Axix Bank Limited Vs Nageswara Rao (NCLT Mumbai)
NCLT Mumbai held that obligations under the Undertaking do not attract the definition of ‘financial debt’. A fortiori, an indemnity of the obligations under the Agreement will equally not constitute a ‘financial debt’ under Section 5(8) of the Code.
Facts-
Applicant (Axis Bank Limited) agreed to subscribe to the Commercial Papers issued by M/s. Reliance Home Finance Limited (RHFL). In order to protect its interest, the Applicant got a tripartite Obligor Undertaking dated April 10, 2019 (Obligor Undertaking) executed by Reliance Capital Ltd. (CD) and RHFL to ensure that any dilution of CD’s stake (Stake Sale) in Reliance Nippon Life Asset Management Limited (Reliance Nippon) would be utilized towards the payment due under the Commercial Papers.
Due to non-payment, the applicant issued a legal notice to CD and RHFL for payment of an amount of approx. INR 120 Crore pursuant to their obligation under the Obligor Undertaking.
CD was admitted into CIRP. Accordingly, the Applicant filed Form C submitting its claim as a Financial Creditor of CD. The Applicant claimed that CD was a guarantor under the Obligor Undertaking. However, the Administrator rejected the claim.
Conclusion-
Held that obligations under the Undertaking do not attract the definition of ‘financial debt’. A fortiori, an indemnity of the obligations under the Agreement will equally not constitute a ‘financial debt’ under Section 5(8) of the Code.
It is construed as that the Applicant does not owed a ‘Financial Debt’ under the Code. Without proof of disbursement, the said amount cannot be claimed as financial debt, as a disbursement is a sine qua non for any debt to fall within the ambit of the definition of financial debt. Reliance is placed on Judgment of the Hon’ble NCLAT in Dr. B.V.S Laxmi Vs. Geometrix Laser Solution Private Limited [2018] 142CLA321.
FULL TEXT OF THE NCLT JUDGMENT/ORDER
1. This Application is filed under section 60(5) of the Insolvency and Bankruptcy Code, 2016 (IBC/Code) by Axix Bank Limited (“the Applicant”), seeking admission of claims as Financial Creditor of Reliance Capital Limited (“the Corporate Debtor”). The Applicant has sought the following prayers:
(a) Acceptance of its claim of an amount of Rs.1,45,02,42,799.04/- (Rupees One Hundred and Forty-Five Crores Two Lakhs Forty-Two Thousand Seven Hundred and Ninety-Nine and Four Paise only) as Financial Creditor of the Corporate Debtor and;
(b) Allowing the Applicant to become a member of the Committee of Creditors during the Corporate Insolvency Resolution Process (“CIRP”) of the Corporate Debtor.
(c) Pass such or further order(s) as this Adjudicating Authority may deem fit and proper in the facts and circumstances of the present case.
Brief Facts:
2. In or around April 2019, Reliance Home Finance Limited (“RHFL”) RHFL proposed the issuance of Commercial Papers to raise funds to meet ‘short term working capital requirements’.
3. In order to protect its interest, the Applicant got a tripartite Obligor Undertaking dated April 10, 2019 (“Obligor Undertaking”) [Exhibit B at pg. 166 of Vol. II] executed by Reliance Capital Ltd. (“CD”) and RHFL to ensure that any dilution of CD’s stake (“Stake Sale”) in Reliance Nippon Life Asset Management Limited (“Reliance Nippon”) would be utilized towards the payment due under the Commercial Papers.
4. The Applicant agreed to subscribe to the Commercial Papers issued by RHFL of a face value of INR 124 Crore (“Commercial Papers”) [Exhibit C, D and E at pg. 178, 181 and 184 of Vol. II respectively]. The Letters of Offer were issued by RHFL on April 15, 2019 and Deal Confirmation was executed on April 16, 2019. Thereafter, the Commercial Papers were issued on April 16, 2019 by the Issuing and Paying Agent i.e. ICICI Bank Limited.
5. Since the execution of the Obligor Undertaking and the subsequent issuance of the Commercial Papers, CD has diluted and sold its stake in Reliance Nippon (reduced to 4.28% from 42.88%) for which it has realised an amount of Rs. 5500 Crores from the said sale. However, despite the stake sale, CD has failed to make payment towards its payment obligations in relation to the Commercial Papers.
6. The Applicant addressed various letters to the CD for making the payments under the Obligor Undertaking [Exhibit F, G and H at pg. 187, 189 and 191 of Vol. II respectively], however, no response was received from the CD. The Applicant issued a legal notice dated October 10, 2019 [Exhibit I at pg. 194 of Vol. II] to CD and RHFL for payment of an amount of approx. INR 120 Crore pursuant to their obligation under the Obligor Undertaking.
