Judgment Summaries (Supreme Court) Anuj Jain, IRP for Jaypee Infratech

  February 27, 2022

Case Summary:

Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. v. Axis Bank Ltd. & Ors. {Supreme Court of India; February 26, 2020}


Committee of Creditors CoC
Corporate Debtor CD
Corporate Insolvency Resolution Process CIRP
Financial Creditor FC
The Insolvency and Bankruptcy Board of India IBBI
Insolvency and Bankruptcy Code, 2016 the Code
National Company Law Appellate Tribunal NCLAT
National Company Law Tribunal NCLT
Operational Creditor OC

FACTS: Jaypee Infratech Limited (“JIL”) was a part of the Jaiprakash Associates Limited (“JAL”) a.k.a. the Jaypee Group against which insolvency proceedings were initiated in August 2017. In May 2018 the RP had claimed certain mortgage deeds made for the assets of JIL by its promoters and directors to be preferential, undervalued and fraudulent transactions under Sections 43, 45 and 60 of the Code respectively. These mortgages were made to provide security for the loans taken by JAL. The mortgages were initially created in 2013 and 2014. These were however re-mortgaged or extended in modified during the relevant period of two preceding years. The lenders in whose favour the securities were furnished also claimed to be the FCs of the CD JIL and demanded to be a part of its CoC. In May 2018, NCLT refused to recognize these lenders to be FCs of the CD JIL and also held the mortgage transactions to be preferential, undervalued or fraudulent under Sections 43, 45 and 60 respectively. In August 2019 the NCLAT reversed both of these orders of the NCLT and held that the mortgage transactions were not preferential, fraudulent or undervalued and also the lenders of JAL against whom the mortgages were created were held to be the FCs of JIL. The RP appealed against the NCLAT’s order before the Supreme Court.

ISSUES: The issues involved in the case are:

  • Whether the transactions in question deserve to be avoided as being preferential, undervalued and fraudulent, in terms of Sections 43, 45 and 66 of the Code?
  • Whether the respondents, who are lenders of JAL, qualify as the FCs of the CD JIL on the ground that JIL’s assets have been furnished as security against the loans taken by JAL?


CONTENTIONS OF THE APPELLANTS: The RP contended that the transactions must be avoided as they were preferential owing to the fact that the transactions put JAL and an OC of JIL in a more beneficial position than they would have been having the assets been distributed in accordance with Section 53 of the Code. It was contended on behalf of the appellants that the re-mortgages were made with such modification in terms that it was done only to give preferential treatment to JAL and certain creditors as it increased the number of facilities. Further that the transactions were not made in the ordinary course of business. The exclusionary clause under Section 43(3)(a) which dealt with the transfer in the ordinary course of business of CD ‘or’ the transferee was highlighted by the appellants and it was urged that the word ‘or’ must be construed as ‘and’ as that would allow situations like the present one where banks have accepted security from a third party escape the provision of preferential transactions. The following cases were relied upon to support the contention that ‘or’ can be read as ‘and’ when the same is needed to interpret a provision in harmony with the legislative intent:

  1. State of Bombay v. R.M.D. Chamarbaugwala and Anr.
  2. Mazagaon Dock Ltd v. Commissioner of Income-Tax and Excess Profits Tax

The homebuyers further relying on the decision in the case of Downs Distributing Co Pty Ltd v. Associated Blue Star Stores Pty Ltd. (“Downs Distributing case”) reiterated that the transactions were not made in the ordinary course of business and substantiated the arguments of the Resolution Professional.

CONTENTIONS OF THE RESPONDENT: The respondents contended that transactions are not preferential and the transactions regarding loans and securities and facilities attached to them are a part of the ordinary course of business. Further, that giving third party securities is legally permissible and will have far-reaching economic consequences if held to be preferential. The following major contentions were made by the Axis Bank:

  1. The transactions were not made within the relevant time which is the two years preceding CIRP. The re-mortgaging cannot be considered a substantive transaction for it to attract the provision of Section 43.
  2. The ingredients of Section 43(2) have not been met. It was argued that the same must be strictly construed and that the position of JAL does not change even after re-mortgages.
  3. The security was provided in the ordinary course of business. It is a common commercial practice and no creditor has raised any dispute against the same.

