Summary
The Supreme Court held that an assignee lender was not a financial creditor of a company which had pledged shares to secure its parent’s borrowing. The pledge and undertaking contained no promise by that company to repay or discharge the borrower’s liability and did not constitute a guarantee. A security interest alone did not establish financial debt owed by the pledgor. The ruling was confined to financial-creditor status and expressly preserved the lender’s other proceedings to establish its rights.
Issues
- Whether a third-party share pledge and undertaking constituted a guarantee giving the lender financial-creditor status against the pledgor company.
Provisions considered
- Sections 5(7) and 5(8)(i), Insolvency and Bankruptcy Code, 2016Financial-creditor status requires financial debt owed by the corporate debtor. A pledge securing another entity’s loan, without an undertaking to discharge that liability, did not create the claimed guarantee debt. (¶¶ 19, 20, 21, 23, 24, 29, 30, 31, 32)
- Sections 126 and 172, Indian Contract Act, 1872A guarantee involves a promise to perform or discharge a third person’s liability on default; a pledge is bailment of goods as security. The documents here created the latter without the former repayment undertaking. (¶¶ 22, 23, 24, 25)
Held
- The corporate debtor was not a party to the loan facility and its subsequent documents pledged specified shares as security. They did not promise repayment of the borrower’s loan or discharge of its liability on default. (¶¶ 15, 16, 17, 18, 23, 24)
- A creditor holding only third-party collateral is not thereby a financial creditor of the collateral provider. The reasoning of Anuj Jain concerning third-party mortgages also applied to this pledge. (¶¶ 29, 30, 31)
- The contention that the pledgor benefited from its parent’s borrowing did not overcome the absence of an obligation by it to repay the loan. The lender was at best a secured creditor in relation to that security. (¶ 31)
- The decision addressed only financial-creditor status under the Code. It did not prejudice other proceedings brought to establish the appellant’s rights according to law. (¶ 32)
Result
Appeal dismissed without costs; rejection of the financial-creditor claim upheld, with other legal rights and proceedings preserved.