Full Judgment Text
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.3606 of 2020
M/S VISTRA ITCL (INDIA) LTD & ORS. ..Appellants
Versus
MR. DINKAR VENKATASUBRAMANIAN
& ANR. ..Respondents
J U D G M E N T
M. R. Shah, J.
1. Feeling aggrieved and dissatisfied with the
impugned judgment and order dated 24.08.2020
Signature Not Verified
Digitally signed by R
Natarajan
Date: 2023.05.04
16:38:35 IST
Reason:
passed by the National Company Law Appellate
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Tribunal (NCLT) passed in Company Appeal (AT)
(Insolvency) No.703 of 2020 by which the NCLAT
has dismissed the said appeal and has confirmed
the order passed by the NCLAT passed in IA
No.62/2020 in CP (IB) 42/Chd./Hry.2017
preferred by the appellant herein, the original
applicant has preferred the present appeal.
2. The facts leading to the present appeal in a
nutshell are as under:
2.1 That one Amtek Auto Limited (hereinafter referred
to as Corporate Debtor) approached appellant
nos. 2 and 3 to extend a shortterm loan facility of
INR 500 crores to its group companies i.e.
Brassco Engineers Ltd. and WLD Investments Pvt.
Ltd. for the ultimate end use of the Corporate
Debtor. According to the appellants it was an
understanding that the Corporate Debtor will
create a first ranking exclusive security by way of
pledge over 16,82,06,100 equity shares of face
value of Rs.2/ each of JMT Auto Ltd. held by the
Corporate Debtor (Pledged Shares). A Security
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Trustee Agreement was executed between the
appellant no.1 and WLD for an amount of
Rs.150,00,00,000/ on 28.12.2015. The
Corporate Debtor’s board of directors passed
Board Resolutions whereby the board of directors
resolved to create security over the shares of JMT
Auto Ltd.
IDBI Bank issued NOC stating that they had no
2.2
objection to the proceeds of sale of assets to the
extent of a maximum of INR 450,00,00,000 being
used to first settle all the dues under the Security
Trustee Agreement STFs issued by AAL. The
Security Trustee Agreement was executed
between the appellant no.1 and Brassco for an
amount of Rs.150,00,00,000/. That thereafter
pursuant to the resolution passed on 23.12.2015,
the Corporate Debtor’s board of directors passed
Board Resolutions whereby the board of directors
paid security towards shares. That thereafter one
another Security Trustee Agreement was executed
between the appellant no.1 and Brassco for an
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amount of Rs.200,00,00,000/. That thereafter
the Corporate Debtor, WLD, BRASSCO and Vistra
executed an amended and reinstated pledge
agreement on 05.07.2016 and the Corporate
Debtor pledged 66.77% of its shareholding in JMT
Auto Limited to secure the term loan facilities
availed by WLD and Brassco from KKR and L&T.
That thereafter an application under Section 7 of
the Insolvency & Bankruptcy Code, 2016
(hereinafter referred to as ‘IBC/Code’) was
admitted against the Corporate Debtor/AAL on
24.07.2017. The respondent herein Mr. Dinkar
T. Venkatasubramanian was appointed as the
interim resolution professional which came to be
later confirmed as the resolution professional.
That on 02.11.2017 the appellant no.1 filed its
2.3
claim as a secured creditor of the Corporate
Debtor and submitted Form C claiming a
principal amount of INR 500 crores. However, the
claim by the appellants – secured creditors was
rejected by the Resolution Professional in 2017,
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which order was not challenged by the appellants.
Resolution Professional received two resolution
plans from only 2 resolution applicants being
Liberty House Group Pvt. Ltd. (LHG) and Deccan
Value Investors (DVI). DVI withdrew its
Resolution Plan so the revised plan by M/s LHG
was considered by the Committee of Creditors
(CoC) which approved the plan on 02.04.2018
with majority voting shares of 94.20%. The
Resolution plan submitted by the LHG was
approved by the Adjudicating Authority vide order
dated 25.07.2018. However, thereafter as the
LHG did not fulfil its commitment the
Adjudicating Authority passed an order directing
reconsideration of the CoC for consideration of
DVI’s plan. Thereafter further proceedings were
initiated before the NCLAT by the CoC etc. (which
are not relevant for the issue involved in the
present appeal).
