PHOENIX ARC PVT. LTD. versus KETULBHAI RAMUBHAI PATEL

Citation: [2021] 1 S.C.R. 1043 · Decided: 03-02-2021 · Supreme Court of India · Bench: ASHOK BHUSHAN · Disposal: Dismissed

Cited by 2 judgment(s) · cites 2 · see the full citation network in Lexace

Judgment (excerpt)

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1043
   [2021] 1 S.C.R. 1043
1043
PHOENIX ARC PVT. LTD.
v.
KETULBHAI RAMUBHAI PATEL
(Civil Appeal No. 5146 of 2019)
FEBRUARY 03, 2021
[ASHOK BHUSHAN, R. SUBHASH REDDY
AND M. R. SHAH, JJ.]
Insolvency and Bankruptcy code, 2016 – ss. 5(7), 5(8), 3
and 60 – Contract Act, 1872 – ss.124, 126 and 172 –L&T
Infrastructure Finance company advanced the financial facility to
‘D’ – A facility agreement was executed between ‘D’ (borrower)
and L&T Infrastructure Finance company (lender) – Lender
advanced to borrower Rs.40 crores – ‘DV’ (corporate debtor) gave
an undertaking in favour of L&T Infrastructure Finance to the effect
that 100% of their shareholding in GEL shall not be disposed of so
long as any amounts were due and payable and outstanding under
the financial assistance proposed to be provided by L&T Infra to
the borrower –A Pledge agreement was also executed between ‘DV’
and L&T Infrastructure Finance company by which agreement
40,160 shares of GEL were pledged as security –L&T assigned all
rights, title and interest in the financial facility including any security,
interest in favour of appellant –‘D’(borrower) failed to repay –
Bank filed petition u/s.7 of the Code to initiate the corporate
resolution process in respect of ‘DV’(corporate debtor) – Pursuant
to commencement of CIRP in respect of corporate debtor, the
appellant filed its claim for an amount of Rs.83,49,85,667/- with
respondent, the Interim Resolution Professional – Respondent opined
that the corporate debtor’s liability was restricted to pledge of shares
–Appellant filed application before the NCLT – NCLT held that
appellant’s status as financial creditor of the corporate debtor is
not proved in light of s.5(8) of the Code – NCLAT dismissed the
appeal filed by the appellant – On appeal, held: A contract of
guarantee is a contract to perform the promise, or discharge the
liability, of a third person in case of his default – The present is not
case where the corporate debtor has entered into a contract to
perform the promise, or discharge the liability of borrower in case
of his default – The Pledge Agreement is limited to pledge 40,160
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1044
SUPREME COURT REPORTS
[2021] 1 S.C.R.
shares as security –The corporate debtor has never promised to
discharge the liability of borrower –It was borrower who had
promised to repay the loan of Rs.40 crores in Facility Agreement
and it was borrower who had undertaken to discharge the liability
towards lender – The appellant at best will be a secured debtor qua
above security but shall not be a financial creditor within the meaning
of s.5 sub-sections (7) and (8) – The appellant is not financial
creditor of the corporate debtor – The decision of the Resolution
Professional is upheld.
Dismissing the appeal, the Court
HELD : 1.Whether the corporate debtor owed any financial
debt to the appellant so as to treat the appellant as financial
creditor is the question to be answered. The definition of ‘financial
debt’ as contained in Section 5(8) of the 2016 Code contains the
expressions “means” and “includes”. The definition begins with
the words “financial debt” means ‘a debt alongwith interest, if
any, which is disbursed against the consideration for the time
value of money and includes’... The main part of the definition,
thus, provides that financial debt means a debt “which is
disbursed against the consideration for the time value of money”.
The definition in the second part gives instances which also
includes financial debt. The appellant in his submission has relied
on Section 5(8)(i) to support his claim that the appellant is the
financial creditor. [Para 21][1054-E-G]
2. It is clear from the definition a contract of guarantee
(section 126 of the Indian Contract Act, 1872) is a contract to
perform the promise, or discharge the liability, of a third person
in case of his default. The present is not a case where the
corporate debtor has entered into a contract to perform the
promise, or discharge the liability of borrower in case of his default.
The Pledge Agreement is limited to pledge 40,160 shares as
security. The corporate debtor has never promised to discharge
the liability of borrower. The Facility Agreement under which the
borrower was bound by the terms and conditions and containing
his obligation to repay the loan security for performance are all
contained in the Facility Agreement. A contract of guarantee
contains a guarantee “to perform the promise or discharge the
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