Brief Facts:
Reliance Home Finance Ltd. (hereinafter referred to as “RHFL”) proposed the issuance of commercial papers to raise funds. To protect the interest the Applicant got a tripartite Obligor Undertaking executed by Reliance Capital Limited/Corporate Debtor (hereinafter referred to as “CD”) and RHFL. The Applicant agreed to subscribe to the Commercial Papers and according to these commercial papers were executed and issued.
Since, the execution of the Obligor Undertaking, CD diluted its stake but failed to make payments instead of its obligations related to commercial papers.
The applicant issued various legal notices calling the CD to make payments, but no response was received. Subsequent, to this the CD, was admitted into CIRP which the applicant got to know about via public advertisement. He claims that the CD was a guarantor under the Obligor Undertaking. His claim got rejected by the administrator on the ground that CD never guaranteed to discharge the obligations of RHFL in case of default.
Therefore, an Application was filed by Axis Bank seeking admission of claims as a financial creditor of Reliance Capital Ltd.
Contentions of the Applicant:
It is contended that if the terms of the Obligor Undertaking are read as a whole then it can be seen that the CD had an obligation to pay the dues under the Commercial Papers. It was contended that Commercial Paper is raised in form of a promissory note and hence it can be classified as a financial debt under Section 5(8)(c) of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”). Based on the above contentions the Applicant should be considered as a financial creditor. It is also contended that the transaction under the Obligor Undertaking and the issuance of Commercial Papers has a commercial effect of borrowing in terms of Section 5(8)(f) of IBC.
Contentions of the Respondent/Corporate Debtor:
It is contended that the Obligor Undertaking is not in the form of a Guarantee that attracts the definition of financial debt under Section 5(8). The basic ingredient of a guarantee i.e., a promise to perform in the event of a default by a third party is lacking in the present case. The Obligor Undertaking is merely a contingent contract. It is also contended that there is no financial debt owed as there was no disbursal to the CD for consideration against the time value of money and this is a sine qua non for debt to be considered as financial debt.
Observations of the Court:
The court concluded that the Applicant failed to show that the money was disbursed to the CD and therefore the question of default on part of CD does not arise. The court further held that there is no “financial debt” in the present case as firstly there was no disbursal to the CD instead it was made to RHFL under the commercial papers, secondly, there was no borrowing by the CD and lastly, unlike RHFL, the CD did not have any commercial interest in the Commercial Papers. The Court also noted that indemnity of the obligations under an agreement does not equate to a financial debt as per Section 5(8) of the IBC, simply put indemnity would not constitute “financial debt” under Section 5(8) of the IBC.
The Decision of the Court:
The court opined that disbursement is a sine qua non for any debt to be classified as financial debt and in the present case disbursement could not be proved and based on that the application was rejected.
Cause Title: Reserve Bank of India v. Reliance Capital Limited
Bench: Hon’ble Member (Judicial) Justice P.N. Deshmukh (Retd.); Hon’ble Member (Technical) Mr. Shyam Babu Gautam
Decided on: October 07th, 2022
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