2.4 That thereafter the appellants filed another
application under Section 60(5) of the IBC being
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I.A. No.62/2020 claiming the right on the basis of
the pledged shares. This Court passed an order
dated 08.06.2020 directing the Adjudicating
Authority to decide the resolution plan and all
pending applications and pass appropriate orders
within 15 days. The Resolution Professional filed
I.A. No.225 of 2020 before the Adjudicating
Authority on 12.06.2020 seeking approval of the
resolution plan. The Adjudicating Authority
dismissed the application filed by the appellants
being I.A. No.62 of 2020. The order passed by the
Adjudicating Authority dated 09.07.2020 passed
in I.A. No.62 of 2020 was the subject matter of
appeal before the NCLAT. By the impugned
judgment and order the NCLAT has dismissed the
said appeal by observing that the appellant no.1’s
claim in purported capacity of ‘Secured Financial
Creditor’ has been rejected way back in the year
2017 and the decision in this regard has not been
called in question and therefore it is not open for
the appellants to raise the same issue in 2020 by
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filing I.A. No.62 of 2020. The NCLAT has also
observed that the appellants have not lent any
money to the Corporate Debtor and the Corporate
Debtor did not owe any financial debt to the
appellants except the pledge of shares was to be
executed. Therefore, the NCLT observed that the
appellants not having advanced any money to the
Corporate Debtor as a financial debt would not be
coming within the purview of financial creditor of
the Corporate Debtor. Making above
observations, the NCLAT has dismissed the
appeal.
Feeling aggrieved and dissatisfied with the
2.5
impugned judgment and order passed by the
NCLAT dismissing the appeal and confirming the
appeal passed by the Revenue dismissing
I.A.No.62 of 2020, the original applicants – M/s
Vistra and others have preferred the present
appeal.
3. Shri Rakesh Dwivedi, learned Senior Advocate has
appeared on behalf of the appellant in C.A.
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No.3606 of 2020 and Shri Shyam Divan, learned
Senior Advocate has appeared on behalf of the
appellant in C.A. No.637273 of 2021. Shri
Tushar Mehta, learned Solicitor General has
appeared on behalf of the respondent no.1 – CoC.
3.1 Learned Senior Counsel appearing on behalf of
the appellants have vehemently submitted that in
the facts and circumstances of the case the
NCLT/NCLAT have materially erred in observing
that the claim made by the appellant no.1 as a
secured financial creditor was belated. It is
submitted on behalf of the appellants that both
the NCLT as well as NCLAT have not properly
appreciated the fact that it was a continuing
cause of action. So, it was a case of continuing
cause of action. It is submitted under the IBC
that there is no limitation prescribed for objecting
to the categorization of the creditors in a wrongful
category.
It is submitted that the ratio of the limitation is
3.2
connected with the principle of cause of action.
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3.3 It is submitted that it is a case of continuous
cause of action as resolution professional, CoC,
Resolution Applicant and the Adjudicating
Authority are all required to consider the correct
categorization of the claimants.
3.4 It is submitted that in the present case, the
corporate insolvency resolution process (“CIRP”)
commenced on 24.07.2017 and the present
resolution plan (which as per the Adjudicating
Authority’s order dated 09.07.2020) was
submitted for voting by the CoC from 07.02.2020
to 11.02.2020; which was only approved by the
Adjudicating Authority on 09.07.2020 i.e., almost
3 years since the start of the CIRP. The
Appellants had already challenged the non
inclusion of the Appellants as a financial secured
creditor in the CoC on 11.02.2020, which was 5
months before the resolution plan was approved
by the Adjudicating Authority. Therefore, the
question of delay on the part of the Appellants
does not arise and neither can delay be agitated
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by the Respondents since the CIRP process under
the supervision of the Resolution Professional and
CoC itself carried on for 3 years, which 3 years is
well beyond the timeline of 330 days as set out
under the IBC. Therefore, the CoC and
Resolution Professional cannot justify their delay
on one hand and then seek to erode the rights of
the Appellants by relying on delay.
3.5 On merits learned counsel appearing on behalf of
the appellants have vehemently submitted that
the decisions of this Court in the case of
Anuj
Jain Interim Resolution Professional for
Jaypee Infratech Limited vs. Axis Bank
1
and
Limited etc. etc. Phoenix ARC Private
2
Limited vs. Ketulbhai Ramubhai Patel, are
distinguishable and shall not be applicable to the
facts of the case on hand.
3.6 It is submitted that there is creditordebtor
relationship between the appellants and the
1 (2020) 8 SCC 401.
2 (2021) 2 SCC 799.
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Amtek Auto Limited. It is submitted that WLD
and Brassco took loans from the appellant nos.2
and 3 through appellant no.1 for the end use and
ultimate benefit of the Corporate Debtor. In order
to establish a direct debtorcreditor relationship,
reliance is placed on the Board Resolution of
Amtek Auto dated 13.06.2016; no objection
certificate requested by Amtek Auto on
23.12.2015; no objection certificate requested by
Amtek Auto on 26.03.2016 from IDBI; No
objection certificate issued by IDBI Bank to Vistra
ITCL etc. It is submitted that from the aforesaid it
is clear that Amtek obtained monies from
Appellant Nos.2 & 3 when it was in financial
distress, which fact the banks were aware of since
the reason for obtaining these loans was to
‘standardize’ Amtek’s loan account with the
banks.
