought to be initiated by the Financial Creditor.  For submitting  claim by a Financial Creditor, there is no requirement of actual default.

The Supreme Court observed that no creditor can recover any dues from the Corporate Debtor during moratorium, but still a creditor can filed its claim.

The Supreme Court set aside the judgment of NCLAT and affirmed the judgment of NCLT.

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