Holding

The mortgage transactions are deemed preferential under Section 43 of the IBC and the lenders of JAL are not financial creditors of JIL.

Summary

Jaypee Infratech Ltd (JIL) mortgaged its land to secure loans taken by its holding company Jaiprakash Associates Ltd (JAL) from a consortium of banks. The Interim Resolution Professional (IRP) applied to the NCLT for avoidance of these transactions under Sections 43, 45 and 66 of the Insolvency and Bankruptcy Code, 2016, alleging they were preferential, undervalued and fraudulent. The NCLT held the transactions to be preferential and ordered the release of the securities; the NCLAT overturned that order and allowed the banks to be treated as financial creditors of JIL. The Supreme Court reversed the NCLAT decision, holding that the mortgage transactions satisfy the criteria of a deemed preference under Section 43 and that the banks, being merely secured creditors without a financial debt owed by JIL, cannot be classified as financial creditors. Consequently, the NCLT order was upheld and the NCLAT order set aside.

Issues considered

The mortgage transactions by JIL constitute a preferential transaction within the meaning of Section 43 of the IBC.
Whether the transactions are also undervalued or fraudulent under Sections 45 and 66 of the IBC.
Whether the lenders of JAL can be categorized as financial creditors of JIL under Sections 5(7) and 5(8) of the IBC.
The proper interpretation of the word ‘or’ in clause (a) of Section 43(3) – whether it should be read as ‘and’.
The applicability of the look‑back period for related parties under Section 43(4).

Legislation cited

Companies Act, 2013s. 328, s. 329
Indian Contract Act, 1872s. 124, s. 126, s. 127
Insolvency and Bankruptcy Code, 2016s. 43, s. 44, s. 45, s. 46, s. 5(7), s. 5(8), s. 60(5), s. 66
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
Transfer of Property Act, 1882s. 58

Subjects

Insolvency and Bankruptcy CodeSection 43preferential transactionfinancial creditormortgagelook‑back periodsecured creditorundervalued transactionfraudulent transactionCorporate insolvency resolution process

Judgment

[2020] 8 S.C.R. 291 291

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR A
JAYPEE INFRATECH LIMITED
v.
AXIS BANK LIMITED ETC. ETC.
(Civil Appeal Nos. 8512-8527 of 2019 Etc.) B
FEBRUARY 26, 2020
[A. M. KHANWILKAR AND DINESH MAHESHWARI, JJ.]
Insolvency and Bankruptcy Code, 2016:
Sections 5(7), 5(8), 7, 43, 45 and 66 – Corporate insolvency C
resolution process against corporate-debtor company – The claim
of lenders of the holding Company of corporate-debtor for being
recognized as financial creditors of the corporate-debtor on the
strength of transactions whereby the corporate-debtor had
mortgaged its properties as collateral securities for the loan to the
D
holding company of the corporate-debtor – The claim rejected by
Interim Resolution Professional (IRP) – Application by IRP seeking
avoidance of the mortgage transactions as being preferential,
undervalued and fraudulent u/ss. 43, 45 and 46 – National Company
Law Tribunal (NCLT) allowed the application of IRP – Appellate
Tribunal (NCLAT) set aside the order of NCLT – Appeal to Supreme E
Court – Held: If a transaction entered into by a corporate-debtor is
not falling in either of the exceptions provided in sub-section (3) of
s. 43, and satisfies the threefold requirements of sub-sections (2)
and (4) thereof, it would be deemed to be a preference during a
relevant time, whether or not, it were so and whether or not it were
F
intended or anticipated to be so – The transactions in question were
of deemed preference to related party during the look-back period
of two years – The transactions also cannot be said to have been
done in the ordinary course of business and hence are not excepted
transfers in terms of sub-section (3) – Thus, the transactions are hit
by s. 43 – The questions as to whether the transactions were G
undervalued or fraudulent in terms of ss. 45 and 66, are left open –
For a debt to become ‘financial debt’, the basic elements are that it
ought to be a disbursal against the consideration for time value of
money – Therefore, for a person to be designated as ‘financial
creditor’ of the corporate-debtor, the corporate-debtor needs to owe
H
291
292 SUPREME COURT REPORTS [2020] 8 S.C.R.

A a financial debt to such person – Thus, a third party to whom the
corporate-debtor does not owe a ‘financial debt’ cannot become its
‘financial creditor’ for the purpose of insolvency and liquidation
process of corporate persons – In the present case, the mortgage
transactions in questions since were neither towards any loan,
facility or advance to the corporate-debtor nor towards protecting
B
any facility or security of the corporate-debtor, the lenders of the
holding company of the corporate-debtor, may fall in the category
of ‘secured creditors’, but not in the category of ‘financial creditors’
within meaning of s. 5(8) – Therefore the claim of the lenders of
holding company rightly rejected by IRP.
C Interpretation of Statutes:
Definition clause – Interpretation of – Where a word is defined
to ‘mean’ something, the definition is prima facie restrictive – Where
the word defined is declared to ‘include’ something more, the
definition is prima facie extensive.
D
Mortgage -
Re-mortgage – Legality of – Held: There is no concept of re-
mortgage – On release by mortgagee, a mortgage ceases to exist –
The so-called re-mortgage can only be regarded as fresh mortgage.
E Judgment:
Observations in a judgment are required to be read in the
context in which they appear.
Words and Phrases:
F Expressions ‘financial debt’ ‘financial creditors’, ‘operational
creditor’, ‘secured creditor’ and ‘unsecured creditor’ – Meaning of
in the context of Insolvency and Bankruptcy Code, 2016.
Allowing the appeals, the Court
HELD: 1.1. The Insolvency and Bankruptcy Code, 2016
G came to be enacted to consolidate and amend the laws relating to
reorganisation and insolvency resolution of corporate persons
and even of partnership firms and individuals in a time bound
manner; the objectives, inter alia, being for maximisation of value
of assets of such persons and balance of interest of all the
H stakeholders. [Para 16.1][356-C]
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 293
INFRATECH LTD. v. AXIS BANK LTD.

Swiss Ribbons Private Limited and Anr. v. Union of India A
and Ors.: (2019) 4 SCC 17 : [2019] 3 SCR 535 –
referred to.
1.2 Though the provisions relating to ‘preferential
transactions and relevant time’ (in Section 43 of the Code) occur
in Chapter III of Part II, relating to liquidation process, but such B
provisions being for avoidance of certain transactions and having
bearing on the resolution process too, by their very nature, equally
operate over the corporate insolvency resolution process (CIRP),
and hence, the resolution professional is obligated, by virtue of
clause (j) of sub-section (2) of Section 25 of the Code, to file
application for avoidance of the stated transactions in accordance C
with Chapter III. That being the position, Section 43 of the Code
comes into full effect in CIRP too. [Para 16.3][358-F-H]
2.1 The basic concept of ‘preference’ as per the law
dictionaries and lexicons is the act of ‘paying or securing to one
or more of his creditors, by an insolvent debtor, the whole or part of D
their claims, to the exclusion of the rest’. Various jurisdictions have
defined, described and dealt with ‘preferential transfer’ as being
the transaction where an insolvent debtor makes transfer to or
for the benefit of a creditor so that such beneficiary would receive
more than what it would have otherwise received through the E
distribution of bankruptcy estate. Section 547 of US Bankruptcy
Code provides for the circumstances in which a bankruptcy
trustee may, for the benefit of the estate in question, recover a
preferential transfer from the transferee. Section 239 of the UK
Insolvency Act, 1986 also provides for the same measures for
avoidance of preference given to any person at the relevant time. F
The time factor also plays a crucial role in such measures of
avoidance. This ‘relevant time’ for the purpose of avoidance of
preferential transactions is now commonly referred to as the
‘look-back’ period. Significantly, when the preferential transaction
is with an unconnected party, the look-back period is G
comparatively lesser than that of the transaction with a connected
party, who is referred to as ‘insider’ or ‘related party’.
[Paras 17.1 and 17.2][359-B; 360-C-F]
Advanced Law Lexicon by P. Ramanatha Aiyar (5th Ed.-
Vol 3, p.4002) – referred to. H
294 SUPREME COURT REPORTS [2020] 8 S.C.R.

A 2.2. The provisions contained in Section 43 of the Code,
however, indicate the intention of legislature that when a
transaction falls within the co-ordinates defined therein, the same
shall be deemed to be a preference given at a relevant time and
shall not be countenanced. Therefore, intent may not be of a
defence or support of any preferential transaction that falls within
B
the ambit of Section 43 of the Code. [Para 17.4][362-A-B]
UNCITRAL Legislative Guide on Insolvency Law –
referred to.
3.1 The consequences of offending preferential transaction
C are, obviously, drastic and practically operate towards annulling
the effect of such transaction. These provisions need to be strictly
construed. However, even if Section 43 of the Code is strictly
construed, the underlying principles and the object cannot be
lost sight of. In other words, the construction has to be such that
leads towards achieving the object of these provisions. [Para
D 18][364-E-G]
Devinder Singh & Ors v. State of Punjab & Ors: (2008)
1 SCC 728 : [2007] 11 SCR 475; Nareshbhai v. Union
of India (2019) SCC Online SC 1027 – referred to.

E 3.2 If twin conditions specified in sub-section (2) of Section
43 are satisfied, the transaction would be deemed to be of
preference. As per clause (a) of sub-section (2) of Section 43, the
transaction, of transfer of property or an interest thereof of the
corporate debtor, ought to be for the benefit of a creditor or a
surety or a guarantor for or on account of an antecedent financial
F debt or operational debt or other liabilities owed by the corporate
debtor; and as per clause (b) thereof, such transfer ought to be of
the effect of putting such creditor or surety or guarantor in
beneficial position than it would have been in the event of
distribution of assets under Section 53 of the case. [Para
G 18.1][365-B-C]
3.3 However, merely giving of the preference and putting
the beneficiary in a better position is not enough. For a preference
to become an offending one for the purpose of Section 43 of the
Code, another essential and rather prime requirement is to be
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satisfied that such event, of giving preference, ought to have A
happened within and during the specified time, referred to as
“relevant time”. The relevant time is reckoned, as per sub-
section (4) of Section 43 of the Code, in two ways: (a) if the
preference is given to a related party (other than an employee),
the relevant time is a period of two years preceding the
B
insolvency commencement date. [Para 18.2][365-D-E]
3.4 However, even if a transaction of transfer otherwise
answers to and comes within the scope of sub-sections (4) and
(2) of Section 43 of the Code, it may yet remain outside the ambit
of sub-section (2) because of the exclusion provided in sub-section
(3) of Section 43. Such exclusion is provided to: (a) a transfer C
made in the ordinary course of business or financial affairs of the
corporate debtor or transferee; (b) a transfer creating security
interest in a property acquired by the corporate debtor to the
extent that such security interest secures new value and was
given at the time specified in sub-clause (i) of clause (b) of Section D
43(3) and subject to fulfilment of other requirements of sub-clause
(ii) thereof. The meaning of the expression “new value” has also
been explained in this provision. [Paras 18.3 and 18.4][365-G;
366-A-C]
3.5 By way of these statutory provisions, legal fictions are E
created whereby preference is deemed to have been given; and
is deemed to have been given at a relevant time, if the stated
requirements are satisfied. The word ‘deemed’ in essence, is to
deem what may or may not be in reality, thereby requiring the
subject-matter to be treated as if real. Applying the principles to
the provision in Section 43 of the Code, it could reasonably be F
concluded that any transaction that answers to the descriptions
contained in sub-sections (4) and (2) is presumed to be a
preferential transaction at a relevant time, even though it may
not be so in reality. In other words, since sub-sections (4) and (2)
are deeming provisions, upon existence of the ingredients stated G
therein, the legal fiction would come into play; and such
transaction entered into by a corporate debtor would be regarded
as preferential transaction with the attendant consequences as
per Section 44 of the Code, irrespective whether the transaction

H
296 SUPREME COURT REPORTS [2020] 8 S.C.R.