It is vehemently submitted that the pledge of
3.7
shares constituted as financial debt under the
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IBC is defined as Security Interest under Section
3(31) of the IBC.
4. Shri Tushar Mehta, learned Solicitor General
appearing on behalf of respondent no.2 has
vehemently submitted that the appellant had filed
its claim with the Resolution Professional on
02.11.2017 which was rejected and the same was
duly reflected in the list of creditors published on
the website of the Corporate Debtor. It is
submitted that the said rejection has never been
challenged by the appellant. It is submitted that
even in various communications exchanged, the
appellant no.1 raised no challenge to non
acceptance of its claim but rather put forth an
absurd request to the Resolution Professional to
ensure that the pledged shares are not to be dealt
with in any manner without the prior written
consent of the appellant no.1. It is submitted that
therefore the appellant on 11.02.2020 had filed
an application before the NCLT that too not in
challenge to its claim rejection but for seeking
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admission into the CoC. It is submitted that
since the said application was filed belatedly the
same is rightly rejected by the NCLT and is rightly
confirmed by the NCLAT.
Shri Mehta, learned Solicitor General has further
4.1
submitted that the issue involved in the present
appeal is squarely covered by this Court in the
case of and
Anuj Jain (supra) Phoenix ARC
. It is submitted that the
Private Limited (supra)
appellants could not qualify to be financial
creditors of the Corporate Debtor. It is submitted
that there is only a thirdparty security given in
form of pledged shares with respect to the
amounts advanced by the appellants to affiliates
of the Corporate Debtor. Thus, the appellants
cannot be considered as financial creditor of the
Corporate Debtor.
5. The issue and legal question are partly covered by
two decisions of this Court namely, Anuj Jain
(supra) and Phoenix ARC Private Limited
(supra) . We will first examine the decisions in
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these two cases and then advert to the contention
of the Appellant No. 1 – M/s Vistra ITCL that
these decisions are distinguishable from the facts
of the instant case.
In the issue was whether the
5.1 Anuj Jain (supra),
lenders of Jaypee Associates Limited (JAL), the
holding company of Jaypee Infratech Limited
(JIL), the Corporate Debtor, hold the status of
‘financial creditors’ of JIL within the meaning of
Section 5(7) of the Insolvency and Bankruptcy
3
Code, 2016 read with expression ‘financial debt’
as defined in Section 5(8) of the Code. This issue
had arisen as JIL had mortgaged certain land
4
with the creditors of JAL. Highlighting and
expounding the unique status of the financial
creditors in the context of Corporate Insolvency
5
Resolution Process under the Code, and that the
legislature has assigned them a specific role to
3 For short, Code.
4 The mortgage by JIL in favour of creditors of JAL were, in fact, set aside in terms of
Section 43 of the Code, albeit this Court had opined on the legal issue on the
assumption even if the mortgage was valid.
5 For short, CIRP.
Civil Appeal No.3606 of 2020 Page 14
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ensure that the Corporate Debtor is, if possible,
revived, rejuvenated, and resuscitated, it was held
that the financial creditors are the only
stakeholders who would be obviously concerned
and concomitant to the resurgence and
restructuring of the Corporate Debtor. A secured
creditor may only have an interest in realising the
value of its security and, therefore, will not have
stake or interest in Corporate Debtor’s revival or
equitable liquidation, while a financial creditor,
apart from looking for safeguards of its own
interests, will also be simultaneously interested in
the revival and growth of the Corporate Debtor.
Therefore, a person only having a security interest
in the assets of the Corporate Debtor, even if
falling in the description of ‘secured creditor’ by
virtue of collateral security extended by the
Corporate Debtor, would nevertheless stand
outside the sect of the ‘financial creditors’, and
consequently outside the CoC as well. The
aforesaid decision is also based upon the meaning
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assigned to the term ‘financial debt’ under Section
5(8) of the Code, which, in the context of the
present decision, need not be elaborated.
5.2 In Phoenix ARC (supra), the Corporate Debtor,
namely Doshion Veolia Water Solutions Private
Limited (Doshion Veolia), had pledged 40,160
shares of Gondwana Engineers Limited as a
security to L&T Infrastructure Finance Company
Limited (L&T). A deed of undertaking was also
executed by Doshion Veolia in favour of L&T.
However, the main and principal transaction was
between L&T, which had advanced financial
facility, to and with Doshion Limited of Rs.40
crores, pursuant to which specific agreements
were executed. For clarity, we may state that L&T
had subsequently assigned the debt to Phoenix
ARC (P) Ltd., who were the appellants before this
Court.
