Indemnity Of Obligations Under An Agreement Is Not A 'Financial Debt' Under IBC: NCLT Mumbai

Background Facts

In April 2019, Reliance Home Finance Limited ("RHFL") proposed the issuance of Commercial Papers to raise funds to meet short term working capital requirements. In order to protect its interest, the Axis Bank Ltd. ("Applicant") got a tripartite Obligor Undertaking executed by Reliance Capital Ltd. ("Corporate Debtor") and RHFL. This was to ensure that any dilution of Corporate Debtor's stake ("Stake Sale") in Reliance Nippon Life Asset Management Ltd. ("Reliance Nippon") would be utilized towards the payment due under the Commercial Papers.

The Applicant agreed to subscribe to the Commercial Papers issued by RHFL of a face value of Rs. 124 Crore. Since then the Corporate Debtor has diluted and sold its stake in Reliance Nippon (reduced to 4.28% from 42.88%) and has realised Rs. 5,500 Crores from the said sale. However, despite the stake sale, Corporate Debtor failed to make payment towards its payment obligations in relation to the Commercial Papers.

Thereafter, Adjudicating Authority had commenced Corporate Insolvency Resolution Process ("CIRP") against the Corporate Debtor. The Administrator rejected the Applicant's claim, stating that the Obligor Undertaking was for the purpose of utilizing money/proceeds from the sale of Reliance Nippon shares in a certain manner and not for repayment of financial debt of RHFL. The Corporate Debtor had not guaranteed to discharge the obligations of RHFL in case of default.

The Applicant filed an application under Section 60(5) of the Insolvency and Bankruptcy Code, 2016 ("IBC") seeking admission of its claim amounting to Rs.1,45,02,42,799.04/-, in the capacity of Financial Creditor of Corporate Debtor.

Contention Of Applicant

It was submitted that Obligor undertaking was in the nature of a Guarantee towards the payments under the Commercial Papers. Therefore, covered within the definition of 'financial debt' under Section 5(8) of IBC. The Obligor Undertaking and the Commercial papers must be construed together to constitute a financial debt.

Decision Of NCLT

The Bench observed that Obligor Undertaking is not a Guarantee that attracts the definition of 'financial debt' under Section 5(8). Section 126 of the Contract Act, 1872 postulates that in a 'guarantee' there must be a contract to perform or discharge the liability of a third party, in case of that third party's default.

Under the Obligor Undertaking, the Corporate Debtor had not promised to perform RHFL'S obligation to pay under the Commercial Papers or discharge its liability in the event of default. The Obligor Undertaking was merely a contingent contract. The Corporate Debtor had undertaken that upon the sale of its or its affiliate shares in Reliance Nippon, it would use the proceeds to either (i) purchase the Commercial Papers from the Applicant; or (ii) infuse funds into RHFL to redeem the Commercial Papers issued by RHFL. This undertaking was not premised on RHFL'S default in serving the Commercial Papers, a basic ingredient of a 'guarantee'. It was held that an indemnity of the obligations under the Agreement will equally not constitute a 'financial debt' under Section 5(8) of IBC.

The Bench further opined that there had been no disbursal to the Corporate Debtor for consideration against the time value of money. Without proof of disbursement, the said amount cannot be claimed as financial debt. Disbursement is a sine qua non for any debt to fall within the ambit of the definition of financial debt

The application was rejected.

Case Title: Reserve Bank of India v Reliance Capital Limited

Case No.: CP. (IB) No. 1231/MB/C-I/2021

Counsel For Applicant: Mr. Vikram Nankani, Sr. Advocate.

Counsel for Respondent: Mr. Rohan Kadam, Advocate.

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