A was in fact intended or even anticipated to be so. [Paras 19.2
and 19.3][367-A; 369-G-H; 370-A-C]
Pioneer Urban Land and Infrastructure Ltd. & Anr. v.
Union of India & Ors.: (2019) 8 SCC 416 : [2019] 10
SCR 381; Hindustan Cooperative Housing Building
B Society Limited v. Registrar, Cooperative Societies and
Anr. (2009) 14 SCC 302 : [2009] 2 SCR 331 - relied
on.
3.6 Thus, if a transaction entered into by a corporate debtor
is not falling in either of the exceptions provided by sub-section
C (3) and satisfies the three-fold requirements of sub-sections (4)
and (2) of Section 43 of the Code, it would be deemed to be a
preference during a relevant time, whether or not in fact it were
so; and whether or not it were intended or anticipated to be so.
[Para 19.5][370-E-F]
D 3.7 In order to find as to whether a transaction, of transfer
of property or an interest thereof of the corporate debtor, falls
squarely within the ambit of Section 43 of the Code, ordinarily,
the following questions shall have to be examined in a given case:
(I) As to whether such transfer is for the benefit of a creditor or
a surety or a guarantor? (ii) As to whether such transfer is for or
E on account of an antecedent financial debt or operational debt or
other liabilities owed by the corporate debtor? (iii) 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
F Section 53? (iv) If such transfer had been for the benefit of a
related party (other than an employee), as to 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
G date? (v) As to whether such transfer is not an excluded
transaction in terms of sub-section (3) of Section 43? [Para
20][370-F-G; 371-A-D]
3.8 09.08.2017 is the insolvency commencement date in
the present case. The transactions in question, even if of putting
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the concerned properties under mortgage with the lenders, carry A
the ultimate effect of working towards the benefit and advantage
of the borrower i.e., the holding company who obtained loans and
finances by virtue of such transactions. It is true that there had
not been any creditor-debtor relationship between the lender
banks and corporate debtor but that will not be decisive of the
B
question of the ultimate beneficiary of these transactions. The
mortgage deeds in question, entered by the corporate debtor to
secure the debts of its holding company obviously, amount to
creation of security interest to the benefit of the holding company.
[Para 22.2.1][373-D-F]
3.9 The corporate debtor owed antecedent financial debts C
as also operational debts and other liabilities towards the holding
company . This puts the holding company in such capacity that it
is a related party to the corporate debtor and is a creditor as also
its surety. In this scenario there is nothing to doubt that the
corporate debtor has given a preference by way of the mortgage D
transactions in question for the benefit of its related person i.e.
its holding company (who has been the creditor as also surety for
the corporate debtor) for and on account of antecedent financial
debts, operational debts and other liabilities owed to such related
person. In the given fact situation, it is plain and clear that the
transactions in question meet with all the requirements of clause E
(a) of sub-section (2) of Section 43. [Paras 22.2.2 and 22.3][374-
A-C]
3.10 In the given scenario, the requirements of clause (b)
of sub-section (2) of Section 43 are also met fair and square. By
way of the impugned transfers, the holding company is put in a F
much beneficial position than it would have been in the absence
of such transfers vis-à-vis other creditors. The applicability of
clauses (a) and (b) of sub-section (2) of Section 43 of the Code is
clear and complete in relation to the impugned six transactions.
[Para 22.4][374-D-E; 375-A] G
4.1 Even when all the requirements of sub-section (2) of
Section 43 of the Code are satisfied, in order to fall within the
mischief sought to be remedied by Section 43, the questioned
preference ought to have been given at a relevant time i.e. within
the period specified in sub-section (4) of Section 43. The extent H
298 SUPREME COURT REPORTS [2020] 8 S.C.R.

A of ‘relevant time’ is different with reference to the relationship
of the beneficiary with the corporate debtor inasmuch as, for the
persons falling within the expression ‘related party’ within the
meaning of Section 5 (24) of the Code, such period is of two years
before the insolvency commencement date whereas it is one year
in relation to the person other than a related party. [Para 23][375D-
B
F]
4.2. The scheme of the Code is to disapprove and disregard
such preferential transaction which falls within the ambit of Section
43 and to ensure that any property likely to have been lost due to
such transaction is brought back to the corporate debtor; and if
C any encumbrance is created, to remove such encumbrance so as
to bring the corporate debtor back on its wheels or in other event
(of liquidation), to ensure pro rata, equitable and just distribution
of its assets. The provisions contained in Section 43, however,
indicate the intention of legislature that when a preference is
D given at a relevant time and thereby, the beneficiary of preference
acquires unwarranted better position in the event of distribution
of assets, the same may not be countenanced. Looking to the
scheme of the Code and the principles applicable for the conduct
of the affairs of a corporate person, it cannot be said that anything
of a new liability has been imposed or a new right has been created.
E Maximisation of value of assets of corporate persons and
balancing the interests of all the stakeholders being the objectives
of the Code, the provisions therein need to be given fuller effect
in conformity with the intention of the legislature. [Para
23.1.1][376-F-G; 377-C-E]
F Purbanchal Cables & Conductors Pvt. Ltd. & Ors v.
Assam State Electricity Board & Ors. (2012) 7 SCC 462
: [2012] 6 SCR 905 — distinguished.
4.3 By virtue of proviso to sub-section (3) of Section 1 of
the Code, different dates can be provided for enforcement of
G different provisions of the Code; and in fact, different provisions
have been brought into effect on different dates. However, after
coming into force of the provisions, if a look-back period is
provided for the purpose of any particular enquiry, it cannot be
said that the operation of the provision itself would remain in
H hibernation until such look-back period from the date of
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 299
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commencement of the provision comes to an end. There is A
nothing in the Code to indicate that any provision in Chapter II
or Chapter III be taken out and put in operation at a later date
than the date notified. [Para 23.1.2][377-F-H; 378-A]
4.4. The preference was given to the holding company who
was a related party of the corporate debtor. Hence, the look- B
back period is two years preceding insolvency commencement
date i.e., 09.08.2017 per clause (a) of sub-section (4) of Section
43; and accordingly, the point of enquiry would be as to whether
the preference had been given during the period of two years
preceding 09.08.2017. Therefore, the transactions commencing
from 10.08.2015 until the date of insolvency commencement shall C
fall under the scanner. [Para 24][378-B-C]
4.5 The plea that most of the impugned transactions were
not of creation of any new encumbrance by the corporate debtor
and in fact, the transaction in respect of the 5 properties in
question had been of so-called re-mortgage/s cannot be accepted. D
In the first place, on release by the mortgagee, the mortgage
ceases to exist and it is difficult to countenance the concept of a
so-called re-mortgage. The so-called re-mortgage, on all its legal
effects and connotations, could only be regarded as a fresh
mortgage; and it obviously befalls on the mortgagor to consider E
at the time of creating any fresh mortgage as whether such a
transaction is expedient and whether it should be entered into at
all. [Para 24.3.1.][379-C-E]
4.6 Thus, the transactions in question had been of deemed
preference to related party i.e. the holding company by the F
corporate debtor during the look-back period of two years and
have rightly been held covered within the period envisaged by
sub-section (4) of Section 43 of the Code. [Para 24.5][381-B-C]
IDBI Bank Ltd. v. The Administrator, Kothari Orient
Finance Ltd., the Official Liquidator & S. Ramaiah : G
(2009) 152 Comp Case 282 (Mad); Monarch
Enterprises v. Kishan Tulpule & Ors : (1992) 74 Comp
Case 89 (Bom) – distinguished.

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A 5.1 In the scheme of provisions contained in s. 43 of the
Code, the underlying concept is to disregard and practically annul
such transactions which appear, in the course of insolvency
resolution or liquidation, to be preferential so as to minimise the
potential loss to other stakeholders in the affairs of the corporate
debtor, particularly its creditors. What is to be examined for the
B
purpose of Section 43 is the conduct and affairs of the corporate
debtor. If the beneficiary of the transaction in question is a related
party of the corporate debtor, the period of enquiry is enlarged
to two years whereas this period is one year in other cases. During
such scanning, by virtue of sub-section (3) of Section 43, two
C types of transfers are kept out of the purview of sub-section (2),
which would not be treated as preference. [Para 25.2][382-C-E]
5.2 The whole of conspectus of sub-section (3) is that only
if any transfer is found to have been made by the corporate debtor,
either in the ordinary course of its business or financial affairs or
D in the process of acquiring any enhancement in its value or worth,
that might be considered as having been done without any tinge
of favour to any person in preference to others and thus, might
stand excluded from the purview of being preferential, subject to
fulfilment of other requirements of sub-section (3) of Section 43.
[Para 25.2.2][383-C-D]
E
5.3 If the transfer is examined with reference to the ordinary
course of business or financial affairs of the transferee alone, it
may conveniently get excluded from the rigour of sub-section (2)
of Section 43, even if not standing within the scope of ordinary
course of business or financial affairs of the corporate debtor.
F Such had never been the scheme of the Code nor the intent of
Section 43 thereof. For the purpose of exception under clause
(a) of sub-section (3) of Section 43, the intent of legislature is
required to be kept in view. If the ordinary course of business or
financial affairs of the transferee (lenders of the holding company
G in the present case) would itself be decisive for exclusion, almost
every transfer made to the transferees like the lender-banks/
financial institutions would be taken out of the net, which would
practically result in frustrating the provision itself. [Para
25.3][383-D-F]

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5.4 It remains trite that an interpretation that defeats the A
scheme, intent and object of the statutory provision is to be
eschewed and for that matter, if necessary, by applying the
principles of purposive interpretation rather than literal. Well
known cannons of construction of statutes permit the Court to
read the word “or” as “and” after looking at the clear intention
B
of the legislature. The contents of clause (a) of sub-section (3) of
Section 43 call for purposive interpretation so as to ensure that
the provision operates in sync with the intention of legislature
and achieves the avowed objectives. Therefore, the expression
“or”, appearing as disjunctive between the expressions
“corporate debtor” and “transferee”, ought to be read as “and”; C
so as to be conjunctive of the two expressions i.e., “corporate
debtor” and “transferee”. Thus read, clause (a) of sub-section
(3) of Section 43 shall mean that, for the purposes of sub-section
(2), a preference shall not include the transfer made in the ordinary
course of the business or financial affairs of the corporate debtor
D
and the transferee. Only by way of such reading of “or” as “and”,
it could be ensured that the principal focus of the enquiry on
dealings and affairs of the corporate debtor is not distracted and
remains on its trajectory, so as to reach to the final answer of the
core question as to whether corporate debtor has done anything
which falls foul of its corporate responsibilities. [Paras 25.4 and E
25.5][383-G-H; 384-A; 384-D-G]
State of Bombay v. R.M.D. Chamarbaugwala and Anr.
[1957] SCR 874 – followed.
Mazagaon Dock Ltd v. Commissioner of Income-Tax
and Excess Profits Tax [1959] SCR 848 – relied on. F

5.5 Even when furnishing a security may be one of normal
business practices, it would become a part of ‘ordinary course of
business’ of a particular corporate entity only if it falls in place as
part of ‘the undistinguished common flow of business done’; and
is not arising out of ‘any special or particular situation’. An activity G
could be regarded as ‘business’ if there is a course of
dealings,which are either actually continued or contemplated to be
continued with a profit motive. [Paras 25.6.1 and 25.6.2][385-B-
C; 386-A-B]
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A State of Andhra Pradesh v. H. Abdul Bakshi and Bros.
1964 STC 644; Downs Distributing Co Pty Ltd v.
Associated Blue Star Stores Pty Ltd (in liq) (1948) 76
CLR 463; Macquarie Bank Ltd. v. Shilpi Cable
Technologies Ltd. (2018) 2 SCC 674: [2017] 13 SCR
751 – referred to.
B
5.6 Though it can be assumed that the transactions in
question were entered in the ordinary course of business of
bankers and financial institutions like the present respondents
but on the given set of facts, there is no doubt that the impugned
transactions do not fall within the ordinary course of business of
C the corporate debtor. The corporate debtor had been promoted
as a special purpose vehicle by its holding company. It is difficult
to even surmise that the business of the corporate debtor, of
ensuring execution of the works assigned to its holding company
and for execution of housing/building projects, in its ordinary
D course, had inflated itself to the extent of routinely mortgaging
its assets and/or inventories to secure the debts of its holding
company. It had also not been the ordinary course of financial
affairs of the corporate debtor that it would create encumbrances
over its properties to secure the debts of its holding company.
The ordinary course of business or financial affairs of the
E corporate debtor cannot be taken to be that of providing
mortgages to secure the loans and facilities obtained by its holding
company; and that too at the cost of its own financial health.
[Para 25.6.2][386-B-E]
5.7 The impugned transactions had not been in the ordinary
F course of business or financial affairs of the corporate debtor.
The impugned transactions are not of excepted transfers in terms
of sub-section (3) of Section 43 of the Code. [Paras 25.7 and
25.8][387-B-C]
Keshavlal Khemchand & Sons Pvt. Ltd. & Ors v. Union
G of India & Ors: (2015) 4 SCC 770 : [2015] 2 SCR 51;
State Bank of India v. Jah Developers Pvt. Ltd. & Ors.:
(2019) 6 SCC 787 : [2019] 7 SCR 701 – held
inapplicable.
6. In the ordinary course of business, when the bankers or
H financial institutions examine any proposal for loan or advance or
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akin facility, they are supposed to, and they indeed, take up the A
exercise commonly termed as ‘due diligence’ so as to study the
viability of the proposed enterprise as also to ensure, inter alia,
that the security against such loan/advance/facility is genuine and
adequate; and would be available for enforcement at any point of
time. Given the nature of transaction, the lenders must prefer a
B
clean security to justify the transaction as being in the ordinary
course of their business. In the same exercise, in the ordinary
course of their business, if they are at all entering into a transaction
whereby a third party security, including that of a subsidiary
company, is to be taken as collateral, they are obliged to undertake
further due diligence so as to ensure that such third party security C
is a prudent and viable one and is not likely to be hit by any law.
In that sequence, they remain under obligation to assure
themselves that such third party whose security is being taken,
is not already indebted or in red and is not likely to fail in dealing
with its own indebtedness. In the context of the Code, such
D
requirement is moreover imperative on a bare look at the
provisions contained in Part II thereof. On the facts of the present
case that in fact, several of the respondent lenders are shown to
be the direct creditors of the corporate debtor too, to the extent
of the advances made to the corporate debtor, they and the co-
respondents cannot plead ignorance about the actual state of E
affairs and financial position of the corporate debtor. Despite such
knowledge, if they chose to take the business risk of accepting
security from the corporate debtor and that too, for securing the
loans/advances/facilities made over to the holding company, who
was a directly related party for being its holding company, they
F
themselves remain responsible for present legal consequences.
[Para 26.1][387-E-F; 388-A-D]
Advanced Law Lexicon by P. Ramanatha Aiyar –
referred to.
7. The transactions in question are hit by Section 43 of the G
Code and the Adjudicating Authority, having rightly held so, had
been justified in issuing necessary directions in terms of Section
44 of the Code in relation to the transactions concerning Property
Nos. 1 to 6. NCLAT, had not been right in interfering with the
well-considered and justified order passed by NCLT in this regard.
[Para 27][388-E] H
304 SUPREME COURT REPORTS [2020] 8 S.C.R.

