No Requirement U/S 5(8) IBC That There Can Be A Debt Only When There Is A Default: Supreme Court
The Supreme Court, in a recent Judgment, observed that there is no requirement under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (IBC) that there can be a debt only when there is a default.
The Court was deciding a batch of Civil Appeals preferred by the China Development Bank and others against the Judgment of the National Company Law Appellate Tribunal (NCLAT).
The two-Judge Bench of Justice Abhay S. Oka and Justice Pankaj Mithal held, “… under Section 3(12), ‘default’ has been defined. This 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. Section 7(1) provides that a Financial Creditor can initiate CIRP against the Corporate Debtor when there is a default on the part of the Corporate Debtor. There is no requirement under Section 5(8) of the IBC that there can be a debt only when there is a default. The moment it is established that the financial debt is owed to any person, he/she becomes a Financial Creditor.”
The Bench said that a public announcement of CIRP (Corporate Insolvency Resolution Process) under Section 15(1) must contain the last date of submission of claims as may be specified and thus, if a person has a claim within the meaning of Section 3(6), he can submit it on public announcement contemplated by Section 15 being made.
“A Financial Creditor has a claim as explained earlier. Therefore, for submitting the claim by a Financial Creditor, there is no requirement of actual default”, it added.
Senior Advocates Neeraj Kishan Kaul and Chetan Kapadia appeared for the Appellants while Senior Advocates P. Chidambaram and Darius Khambata appeared for the Respondents.
In this case, the issued involved was whether the Appellants can be classified as ‘Financial Creditors’ within the meaning of sub-section (7) of Section 5 of the Insolvency and Bankruptcy Code, 2016 (IBC). The Respondent i.e., Doha Bank claimed to be a direct lender and secured Financial Creditor of Reliance Infratel Limited (RITL). A Corporate Insolvency Resolution Process (CIRP) was initiated by the adjudicating authority (NCLT) in respect of RITL-Corporate Debtor at the instance of Ericsson India Private Limited, and the Interim Resolution Professional (IRP) was appointed.
Public announcements were made inviting claims from creditors and the Appellants submitted their claims as Financial Creditors. While admitting the claim of the Appellants, the Resolution Professional classified them as Financial Creditors. Accordingly, the Appellants were included in the Committee of Creditors (COC). The Respondent made applications before the NCLT to challenge the admission of the Appellants’ claims. The NCLT approved the Resolution Plan. This was challenged before the NCLAT and the Order of the NCLT was set aside. The case was remanded to the NCLT and being aggrieved, the Appellants were before the Apex Court.
The Supreme Court in the above context of the case, noted, “If we go by the title, DoH is a Document creating hypothecation. In short, hypothecation means the process of using an asset as collateral for a loan. It acts as a protection to the lender when the borrower does not repay the loan.”
The Court further noted that under Section 5(7) of the IBC, any person to whom financial debt is owed, becomes a Financial Creditor even if there is no default in payment of debt.
“Only the title of a document cannot be a decisive factor in deciding the nature of the document or the transactions affected by the document. … the name of the document is not a decisive factor. Only because the title of the document contains the word hypothecation, we cannot conclude that guarantee is not a part of this document”, it observed.
The Bench said that a sentence or a term in a contract does not determine the real nature of the contract and the Courts should not rewrite the contract while making an attempt to interpret it.
The Court further said that, every provision contained in the deed shall be severable and distinct from every other such provision and if any one or more of the provisions of the DoH are invalid, illegal and unenforceable, the same will not affect the remaining provisions.
“If the right to payment exists or if a breach of contract gives rise to a right to payment, the definition of ‘claim’ is attracted. Even if that right cannot be enforced by reason of the applicability of the moratorium, the claim will still exist. Therefore, whether the cause of action for invoking the guarantee has arisen or not is not relevant for considering the definition of ‘claim”, it also observed.
Accordingly, the Apex Court allowed the Appeals and quashed the Order of the NCLAT.
Cause Title- China Development Bank v. Doha Bank Q.P.S.C. & Ors. (Neutral Citation: 2024 INSC 1029)
Appearance:
Appellant: Senior Advocates Neeraj Kishan Kaul, Chetan Kapadia, AOR Syed Jafar Alam, Advocates Siddharth Ranade, Nishi Bhankharia, Ribhu Garg, Kaazvin Kapadia, Pushkar Deo, Deepak Joshi, and Raghav Agarwal.
Respondents: Senior Advocates P. Chidambaram, Darius Khambata, AORs S. S. Shroff, Sanjay Kapur, Liz Mathew, Advocates Saurav Panda, Rajendra Barot, Abhijnan Jha, Bharat Makkar, Pranav Tomar, Vaijayant Paliwal, Charu Bansal, Mohana Nijhawan, Kirti Gupta, Dhruv Malik, Jinal Shah, Palak Nenwani, Ronit Chopra, Bharat Makkar, Pranav Tomar, Devesh Dubey, Surya Prakash, Arjun Bhatia, Divya Singh Pundir, Mahima Kapur, and Shubhra Kapur.