7. Thereafter, the CD was admitted into CIRP and the Public Announcement was made by the Administrator on December 07, 2021 [Exhibit J at pg. 199 of Vol. II]. Accordingly, the Applicant filed FORM C dated December 20, 2021 [Exhibit K at pg. 201 of Vol. II] submitting its Claim as a Financial Creditor of the CD. The Applicant claimed that the CD was a guarantor under the Obligor Undertaking.
8. The Administrator rejected this Claim filed by the Applicant vide its email dated January 24, 2022 [Exhibit L at pg. 214 of Vol. II] stating as per the terms of the Obligor Undertaking, the CD has not guaranteed to discharge the obligations of RHFL in case of a default. Further, the Administrator also requested the Applicant to submit the proof of claim in the appropriate form under the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
9. Thereafter, the Applicant filed its claim again in the capacity of Financial Creditor vide Form C dated February 25, 2022 [Exhibit M at pg. 217 of Vol. II], however, the Applicant did not withdraw its previous Form C.
10. The Administrator rejected the Form C dated February 25, 2022 vide email dated February 28, 2022 [Exhibit N at pg. 226 of Vol. II] stating, “We note that the Obligor Undertaking (as defined below) is an undertaking for the purposes of utilizing money/proceeds from the sale of Reliance Nippon Life Asset Management Limited shares in a certain manner and not for paying/repayment of financial debt of Reliance Home Finance Limited. Therefore, the claim of Axis Bank as a financial creditor of RCL cannot be admitted.”
Submissions on behalf of the Applicant:
I. The Obligor Undertaking is in the nature of a Guarantee towards the payments under the Commercial Papers:
11. Clause 2 of the Obligor Undertaking has been wholly misread by the Respondent inasmuch as it clearly states that the CD has an obligation to make payment due under the Commercial Papers. It is submitted that the obligation to pay under the Commercial Papers is crystallized upon the occurrence of the Stake Sale. It is pertinent to note that the Stake Sale has not been disputed by the Respondent. Further, it is submitted that the terms of a guarantee under Section 126 of the Contract Act, 1872 are not required to be in a specified format. It is submitted that if the terms of the Obligor Undertaking and the Commercial Papers are read as a whole, the obligation of the CD to pay the dues under the Commercial Papers is clearly made out. Reliance is placed on a judgment dated 13.11.2019 passed by this Hon’ble Tribunal in MA No. 1124/2019 in CP No. 2714/2018. The relevant paragraph is reproduced hereinbelow:
“Now, the points for consideration are basically of two-fold whether the documents relied upon by the Respondents for being considered as Financial Creditors are correct and will the same fasten any liability on the Corporate Debtor who is projected as obligor/guarantor as the case may be. The basic principle is that “Documents speak for themselves”, a simple verification of the above documents infact are sufficient enough to conclude that the Corporate Debtor has a liability to pay the amounts as claimed in the documents. Any amount of interpretation from the side of the Applicants that there is no privity of Contracts or the term ‘obligor does not bind them, nor documents does not directly or indirectly connect the Claimants with that of the Corporate Debtor, is of no consequence or for consideration,”
12. The Definition of ‘Obligor’ under SARFAESI Act, 2002 is, “Obligor means a person liable to the originator, whether under a contract or otherwise, to pay a financial asset or to discharge any obligation in respect of a financial asset, whether existing, future, conditional or contingent and includes the borrower.”
13. Further, “financial asset means debt or receivables and includes (1) a claim to any debt or receivables or part thereof, whether secured or unsecured; or….”. Since Commercial Paper is an unsecured money market instrument issued in the form of a promissory note, it can be classified as a financial debt under Section 5(8)(c) of IBC, “any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;” and the CD has a contingent obligation to pay the aforesaid debt, either in whole or in part, depending on the value of the Stake Sale.
14. Therefore, once the Stake Sale has materialized, the CD has the obligation to pay the Financial Debt i.e. the amount due under the Commercial Papers pursuant to the Obligor Undertaking and the Applicant should be classified as a Financial Creditor.
15. The contention of behalf of the Administrator that there is no promise to perform or pay in case of default by RHFL (Issuer of the Commercial Papers) on the part of the Obligor (Corporate Debtor) is belied by the express language of Cause 2 of the Obligor Undertaking. The sale of shares/stake in Reliance Nippon Asset Management Company Limited by RHFL, is only a trigger event for ascertaining the due date for payment. It does not absolve the Corporate Debtor (Obligor) from the liability to pay, on account of default by RHFL, as is clear from the words “………….. or otherwise, including…………. ” and in the manner provided for in sub-clause (a) and (b), which payment mechanism is independent of the proceeds of stake sale referred to above. Admittedly, RHFL has not paid the Applicant. Consequently, the liability of the Corporate Debtor gets triggered to discharge the financial debt, which the corporate debtor is obliged to pay to the Applicant.