A 8. Having approved the order passed by NCLT as regards
the aspect of the transactions being preferential, the Court does
not consider it necessary to deal with the questions as to whether
the transactions are undervalued and/or fraudulent too. In the
totality of circumstances, the said questions are left at that only,
while also leaving all the related questions of law open; to be
B
examined in an appropriate case. [Para 29][391-A-C]
9. In the present case, the IRP moved one composite
application purportedly under Sections 43, 45 and 66 of the Code
while alleging that the transactions in question were preferential
as also undervalued and fraudulent. In the scheme of the Code,
C the parameters and the requisite enquiries as also the
consequences in relation to these aspects are different and such
difference is explicit in the related provisions. The arena and
scope of the requisite enquiries, to find if the transaction is
undervalued or is intended to defraud the creditors or had been
D of wrongful/fraudulent trading are entirely different. Specific
material facts are required to be pleaded if a transaction is sought
to be brought under the mischief sought to be remedied by
Sections 45/46/47 or Section 66 of the Code. The scope of enquiry
in relation to the questions as to whether a transaction is of giving
preference at a relevant time, is entirely different. Hence, it would
E be expected of any resolution professional to keep such
requirements in view while making a motion to the Adjudicating
Authority. It would also have been appropriate for NCLT to deal
with all these aspects separately and distinctively, rather than
giving a combined findings on all these three aspects that the
F impugned transactions were preferential, undervalued and
fraudulent. [Para 29.1, 29.2][391-C-D; G-H; 392-A-C]
10.1 In the Code, the significant expressions “financial
creditor” and “financial debt” have been defined with the words
“means” and “includes”. The law remains settled that where a
G word is defined to ‘mean’ something, the definition is prime facie
restrictive and exhaustive. On the other hand, where the word
defined is declared to ‘include’ something more, the definition is
prima facie extensive. However, a little difficulty arises when the

H
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 305
INFRATECH LTD. v. AXIS BANK LTD.

definition contains both the words ‘means’ and ‘includes’. A
[Para 42][422-H; 423-A-B]
P. Kasilingam & Ors. v. P.S.G. College of Technology &
Ors. (1995) Suppl. 2 SCC 348 : [1995] 2 SCR 1061;
Krishi Utapadan Mandi Samiti & Anr v. M/s Shankar
Industries & Ors. (1993) Suppl. 3 SCC 361 : [1993] 1 B
SCR 1037; Delhi Development Authority v. Bhola Nath
Sharma (Dead) by LRs & Ors. (2011) 2 SCC 54; Black
Diamond Beverages & Anr. v. Commercial Tax Office,
Central Section, Assessment Wing, Calcutta & Ors.
(1998) 1 SCC 458 : [1997] 4 Suppl. SCR 133 – referred C
to.

10.2 For a debt to become ‘financial debt’ for the purpose
of Part II of the Code, the basic elements are that it ought to be
a disbursal against the consideration for time value of money. It
may include any of the methods for raising money or incurring D
liability by the modes prescribed in sub-clauses (a) to (f) of Section
5(8); it may also include any derivative transaction or counter-
indemnity obligation as per sub-clauses (g) and (h) of Section
5(8); and it may also be the amount of any liability in respect of
any of the guarantee or indemnity for any of the items referred to
E
in sub-clauses (a) to (h). The requirement of existence of a debt,
which is disbursed against the consideration for the time value of
money remains an essential part even in respect of any of the
transactions/dealings stated in sub-clauses (a) to (i) of Section
5(8), even if it is not necessarily stated therein. In any case, the
definition, by its very frame, cannot be read so expansive, rather F
infinitely wide, that the root requirements of ‘disbursement’
against ‘the consideration for the time value of money’ could be
forsaken in the manner that any transaction could stand alone to
become a financial debt. In other words, any of the transactions
stated in the said sub-clauses (a) to (i) of Section 5(8) would be
G
falling within the ambit of ‘financial debt’ only if it carries the
essential elements stated in the principal clause or at least has
the features which could be traced to such essential elements in
the principal clause. The essential element of disbursal, and that
too against the consideration for time value of money, needs to
be found in the genesis of any debt before it may be treated as H
306 SUPREME COURT REPORTS [2020] 8 S.C.R.

A ‘financial debt’ within the meaning of Section 5(8) of the Code.
This debt may be of any nature but a part of it is always required
to be carrying, or corresponding to, or at least having some traces
of disbursal against consideration for the time value of money.
[Para 43][427-E-H; 428-A-C]
B 10.3 The root requirement for a creditor to become financial
creditor for the purpose of Part II of the Code, there must be a
financial debt which is owed to that person. He may be the principal
creditor to whom the financial debt is owed or he may be an
assignee in terms of extended meaning of this definition but, and
C nevertheless, the requirement of existence of a debt being owed
is not forsaken. [Para 44][428-D]
10.4 Therefore, for a person to be designated as a financial
creditor of the corporate debtor, it has to be shown that the
corporate debtor owes a financial debt to such person. Understood
this way, it becomes clear that a third party to whom the corporate
D
debtor does not owe a financial debt cannot become its financial
creditor for the purpose of Part II of the Code. [Para 45][428-E-
F]
10.5 The peculiar elements of the expressions “financial
creditor” and “financial debt”, as occurring in Sections 5(7) and
E
5(8), when visualised and compared with the generic expressions
“creditor” and “debt” respectively, as occurring in Sections 3(10)
and 3(11) of the Code, the scheme of things envisaged by the
Code becomes clearer. The generic term “creditor” is defined
to mean any person to whom the debt is owed and then, it has
F also been made clear that it includes a ‘financial creditor’, a
‘secured creditor’, an ‘unsecured creditor’, an ‘operational
creditor’, and a ‘decree-holder’. Similarly, a “debt” means a
liability or obligation in respect of a claim which is due from any
person and this expression has also been given an extended
meaning to include a ‘financial debt’ and an ‘operational debt’.
G
[Para 46][428-F-H; 429-A]
10.6 The use of the expression “means and includes” in
these clauses makes it clear that for a person to become a creditor,
there has to be a debt i.e., a liability or obligation in respect of a
claim which may be due from any person. A “secured creditor”
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in terms of Section 3(30) means a creditor in whose favour a A
security interest is created; and “security interest”, in terms of
Section 3(31), means a right, title or interest or claim of property
created in favour of or provided for a secured creditor by a
transaction which secures payment for the purpose of an
obligation and it includes, amongst others, a mortgage. Thus,
B
any mortgage created in favour of a creditor leads to a security
interest being created and thereby, the creditor becomes a
secured creditor. [Para 46.1][429-A-C]
10.7 However, when all the defining clauses are read
together and harmoniously, it is clear that the legislature has
maintained a distinction amongst the expressions ‘financial C
creditor’, ‘operational creditor’, ‘secured creditor’ and ‘unsecured
creditor’. Every secured creditor would be a creditor; and every
financial creditor would also be a creditor but every secured
creditor may not be a financial creditor. The expressions “financial
debt” and “financial creditor”, having their specific and distinct D
connotations and roles in insolvency and liquidation process of
corporate persons, have only been defined in Part II whereas
the expressions “secured creditor” and “security interest” are
defined in Part I. [Para 46.1][429-C-E]
10.8 In the scheme of the IBC, what is intended by the E
expression ‘financial creditor’ is a person who has direct
engagement in the functioning of the corporate debtor; who is
involved right from the beginning while assessing the viability of
the corporate debtor; who would engage in restructuring of the
loan as well as in reorganisation of the corporate debtor’s business
when there is financial stress. In other words, the financial F
creditor, by its own direct involvement in a functional existence
of corporate debtor, acquires unique position, who could be
entrusted with the task of ensuring the sustenance and growth of
the corporate debtor, akin to that of a guardian. In the context of
insolvency resolution process, this class of stakeholders namely, G
financial creditors, is entrusted by the legislature with such a
role that it would look forward to ensure that the corporate debtor
is rejuvenated and gets back to its wheels with reasonable capacity
of repaying its debts and to attend on its other obligations.
Protection of the rights of all other stakeholders, including other
H
308 SUPREME COURT REPORTS [2020] 8 S.C.R.

A creditors, would obviously be concomitant of such resurgence of
the corporate debtor. [Para 47][429-F-H; 430-A]
10.9 Keeping the objectives of the Code in view, the
position and role of a person having only security interest over
the assets of the corporate debtor could easily be contrasted with
B the role of a financial creditor because the former shall have only
the interest of realising the value of its security (there being no
other stakes involved and least any stake in the corporate debtor’s
growth or equitable liquidation) while the latter would, apart from
looking at safeguards of its own interests, would also and
simultaneously be interested in rejuvenation, revival and growth
C of the corporate debtor. Thus understood, it is clear that if the
former i.e., a person having only security interest over the assets
of the corporate debtor is also included as a financial creditor
and thereby allowed to have its say in the processes contemplated
by Part II of the Code, the growth and revival of the corporate
D debtor may be the casualty. Such result would defeat the very
objective and purpose of the Code, particularly of the provisions
aimed at corporate insolvency resolution. [Para 47.1][430-B-D]
10.10 Therefore, a person having only security interest
over the assets of corporate debtor (like the instant third party
E securities), even if falling within the description of ‘secured
creditor’ by virtue of collateral security extended by the corporate
debtor, would nevertheless stand outside the sect of ‘financial
creditors’ as per the definitions contained in sub-sections (7) and
(8) of Section 5 of the Code. Differently put, if a corporate debtor
has given its property in mortgage to secure the debts of a third
F party, it may lead to a mortgage debt and, therefore, it may fall
within the definition of ‘debt’ under Section 3(10) of the Code.
However, it would remain a debt alone and cannot partake the
character of a ‘financial debt’ within the meaning of Section 5(8)
of the Code. [Para 47.2][430-E-G]
G 10.11 Indisputably, the debts in question are in the form of
third party security; said to have been given by the corporate
debtor so as to secure the loans/advances/facilities obtained by
its holding company from the respondent-lenders. Such a ‘debt’
is not and cannot be a ‘financial debt’ within the meaning of Section
H
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 309
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5(8) of the Code; and hence, the respondent-lenders, the A
mortgagees, are not the ‘financial creditors’ of the corporate
debtor. [Para 48][430-G-H; 431-A]
10.12 The lenders of the holding company of the corporate
debtor, on the strength of the mortgages in question, may fall in
the category of secured creditors, but such mortgages being B
neither towards any loan, facility or advance to the corporate
debtor nor towards protecting any facility or security of the
corporate debtor, it cannot be said that the corporate debtor owes
them any ‘financial debt’ within the meaning of Section 5(8) of
the Code; and hence, such lenders do not fall in the category of
the ‘financial creditors’ of the corporate debtor. [Para 54][441- C
C-D]
Swiss Ribbons Private Limited and Anr. v. Union of India
and Ors.: (2019) 4 SCC 17 : [2019] 3 SCR 535;
Committee of Creditors of Essar Steel India Limited
through Authorised Signatory v. Satish Kumar Gupta D
(2019) SCC OnLine SC 1478 – distinguished.
Rajkumari Kaushalya Devi v. Bawa Pritam Singh & Anr.
AIR 1960 SC 1030 : [1960] SCR 570 – held
inapplicable.
E
Order dated 13.03.2019 in M.A. No. 1584/2019 in CP
No. 402 of 2018 as passed by NCLT (Mumbai Bench) in
the case of SREI Infrastructure Finance Limited v. Sterling
International Enterprises Ltd – disapproved.
Dr. B.V.S. Lakshmi v. Geometrix Laser Solutions (P) Ltd. F
Company Appeal (AT) (Insolvency) No. 38 of 2017;
Ramchand Sur v. Ishwar Chandra Giri 61 Ind Cases
539; Prithvi Nath Singh & Ors. v. Suraj Ahir & Ors.
[1963] 3 SCR 302; State Bank of India v. Samneel
Engineering Co. & Ors. 1995 (35) DRJ 485; Dassappa
& Ors v. Jogaiah & Ors. (1964) ILR 545; Manik Chand G
Raut v. Baldeo Chaudhary & Ors. (1949) SCC Online
Pat 64; State Bank of India v. Smt. Kusum Vallabhdas
Thakkar (1991) SCC Online GUJ 14; Nikhil Mehta
and Sons (HUF) v. AMR Infrastructure Limited (2017)
SCC Online NCLAT 859; Pomal Khanji Govindji &
H
310 SUPREME COURT REPORTS [2020] 8 S.C.R.

