In the recent case of I.K. Agencies Private Limited (formerly Dipco Private Limited) v. Jayesh Sanghrajka (resolution professional of Ariisto Developers Private Limited) & Ors. (civil appeal no. 820 of 2020, decided on February 10, 2020), the issue which came up for consideration before the Supreme Court was whether, in the Corporate Insolvency Resolution Process (“CIRP”) of a corporate debtor who was an obligor in respect of credit facilities given to another entity, such lenders who had lent to another entity will constitute financial creditors of the corporate debtor.  

Facts: 

The National Company Law Tribunal (“NCLT”) vide its order dated November 20, 2018 admitted a petition and ordered commencement of CIRP against Ariisto Developers Private Limited (“Corporate Debtor”) and an interim resolution professional was appointed (“IRP”).  

The applicant-appellant raised several objections before the IRP/ resolution professional (“RP”) against the alleged wrongful admission of the claims of Aasan Corporation Solutions Private Limited, IIFL Trustee Limited and Vistra ITCL (India) Limited (“Respondent Nos. 2-4”). The Corporate Debtor was named as an obligor in the documents executed in connection with the amounts advanced to another entity and had also provided security/ guarantee to Respondent Nos. 2-4. The applicant-appellant contended before the IRP/ RP that the claims of Respondent Nos. 2-4 should not be admitted as there was no debtor-creditor relationship between them and the Corporate Debtor, however, their plea was rejected by the RP.  

Thereafter, two applications were filed before the NCLT under Section 60(5) of the Insolvency and Bankruptcy Code, 2016 (“Code”), by the applicant-appellant and one of the other financial creditors of the Corporate Debtor, challenging the admission of the afore-mentioned claims.  

Submissions of applicant-appellant: 

The applicant-appellant contended  that the alleged debt claimed by Respondent Nos. 2-4 from the Corporate Debtor was not a ‘financial debt’ within the meaning of the Code since the Corporate Debtor had not been provided any disbursement for the time value of money.  

Submissions of respondents: 

Respondent Nos. 2-4 contended that since the Corporate Debtor was an obligor and had an express obligation to pay the amounts in respect of the credit facilities advanced, therefore, the Respondent Nos. 2-4 were financial creditors of the Corporate Debtor.  

The RP contended that the fact regarding the Corporate Debtor being a co-obligor was not disputed. Therefore, as per the RP, liability of the co-obligor would be the same as that of the principal debtor. Under the aforesaid documents executed in respect of the credit facilities, in an event of default, the entire outstanding amount as due and payable by each co-obligor was the liability of each co-obligor including the Corporate Debtor.  

Findings:

NCLT 

Upon reviewing the documents executed in respect of the credit facilities, the NCLT observed that the Corporate Debtor was liable to pay the amounts as claimed in the aforesaid documents. Further, the NCLT observed that any amount of interpretation from the side of the applicant-appellant that there is no privity of contract or the term ‘obligor’ did not bind the Corporate Debtor was not tenable.  

Accordingly, the NCLT vide order dated November 13, 2019 dismissed the application. 

National Company Law Appellate Tribunal (“NCLAT”) 

Aggrieved by the order of the NCLT, the applicant-appellant preferred an appeal to the NCLAT.  

The NCLAT agreed with the findings of the NCLT and vide order dated January 24, 2020 dismissed the appeal.  

Supreme Court 

The Supreme Court dismissed the appeal, however, no observations were made in respect of the rival contentions of the parties.   

Therefore, in effect, the classification of Respondent Nos. 2-4 as financial creditors was not interfered with by the Supreme Court.  

In this regard it may be noted that, a few days later, the Supreme Court in the matter of Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited Etc. (Civil appeal nos. 8512-8527 of 2019, decided on February 26, 2020) held that a creditor, in whose favour security is created by the corporate debtor for a loan taken by a third party, shall not be considered a financial creditor of such corporate debtor since in such a case there is no disbursement against the consideration for the time value of money within the meaning of Section 5(8) of the Code.

This update has been written by Aastha (Partner) and Kartik Jigyasi (Associate).