5.3 A three judges’ bench of this Court in Phoenix
ARC (supra) observed that the pledge agreement
was in respect of 40,160 shares of Doshion
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Veolia, which were pledged to L&T as security,
thereby restricting the liability of Doshion Veolia,
albeit , this cannot constitute ‘financial debt’ as
defined in Section 5(8) of the Code and, therefore,
the appellant would not be a financial creditor of
the corporate debtor.
5.4 also refers to Chapter VIII
Phoenix ARC (supra)
of the Indian Contract Act, 1872 which deals with
the definition of ‘indemnity’ and ‘guarantee’ under
Sections 124 and 126 therein. It was observed:
" 25 . As is clear from the definition 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 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 the
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
Civil Appeal No.3606 of 2020 Page 17
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facility agreement. A contract of
guarantee contains a guarantee “to
perform the promise or discharge the
liability of third person in case of his
default”. Thus, key words in Section 126
are contract “to perform the promise”, or
“discharge the liability”, of a third
person. Both the expressions “perform
the promise” or “discharge the liability”
relate to “a third person”.
Reference is made to the expression ‘pledge’
as defined in Section 172 of the Contract Act and
it has been held:
“ 26 . …..The pledge agreement dated 10
12012 does not contain any contract
that the corporate debtor has contracted
to perform the promise, or discharge the
liability of the third person…….
30. The words “guarantee” and
“indemnity” as occurring in Section 5(8)
(i) has not been defined in the Code.
Section 3 clause (37) of the Code
provides that words and expressions
used but not defined in the Code but
defined in the Contract Act, 1872 shall
have the meanings respectively assigned
to them.”
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5.5 The decision in Phoenix ARC (supra) has also
relied upon and reproduced paragraphs 4650.2
of the decision in (referred to
Anuj Jain (supra)
as
Jaypee Infratech Interim Resolution
v. in the aforesaid
Professional Axis Bank
judgment), and thereupon observes:
" 36 . This Court held 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 covered
by the financial creditors as per
definitions contained in clauses (7)
and (8) of Section 5. What has been
held by this Court as noted above is
fully attracted in the present case
where corporate debtor has only
extended a security by pledging 40,160
shares of GEL. The appellant at best
will be secured debtor qua above
security but shall not be a financial
creditor within the meaning of Section
5 clauses (7) and (8).
. Mr Vishwanathan tried to
37
distinguish the judgment of this Court
in Jaypee Infratech Ltd. [Jaypee
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Infratech Ltd. Interim Resolution
Professional v. Axis Bank Ltd., (2020)
8 SCC 401] by contending that the
above judgment has been rendered in
the specific facts scenario which does
not apply to the present case at all.
Shri Vishwanathan submits that
in Jaypee Infratech Ltd. [Jaypee
Infratech Ltd. Interim Resolution
Professional v. Axis Bank Ltd., (2020)
8 SCC 401] corporate debtor had
created mortgage for the loan obtained
by the parent Company and no benefit
of such loan has been received by the
corporate debtor whereas in the
present case corporate debtor has
been the direct and real beneficiary of
the loan advanced by assignor to the
parent Company of the corporate
debtor.”
5.6 We have specifically quoted paragraph 37 in the
decision of Phoenix ARC (supra) as the counsel
for the appellant therein, had also argued before
us to distinguish the decisions of
Anuj Jain
and from the
(supra) Phoenix ARC (supra)
instant case, on the ground that the Short Term
Loan Facilities (STL Facilities) advanced by the
Civil Appeal No.3606 of 2020 Page 20
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Appellant No. 1 Vistra in the present case to the
group companies of the Corporate Debtor – Amtek
Auto Limited (Amtek) i.e., Brassco Engineering
Limited (Brassco) and WLD Investments Private
Limited (WLD) vide Facility Agreement dated
30.06.2016 (Facility Agreement), was in fact for
the enduse and benefit of the Corporate Debtor –
Amtek. The said reasoning does not appeal to us
for the reason that the liability to repay the STL
Facilities advanced to Brassco and WLD is that of
the said companies, and that not of the Corporate
Debtor Amtek, even if the latter was, as per the
terms of the Facility Agreement, the ultimate
beneficiary of the amount disbursed through the
STL Facilities. The aforesaid decisions cannot be
distinguished on the ground that the loans were
not for the end use and benefit of JIL or Doshion
Veolia. The Corporate Debtor – Amtek was not
liable to repay the loans advanced by the
predecessorininterest of the appellant Vistra, in
respect of which there were detailed and separate
Civil Appeal No.3606 of 2020 Page 21
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agreements executed by the lenders with Brassco
and WLD.