A Ors. v. Brajlal Karsandas Purohit & Ors. (1989) 1 SCC
458 : [1988] 3 Suppl. SCR 826; K. Sashidhar v. Indian
Overseas Bank and Ors. (2019) SCC OnLine SC 257;
Bikram Chatterjee v. Union of India (2019) 8 SCC 527;
Haryana Financial Corporation and Anr. v. Jagdamba
Oil Mills and Anr. (2002) 3 SCC 496 : [2002] 1 SCR
B
621 – referred to.
Report of Banking Law Reform Committee; Craise on
Statue Law (Seventh Ed.—Indian reprint 1999 page
213; Bankruptcy Law Reforms Committee (February
2015) – referred to.
C
Case Law Reference
[2017] 13 SCR 751 referred to Para 14.3
[2019] 3 SCR 535 referred to Para 16.1

D [2007] 11 SCR 475 referred to Para 18
[2019] 10 SCR 381 relied on Para 19.2
[2009] 2 SCR 331 relied on Para 19.2.2
[2012] 6 SCR 905 distinguished Para 23.1.1
E [1957] SCR 874 followed Para 25.4
[1959] SCR 848 relied on Para 25.4
[2015] 2 SCR 51 held inapplicable Para 25.7
[2019] 7 SCR 701 held inapplicable Para 25.7
F (1963) 3 SCR 302 referred to Para 37.1
[1988] 3 Suppl. SCR 826 referred to Para 37.3
(2019) 8 SCC 527 referred to Para 41.1
[1995] 2 SCR 1061 referred to Para 41.1.2
G [1993] 1 SCR 1037 referred to Para 41.1.2
[2002] 1 SCR 621 referred to Para 41.1.5
(2011) 2 SCC 54 referred to Para 42.2

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ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 311
INFRATECH LTD. v. AXIS BANK LTD.

[1997] 4 Suppl. SCR 133 referred to Para 42.3 A
[2019] 3 SCR 535 distinguished Para 50.5
[1960] SCR 570 held inapplicable Para 52
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 8512-
8527 of 2019. B
From the Judgment and Order dated 01.08.2019 of the National
Company Law Appellate Tribunal, New Delhi in Company Appeal (AT)
(Ins) Nos. 243, 244, 245, 249, 276, 343, 370, 374, 376, 411, 424, 436, 458,
492, 511 & 524 of 2018.
With C
Civil Appeal Nos. 6777-6797 and 9357-9377 of 2019.
Ms. Maninder Acharya, ASG, V. Giri, Jaideep Gupta, Ritin Rai,
C.U. Singh, Shyam Divan, Amit Sibal, Siddharth Bhatnagar, Anupam
Lal Das, Sr. Advs., Sanjay Bhatt, Ms. Niharika Sharma, Ms. Svadha,
D
Rabin Majumdar, Amit Kumar Mishra, Aditya Shankar, Shashank Manish,
Gaurav Priyadarshi, Ms. Smriti Shah, Ms. Twinkle Kataria, Ms. Nidhi
Sahay, Ms. Anindita Mitra, Ms. Gunjan Mathur, Mridul Godha, Shivam
Pandey, Sidhartha Barua, Adity Gupta, Sharan Thakur, Praful Jindal,
Viplav Acharya, Aishwarya Kaushique, Harshul Choudhary, Ms. Ikshita
Singh, Ms. Jasmine Damkewala, Ms. Anindita Roy Chowdhary, Abhijnan E
Jha, Shivam, Abhishek Singh, Bharat Makkar,. Anannya Ghosh,
Ms. Misha, Shantanu Chaturvedi, Nikhil Mathur, Shardul. S. Shroff,
Ms. Jasveen Kaur, Tushar Singh, Parag Maini, Abhimanyu Chopra,
Saksham Dhingra, Ms. Pankhuri, Parthasarathy, Varun Singh,
Ms. Archana Singh, Arjun Raghuvanshi, Aditya Sidhra, Sumeet Sharma,
F
Daksh Pandit (for Vishal Gupta), Divyanshu Goyal, Ms. Swati Jain, Vijay
Kumar, Ram Naresh Yadav, Mohit K. Singh, Rajiv S. Roy, Ms. Avrojyoti
Chatterjee, Abhijit S. Roy, Ms. Jayshree Saha, Udayan Agarwal,
R. Sanmay Rath, Rajesh Kumar-I, Anant Gautam, Ms. Sakshi Gaur,
Ms. Khushboo Aggarwal, Sorabh Dahiya, Vibhu Sharma, Anmol Mehta,
Umesh Kr. Khaitan, Jatin Julka, Arsalan Syed, Prateek Khaitan, G
Jaswinder Singh, Ms. Niraj Jha, Ms. Pratima Singh, Vinod Sharma, Advs.
for the appearing parties.

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312 SUPREME COURT REPORTS [2020] 8 S.C.R.

A CIVIL APPEAL NOS. 8512-8527 OF 2019
and connected cases
INDEX OF JUDGMENT*

Sl. No. Contents Page
B 1. Introductory 1-3

2. Brief Outli ne and the Issues Involved 3-5

3. Parties and their respective roles and interest in 6-7
the matter
C
4. The transactions in question 8-11

5. The relevant factual and background aspects 11-18

6. The Application by Interi m Resolution 18-24
Professional and the order passed by NCLT
D
7. Appeals before NCLAT: the impugned order 24-29

8. The relevant provisions 29-37

WHETHER THE TRANSACTIONS IN QUESTION ARE
E PREFERENTIAL:
9. B road features of rival contentions and 38-54
su bmissi ons
10. In solvency a nd B ank ru ptcy Code, 2016: historical 54-58
backgro und, objects , scheme and s tructure of the
relevant pa rts
F 11. Preferential transaction at a relevant time: concept 58-64
a nd connotati ons
12. Analys ing Section 43 of the Code 64-74

13. Whether impug ned transactions are preferential, 74-80
falling withi n the ambit of sub-section (2) of
Section 43 IB C
G 14. Th e requi rements o f sub-s ection (4) of S ection 43 80-89
IB C - related party an d look-ba ck period
15. O rdinary course of business or financial affairs 90-98
16. Th e concern expres sed by lenders of JAL is 99-100
legally untenable

H *The Index is as per the Original Judgment.
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 313
INFRATECH LTD. v. AXIS BANK LTD.

17. Summation: The transactions in question are hit 100
A
by Section 43 IBC

18. Search and commandeering of preference at a 101-104
relevant time
B

19. Other aspects of the application made by IRP – 104-107
allegations of transactions being undervalued
and fraudulent

C
WHETHER LENDERS OF JAL COULD BE CATEGORISED
AS FINANCIAL CREDITORS OF JIL

20. Preliminary and background 107-109

21. Reasoning and Findings of NCLT 110-114 D
22. Rival submissions 114-130

23. Unique position of financial creditor- as 130-134
explained in Swiss Ribbons
E
24. Financial debt - ratio of Pioneer Urban 134-147

25. The expressions “means and includes” in the 147-152
definition clauses - effect

26. The essentials for financial debt and financial 152-158
creditor
F
27. The respondent mortgagees are not the 158-171
financial creditors of corporate debtor JIL

28. Summation on second issue 171

29. Conclusion 171-172
G

Acknowledgment 172

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314 SUPREME COURT REPORTS [2020] 8 S.C.R.

A The Judgment of the Court was delivered by
DINESH MAHESHWARI, J.
Introductory
1. These appeals are essentially directed against the common order
B dated 01.08.2019 as passed by the National Company Law Appellate
Tribunal, New Delhi1 in a batch of appeals preferred by various banks
and financial institutions whereby, the Appellate Tribunal set aside the
order dated 16.05.2018, passed by the Adjudicating Authority, the National
Company Law Tribunal, Allahabad Bench2 on the application moved by
the Interim Resolution Professional3 in the Corporate Insolvency
C Resolution Process4 concerning the Corporate Debtor Company viz.,
Jaypee Infratech Limited5 seeking avoidance of certain transactions,
whereby the corporate debtor had mortgaged its properties as collateral
securities for the loans and advances made by the lender banks and
financial institutions to Jaiprakash Associates Limited6, the holding
D company of JIL, as being preferential, undervalued and fraudulent, in
terms of Sections 43, 45 and 66 of the Insolvency and Bankruptcy Code,
20167.
1.1. It may be noticed at the outset that the batch of appeals
decided by the impugned common order dated 01.08.2019 also comprised
E of two appeals filed by the lenders of JAL, being Comp. App (AT) (Ins)
No. 353 of 2018 and Comp. App (AT) (Ins) No. 301 of 2018 that were
preferred against the orders passed by NCLT on 09.05.2018 and
15.05.2018 respectively, whereby NCLT approved the decision of IRP
rejecting the claims of such lenders of JAL to be recognized as financial
creditors of the corporate debtor JIL on the strength of the mortgage
F created by the corporate debtor, as collateral security of the debt of its
holding company JAL. These two appeals also came to be allowed as
per the result recorded in the impugned order dated 01.08.2019, though
the entire discussion and the final conclusion therein had only been in
relation to the order dated 16.05.2018 that was passed by NCLT on the
G 1 Hereinafter also referred to as ‘the Appellate Tribunal’ or ‘NCLAT’
2 Hereinafter also referred to as ‘the Tribunal’ or ‘NCLT’ or ‘the Adjudicating Authority’.
3 ‘IRP’ for short.

4 ‘CIRP’ for short.

5 ‘JIL’ for short; also referred to as ‘the corporate debtor’.

6 ‘JAL’ for short.

7 Hereinafter also referred to as ‘the Code’ or ‘IBC’.
H
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 315
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application for avoidance filed by IRP. The appellant of Civil Appeal D. A
No. 32881 of 20198, IIFCL, apart from raising other contentions, has
also questioned this aspect of the order impugned that the aforesaid two
appeals, involving the question as to whether the lenders of JAL could
be categorised as financial creditors of JIL for the purpose of IBC, have
been allowed by NCLAT without recording any findings and without
B
any discussion in that regard.
Brief Outline and the Issues Involved
2. Before proceeding further, we may draw up a brief outline of
the subject-matter and the issues involved in these appeals.
2.1. As shall be noticed hereafter later, the CIRP concerning the C
corporate debtor JIL has already undergone several rounds and circles
of proceedings in NCLT, NCLAT and at least twice over in this Court.
2.2. For what has been indicated in the introduction, it is evident
that two major issues would arise in these appeals. One, as to whether
the transactions in question deserve to be avoided as being preferential, D
undervalued and fraudulent, in terms of Sections 43, 45 and 66 of the
Code; and second, as to whether the respondents (lender of JAL) could
be recognized as financial creditors of the corporate debtor JIL on the
strength of the mortgage created by the corporate debtor, as collateral
security of the debt of its holding company JAL. E
2.3. For a preliminary insight into the first issue, suffice would be
to notice that during CIRP, the Interim Resolution Professional preferred
an application before the Adjudicating Authority seeking orders for
avoidance of the impugned transactions, whereby several parcels of
land were put under mortgage with the lenders of JAL, the holding F
company of JIL. The contention of IRP, that the transactions in question
were preferential, undervalued and fraudulent within the meaning of
Sections 43, 45 and 66 of the Code, were accepted in part by the
Adjudicating Authority, the NCLT, in its order dated 16.05.2018 and
necessary directions were issued for avoidance of at least six of such
transactions. In other words, in relation to such six transactions, the G
security interest was ordered to be discharged and the properties involved
therein were vested in the corporate debtor, with release of
encumbrances. The NCLAT, however, took an entirely opposite view of
the matter and upturned the order so passed by NCLT, while holding
8 Now numbered as Civil Appeal Nos. 009357-77 of 2019 H
316 SUPREME COURT REPORTS [2020] 8 S.C.R.