The Standard Chartered Bank and the ICICI bank made contentions on similar grounds. JAL contended that it had been providing financial support and other assistance to JIL as its holding company and the same depicted their relationship. Based on the same the impugned transactions were made in the ordinary course of business and the mortgage fell within the ambit of Section 186 of the Companies Act, 2013.

HELD ON ISSUE I: Regarding the first issue, the Supreme Court began by discussing the historical background of the Code and its objects. The object of Section 43 was discussed noting law dictionary definitions of preference and preferential transfer. The position of such transfers in the US and UK bankruptcy laws was taken into account. Further, the importance of establishing that the preference occurred during the ‘relevant time’ was discussed. The case of Pioneer Urban was referred.

The principle of noscitur a sociis was applied which means that – “the questionable meaning of a doubtful word could be derived and understood from its associates and context”. The case of  Downs Distributing case was noted wherein it was held that for a transaction to become part of the “ordinary course of business” of the CD it must be established as a part of “the undistinguished common flow of business done” and not of any ‘special’ circumstance. The court found the impugned transactions to fall out of the purview of the ordinary course of business as JIL was a special purpose vehicle formed for the construction of the Yamuna Expressway. Therefore, regularly securing debts for its holding company nowhere come in its ordinary course of business. The transactions were held to be preferential. The Resolution Professional was directed to sift through the transaction of CD and make note of all the beneficiaries, categorize them into related parties or non-related and shortlist the preferential transactions. All the shortlisted transactions were directed to refer to the NCLT which would pass appropriate orders for the avoidance of the transactions.


BACKGROUND: The ICICI Bank and Axis Bank had raised the matter before NCLT that they must be considered as the FCs of the CD JIL. The NCLT had rejected their claims. The Supreme Court noted the findings of NCLT that the security interest of the Banks does not fall within the definition of financial debt under Section 5(8). Noting the judgement in the case of Nikhil Mehta and Sons v. AMR Infrastructure Ltd. Company the NCLAT held that there was disbursal of an amount in the present case against the time value of money to the CD by the Banks. Further that the mortgages executed in the present case were not in the nature of guarantee or indemnity.

CONTENTIONS OF THE APPELLANT: The appellants contended that the Banks are not FCs of the CD as the CD does not owe a financial debt to them and security interest created without any disbursal of credit towards the CD JIL cannot amount to financial debt. The judgements of Swiss Ribbons  v. Union of India and Dr B.V.S. Lakshmi v. Geometrix Laser Solutions (P) Ltd. was relied upon for the same.

Further, it was argued that the mortgages were tri-partite with different mortgagor and debtor and therefore does not fall under Section 126 of the Contract Act.

Further while countering the contention of the respondents that a secured creditor is by default a FC also, the appellants argued that the existence of security interest is not the basis of determining whether a creditor is an FC or not as even an unsecured creditor can be a FC.

CONTENTIONS OF THE RESPONDENT: The decision of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta was referred to by the respondents that a secured creditor automatically becomes the FC. The respondents submitted that mortgage is of the character of secured debt. The purpose of mortgage was highlighted and it was urged that a mortgaged debt qualifies as a financial debt even if no amount is directly disbursed to the CD. They also relied on the judgement of Pioneer Urban Land and Infrastructure Ltd. & Anr. v. Union of India & Ors. that financial debts include money not directly disbursed.

HELD ON ISSUE II: The Supreme Court held that the securities cannot be covered under the head of financial debt and consequently the creditors are not FCs of the CD JIL. The requirement of disbursal against the time value of money was not fulfilled. It was also clarified that every secured creditor is not a financial creditor. Further, noting the judgements of Swiss Ribbons and Pioneer Urban, it was noted that FCs must be directly involved in assessing the viability of the CD and other creditors cannot be treated as FCs.


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