6. It was submitted before us that the Amended and
Restated Pledge Agreement dated 5.07.2016
between the corporate debtor – Amtek and the
IL&FS Trust Company Limited, the predecessor
ininterest of the Appellant No. 1 Vistra (Pledge
Agreement) inter alia provides that the Corporate
Debtor Amtek is the guarantor of the entire loan
amount, for which reliance was placed upon
clause 2.1.2 of the Pledge Agreement. This
contention is liable to be rejected, for the Pledge
Agreement specifically restricts and limits the
liability of the Corporate Debtor to the extent of
the pledged shares vide clause 2.1.1, which reads
as under:
“ 2.1.1 . Pursuant to the Financing
Documents and in consideration of the
Identified Lenders having entered into
and/or agreed to enter into the
Financing Documents in respect of each
of the Facilities, the Pledgor covenants
and agrees with the Identified Lenders
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that it shall comply with the provisions
of the Financing Documents in relation
to each of the Facilities and shall repay,
pay and/or discharge the Outstanding
Amounts in relation to the Identified
Debt in accordance with the terms set
out herein and therein. Provided that
the Pledgor shall not be required to
pay to any Finance Party any amount
in excess of the aggregate amount
realized by the Trustee pursuant to an
enforcement of the Security Interest
over the Pledged Shares in accordance
with the terms of this Pledge
Agreement .”
( Emphasis supplied )
6.1 Similarly, reliance has also been placed by the
Corporate Debtor – Amtek on certain
communications issued by the IDBI Bank, the
lead bank of the Joint Lenders Forum, which now
constitutes the majority of the CoC of the
corporate debtor – Amtek, permitting the pledge of
shares etc. We observe that these
communications have to be read and understood
in the context in which they were written. It was
clear and understood by the financial creditors of
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the corporate debtor – Amtek that the corporate
debtor – Amtek is not to bear any additional
financial liability by a security or charge of its
assets for the STL Facilities, and the loans were
being procured and taken by Brassco and WLD
from the Appellant Nos. 2 and 3, namely, KKR
India Financial Services Limited and L&T Finance
Limited. It was stipulated that the assets of the
Corporate Debtor – Amtek would not be
encumbered in anyway, and except for shares
given as security, and the burden to
repay/discharge the loan was/is upon Brassco
and WLD. IDBI Bank had only permitted the
corporate debtor – Amtek to pledge the shares in
question, and to this extent, they did not have
any objection.
However, there is another aspect of the matter.
7. Appellant No. 1 Vistra is a secured creditor to
the extent of the shares pledged to it by the
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Corporate Debtor Amtek. It holds the first right
in pledge on 66.77% shareholding in JMT Auto
Limited. The expression ‘security interest’ as
defined in Section 3(31) of the Code states that it
means right, title, interest or a claim to a property
created in favour, or provided for a secured
creditor by a transaction which secures payment
or performance of an obligation and includes,
mortgage, charge, hypothecation, assignment and
encumbrance, or any other agreement or
arrangement for securing payment or
performance of any obligation of any person. The
person is whose favour the security interest is
created need not be the creditor who avails the
credit facility, and can be a third person. Security
interest can be created for credit facilities/loan
advanced to another person. It is accepted and
admitted that the Appellant No. 1 – Vistra has
security interest in the pledged shares. In order to
examine the nature of the said interest, we must
first understand what constitutes ‘pledge’ in law.
Civil Appeal No.3606 of 2020 Page 25
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7.1 The concept of ‘pledge’ has been elucidated by
this Bench in PTC India Financial Services
6
Limited v. Venkateswarlu Kari and Another ,
with reference to the provisions of contract of
bailment and specific provisions concerning the
pledge, a subset of bailments, in the following
manner:
. As per Section 151, a bailee is
“18
bound to take as much care of the goods
bailed to him as a man of ordinary
prudence would, under similar
circumstances, take of his goods of the
same bulk, quality and value as the
goods bailed. Section 152 states that a
bailee, in the absence of a special
contract, will not be liable for any loss,
destruction, or deterioration of the bailed
goods if he acts in conformity with
Section 151. As per Section 153, a
contract for bailment is voidable at the
option of the bailor if the bailee does any
act with regard to the goods bailed,
inconsistent with the conditions of the
bailment. Section 154 lays down that the
bailee shall be liable for damage arising
from unauthorised use of the bailed
goods. The bailee, with the consent of
6 (2022) 9 SCC 704.
Civil Appeal No.3606 of 2020 Page 26
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the bailor, can mix the goods bailed with
his own goods, in which event, the bailor
and the bailee will have interest in
proportion to their respective shares in
the mixture. [ Section 155, Contract Act.]
However, if the bailee, without the
bailor's consent, mixes the bailed goods
with his own, and the goods can be
separated or divided, the property in the
goods remain with the parties
respectively. [ Section 156, Contract Act.]
Further, the bailee is bound to bear the
expense of separation or division of the
goods, as well as any damage arising
from the mixture. Section 157 provides
that when the goods are so mixed
without the bailor's consent and cannot
be separated, the bailor is liable to be
compensated, and the bailee is liable for
the loss.