A that the transactions in question do not fall within the mischief of being
preferential or undervalued or fraudulent; and that the lenders in question
(the lenders of JAL) were entitled to exercise their rights under the
Code. Aggrieved, the IRP, one of the creditors of the corporate debtor
JIL and the associations of home buyers, who have invested in the
proposed projects of JIL and JAL, have preferred these appeals.
B
2.4. As regards the second issue, noticeable it is that during CIRP,
two of the respondent banks namely, ICICI Bank Limited and Axis Bank
Limited, sought inclusion in the category of financial creditors of JIL but
IRP did not agree and declined to recognize them as such. Being aggrieved
by the decisions so taken by IRP, the said banks preferred separate
C
applications under Section 60(5) of the Code before NCLT while
asserting their claim to be recognized as financial creditors of the corporate
debtor JIL, on account of the securities provided by JIL for the facilities
granted to JAL. The NCLT rejected the applications so filed by the said
banks, by way of its orders dated 09.05.2018 and 15.05.2018 respectively,
D while concluding that on the strength of the mortgage created by the
corporate debtor JIL, as collateral security of the debt of its holding
company JAL, the lenders of JAL could not be categorised as financial
creditors of JIL for the purpose of the Code. As already noticed, the
appeals against the said orders dated 09.05.2018 and 15.05.2018 are
purportedly allowed as per the result recorded in the impugned order
E
dated 01.08.2019, but without any discussion in that regard. Aggrieved,
one of the lenders of the corporate debtor JIL, IIFCL (appellant of Civil
Appeal D. No. 32881 of 2019) has also questioned this aspect of the
order impugned while asserting that such mortgagees cannot be taken
as financial creditors of the corporate debtor JIL.
F Parties and their respective roles and interest in the matter
3. In view of the issues arising for determination in these appeals,
with several parties carrying different roles, status and interests,
worthwhile it would be to narrate at the outset, in brief, the relevant
particulars of the key parties involved as follows:
G
3.1. Jaypee Infratech Limited (JIL):
It is the corporate debtor company in whose relation CIRP is
pending; and the mortgage transactions concerning its properties were
questioned in the application filed by the Interim Resolution Professional.
Such transactions form the subject-matter of these appeals.
H
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 317
INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

3.2. Jaiprakash Associates Limited (JAL): A
It is the holding company of JIL; it had approximately 71.64%
equity shareholding in JIL as on 31.03.2017. The impugned mortgage
transactions were entered into in favour of its lenders.
3.3. Shri Anuj Jain:
B
He is the Interim Resolution Professional in CIRP concerning JIL
who moved the application for avoidance of the transactions in question.
He is the appellant in Civil Appeal Nos. 8512-27 of 2019.
3.4. Jaypee Greens Krescent Home Buyers Welfare Association;
Jaypee Kasa Isles Welfare Association; Jaypee Kensington Boulevard C
Apartments Welfare Association; Garden Isle Welfare Association;
Jaypee Klassic Apartment Welfare Association; Jaypee Kube Buyers
Welfare Association; Wish Town Property Owners Welfare Society;
KRH Buyers Association ABL Workplace:
They are the associations of home buyers who have invested in D
the projects of JIL and JAL. They are the appellants in Civil Appeal
Nos. 6777-97 of 2019; and they also support the assertion of IRP that
the transactions in question cannot be countenanced.
3.5 India Infrastructure Finance Company Limited:
It is the financial creditor of the corporate debtor JIL and has filed E
Civil Appeal in Diary No. 32881 of 2019 while asserting that the
transactions in question need to be avoided; and that the lenders of JAL
related with such transactions cannot be the financial creditors of JIL
for the purpose of CIRP in question.
3.6 Axis Bank Limited; Standard Chartered Bank Limited; ICICI F
Bank Limited; State Bank of India; United Bank of India; UCO Bank;
The Karur Vyasa Bank (P) Limited; L&T Infrastructure Finance
Company Limited; Central Bank of India; Canara Bank; Karnataka Bank
Limited; IFCI Limited; Allahabad Bank; Jammu & Kashmir Bank; South
Indian Bank Limited; Bank of Maharashtra and other banks and financial
G
institutions:
They are the lenders of JAL in whose favour the properties of
JIL were put under mortgage by way of the impugned transactions.
They oppose the assertions of appellants while maintaining that the
transactions in question are not avoidable and are valid, investing them
H
318 SUPREME COURT REPORTS [2020] 8 S.C.R.

A with the capacity of financial creditors of JIL. They are the principal
contesting respondents in these appeals.
The transactions in question
4. Having taken note of the principal contesting parties and their
respective interests, it would also be worthwhile to take note of the
B relevant particulars of the properties and the transactions involved in
this dispute. It may be usefully noticed that out of seven transactions
that were questioned by IRP, the Adjudicating Authority held that six of
them were preferential, undervalued and fraudulent and passed the orders
for their avoidance while accepting the contentions of IRP. It may also
C be observed that five out of these six transactions were preceded by
previous mortgage transactions for securing the loans/facilities to JAL.
The transactions in question, with previous transactions and flow thereof,
as given out during the course of submissions, could be comprehensively
viewed as under: -
D 4.1. The transactions in favour of the Consortium of Banks and
Financial Institutions:
Prope rty/transaction in Previous transaction/s and flow
question thereof
Mortgage deed dated 29.12.2016 for Initial mortgage deed dated
167.229 acres of land situated at 24.02.2015 released on 15.09.2015
E Village Chhalesar and Chaugan, and re-mortgaged on 15.09.2015
Tehsil Etmadpur, District Agra, (changing facility amount from Rs.
Uttar Pradesh executed by JIL in 3250 crores (appx.) to Rs. 24109
favour of Axis Trustee Services Ltd. crores); thereafter released on
to provide an additiona l security for 29.12.2016 and again re-mortgaged
term loans of Rs. 21081.5 crores on 29.12.2016 (changing facility
sanctioned as a consortium to JAL.9 amount from Rs. 24109 crores to Rs.
F 23491 crores).
Mortgage deed dated 29.12.2016 for Initial mortgage deed dated
167.9615 acres of land situated at 24.02.2015 released on 15.09.2015
Village Tappal, Kansera and and re-mortgaged on 15.09.2015
Jahangarh, Tehsil Kha ir, District (changing facility amount from Rs.
Aligarh, Uttar Pradesh executed by 3250 crores (appx.) to Rs. 24109
G JIL in favour of Axis Trustee crores); thereafter released on
Services Ltd. to provide as an 29.12.2016 and again re-mortgaged
additional security for term loans of on 29.12.2016 (changing facility
Rs.21081.5 crores sanctioned by the amount from Rs. 24109 crores to Rs.
consortium to JAL.10 23491 crores).

9
Hereinafter also referred to as ‘Property No. 1’
10
H Hereinafter also referred to as ‘Property No. 2’
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 319
INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

4.2. The exclusive mortgage transactions in favour of ICICI Bank A
Limited:
Property/transaction in Previous trans action/s and flow
question thereof
Mortgage deed dated 07.03.2017 Initia l mortgage deed dated
for 158.1739 acres situated at 12.05.2014 for 433.35 acres of B
Village Jaganpur and land, followed by release of land
Aurangpur, Uttar Pradesh, admeasuring 240 acres vide
executed by JIL in favour of release deed dated 30.12.2015
IDBI Trustee-ship Services along w ith re lease of land
Limited in the capacity of admeasuring 35.03 acres vide
C
security trustee for term loan of release deed dated 24.06.2016.
Rs.1200 crores granted by ICICI Further release of 158.1739 acres
Bank Limited to JAL against the of land vide release deed dated
facility agreement dated 07.03.2017 and thereafter re-
11
25.05.2015. mortgaged on 07.03.2017.
Mortgage deed dated 07.03.2017 Initia l mortgage deed dated D
for 151.0063 acres situated at 12.05.2014 released on
Village Jikarpur, Tehsil Khair, 07.03.2017 and re-mortgaged on
District A ligarh, Uttar Pradesh, 07.03.2017.
executed by JIL in favour of
IDBI Trustee-ship Services
E
Limited in the capacity of
security trustee for term loan of
Rs.1200 crores granted by ICICI
Bank Limited to JAL against the
facility agreement dated
12
25.05.2015. F

4.3. The exclusive mortgage transaction in favour of the Standard
Chartered Bank Limited:
Property/transaction in question Previous transaction/s and
flow thereof
Mortgage deed dated 24.05.2016 for Initial mortgage deed dated G
25.0040 acres of land situated at 24.06.2009, extended by
Village Sultanpur, Sector-128, Noida, mortgage deed dated 27.11.2012
District Gautam Budh Nagar, Uttar (for increased facility amount of

11 Hereinafter also referred to as ‘Property No. 3’
12 Hereinafter also referred to as ‘Property No. 4’ H
320 SUPREME COURT REPORTS [2020] 8 S.C.R.

A Pradesh executed by JIL in favour of Rs. 1300 crores as compared to
IDBI Trustee-ship Services Ltd, as Rs. 900 crores earlier).
additional security, against the facility
Vide mortgage on 23.03.2013,
agreement dated 29.08.2012 between
additiona l land admeasuring
Standard Chartered Bank and JAL of
25.0040 acres was added in the
Rs.400 crores. The security was
B original land parcel to secure
further extended for facility II for
increased facility amount of Rs.
Rs.450 crores on 27.12.2012; for
1750 crores as compared to Rs.
facility III for Rs.538.16 crores on
1300 crores earlier against the
29.04.2015; for facility IV for
facility agreement dated
Rs.81.84 crores on 29.04.2015 and for
29.08.2012 for an amount of
C working capital facility Rs.297 crores
Rs. 400 crores. Security further
on 29.08.2012. 13
extended for Facilities II, III
and IV as mentioned in Column
1.
The extended mortgage deed
D dated 23.03.2013 was released
vide release deed dated
04.11.2015 (changing facility
amount from Rs.1750 crores to
Rs. 1470 crores) and re-
mortgaged on 24.05.2016
E
(increasing facility amount from
1470 crores to Rs. 1767 crores).

4.4. The sixth transaction in question had been the exclusive
mortgage transaction in favour of State Bank of India that was not
F preceded by any earlier transaction; the same had been as under:-
Mortgage deed dated 04.03.2016 for 90 acres of land situated at
Village Chaugan Tehsil Elmadpur, District Agra, Uttar Pradesh,
executed by JIL in favour of State Bank of India against the facility
agreement dated 26.03.2015 granting Short Term Loan Facility to
G JAL of Rs.1000 crores.14
4.5. Yet another transaction was questioned by IRP as being
avoidable but the Adjudicating Authority held the same to be not falling

13 Hereinafter also referred to as ‘Property No. 5’
H 14 Hereinafter also referred to as ‘Property No. 6’
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 321
INFRATECH LTD. v. AXISBANK LTD. [DINESH MAHESHWARI, J.]

within the relevant time as provided under Section 43 of the Code. The A
particulars of this transaction are as follows:
Mortgage deed dated 12.05.2014 for 100 acres of land situated at
Village Tappal, Tehsil Khair, District Aligarh, Uttar Pradesh
executed by JIL in favour of ICICI Bank Limited against the
facility agreement dated 12.12.2013 granting Term Loan of Rs. B
1500 crores and overdraft amount of Rs. 175 crores to JAL.15
The relevant factual and background aspects
5. Having taken note of the principal parties to the dispute and the
transactions/properties involved, but before dilating on the issues, we
may briefly narrate the background in which the present CIRP is C
underway as also the orders passed by this Court, for ensuring its
completion in accordance with law and towards the larger benefit of
stakeholders.
6. JAL is stated to be a public listed company with more than 5
lakh individual shareholders. In the year 2003, JAL was awarded the D
rights for construction of an expressway from Noida to Agra. A
concession agreement was entered into with the Yamuna Expressway
Industrial Development Authority. Coming on the heels of this project,
JIL was set up as a special purpose vehicle. Finance was obtained from
a consortium of banks against the partial mortgage of land acquired and E
a pledge of 51% of the shareholding held by JAL. Housing plans were
envisaged for the construction of real estate projects in two locations of
the land acquired, one in Wish Town, Noida and another in Mirzapur.
Several other aspects of the dealings by these companies, their creditors
and other stakeholders need not be dilated for the present purpose.
F
6.1. The crucial and relevant part of the matter is that IDBI Bank
Limited instituted a petition under Section 7 of the Code before the NCLT,
seeking initiation of Corporate Insolvency Resolution Process against
JIL, while alleging that JIL had committed a default in repayment of its
dues to the tune of Rs. 526.11 crores. JIL filed its objections to the
petition but later on, withdrew the objections and furnished consent for G
resolution plan under the provisions of the Code. On 09.08.2017, NCLT

15 Hereinafter also referred to as ‘Property No. 7’ (As regards this description, it is

pointed out on behalf of the respondent ICICI Bank that it had been of ‘Term Loan of
Rs. 1500 crores under the Corporate Rupee Loan Facility agreement and General
Conditions dated 12.12.2013 and mortgage deed was dated 10.03.2014’) H
322 SUPREME COURT REPORTS [2020] 8 S.C.R.

