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Secured creditors cannot be given the status of financial creditors when such security is created by


The judgment was pronounced by Hon’ble Justice A.M.Khanwilkar and Hon’ble Justice Dinesh Maheshwari.


Jaypee Infratech Limited seeking avoidance of certain transactions, whereby the corporate debtor had mortgaged its properties as collateral securities for the loans and advances made by the lender banks and financial institutions to Jaiprakash Associates Limited, the holding company of JIL, as being preferential, undervalued and fraudulent, in terms of Sections 43, 45 and 66 of the Insolvency and Bankruptcy Code, 2016. Interim Resolution Professional preferred an application before the Adjudicating Authority seeking orders for avoidance of the impugned transactions, whereby several parcels of land were put under mortgage with the lenders of JAL, the holding company of JIL. The contention of IRP, that the transactions in question were preferential, undervalued and fraudulent within the meaning of Sections 43, 45 and 66 of the Code. The contention was adjudicating authority and NCLT necessary direction were issued for avoidance of transaction. NCLAT set aside the order of NCLT and held transaction was no preferential. The IRP preferred the current appeal in Apex Court. The aforesaid appeal, involving the question as to whether the lenders of JAL could be categorized as financial creditors of JIL for the purpose of IBC .

Whether the transactions in question could be said to be preferential and/or undervalued and/or fraudulent, essentially within the meaning of Sections 43, 45, 49 and 66 of the Code.

Contention of appellant that in the exclusionary clause under Section 43(3) (a) , which pertains to the transfer being made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee, the expression “or” will have to be read conjunctively and not in the alternative. It is submitted that the intention of legislature behind enacting a provision like Section 43  is that preferential transactions are avoided so that such assets would be available either with the resolution professional or with the liquidator, as the case may be, to put the corporate debtor back on its wheels or if that is not possible, to ensure that the creditors of the corporate debtor get a fair deal. It is submitted on behalf of this appellant that the Court should consider substance rather than legal form in evaluating the true economic effect of a transaction or a set of transactions in applying the relevant provisions.

The respondents, particularly the lenders of JAL, while maintaining a consistent stand that the transactions in question are not preferential and do not fall under Section 43 of the Code, have submitted that they being the bankers and financial institutions, are regularly engaged in the business of extending loans and other facilities which form the backbone of economic growth; and taking of such securities, including third party security, is one of the normal and ordinary feature of their business and dealings, particularly that of corporate money lending. It is contended that on the true scope of the provisions contained under Section 43 of the Code, with reference to the intent and object, the transactions in question, representing the security and guarantee extended by the corporate debtor JIL, cannot be construed as preferential, particularly when they were entered into in the ordinary course of business and financial affairs of the corporate debtor as also the transferees. It was also submitted by respondent that that relevant transaction does not fall within the relevant time.

The court held that, the sum total of sub-sections (2) and (4) of section 43 is that a corporate debtor shall be deemed to have given a preference at a relevant time if: (i) the transaction is of transfer of property or the interest thereof of the corporate debtor, for the benefit of a creditor or surety or guarantor for or on account of an antecedent financial debt or operational debt or other liability; (ii) such transfer has the effect of putting such creditor or surety or guarantor in a beneficial position than it would have been in the event of distribution of assets in accordance with Section 53; and (iii) preference is given, either during the  period of two years preceding the insolvency commencement date when the beneficiary is a related party (other than an employee), or during the period of one year preceding the insolvency commencement date when the beneficiary is an unrelated party.

Now, the capacity of JAL is admittedly that of the holding company of JIL as its largest equity shareholder (with approximately 71.64 %shareholding). Moreover, JAL had admittedly been the operational creditor of JIL, for an amount of approximately Rs. 261.77 crores. JAL itself maintains that it had been providing financial, technical and strategic support to JIL in various ways. In the given fact situation, it is plain and clear that the transactions in question meet with all the requirements of clause (a) of sub-section (2) of Section 43. in case of liquidation (per Section 53 of the Code), JAL, as an operational creditor, stands much lower in priority than the other creditors and stakeholders. Such submissions, in our view, only strengthen the position that by way of the impugned transfers, JAL is put in a much beneficial position than it would have been in the absence of such transfers. Thus, the corporate debtor JIL has given a preference in the manner laid down in sub-section (2) of Section 43 of the Code.

The provisions contained in Section 43, however, indicate the intention of legislature that when a preference is given at a relevant time and thereby, the beneficiary of preference acquires unwarranted better position in the event of distribution of assets, the same may not be countenanced. As noticed, the preference is given to JAL who is a related party of JIL. Hence, the look-back period is two years preceding insolvency commencement date i.e., 09.08.2017 per clause (a) of sub-section (4) of Section 43; and accordingly, the point of enquiry would be as to whether the preference had been given during the period of two years preceding 09.08.2017. Therefore, the transactions commencing from 10.08.2015 until the date of insolvency commencement shall fall under the scanner. So the mortgages of all property falls within the relevant time.

As noticed, in the scheme of such provisions in the Code, the underlying concept is to disregard and practically annul such transactions which appear, in the course of insolvency resolution or liquidation, to be preferential so as to minimize the potential loss to other stakeholders in the affairs of the corporate debtor, particularly its creditors. To decide whether the transaction is made in the ordinary course of the business, transfer should not be examined in reference to transferee alone. The contention invites for a purposive interpretation of clause (a) of sub-section (3) of Section 43 the expression “or” being distinctive it should be read as “corporate debtor” and “transferee.” There is no iota of doubt that said transaction does not fall within the ordinary business or financial affairs of corporate debtor.

For what has been discussed hereinabove, we are clearly of the view that the transactions in questions are hit by Section 43 of the Code and the Adjudicating Authority, having rightly held so, had been justified in issuing necessary directions in terms of Section 44 of the Code in relation to the transactions concerning Property Nos. 1 to 6.


It was observed by the court that, only such creditor could be the ‘financial creditor’ of the corporate debtor to whom a ‘financial debt’ is owed by the corporate debtor; and, as per sub-section (8) of Section 5 of the Code, the key requirement of a financial debt is ‘disbursal against the consideration for the time value of money’, which includes the events or modes of disbursement as enumerated in sub-clauses (a) to (i) of Section 5(8).

It cannot be said that the corporate debtor owes them any ‘financial debt’ within the meaning of Section 5(8) of the Code; and hence, such lenders of JAL do not fall in the category of the ‘financial creditors’ of the corporate debtor JIL. To be more specific, the security interests created by the corporate debtor JIL over the properties in question stand discharged in whole. Therefore, the respondent-lenders cannot claim any status as creditors of the corporate debtor JIL and there could arise no question of their making any claim to be treated as financial creditors as such.

Therefore, appeals are allowed. The order passed by NCLAT is set aside and order of NCLT is restored.

– Aarthy K



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