Supreme Court sets aside NCLAT order de-recognizing four lenders of the insolvent Reliance Infratel as Financial Creditors

Supreme Court: In appeals filed against the judgment passed by the National Company Law Appellate Tribunal (‘NCLAT’), wherein the tribunal held that the Deed of Hypothecation (DoH) is not a deed of guarantee. It further clarified that the only parties to the DoH were the Chargors and the Security Trustee, and its sole purpose was to create a charge on the property of the Chargors. Consequently, the Chargors could not be treated as guarantors. As a result, the NCLAT set aside the order passed by the National Company Law Tribunal (NCLT) and remanded the case back to the NCLT for taking consequential action. This included de-recognizing the Assets Care & Reconstruction Enterprise Ltd, Shubh Holdings Pte Ltd, China Development Bank, and Export-Import Bank of China as Financial Creditors, the division bench, consisting of Abhay S. Oka* and Justice Pankaj Mithal, JJ. set aside the impugned judgment and order passed by the NCLAT and upheld the order of NCLT.

Background

Doha Bank claims to be a direct lender and secured financial creditor of Reliance Infratel Limited (‘RITL’), the corporate debtor, in a Corporate Insolvency Resolution Process (‘CIRP’) initiated by Ericsson India Private Limited. The Interim Resolution Professional (‘IRP’) was appointed, and public announcements under Section 15 of the Insolvency and Bankruptcy Code (IBC) were made inviting claims from creditors. The appellants, asserting themselves as financial creditors, submitted their claims and were classified as such by Resolution Professional. Consequently, they were included in the Committee of Creditors (‘CoC’). However, Doha Bank objected to this inclusion, arguing that the appellants were not direct lenders to the corporate debtor and that their claims were impermissibly admitted based on the terms of the Deeds of Hypothecation. Despite this, a Resolution Plan was submitted by a resolution applicant and approved by the CoC, followed by NCLT approval, without deciding the pending objection by Doha Bank. Doha Bank appealed to NCLAT, which directed NCLT to decide the pending application. The NCLAT observed that depending on the outcome of this decision, the approval of the resolution plan could be reconsidered.

The appellants, in this case, have relied on the DoH to claim their status as Financial Creditors of the Reliance Communications entities (RCom entities), including Reliance Communications Infrastructure Limited (‘RCIL’). These deeds were executed by the RCom entities, including the Corporate Debtor (‘RCIL’), to create a charge on their assets, securing repayment of the facilities advanced by the appellants. According to the appellants, if any entity defaults on its obligations, the other entities are liable for the shortfall in recovering the debt after the hypothecated assets are realized.

The NCLT initially upheld the status of the appellants as Financial Creditors, but the NCLAT reversed this decision. The NCLAT ruled that the DoH was not a deed of guarantee, but a document meant to create a charge over the property of the Chargors. It concluded that the Chargors could not be treated as guarantors, as their only role was to provide security, not to guarantee repayment. Therefore, the NCLAT set aside the NCLT’s order and remanded the case for consequential actions, including de-recognizing the first four appellants as Financial Creditors. Thus, the present appeal was filed.

Issue

Whether the appellants can be classified as ‘Financial Creditors’ within the meaning of Section 5 (7) of the Insolvency and Bankruptcy Code, 2016 (‘IBC’), or whether the appellants can be classified as ‘Secured Creditors’ and paid commensurate to their security interest.

Analysis and Decision

The Court took note of the clauses of Master Security Trustee Agreement (‘MSTA’) and said that the DoH, which are central to this case, were executed by the Security Trustee on behalf of the appellants, with the authority granted by the MSTA.

To understand the role of the DoH, the Court examined the MSTA, which was executed on 4-03-2011 by and between the RCom entities (‘Original Obligors’), the Original Lenders (which include the appellants), and the Security Trustee.

The Court noted that under the MSTA, the term “Original Lenders” is defined to include those listed in Schedule I, which encompasses the appellants. Additionally, the MSTA introduces the concept of “Acceding Lenders”, who are persons that join the agreement via a lender’s deed of accession. Both the Original Lenders and the Acceding Lenders collectively form the Secured Lenders under the MSTA. As such, all Original Lenders (the appellants) and any acceding lenders are designated as Secured Lenders. A key provision of the MSTA, Clause 2.1, specifies that each Original Obligor (the RCom entities) appoints the Security Trustee to act on behalf of the Secured Parties. The Secured Parties include the Security Trustee, the Secured Lenders (including the appellants), and any other parties specifically named in the agreement. Thus, the Security Trustee was appointed by the RCom entities to act for the benefit of the Secured Lenders, including the appellants.