A initiated the CIRP in respect of JIL. An order of moratorium was issued
under Section 14 by which, the institution of suits and continuation of
pending proceedings, including execution proceedings were prohibited
and an Interim Resolution Professional was appointed. On 14.08.2017,
IRP, in pursuance of the order of NCLT, called for submissions of claims
by financial creditors in Form-C, by operational creditors in Form-B, by
B
the workmen and employees in Form-E and by other creditors in Form-
F. On 16.08.2017, the Insolvency and Bankruptcy Board of India made
an amendment to its regulations and Regulation 9(a) was inserted to
include the claims by other creditors. On 18.08.2017, the Board released
a press note that the home buyers could fill in Form-F as they could not
C be treated at par with financial and operationalcreditors.
6.2. The aforesaid position led to the proceedings in this Court
that were dealt with in a batch of petitions led by Writ Petition (Civil)
No. 744 of 2017: Chitra Sharma and Ors. v. Union of India and
Ors. Several orders were passed by this Court in the said batch of petitions
D from time to time, inter alia, to the effect that IRP was permitted to
take over management of JIL and was directed to ensure that necessary
provisions were made to protect the interests of home buyers. Various
orders were also made with directions to JAL, as holding company of
JIL, for making deposits in the Court, particularly looking to the claim of
refund being made by some of the home buyers. This Court also took
E
note of the facts that CIRP commenced on 09.08.2017; the statutory
period of 180 days for concluding the CIRP had come to an end; and
even the extended statutory period of 90 days also ended on 12.05.2018
but then, by way of the Amendment Ordinance, 2018, the home buyers
were accorded the statutory recognition as financial creditors w.e.f.
F 06.06.2018. While finally disposing of the matters on 09.08.2018, this
Court took note of the interest of home buyers as also the creditors of
JIL and JAL, the status of proceedings and the statutory provisions as
then obtaining and ultimately issued the following directions: -
“(i) In exercise of the power vested in this Court under Article
G 142 of the Constitution, we direct that the initial period of 180
days for the conclusion of the CIRP in respect of JIL shall
commence from the date of this order. If it becomes necessary to
apply for a further extension of 90 days, we permit the NCLT to
pass appropriate orders in accordance with the provisions of the
IBC;
H
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 323
INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

(ii) We direct that a CoC shall be constituted afresh in accordance A
with the provisions of the Insolvency and Bankruptcy
(Amendment) Ordinance, 2018, more particularly the amended
definition of the expression “financial creditors”;
(iii) We permit the IRP to invite fresh expressions of interest for
the submission of resolution plans by applicants, in addition to the B
three short-listed bidders whose bids or, as the case may be, revised
bids may also be considered;
(iv) JIL/JAL and their promoters shall be ineligible to participate
in the CIRP by virtue of the provisions of Section 29A;
(v) RBI is allowed, in terms of its application to this Court to C
direct the banks to initiate corporate insolvency resolution
proceedings against JAL under the IBC;
(vi) The amount of Rs 750 crores which has been deposited in
this Court by JAL/JIL shall together with the interest accrued
thereon be transferred to the NCLT and continue to remain D
invested and shall abide by such directions as may be issued by
the NCLT.”
6.3. It had been during pendency of the aforesaid proceedings
that the application leading to present appeals came to be filed by IRP
on 06.02.2018, complaining against the transactions in question. However, E
before taking note of the matters involved in such application filed by
IRP and, for completion of the narration about the orders passed by this
Court, we may also point out that during the CIRP of JIL, an application
came to be made by IDBI bank, for excluding the period of pendency of
the application for clarification regarding the manner of counting of the F
votes of the concerned financial creditors, for the purpose of the period
of 270 days for completion of corporate insolvency resolution process
but, during the pendency of such application, NCLT, by its order dated
06.05.2019, called upon the authorities and the representatives of allottees
and others to file reply on the necessity to proceed further with CIRP
for considering the resolution plan received from the concerned bidder. G
The IDBI Bank assailed this order of NCLT by way of an appeal before
the NCLAT that came to be decided on 30.07.2019 whereby, NCLAT
granted relief to exclude the period from 17.09.2018 to 04.06.2019 for
the purpose of counting 270 days of CIRP period and issued consequential
H
324 SUPREME COURT REPORTS [2020] 8 S.C.R.

A directions. This led to further appeals in this Court16, which were
considered and decided on 06.11.2019.
6.3.1. In the order dated 06.11.2019, we took note of the fact that
CIRP in relation to JIL stood revived in view of the directions in Chitra
Sharma (supra) as also the amendments brought about in IBC. In the
B peculiar, rather extraordinary, situation obtaining in the matter, we passed
the orders under the plenary powers so as to ensure that an attempt was
made for revival of the corporate debtor JIL, lest it was exposed to
liquidation process while taking note of the unanimity amongst the parties
that liquidation of JIL must be eschewed; and while also taking note of
the time limit for completion of Insolvency Resolution Process as per
C
third proviso to Section 12(3), which came into effect from 16.08.2019.
In the given circumstances, we passed the following order for the purpose
of substantial and complete justice to the parties and in the interest of all
the stakeholders:
“i) We direct the IRP to complete the CIRP within 90 days from
D today. In the first 45 days, it will be open to the IRP to invite
revised resolution plan only from Suraksha Realty and NBCC
respectively, who were the final bidders and had submitted
resolution plan on the earlier occasion and place the revised plan(s)
before the CoC, if so required, after negotiations and submit report
E to the adjudicating authority NCLT within such time. In the second
phase of 45 days commencing from 21st December, 2019, margin
is provided for removing any difficulty and to pass appropriate
orders thereon by the Adjudicating Authority.
ii) The pendency of any other application before the NCLT or
F NCLAT, as the case may be, including any interim direction given
there in shall be no impediment for the IRP to receive and process
the revised resolution plan from the above-named two bidders
and take it to its logical end as per the provisions of the I & B
Code within the extended timeline prescribed in terms of this order.

G iii) We direct that the IRP shall not entertain any expression of
interest (improved) resolution plan individually or jointly or in concert
with any other person, much less ineligible in terms of Section
29A of the I & BCode.

Being Civil Appeal No. 8437 of 2019 [@ D No. 27229 of 2019]: Jaiprakash Associates
16

H Ltd. & Anr. v. IDBI Bank Ltd. and connected case
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 325
INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

iv) These directions are issued in exceptional situation in the facts A
of the present case and shall not be treated as a precedent.
v) This order may not be construed as having answered the
questions of law raised in both the appeals, including as recognition
of the power of the NCLT / NCLAT to issue direction or order
not consistent with thestatutory timelines and stipulations specified B
in the I & B Code and Regulations framed thereunder.”17
7. Having thus referred to the orders previously passed in relation
to the CIRP in question, we may, for complete narration of the orders
passed by this Court, also refer to the fact that in this batch of appeals,
the extensive arguments were finally concluded on 10.12.2019. Even C
while reserving the orders, looking to the facts and circumstances of the
case, we stayed the operation of the order passed by NCLAT, insofar
relating to the prayer of the lender-banks of JAL for treating them as
financial creditors of JIL. The relevant part of the order dated 10.12.2019
reads as under: -
D
“Civil Appeal @ Diary No(s). 32881/2019
These appeals take exception to the decision of the National
Company Law Appellate Tribunal allowing the appeal(s) filed by
the lender-Banks of Jayprakash Associates Limited (JAL) claiming
to be financial creditors(s) of Jaypee Infratech Limited (JIL). The E
National Company Law Tribunal had rejected that claim but we
find that in the impugned judgment, without dealing with the reasons
recorded by the National Company Law Tribunal, the Appellate
Tribunal allowed the appeal(s) filed by the stated lender-Banks(s),
who were claiming to be the financial creditor(s) of JIL.
F
After fully hearing counsel for the parties, prima facie, we
are of view that lender-Banks of JAL cannot be regarded as
financial creditor(s) of JIL. We would elaborate on this aspect in
our final judgment. Be that as it may, it is appropriate that we
must stay the operation of the impugned judgment(s) of the
Appellate Tribunal lest any confusion occurs in the revival process G
17It may also be noticed that by another order dated 03.02.2020, while accepting the
reasons stated in an application filed by the IRP pointing out various difficulties and
unavoidable circumstances which have delayed the culmination of proposal for approval
of resolution plan, though submitted within the time frame prescribed by this Court,
we had extended the time by four weeks for approval of the resolution plan, in the
proceedings now being dealt with by the Principal Bench of NCLT at New Delhi. H
326 SUPREME COURT REPORTS [2020] 8 S.C.R.

A of JIL and the constitution of Committee of Creditors thereof, in
view of the impugned order passed by the National Company
Law Appellate Tribunal. Ordered accordingly.
We clarify that the stay of operation is only in respect of
order passed on the application(s) moved by the lender-Bank(s)
B of JAL before the National Company Law Appellate Tribunal for
a declaration that they be regarded as financial creditor(s) of JIL
and included in the Committee of Creditors of JIL.”
The Application by Interim Resolution Professional and the
order passed by NCLT
C 8. Having thus referred to the orders already passed in relation to
the CIRP in question, we may now advert to the application filed by IRP
forming subject-matter of the first issue involved in these appeals.
9. The IRP, in terms of his duties under clause (j) of Section 25(2)
of the Code18, made the application under consideration before the
D Adjudicating Authority stating, inter alia, that the corporate debtor was
itself in dire need of funds; and was facing severe liquidity crunch to
complete the construction of projects and deliver flats to home buyers
as well as to honour the payment obligations to financial creditors,
including the Fixed Deposit Holders. It was contended that JIL could
E have sold/mortgaged its unencumbered land to raise funds to complete
the construction of flats in a timely manner and fulfil its obligation to its
creditors and prevent value deterioration or erosion or insolvency but
then, the mortgages in question were created in a highly questionable
manner and in complete disregard to the interests of the creditors and
stakeholders of the corporate debtor. Also, that the mortgage of land
F was in nature of assetstripping and was entered with intent to defraud
the creditors of the corporate debtor without obtaining the approval of
shareholders.
18The relevant parts of Section 25 read as under:
“Duties of resolution professional. - (1) It shall be the duty of the resolution
G professional to preserve and protect the assets of the corporate debtor, including the
continued business operations of the corporate debtor.
(2) For the purposes of sub-section (1), the resolution professional
shall undertake the following actions, namely:-

*** *** ***
(j) file application for avoidance of transactions in accordance with Chapter
H III, if any;…”
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 327
INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

9.1. In opposition to the application, it was contended that the A
financial position of the corporate debtor was very strong notwithstanding
the temporary financial crunch; that JAL was helping JIL in various
ways and hence, creation of impugned mortgages was not unusual, but
merely reciprocal; and such reciprocal accommodation cannot be termed
without consideration. It was also contended that no transaction which B
was permitted by law and entered into transparently could amount to
‘carrying on business for a fraudulent purpose’. It was further contended
that the impugned mortgages had not been created on account of any
antecedent debt liability owed by the corporate debtor; they had been
within the ordinary course of business of corporate debtor and the
transferees; and were not within the statutory period of one year and, C
therefore, Section 43 of IBC would not apply. It was maintained that the
transactions in question were reciprocal and could not be termed as
without consideration or undervalued. According to the contesting parties,
when the essential jurisdictional conditions were not satisfied, the provisions
of Section 66 of IBC were not attracted.
D
10. The NCLT, after having heard the parties and having scanned
through the record, held that the transactions in question were to defraud
the lenders of the corporate debtor JIL, as 858 acres of unencumbered
land owned by the corporate debtor to secure the debt of the related
party JAL was mortgaged in the midst of the corporate debtor’s immense
E
financial crunch, while continuing with default towards the home buyers
and financial creditors and after it had been declared as Non Performing
Asset19, in utter disregard to fiduciary duties and duty of care to the
creditors; and further that the mortgage of land was created without any
counter guarantee from the related party and with no other consideration
being paid to the corporate debtor. The Tribunal was of the view that at F
the time when the mortgage was created, the corporate debtor was
already in default to its lenders and it was unlikely that its lenders would
have provided no-objection for creation of mortgages to secure the debt
of a related party as that would have compromised not only the recovery
of their dues but also the interests of thousands of home buyers waiting
G
for their homes with investment of their hard earned money. The Tribunal
also observed that even though the nominees of lenders attended the
Board Meeting of the corporate debtor in which decision to mortgage
the land was taken, but that cannot be treated as approval or no-objection
of lenders, as the lenders invariably have covenants in the loan agreement
19 ‘NPA’ for short H
328 SUPREME COURT REPORTS [2020] 8 S.C.R.

