The Supreme Court held that the moratorium under Section 14 barred enforcement actions but did not extinguish claims.
The Supreme Court Bench of Justice Abhay S. Oka and Justice Pankaj Mithal reviewed multiple appeals and held that while the moratorium under Section 14 of the IBC bars enforcement actions, it does not extinguish claims and that the Deed of Hypothecation did not constitute a guarantee under Section 5(8) of the IBC. It clarified the status of Deeds of Hypothecation in determining the appellants' classification as Financial Creditors under the Insolvency and Bankruptcy Code.
The appeals arose from the NCLAT Principal Bench's judgment dated 9th September 2022, addressing the classification of appellants as "Financial Creditors" under Section 5(7) of the Insolvency and Bankruptcy Code, 2016 (IBC). The primary issue was whether the appellants could be recognized as Financial Creditors or, alternatively, as Secured Creditors with rights commensurate with their security interests. Doha Bank, as a respondent, contested the appellants' classification, asserting that their claims were improperly admitted based on Deeds of Hypothecation (DoH) without the presence of a direct lending relationship with the Corporate Debtor.
The judgment delivered by the Supreme Court in this case primarily addresses the classification of appellants as "Financial Creditors" under Section 5(7) of the Insolvency and Bankruptcy Code, 2016 (IBC), and the nature of the security interest in the form of Deeds of Hypothecation (DoH) and the Master Security Trustee Agreement (MSTA). The appellants, who had provided financial facilities to certain RCom entities, were seeking recognition as Financial Creditors of Reliance Infratel Limited (RITL) in the ongoing Corporate Insolvency Resolution Process (CIRP) initiated by Ericsson India Private Limited. The issue before the Court was whether these appellants could be classified as Financial Creditors or merely as Secured Creditors, and whether their claims would be valid under the applicable provisions of the IBC.
The case revolved around whether the DoH and MSTA created a guarantee obligation and whether the appellants could be recognized as Financial Creditors under Section 5(8) of the IBC, which involves guarantees for third-party debts. The appellants argued that the DoH, though titled as such, included provisions that created a guarantee-like obligation, particularly in relation to the Corporate Debtor’s liability for any shortfall in the realization of secured assets. The Supreme Court rejected the argument that the DoH did not create a guarantee and confirmed that these documents when viewed in context, did indeed establish a guarantee under the IBC.
A key aspect of the judgment was the Court’s interpretation of the moratorium under Section 14 of the IBC, which bars the enforcement of claims against the Corporate Debtor during the CIRP. The Supreme Court held that while the moratorium prevented certain enforcement actions, it did not extinguish the appellants' claims, as these claims remained enforceable despite the ongoing resolution process.
The Court further noted that the Resolution Plan, once approved by the Committee of Creditors (CoC) and the National Company Law Tribunal (NCLT), could not be revisited or altered merely on the appellants' objections. It reaffirmed that the CoC's decision to treat the appellants' claims as part of the overall debt pool was final, and the appellant’s participation in the voting process effectively extinguished any rights to be treated as secured creditors. The judgment underscored that the IBC's primary purpose is rehabilitation and revival, not debt recovery and that the appellants had implicitly accepted pari passu distribution by voting in favour of the Resolution Plan.
In conclusion, the Supreme Court clarified that the moratorium under Section 14 does not affect the validity of claims but bars their enforcement, and it upheld the appellants' claims as Financial Creditors based on the guarantee provisions in the DoH. This decision highlighted the legal interpretation of security documents and the scope of the IBC’s provisions on creditor classification.
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