19 . Under Section 160, the bailee has to
return or deliver, as per the bailor's
directions, the goods, without demand,
as soon as the time for which they were
bailed has expired or the purpose for
which they were bailed has been
accomplished. Section 161 states that if
there is a default by the bailee and the
goods are not returned, delivered, or
tendered at the proper time, the bailee is
responsible to the bailor for any loss,
destruction, or deterioration of the goods
from that time. As per Section 163, in
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the absence of any contract to the
contrary, the bailee is bound to deliver to
the bailor, or in accordance with his
directions, any increase or profit that
may accrue from the goods bailed.
20 . Section 172 of the Contract Act is
reproduced as under:
“172. “Pledge”, “pawnor” and “pawnee”
defined.—The bailment of goods as
security for payment of a debt or the
performance of the promise, is called a
“pledge”. The bailor is in this case called
the “pawnor”. The bailee is called the
“pawnee”.”
As per Section 172, creating a valid
pledge requires delivery of the
possession of goods by the pawnor to the
pawnee by way of security upon the
promise of repayment of a debt or the
performance of a promise, thereby,
creating an estate that vests with the
pawnee.
22 . As per Section 176, when a pawnor
makes a default in payment of debt or
performance of a promise, the pawnee
may bring a suit against the pawnor
upon such debt or promise and retain
the goods pledged as collateral security,
or he may sell the goods pledged upon
giving the pawnor reasonable notice of
the sale. If the pledged goods are sold,
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and the proceeds of such sale are less
than the amount due in respect of the
debt or promise, the pawnor is still liable
to pay the balance amount to the
pawnee. If the proceeds of such sale
exceed the amount due, the pawnee will
be liable to pay the surplus to the
pawnor.
23 . Section 177 gives statutory right to
the pawnor, who is at default in payment
of the debt or performance of the
promise, to redeem the pledged goods at
any time before “actual sale” by the
pawnee. However, in such cases, the
pawnor must pay in addition the
expenses that have arisen from his
default. Section 179 states that the
limited interest that a pawnor has in the
goods can be validly pledged.”
7.2 The law of pledge contemplates special rights for
the pawnee in the goods pledged, i.e., the right to
possession of the security, and in case of default,
the right to bring a suit against the pawnor, as
well as the right to sell the goods after giving
reasonable notice to the pawnor. The general
rights or ownership rights in the property remain
with the pawnor, and wholly reverts to him on
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discharge of the debt or performance of the
promise. In other words, the right to property
vests in the pawnee only as far as it is necessary
to secure the debt. We need not refer to other
portions of the said judgment which relate to right
of redemption till ‘actual sale’, etc.
8. In light of the aforesaid exposition, the second
issue which arises for consideration is whether
the resolution plan can dilute, negate, or override
the pledge agreement because a resolution plan to
this effect has been approved by the CoC.
Revisiting this issue is important, as
Anuj Jain
(supra) had interpreted the provisions as they
existed prior to substitutions of several provisions
of the Code by Act No. 26 of 2018 with
retrospective effect from 6.06.2018 and Act No. 26
of 2019 with effect from 16.08.2019. In particular,
we would like to make reference to the amended
Section 30(2) of the Code, which post the
substitution by Act No. 26 of 2019, reads as
under:
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30. Submission of Resolution plan. —
“
(2) The resolution professional shall
examine each resolution plan received by
him to confirm that each resolution plan
—
(a) provides for the payment of
insolvency resolution process costs in a
manner specified by the Board in priority
to the payment of other debts of the
corporate debtor;
(b) provides for the payment of debts of
operational creditors in such manner as
may be specified by the Board which
shall not be less than—
(i) the amount to be paid to such
creditors in the event of a liquidation of
the corporate debtor under Section 53;
or
(ii) the amount that would have been
paid to such creditors, if the amount to
be distributed under the resolution plan
had been distributed in accordance with
the order of priority in subsection (1) of
Section 53,
whichever is higher, and provides for the
payment of debts of financial creditors,
who do not vote in favour of the
resolution plan, in such manner as may
be specified by the Board, which shall
not be less than the amount to be paid
to such creditors in accordance with
subsection (1) of Section 53 in the event
of a liquidation of the corporate debtor.
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Explanation 1.—For the removal of
doubts, it is hereby clarified that a
distribution in accordance with the
provisions of this clause shall be fair and
equitable to such creditors.