The Court further noted that Clause 2.2 of the MSTA further elaborates on the authority vested in the Security Trustee. It authorizes the Security Trustee to act for the benefit of the Secured Lenders, which includes executing and accepting delivery of the secured documents, including the Deeds of Hypothecation. Moreover, it grants the Security Trustee the power to enforce the security in accordance with the provisions of the MSTA. In this capacity, the Security Trustee is acting on behalf of the appellants, who are the Original Lenders and thus part of the Secured Lenders group.

Therefore, the Court concluded that the Security Trustee, while executing the DoH, is acting as an agent for the appellants, ensuring that their interests as Secured Lenders are protected under the terms of the MSTA.

Interpreting clause 5(iii) of the DoH , the Court went on to decide whether the clause creates any guarantee in favour of the appellants.

Concerning whether the Corporate Debtor is a guarantor who has guaranteed the repayment of the loan amount by the borrowers of the appellant, the Court said that the answer to the question of whether the appellants are the Financial Creditors depends upon the answer to the question of whether the appellants are the guarantors.

The Court took note of Section 3 (6) of the IBC defines “claim” and the definitions of ‘Financial Creditor’ and ‘financial debt’ under sub-sections (7) and (8) of Section 5 of the IBC. The Court said that a claim is a right to payment whether or not, such right is reduced to judgment and whether it is disputed or undisputed. The right to payment can be legal, equitable, secured or unsecured. Therefore, if there is a liability or obligation in respect of a payment which is disputed, it still becomes a claim. Once there is a liability or obligation in respect of a claim, it becomes a debt. Once there is a financial debt, the person to whom the debt is owed becomes a Financial Creditor.

The Court noted that the appellants are asserting that their case falls under clause (i) of sub-section (8) of Section 5 of the IBC. According to this clause, any liability arising from a guarantee related to items listed under clauses (a) to (h) of Section 5(8) qualifies as a financial debt. Importantly, clause (i) does not require the Financial Creditor to have actually tendered any money to the Corporate Debtor. In the appellants’ case, they argue that their liability stems from the guarantees provided for money borrowed by the RCom entities (excluding the Corporate Debtor, RITL) against payment of interest, as outlined in the facility agreements.

The appellants assert that the liabilities resulting from these guarantees, which cover money borrowed by the RCom entities, should be treated as a financial debt under Section 5(8) of the IBC. There is no dispute regarding the fact that the facilities were extended by the appellants to the RCom entities. As per Section 5(8)(i), a financial debt includes liabilities related to money borrowed for the payment of interest, and in this case, the guarantees provided for the loans taken by the RCom entities meet the criteria specified in the IBC.

Therefore, the appellants argue that these liabilities qualify as financial debts and should be recognized as such under the IBC, which would entitle them to be classified as Financial Creditors in the CIRP.

The Court reiterated that when a contract becomes a guarantee when the contract is to perform the promise or discharge the liability of a third person in case of default. Thus, when a person enters a contract to perform or discharge the liability of a third party, the contract becomes a contract of guarantee. Hence, any promise made, or anything done for the benefit of principal debtor may be sufficient consideration to the surety for giving guarantee.

Noting that 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 highlighted that the name of the document is not a decisive factor. Only because the title of the document contains the word hypothecation, it cannot be concluded that guarantee is not a part of this document.

The Court noted that as per clause 2, Secured Lenders had made available the secured facilities to the Obligors. It provides that Obligors shall repay the secured facilities availed by it together with the interest, liquidated damages, premia of prepayment, financing charges, etc., including the remuneration payable to the Security Trustee. The two RCom entities, namely RCom and RTL, are the borrowers of the appellants. Thus, these two companies are Obligors who covenanted to repay the secured facilities availed by it together with interest, liquidated damages, etc.

Thus, the Court concluded that the parties to the DoH are Security Trustees acting on behalf of the present appellants, the Corporate Debtor who is not the borrower of the appellants and the other three RCom entities. Therefore, there are three parties to the DoH.

The Court noted that in the present case, from the last part of clause 5(iii) of the DoH, it is very clear that the Corporate Debtor has undertaken to discharge the liability of the RCom and RTL, the borrowers of the appellants. RCom and RTL are third parties as far as Corporate Debtor is concerned.

The Court also highlighted that for submitting the claim by a Financial Creditor, there is no requirement of actual default.

The Court further highlighted the procedural aspect regarding the Resolution Plan. It noted that the NCLAT had observed in its earlier ruling that the Resolution Plan was rightly approved, subject to the disposal of the pending application filed by the Doha Bank challenging the appellants’ status as Financial Creditors. The NCLAT had specifically mentioned that depending on the outcome of this challenge, the Resolution Plan could be reconsidered. This order had become final, and the Court emphasized that despite the ongoing challenges, the approval of the Resolution Plan remained intact. Consequently, the appellants’ main contention regarding their status as Financial Creditors was accepted, and the alternative argument related to their position as secured creditors was not addressed further, as it had become redundant in light of the decision.