A that require their approval for creating interest in favor of any one of the
unencumbered assets of the borrower. Moreover, directors of the
corporate debtor (JIL) and the related party (JAL) were well aware of
the fact that the corporate debtor was in default and had been declared
as NPA by several creditors. The Tribunal, thus, formed the opinion that
when the directors of the corporate debtor were fully aware that they
B
were in the twilight zone and insolvency was imminent, they ought to
have exercised due diligence in minimizing the potential loss to the creditors
but they entered into such transactions which ex facie gave benefits to
the related party JAL, with a clear intent to defraud the creditors of JIL.
The Tribunal further observed that the land in question could have been
C sold to generate cash that would have been sufficient to complete the
construction of flats and the home buyers are directly and adversely
affected by such a decision.
10.1. With respect to Section 43 of IBC, the NCLT held that the
transaction of creating a security interest by way of mortgage in favour
D of lenders of the third party (JAL) on the unencumbered land of the
corporate debtorwithout any consideration or counter guarantee cannot
be treated as transfer in the ordinary course of business or financial
affairs of the corporate debtor. Further, it did not benefit either the
business or finances of the corporate debtor in any way and hence, was
not covered under ‘financial affairs’. The Tribunal held that the phrase
E under consideration cannot be interpreted to mean that the ordinary course
of business also includes the transferee’s ordinary course of business
because transferee can never do the transfer himself; and that the words
‘the transfer made’ indicate that they relate to the transfer or and not
the transferee. As regards ‘relevant time’ for the purpose of sub-section
F (4) of Section 43 of the Code20, the Tribunal observed that the Code
itself has provided a retrospective effect to the provisions of Section
43(4)(a) wherein it is stated that ‘it is given to a related party, during two
years preceding the insolvency commencement date’. This, according
to NCLT, indicates that the retrospective effect is laid down in the
legislation itself and thus, the look-back period for the transactions was
G made dependent on the insolvency commencement date and not on the
date when the Insolvency and Bankruptcy Code came into effect
(01.12.2016). The Tribunal, therefore, held that for transactions of a
related party, the look-back period was two years preceding the insolvency
20This “relevant time” for the purpose of avoidance of preferential transactions is now
H commonly referred to as “look-back period”.
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 329
INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

commencement date and hence, the relevant period for examining the A
transactions in question would be from 10.08.2015 to 09.08.2017 (date
of commencement of CIRP).
10.2. The Tribunal made in-depth analysis of the facts of the case,
particularly those related with the transactions in question as also the
provisions of law applicable and, while rejecting the contentions urged B
on behalf of the opposing parties, including JAL, observed and held as
under:
“After the elaborate discussion, we have decided that impugned
transactions are preferential transactions as defined in the
subsection (2)(a) of Section 43 of insolvency and bankruptcy code C
2016. We have found that corporate debtor Jaypee Infratech Ltd
(JIL) has by way of mortgage of unencumbered land created
security interest in favour of lenders of the Jaiprakash Associates
Ltd. (JAL), which happens to be the holding company of JIL,
without any consideration. We have also found that the corporate
debtor was facing liquidity crunch and their accounts were declared D
as NPA and even after formation of Joint Lender Forum, without
obtaining approval from Joint Lender Forum, unencumbered land
of the corporate debtor has been mortgaged in favour of lenders
of JAL. There by this transfer has the effect of putting the JAL,
one of the creditors of JIL in a beneficial position than it would E
have been in the event of distribution of assets being made by
section 53 of the code.
The said mortgage of immovable properties, i.e. of the
unencumbered land of the corporate debtor has been made without
any consideration to the corporate debtor. Therefore the said F
transaction is covered under the umbrella of Sec 45(1) of the
Code and will be treated as an undervalued transaction as defined
under section 45 of the Code.
*** *** ***
In this case, we have found that impugned transactions are covered G
under preferential transactions as defined in section 43(2)(a) of
the Code. Therefore, it cannot be said that section 45 does not
apply for these transactions.
The impugned mortgage of unencumbered land parcels of the
Corporate Debtor in favour of lenders of the JAL to create a H
330 SUPREME COURT REPORTS [2020] 8 S.C.R.

A security interest are transactions between the Corporate Debtor,
lenders of JAL and JAL, who happens to be an Operational
Creditor of the Corporate Debtor.
It is true that the collateral security is common practice in loan
transactions. It is on record that in this case, the Corporate Debtor
B was under liquidity crunch and its accounts were declared NPA
by LIC and other creditors. The Joint Lender Forum was formed
to deal with the situation. But the Corporate Debtor entered into
the transaction even without taking prior approval of Joint Lender
Forum and mortgaged its unencumbered land in favour of the
lenders of the JAL.
C
In the circumstances stated above it is clear that the impugned
preferential transactions are also undervalued transactions and
covered under section 45(1) of the Code. It is also clear that
these transactions are undertaken during the relevant period of 2
years from the date of initiation of Corporate Insolvency Process
D as provided under section 46(1)(ii) of the Code. Therefore, this
issue is also decided in positive, in favour of applicant Resolution
Professional and against the Corporate Debtor.
In view of the above, it is clear that the mortgage of land of JIL in
favour of lenders of JAL, amounts to transfer of interest in property
E of JIL for the benefit of its creditor i.e. JAL and putting it in a
beneficial position vis-à-vis other creditors is a preferential
transactions U/s 43(2)(a) & (b).
The transactions were executed within the look back period of
two years before the commencement of Insolvency proceeding
F and is therefore covered U/s 43(4)(a). Further, transaction cannot
be treated is in ordinary course of business or financial affairs of
Corporate Debtor and is not excluded U/s 43(3).”
10.3. The Tribunal concluded in its order as follows:

G “On the above basis, it is clear that the company application filed
by the Resolution Applicant deserves to be allowed. Hence, is
allowed.
ORDER
The company application filed by the Resolution Professional under
H Sec. 66, 43 & 45 of the Insolvency and Bankruptcy 2016 is allowed.
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 331
INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

The impugned transactions, details of which are given in the A
schedule of the judgment are declared as fraudulent, preferential
and undervalued transactions as defined under section 66, 43 and
45 of the Code respectively.
Transactions given in the following schedule of property have
been found as preferential, undervalued and fraudulent, therefore, B
we pass the order for release and discharge of the security interest
created by the Corporate Debtor in favour of lenders of the
Jaiprakash Associates Ltd. under the provision of Section 44(c)
of the Insolvency and Bankruptcy Code 2016. We also pass an
order under Section 48(a) of the Code that the properties C
mortgaged by way of preferential and undervalued transactions
shall from now on be deemed to be vested in the Corporate
Debtor.”21
Appeals before NCLAT: the impugned order
D
11. Assailing the aforesaid order passed by NCLT accepting the
application of IRP in relation to six of the mortgage transactions, the
aggrieved parties filed separate appeals before the Appellate Tribunal,
the NCLAT. The Appellate Tribunal took note of the facts of the case
and the rival contentions and proceeded to upturn the order passed by
NCLT on the considerations as indicated infra. E
11.1. As regards the assertion of IRP that the transactions in
question were preferential transactions within the relevant time as
envisaged by Section 43 of the Code, the NCLAT observed that the
corporate debtor had created interest over its property, but such interest
had not been created in favour of any creditor or a surety or a guarantor F
for or on account of an antecedent financial debt or operational debt or
other liabilities owed by the corporate debtor and hence, Section 43(2)(a)
of the Code was not attracted. It was further observed that the mortgages
in question were made in the ordinary course of business and financial
affairs of the transferees, ruling out the applicability of Section 43 as G
such and hence, the Adjudicating Authority had no power to pass the
21In the schedule to the order aforesaid, NCLT gave out the description of six transaction
with particulars of the properties which were treated as preferential, undervalued and
fraudulent and also gave the description of one transaction that was not coming within
the ambit of ‘relevant time’ per Section 43 of the Code. (as fully taken note of in
paragraph 4 and its sub-paragraphs under the heading ‘Transactions in question’ ibid.). H
332 SUPREME COURT REPORTS [2020] 8 S.C.R.

A order under Section 44 of the Code. The Appellate Tribunal observed
and held, inter alia, as follows:
“62. In the present case, the ‘Corporate Debtor’ has created
interest on the property of the ‘Corporate Debtor’, but such interest
has not been created in favour of any creditor or a surety or a
B guarantor for or on account of an antecedent financial debt
or operational debt or other liabilities owed by the ‘Corporate
Debtor’.
63. The aforesaid interest on the property of the ‘Corporate
Debtor’ has been created in all these cases with regard to financial
C debt given by the Appellants to ‘Jaiprakash Associates Ltd.’, which
is not the ‘Corporate Debtor’.
64. Thus, it is clear that the interest on the property of the
‘Corporate Debtor’ has not been created in favour of the
Appellants- ‘Financial Creditors’ of an antecedent financial debt
D of the Appellants owed by the ‘Jaypee Infratech Ltd.’
(‘Corporate Debtor’). Therefore, we hold that clause (a) of sub-
section (2) of Section 43 is not attracted in any of the case of the
Appellants Bank, thereby none of the Appellants Bank come
within the meaning of ‘deemed to have given a preference’, as
used in Section 43. Therefore, the mortgage(s) created in their
E favour cannot be annulled on the ground of preferential transaction
in terms of Section 43 (2) (a) of the ‘I&B Code’.
65. Clause (b) of sub-section(2) of Section 43 relates to transfer
under clause (a) of sub-section (2) of Section 43, which in effect
puts such creditor or a surety or a guarantor in a beneficial position
F than it would have been in the event of a distribution of assets
being made in accordance with Section 53. As clause (a) of sub-
section (2) of Section 43 is not attracted, the question of
applicability of clause (b) of sub-section (2) of Section 43 does
not arise.
G 66. Apart from the aforesaid position of law in respect of mortgage,
in question, as per sub-section (3) of Section 43, for the purposes
of sub-section (2), “a preference shall not include the transfer
made in the ordinary course of the business or financial affairs of
the ‘Corporate Debtor’ or the transferee”. The mortgages in
question which were made in favour of the Appellants-Banks and
H
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 333
INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

Financial Institutions have been made in ordinary course of A
business and financial affairs of the transferee, as apparent from
the relevant facts.
67. Therefore, we hold that Section 43 is not attracted to any of
the transaction/mortgage(s) made in favour of the Appellants.”
B
11.2. The Appellate Tribunal further proceeded to hold that the
provisions of Section 45 of Code, for avoidance of undervalued
transactions, were not applicable in relation to the transactions in question
while observing as under:-
“71. For holding a transaction undervalued, the ‘Resolution
Professional’/‘Liquidator’ is required to examine the transactions C
which were made during ‘the relevant period’ as prescribed under
Section 46, if any of it is undervalued. As per sub-section (2) of
Section 45, the transaction shall be considered ‘undervalued’
‘where the ‘Corporate Debtor’ makes a gift to a person or
enters into a transaction with a person which involves the D
transfer of one or more assets by the ‘Corporate Debtor’ for
a consideration the value of which is significantly less than
the value of the consideration provided by the ‘Corporate
Debtor’ and such transaction has not taken place in the
ordinary course of business of the ‘Corporate Debtor’.’
E
72. In these appeals, we find that the transactions as has been
made i.e. mortgage(s) in favour of the Appellants as and when
made against the amount payable by ‘Jaiprakash Associates
Limited’ (borrower), the amount is not payable by the ‘Corporate
Debtor’. Therefore, clause (a) of sub-section (2) of Section 45 is
not attracted. For the same very reason, clause (b) of sub-section F
(2) of Section 43 or Section 45 cannot be made applicable with
regard to transaction in question which are not related to any
payment due from the ‘Corporate Debtor’.
73. As Section 44 is not attracted, it is not necessary to notice
Section 46 which is not attracted and, therefore, the Adjudicating G
Authority has no power to pass any order under Section 48 of the
‘I&B Code’. “
11.3. With respect to Section 66 of the Code dealing with fraudulent
trading or wrongful trading, the Appellate Tribunal observed that the
H
334 SUPREME COURT REPORTS [2020] 8 S.C.R.