II. Due Amount under Commercial Papers is a Financial Debt under Clause 5 (8) (i) of IBC:
16…. The Obligor Undertaking provides for an indemnity clause (Clause 6), wherein the CD has indemnified the Applicant against any breach of the Obligor Undertaking by the CD or RHFL, including but not limited to any losses, liabilities, damages, judgments, settlements, and expenses, incurred or suffered by the Applicant arising out of or resulting from any breach by the CD or RHFL of any of the terms of the Obligor Undertaking. It is an admitted position that RHFL has not paid any amount under the Commercial Papers, therefore, the obligation of the CD to indemnify the Applicant in case of any default of the Obligor Undertaking (after the Stake Sale has happened) has arisen since the Obligor Undertaking has been breached.
17. Therefore, the obligation of the CD can be termed as a financial debt under Clause 5(8) (i) i.e., “the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clause (a) to (h) of this clause.”.
III. Due Amount under Commercial Papers is a Financial Debt under Clause 5 (8) (f) of IBC:
18. The Obligor Undertaking specifically refers to making payments under the Commercial Papers issued by RHFL to the Applicant i.e., discharging a ‘financial debt having a commercial effect of a borrowing’. The Obligation to pay under the Obligor Undertaking gets triggered upon occurrence of the Stake Sale, creating an independent payment obligation (of a financial debt) of CD towards the Applicant.
19. That the present transaction under the Obligor Undertaking and the subsequent issuance of Commercial Papers has a commercial effect of borrowing in terms of Section 5(8)(f) of the Code, wherein the repayment obligation of the borrowed amount was always that of Corporate Debtor. The Obligor Undertaking clearly refers to payments under ‘Commercial Papers’. Therefore, in order to ascertain the nature of the debt obligation, it is imperative to refer to both the documents together and look at the transaction as a whole.
20. The language used in the Obligor Undertaking is expressly clear that there is a payment obligation towards the amount under the Commercial Papers.
21. The Administrator rejected the Applicant’s claim stating that:
“… We note that the Obligor Undertaking (as defined below) is an undertaking for the purposes of utilizing money/proceeds from the sale of Reliance Nippon Life Asset Management Limited shares in a certain manner and not for paying/repayment of financial debt of Reliance Home Finance Limited. Therefore, the claim of Axis Bank as a financial creditor of RCL cannot be admitted…”
The reasoning provided by the Administrator is contrary to the above explanation that the CD’s obligation is with respect to payment of financial debt of RHFL.
Submissions on behalf of the Respondent/Corporate Debtor:
22. On April 16, 2019 the Applicant had subscribed to commercial paper of Rs.124 Crores issued by Reliance Home Finance Limited (“RHFL”). The Applicant, RHFL and the Corporate Debtor had also executed on “Obligor Undertaking’. Under this ‘Obligor Undertaking” the Corporate Debtor had undertaken to utilize the sales proceeds generated from the sale of all or any portion of its or its affiliates’ shareholding in Reliance Nippon Life Asset Management Ltd (“RNLAM”) towards making payments to the Applicant in respect of the Commercial Papers issued by RHFL. [See Clause 2 of Exhibit B/pg. 170. Vol II of Appn.].
23. On the basis of this ‘Obligor Undertaking’, the Applicant submitted two Form C Claims dated December 20, 2021 [See Exhibit K of Appn/Pg. 201 Vol II of Appn.] & February 25, 2022 [See Exhibit Mof Appn/Pg.217 Vol II of Appn.] to the Administrator seeking admission into the Committee of Creditors as a ‘Financial Creditor” on the footing that the ‘Obligor Undertaking’ constituted ‘financial debt’ under the Code. Both Form C claims were rejected by the Administrator vide communication dated January 24, 2022 [See Exhibit K of Appn/Pg.214 Vol II of Appn.] & February 28,2022 [See Exhibit K of Appn/Pg.226 Vol II of Appn.]
24. The Applicant was directed to file its claim via the appropriate form [See Exhibit K of Appn/Pg.233 Vol II of Appn.]
25. By this Application, the Applicants seeks the issuance of Orders by this Tribunal for admitting it as a ‘financial creditor’ into the Corporate Debtor’s committee of Creditors (Coc) on the strength of the ‘Obligor Undertaking’ bearing a ‘financial debt’ under section 5(8) of the code. [See reliefs sought /Vol.I, Pg. 10-11 of Appn.]
26. The Applicant contends that it is owed a ‘financial debt’ under the following two grounds;
I. It is asserted that eh ‘Obligor undertaking’ is and /or asking to a ‘Guarantee’ and therefore it attracts the definition of ‘financial debt’ under Section 5(8) of the Code.
II. Alternatively, it has urged that the ‘Obligor Undertaking’ and the Commercial papers must be construed together to constitute ‘financial debt’ under Section 5(8) of the Code.
27. These contentions are not sustainable in law for the reasons elaborated hereinbelow. These reasons must be assessed and examined in the following factual backdrop.
