The Insolvency and Bankruptcy Code stands to be one of the most direly needed legislation in the wake of the increasing corporate culture in India. The code makes both individual and corporate insolvency process comprehensive yet simpler. The code has a very vast scope and is applicable to the entire range starting from a farmer to a billionaire businessman, from startups to well-established gigantic corporate hubs. Corporate defaults run at micro levels. Even at a micro level of the individual such failures may very well occur. Due to an unfortunate yet inevitable circumstances companies become unable to discharge their depth and liabilities to the loan applications coming out from which becomes a herculean task for them leading to unfortunate Financial failure as a whole. The current article focuses on the Jaypee verdict and on the specific issue of third-party mortgage or third-party being a security holder. It focuses on the word financial debt debarring third party security holders as financial creditors of a corporate debtor. The article emphasizes on Section 5(8) of the code and discusses on the suggestions being put forth after the verdict that might impose implications in the future of insolvency.
The IBC is a group of complex yet detailed provisions with the objective of time bound resolution among business entities that face a financial crisis. The prime objective is to attain the maximum value that can be ascertained from the assets and liabilities in the market. The case of Anuj Jain (interim resolution professional for Jaypee Infratech Limited) v. Axis Bank (Civil appeal nos. 6777-6797 of 2019) paved a way for the Hon'ble Supreme Court to observe that money lenders who act as third party security should be called as called secured creditors and shall not be called financial creditors. It can be interpreted that the decision might have far fetched consequences because lenders who have third party securities in pledge or hypothecation form cannot be called as financial creditors. In the present case Jaiprakash Associates Limited had taken a loan from ICICI bank and Axis Bank. The loan was taken by mortgage in the assets of the company Jaiprakash Infratech Limited which was the subsidiary of the parent company. During the proceedings initiated for insolvency, the banks wanted to claim the amount and therefore appeared before the Interim Resolution Professional. The claim was rejected and it was decided that a financial agreement that would provide mortgage as a third party security would not be considered as a guarantee while Section 5(8)(i) is being read with 5(8)(a) of the Insolvency and Bankruptcy Code. According to Section 5(8) of the Act financial debt means a debt which has an interest and is disbursed against a consideration that would have value of money and will include the arrangement used in 5(8)(a) to 5(8)(i). It is to be kept in mind that section 5(8) of the Transfer of Property Act should also be taken into consideration when a liability is being discharged by disbursing a created mortgage. Therefore it would not be justified to presume a mortgaged property of a third party to be considered financial debt as explained in section 5(8). Further the parties contended that third party security holder should be titled as financial creditors but the same was rejected by the supreme court and the judgement of Swiss ribbons Private Limited v. Union of India (2019 4 SCC 172) was brought into picture where the financial creditors can be termed to the ones who who would be involved in lending money to a corporate debtor for the operation of its business. If third-party security holders are financial creditors it would slower the growth of the business and the revival of a corporate debtor would result in a faulty method while realising the value of the set property. Observing the judgement of State Bank of India v. Kusum Vallabhdas Thakkar (1991 SCC Online Guj 14) it was decided that when a property is mortgaged by a third party on behalf of the principal debtor the consideration may not grow from the mortgagor to the creditor but it will be between the principal debtor and the creditor. Section 127 of the Indian Contract Act was placed in picture and emphasis was put on Section 127. The word guarantee in section 5(8) of the IBC interprets the context of a common law. When it is being read with section 127 of the Contract Act the disbursement of the amount of loan which was taken for consideration against the time value of money does not become essential when put against the surety. Therefore the creditor will not be required to disburse the amount against consideration to a corporate debtor who will be acting as a surety in a contract. The principal of third party ticle mortgage, which is accepted under commercial law, should be considered as a principle of common law. The Supreme Court in the Jaypee judgement should had considered the lenders of of Jai Prakash Associates Limited i.e. Jaypee Infratech Limited as a commercial debtor and could have interpreted section 5(8) of the IBC in a way where the disbursal of the loan amount against consideration for the time value of money would have been an essential prerequisite against a principal debtor and not against the surety. By this approach the loan amount would have been considered as a financial debt under section 5(8) and the petitioner would have been termed as a principal debtor and a financial debtor and also would have coexisted under the liability clause of section 128 of the Indian Contract Act.
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