The Supreme Court held that a creditor will not become a ‘financial creditor’ under the Insolvency and Bankruptcy Code, if a corporate debtor offered security by pledging shares, without discharging the borrower’s liability.
The Bank of Baroda filed Company Petition before the Adjudicating Authority under Section 7 of the Code to initiate the corporate insolvency resolution process in respect of the Doshion Veolia Water Solutions Private Limited (Corporate Debtor).
The Adjudicating Authority admitted the Company Petition and the corporate insolvency resolution process began. The respondent was appointed as the Interim Resolution Professional of the corporate debtor which was later confirmed as the Resolution Professional of the corporate debtor. Pursuant to the commencement of corporate insolvency resolution process in respect of the corporate debtor, the appellant filed its claim for an amount of Rs.83,49,85,667/- with the respondent.
The respondent expressed an opinion that as per the Pledge Agreement submitted by the appellant, the corporate debtor’s liability was restricted to pledge of the shares only. The respondent sought further documents in respect of the appellant’s claim.
Although additional documents were submitted by the appellant, the respondent by email reiterated the earlier view.
The appellant filed the petition before the NCLT seeking a direction to the respondent to admit the claim of the appellant as a financial debt with all consequential benefits including voting rights in the Committee of creditors of the corporate debtor. The appellant stated that the pledge of the shares by the corporate debtor was in essence a guarantee for financial debt and, therefore, the appellant was a financial creditor of the corporate debtor.
The Resolution Professional vide email rejected the claim of the appellant as financial creditor of the corporate debtor on the ground that there was no separate Deed of Guarantee in favour of the Assignor. The respondent filed an affidavit in reply before the Adjudicating Authority.
After hearing the parties, the Adjudicating Authority passed an order rejecting the Miscellaneous Application filed by the appellant. The Adjudicating Authority held that the applicant’s status as financial creditor of the corporate debtor is not proved in the light of Section 5(8) of the Code.
The issue raised in the case was whether the appellant is a financial creditor within the meaning of Section 5(8) of the Code on the strength of pledge agreement and Deed of Undertaking entered into with L&T Infrastructure.
The three-judge bench of Justices Ashok Bhushan, R.Subhash Reddy, and M.R.Shah held that a person having only security interest over the assets of the corporate debtor, even if falling within the description of ‘secured creditor’ by virtue of collateral security extended by the corporate debtor, would not be covered by the financial creditors as per definitions contained in sub-section (7) and (8) of Section 5. What has been held by this Court as noted above is fully attracted in the present case where a corporate debtor has only extended security by pledging 40,160 shares of GEL.
Therefore, the court clarified that The appellant is not a financial creditor of the corporate debtor. Hence, Miscellaneous Application was rightly rejected by the Adjudicating Authority.
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