Explanation 2.—For the purposes of this
clause, it is hereby declared that on and
from the date of commencement of the
Insolvency and Bankruptcy Code
(Amendment) Act, 2019, the provisions
of this clause shall also apply to the
corporate insolvency resolution process
of a corporate debtor—
(i) where a resolution plan has not been
approved or rejected by the Adjudicating
Authority;
(ii) where an appeal has been preferred
under Section 61 or Section 62 or such
an appeal is not time barred under any
provision of law for the time being in
force; or
(iii) where a legal proceeding has been
initiated in any court against the
decision of the Adjudicating Authority in
respect of a resolution plan;
(c) provides for the management of the
affairs of the corporate debtor after
approval of the resolution plan;
(d) the implementation and supervision
of the resolution plan;
(e) does not contravene any of the
provisions of the law for the time being
in force;
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(f) conforms to such other requirements
as may be specified by the Board.
Explanation.—For the purposes of clause
(e), if any approval of shareholders is
required under the Companies Act, 2013
(18 of 2013) or any other law for the time
being in force for the implementation of
actions under the resolution plan, such
approval shall be deemed to have been
given and it shall not be a contravention
of that Act or law.”
8.1 The amendment introduced by Act No. 26 of 2019
ensures that the operational creditors under the
resolution plan should be paid the amount
equivalent to the amount which they would have
been entitled to, in the event of liquidation of the
Corporate Debtor under Section 53 of the Code. In
other words, the amount payable under the
resolution plan to the operational creditors should
not be less than the amount payable to them
under Section 53 of the Code, in the event of
liquidation of the Corporate Debtor. The amended
provision also provides that the financial creditors
who have not voted in favour of the resolution
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plan shall be paid not less than the amount which
would be paid to them in accordance with sub
section (1) to Section 53 of the Code, in the event
of liquidation of the corporate debtor. Explanation
(1) to clause (b) of the 30(2) of the Code, for the
removal of doubts, states and clarifies that the
distribution in accordance with this clause shall
be fair and equitable to such creditors.
7
8.2 It is also the mandate of Section 31 of the Code
that the adjudicating authority should be satisfied
that the resolution plan, as approved by the CoC
under subsection (4) of Section 30 meets with the
requirement as referred to in subsection (2) of
Section 30. Only then, the adjudicating authority
shall approve the resolution plan, which shall
7 31 . Approval of resolution plan.— (1) If the Adjudicating Authority is satisfied that the
resolution plan as approved by the committee of creditors under sub-section (4) of
Section 30 meets the requirements as referred to in sub-section (2) of Section 30, it
shall by order approve the resolution plan which shall be binding on the corporate
debtor and its employees, members, creditors, including the Central Government, any
State Government or any local authority to whom a debt in respect of the payment of
dues arising under any law for the time being in force, such as authorities to whom
statutory dues are owed, guarantors and other stakeholders involved in the resolution
plan:
Provided that the Adjudicating Authority shall, before passing an order for
approval of resolution plan under this sub-section, satisfy that the resolution plan has
provisions for its effective implementation.
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then be binding on the Corporate Debtor and its
employees, members, creditors, guarantors and
other stakeholders involved in the resolution plan.
8.3 Section 30(2)(e) also requires the resolution
professional to examine each resolution plan
received by him/her and confirm that it does not
contravene any provisions of law for the time
being in force. Thus, the amended Section 30(2)
read with Section 31 of the Code, enunciates the
manner in which the interests of the creditors
who are not included in the CoC i.e., the
operational creditors and the financial creditors
who have not voted in favour of the resolution
plan, must be protected in the resolution plan by
the resolution professional and the adjudicating
authority.
8.4 It is in this context that the Appellant No. 1
Vistra submits that the resolution plan in
question does not meet the requirements of the
Code, as it extinguishes and vaporises the pledge
created in favour of the Appellant No. 1 – Vistra,
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and thereby, Appellant No. 1 – Vistra, a secured
creditor, , the pledged shares, is left remediless
viz
and worse off than the dissenting financial
creditors, or even the operational creditors.
8.5 The difficulty which arises in the present case is
that, in terms of the decision of this Court in
and
Anuj Jain (supra) Phoenix ARC (supra),
Appellant No. 1 Vistra is to be treated as a
secured creditor, but would not fall under the
category of financial creditors or operational
creditors. Therefore, they would be denied the
benefit of the amendments to Section 30(2) of the
Code made vide Act No. 26 of 2019, or for that
matter Act No. 26 of 2018. Consequently, a very
odd and a peculiar situation is created where a
secured creditor is denied the benefit of the
secured interest i.e., the right to exercise the sale
of the secured interest, yet not be treated as
either a financial creditor or an operational
creditor. In terms of Section 52 of the Code, a
secured creditor in liquidation proceedings has
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the right to relinquish its security interest to the
liquidation estate and receive proceeds from the
sale of assets by the liquidator in the manner
specified under Section 53 of the Code. The
second option given to the secured creditor is to
realise the security interest in the manner
specified in aforesaid Section. Rule 21A of the
Insolvency and Bankruptcy Board of India
8
(Liquidation Process) Regulations, 2016 deals
with the presumption of security interest, which
we need not elaborate for the present decision. If
the secured creditor relinquishes the security
interest, it is then entitled to priority in payment
under clause (b) to subsection (1) to Section 53 of
the Code. The debts owed to the secured creditor
in such event, rank pari passu with the
workmen’s dues for the period 24 months
preceding the liquidation commencement date. As
per Section 52(9) of the Code, where the proceeds
on realisation of secured assets are not adequate
8 For short, Liquidation Process Regulations.
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to repay the debts due to the secured creditors
who have exercised the option to realise the
security interest, the unpaid dues of such secured
creditors are to be paid by the liquidator in terms
of clause (e) of subsection (1) of Section 53 of the
Code.
