The Supreme Court clarified several including the scope and ambit for preferential transaction adjudication, as well as the nature of the financial debt, particularly in relation to third-party mortgages.
In the instant case titled, Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited vs. Axis Bank Limited Etchttps. two issues were raised before the Supreme Court for clarification, they are
Whether it is possible that the contested transactions are preferential transactions under the Code?
Whether is it possible to classify the lenders of a corporate debtor's holding company as financial creditors of the corporate debtor?
The Bench stated in deciding the first issue that the requirements of Section 43 of the Code, as well as the following questions, must be evaluated to determine whether a transaction falls within the scope of Section 43: -
“As to whether such transfer is for the benefit of a creditor or a surety or a guarantor?
As to whether such transfer is for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor?
As to whether 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 being made in accordance with Section 53?
If such transfer had been for the benefit of a related party (other than an employee), whether the same was made during the period of two years preceding the insolvency commencement date; and if such transfer had been for the benefit of an unrelated party, as to whether the same was made during the period of one year preceding the insolvency commencement date?
As to whether such transfer is not an excluded transaction in terms of sub-section (3) of Section 43?”
The bench stated that according to Section 43 of the Code, the relevant time is two years prior to the insolvency commencement date if the preference is granted to a related party, and one year prior to the insolvency commencement date if the preference is offered to an unconnected party.
The first issue was concluded by answering the above-mentioned questions and concluding that "since the impugned transactions have the effect of putting JAL in a better position than it would have been if assets were distributed in accordance with Section 53 of the Code, the impugned transactions have the effect of putting JAL in a better position than it would have been if assets were distributed in accordance with Section 53 of the Code." As a result, the corporate debtor JIL has provided a preference in accordance with sub-section (2) of Section 43 of the Code of Civil Procedure.
As on the second issue, the Bench relied on Swiss Ribbons Private Limited & Anr. v. Union of India & Ors. (2019 SCC OnLine SC 73), holding that the financial creditor acquires a unique position, similar to that of a guardian, through its direct involvement in the functional existence of the corporate debtor. It was further concluded that if a corporate debtor has mortgaged its assets to protect the debts of a third party, the debt may be classified as a mortgage loan under Section 3(10) of the Code and cannot be classified as a "financial debt" under Section 5 of the Code (8).
The Bench concluded that, while the lenders of JAL may be secured creditors because of the mortgages, they cannot be said to owe the corporate debtor any 'financial debt' because the mortgages are not for any loan, facility, or advance to the corporate debtor or to protect any facility or security of the corporate debtor. As a result, JAL's lenders are not considered "financial creditors."