Having security interest over corporate debtor’s asset alone does not qualify one as financial creditor: SC
The Supreme Court of India has once again reiterated that a person having only security interest over the assets of corporate debtor, even if falling within the description of ‘secured creditor’ by virtue of collateral security extended by the corporate debtor, would not be considered as a financial creditor as per provisions of Insolvency and Bankruptcy Code (IBC).
The Supreme Court passed this order on the plea of Phoenix ARC against an NCLAT judgment, which had rejected the asset reconstruction company’s plea to admit its claim as financial debt in the corporate insolvency resolution process (CIRP) of Doshion Veolia Water Solutions. Before appealing in Supreme Court, Phoenix ARC’s plea was rejected both in the Mumbai bench of NCLT as well as in NCLAT.
While rejecting the appellant’s plea, the Supreme Court said that the appellant at best will be secured debtor but shall not be a financial creditor within the meaning of Section 5(7) and Section 5(8) of IBC.
The apex court relied heavily on its order in the Anuj Jain (interim resolution professional for Jaypee Infratech Limited) vs Axis Bank, whereby it had denied Axis Bank’s claim as financial creditor in the CIRP of Jaypee Infratech.
Facts of the case
L & T Infrastructure Finance Company had advanced Rs 40 crore to Doshion Veolia Water Solution Pvt Limited through a loan facility agreement signed on 12 May 2011. The loan was repayable in 72 structured monthly installments.
A pledge agreement was executed on 10 January 2012 between Doshion Veolia (corporate debtor) and L&T Infrastructure Finance by which 40,160 shares of Gondwana Engineers Limited (a subsidiary of the corporate debtor) were pledged as a security against the loan. The borrower, Doshion Limited, had failed to repay as per agreed terms dated 12 May 2011.
On 30 December 2013 L&T Infrastructure assigned all rights, title and interest in the financial facility including any security, interest therein in favour of Phoenix ARC Pvt. Ltd, the appellant under the provisions of SARFAESI Act 2002. The appellant issued a notice dated 19 February 2014 and recalled the financial facility. Phoenix filed a recover application against the corporate debtor before the Debts Recovery Tribunal, Ahmedabad which is said to be pending.
In 2018, Bank of Baroda filed an insolvency petition under Section 7 of the IBC against Doshian Limited. The Adjudicating Authority admitted the application in August 2018. Once the CIRP against Doshion started, Phoenix ARC filed its claim for an amount of Rs 83.5 crore with the IRP, who rejected the claim as financial debt.
The Supreme Court rejected the appellant’s plea by saying that in the case only security was created by the corporate debtor in 40,160 shares of GEL and that there was no liability to repay the loan taken by the borrower on the corporate debtor in the present case.
Also See: Landmark Judgements/Orders