9. Thus, we are presented with a difficult situation,
wherein, Appellant No.1 – Vistra, a secured
creditor, is being denied the rights under Section
52 as well as Section 53 of the Code in respect of
the pledged shares, whereas, the intent of the
amended Section 30(2) read with Section 31 of the
Code is too contrary, as it recognises and protects
the interests of other creditors who are outside
the purview of the CoC. To our mind, the answer
to this tricky problem is twofold. First is to treat
the secured creditor as a financial creditor of the
Corporate Debtor to the extent of the estimated
value of the pledged share on the date of
commencement of the CIRP. This would make it a
member of the CoC and give it voting rights,
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equivalent to the estimated value of the pledged
shares. However, this may require re
consideration of the dictum and ratio of Anuj
and , which
Jain (supra) Phoenix ARC (supra)
would entail reference to a larger bench. In the
context of the present case, the said solution may
not be viable as the resolution plan has already
been approved by the CoC without Appellant No.
1 Vistra being a member of the CoC. Therefore,
we would opt for the second option. The second
option is to treat the Appellant No. 1 – Vistra as a
secured creditor in terms of Section 52 read with
Section 53 of the Code. In other words, we give
the option to the successful resolution applicant –
DVI (Deccan Value Investors) to treat the
Appellant No.1 – Vistra as a secured creditor, who
will be entitled to retain the security interest in
the pledged shares, and in terms thereof, would
be entitled to retain the security proceeds on the
sale of the said pledged shares under Section 52
of the Code read with Rule 21A of the Liquidation
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Process Regulations. The second recourse
available, would be almost equivalent in monetary
terms for the Appellant No. 1 Vistra, who is
treated it as a secured creditor and is held
entitled to all rights and obligations as applicable
to a secured creditor under Section 52 and 53 of
the Code. This to our mind would be a fair and
just solution to the legal conundrum and issue
highlighted before us.
9.1 We wish to clarify that the directions given by us
would not be a ground for the successful
resolution applicant – DVI to withdraw the
resolution plan which has already been approved
by the NCLAT and by us. The reason is simple.
Any resolution plan must meet with the
requirements/provisions of the Code and any
provisions of law for the time being in force. What
we have directed and the option given by us
ensures that the resolution plan meets the
mandate of the Code and does not violate the
rights given to the secured creditor, who cannot
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be treated as worse off/inferior in its claim and
rights, , an operational creditor or a dissenting
viz
financial creditor.
10. In the end, we must meet the argument raised by
the Respondent No. 1 – Dinkar
Venkatasubramanian, resolution professional for
the Corporate Debtor – Amtek and the
Respondent No. 2 – the CoC of the Corporate
Debtor – Amtek, that the present plea of the
Appellant No.1 – Vistra to be treated as a financial
creditor of the Corporate Debtor Amtek should
be dismissed on the grounds of delay, laches and
acquiescence. The submission is that the
Appellant No. 1 Vistra had not objected to the
resolution plan submitted by the erstwhile
resolution applicant LHG and, as a sequitur , its
nonclassification as a financial creditor in the
CoC of the Corporate Debtor Amtek. Though this
argument had appealed and had weighed with the
NCLAT, in our opinion is untenable since the
resolution plan submitted by erstwhile resolution
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applicant LHG did not in any way affect the
rights or interests of the Appellant No. 1 – Vistra
as a secured creditor in respect of the pledged
shares. Appellant No. 1 – Vistra has elaborately
explained that LHG etc. were in negotiations with
them so as to redeem the pledge and acquire the
shares.
11.
In view of our aforesaid findings, the impugned
judgment of the NCLAT affirming the view taken
by the NCLT is partly modified in terms of our
directions holding that appellant no.1 – M/s.
Vistra ITCL (India) Limited would be treated as a
secured creditor, who would be entitled to all
rights and obligations as applicable to a secured
creditor in terms of Sections 52 and 53 of the
Code, and in accordance with the pledge
agreement dated 05.07.2016.
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Present appeal is disposed of in the above terms
without any order as to costs.
……………………………J.
(M. R. SHAH)
……………………………J.
(SANJIV KHANNA)
New Delhi,
May 4, 2023.
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