A corporate debtor, being one of the group company, like a guarantor, had
executed mortgage deeds in favour of the lender banks and financial
institutions; and the transactions were in the ordinary course of business
of the corporate debtor. Thus, according to NCLAT, in the absence of
any contrary evidence to show that they were made to defraud the
creditors of the corporate debtor or for any fraudulent purpose, it was
B
not open to the Adjudicating Authority to hold that the mortgage deeds in
question were made by way of transactions within the meaning of
‘fraudulent trading’ or ‘wrongful trading’ under Section 66. The Appellate
Tribunal held,-
“76. In the present case, we have noticed that the transactions in
C question i.e. mortgage(s) were made in favour of the ‘Banks and
Financial Institutions’ by the ‘Corporate Debtor’ (‘Jaypee Infratech
Limited’) in the ordinary course of business of the ‘Corporate
Debtor’. The Appellants-Banks and Financial Institutions have
given loans to the holding Company namely-‘Jaiprakash Associates
D Limited’. The ‘Corporate Debtor’ being one of the group company,
like a guarantor, executed mortgage deed(s) in favour of the
Appellants-‘Banks and Financial Institutions’. We have seen that
none of the transactions were ‘preferential transaction’ or
‘undervalued transaction’. It has not been alleged that the
transactions, in question, were made to defraud the creditors in
E terms of Section 49 so allegation has been made that such
transactions amount to ‘extortionate credit’ as defined under
Section 50. Therefore, the Adjudicating Authority in absence of
any such finding is not empowered to pass order under Section
51. Further, as we have held that the transactions were made in
F the ordinary course of business in absence of any contrary
evidence to show that they were made to defraud the creditors of
the ‘Corporate Debtor’ or for any fraudulent purpose, on mere
allegation made by the ‘Resolution Professional’, it was not open
to the Adjudicating Authority to hold that mortgage deeds, in
question, were made by way of transactions which come within
G the meaning of ‘fraudulent trading’ or ‘wrongful trading’ under
Section 66.”
11.4. The Appellate Tribunal, therefore, allowed the appeals and
set aside the impugned order passed by NCLT on 16.05.2018 in so far
relating to the lenders in question in the following:-
H
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 335
INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

“80. For the reasons aforesaid, we set aside the impugned order A
dated 16th May, 2018 so far it relates to the Appellants. In view of
such findings, the Appellants-‘Axis Bank Ltd’, ‘Standard Chartered
Bank’, ‘ICICI Bank Ltd.’, ‘State Bank of India’, ‘Jai Prakash
Associates Ltd.’, ‘Bank of Maharashtra’, ‘United Bank of India’,
‘Central Bank of India’, ‘UCO Bank’, ‘Karur Vyasa Bank (P)
B
Ltd.’, ‘L&T Infrastructure Finance Company Ltd.’, ‘Canara
Bank’, ‘Karnataka Bank Ltd.’, ‘IFCI Ltd.’, ‘ Allahabad Bank’,
‘Jammu & Kashmir Bank’, and ‘The South Indian Bank Ltd.’ are
entitled to exercise their rights under the ‘I&B Code’.
81. All the appeals are allowed. However, we make it clear that
we have not made any observations with regard to the Promoters C
or Directors in absence of any appeal preferred on their behalf.
No costs.”
The relevant provisions
12. For comprehension of the subject-matter and appropriate D
dealing with the issues involved, before proceeding further, suitable it
would be to take note of the relevant statutory provisions.
12.1. It may be observed that while generally, the expressions
used in the Code are defined in Section 3 thereof but then, the expressions
employed for the purpose of Part II of the Code, dealing with insolvency E
resolution and liquidation of corporate persons, are defined in Section 5
thereof. The relevant definitions as occurring in Sections 3 and 5 are as
under:-
“Section 3(4): “charge” means an interest or lien created on the
property or assets of any person or any of its undertakings or F
both, as the case may be, as security and includes a mortgage;
Section 3(6): “claim” means—
(a) a right to payment, whether or not such right is reduced to
judgment, fixed, disputed, undisputed, legal, equitable, secured or
unsecured; G
(b) right to remedy for breach of contract under any law for the
time being in force, if such breach gives rise to a right to payment,
whether or not such right is reduced to judgment, fixed, matured,
unmatured, disputed, undisputed, secured or unsecured;
H
336 SUPREME COURT REPORTS [2020] 8 S.C.R.

A Section 3(8): “corporate debtor” means a corporate person who
owes a debt to any person;
Section 3(10): “creditor” means any person to whom a debt is
owed and includes a financial creditor, an operational creditor, a
secured creditor, an unsecured creditor and a decree-holder;
B Section 3(11): “debt” means a liability or obligation in respect of
a claim which is due from any person and includes a financial
debt and operational debt;
Section 3(12): “default” means non-payment of debt when whole
or any part or instalment of the amount of debt has become due
C and payable and is not paid by the debtor or the corporate debtor,
as the case may be;
Section 3(30): “secured creditor” means a creditor in favour of
whom security interest is created;

D Section 3(31): “security interest” means right, title or interest
or a claim to property, created in favour of, or provided for a
secured creditor by a transaction which secures payment or
performance of an obligation and includes mortgage, charge,
hypothecation, assignment and encumbrance or any other
agreement or arrangement securing payment or performance of
E any obligation of any person:
Provided that security interest shall not include a performance
guarantee;
Section 3(33): “transaction” includes a agreement or
arrangement in writing for the transfer of assets, or funds, goods
F
or services, from or to the corporate debtor;
Section 3(34): “transfer” includes sale, purchase, exchange,
mortgage, pledge, gift, loan or any other form of transfer of right,
title, possession or lien;
G Section 3(35): “transfer of property” means transfer of any
property and includes a transfer of any interest in the property
and creation of any charge upon such property;
Section 5(5A): “corporate guarantor” means a corporate person
who is the surety in a contract of guarantee to a corporate debtor;
H
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 337
INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

Section 5(7): “financial creditor” means any person to whom a A
financial debt is owed and includes a person to whom such debt
has been legally assigned or transferred to;
Section 5(8): “financial debt” means a debt alongwith interest, if
any, which is disbursed against the consideration for the time value
of money and includes- B
(a) money borrowed against the payment of interest;
(b) any amount raised by acceptance under any acceptance credit
facility or its de-materialised equivalent;
(c) any amount raised pursuant to any note purchase facility or C
the issue of bonds, notes, debentures, loan stock or any similar
instrument;
(d) the amount of any liability in respect of any lease or hire
purchase contract which is deemed as a finance or capital lease
under the Indian Accounting Standards or such other accounting D
standards as may be prescribed;
(e) receivables sold or discounted other than any receivables sold
on non-recourse basis;
(f) any amount raised under any other transaction, including any
forward sale or purchase agreement, having the commercial effect E
of a borrowing;
Explanation.— For the purposes of this sub-clause,—
(i) any amount raised from an allottee under a real estate project
shall be deemed to be an amount having the commercial effect of
a borrowing; and F

(ii) the expressions, “allottee” and “real estate project” shall have
the meanings respectively assigned to them in clauses (d) and
(zn) of section 2 of the Real Estate (Regulation and Development)
Act, 2016 (16 of 2016);22
G
(g) any derivative transaction entered into in connection with
protection against or benefit from fluctuation in any rate or price
and for calculating the value of any derivative transaction, only
the market value of such transaction shall be taken into account;
22 This explanation was inserted w.e.f. 06.06.2018. H
338 SUPREME COURT REPORTS [2020] 8 S.C.R.

A (h) any counter-indemnity obligation in respect of a guarantee,
indemnity, bond, documentary letter of credit or any other instrument
issued by a bank or financial institution;
(i) the amount of any liability in respect of any of the guarantee or
indemnity for any of the items referred to in sub-clauses (a) to (h)
B of this clause;
Section 5(20): “operational creditor” means a person to whom
an operational debt is owed and includes any person to whom
such debt has been legally assigned or transferred;
Section 5(21): “operational debt” means a claim in respect of
C the provision of goods or services including employment or a debt
in respect of the payment of dues arising under any law for the
time being in force and payable to the Central Government, any
State Government or any local authority;
Section 5(24): “related party”, in relation to a corporate debtor,
D means –
(a) a director or partner of the corporate debtor or a relative of a
director or partner of the corporate debtor;
(b) a key managerial personnel of the corporate debtor or a relative
E of a key managerial personnel of the corporate debtor;
(c) a limited liability partnership or a partnership firm in which a
director, partner, or manager of the corporate debtor or his relative
is a partner;
(d) a private company in which a director, partner or manager of
F the corporate debtor is a director and holds along with his relatives,
more than two per cent of its share capital;
(e) a public company in which a director, partner or manager of
the corporate debtor is a director and holds along with relatives,
more than two per cent of its paid-up share capital;
G (f) anybody corporate whose board of directors, managing director
or manager, in the ordinary course of business, acts on the advice,
directions or instructions of a director, partner or manager of the
corporate debtor;
(g) any limited liability partnership or a partnership firm whose
H partners or employees in the ordinary course of business, acts on
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 339
INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

the advice, directions or instructions of a director, partner or A
manager of the corporate debtor;
(h) any person on whose advice, directions or instructions, a
director, partner or manager of the corporate debtor is accustomed
to act;
B
(i) a body corporate which is a holding, subsidiary or an associate
company of the corporate debtor, or a subsidiary of a holding
company to which the corporate debtor is a subsidiary;
(j) any person who controls more than twenty per cent of voting
rights in the corporate debtor on account of ownership or a voting
agreement; C

(k) any person in whom the corporate debtor controls more than
twenty per cent of voting rights on account of ownership or a
voting agreement;
(l) any person who can control the composition of the board of D
directors or corresponding governing body of the corporate debtor;
(m) any person who is associated with the corporate debtor on
account of —
(i) participation in policy making process of the corporate
debtor; or E
(ii) having more than two directors in common between the
corporate debtor and such person; or
(iii) interchange of managerial personnel between the
corporate debtor and such person; or
F
(iv) provision of essential technical information to, or from,
the corporate debtor;”
12.2. The concept and consequences of preferential transactions
at a relevant time are provided in Sections 43 and 44 of the Code, which
may also be usefully extracted as follows:- G
“Section 43. Preferential transactions and relevant time.-
(1) Where the liquidator or the resolution professional, as the case
may be, is of the opinion that the corporate debtor has at a relevant
time given a preference in such transactions and in such manner
as laid down in sub-section (2) to any persons as referred to in H
340 SUPREME COURT REPORTS [2020] 8 S.C.R.

A sub-section (4), he shall apply to the Adjudicating Authority for
avoidance of preferential transactions and for, one or more of the
orders referred to in section 44.
(2) A corporate debtor shall be deemed to have given a preference,
if—
B
(a) there is a transfer of property or an interest thereof of the
corporate debtor for the benefit of a creditor or a surety or a
guarantor for or on account of an antecedent financial debt or
operational debt or other liabilities owed by the corporate debtor;
and
C (b) the transfer under clause (a) has the effect of putting such
creditor or a surety or a guarantor in a beneficial position than it
would have been in the event of a distribution of assets being
made in accordance with section 53.
(3) For the purposes of sub-section (2), a preference shall not
D include the following transfers—
(a) transfer made in the ordinary course of the business or financial
affairs of the corporate debtor or the transferee;
(b) any transfer creating a security interest in property acquired
E by the corporate debtor to the extent that—
(i) such security interest secures new value and was given at
the time of or after the signing of a security agreement that
contains a description of such property as security interest,
and was used by corporate debtor to acquire such property;
and
F
(ii) such transfer was registered with an information utility on
or before thirty days after the corporate debtor receives
possession of such property:
Provided that any transfer made in pursuance of the order of a
G court shall not, preclude such transfer to be deemed as giving of
preference by the corporate debtor.
Explanation.—For the purpose of sub-section (3) of this section,
“new value” means money or its worth in goods, services, or new
credit, or release by the transferee of property previously
H transferred to such transferee in a transaction that is neither void
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 341
INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

nor voidable by the liquidator or the resolution professional under A
this Code, including proceeds of such property, but does not include
a financial debt or operational debt substituted for existing financial
debt or operational debt.
(4) A preference shall be deemed to be given at a relevant time,
if— B
(a) It is given to a related party (other than by reason only of
being an employee), during the period of two years preceding the
insolvency commencement date; or
(b) a preference is given to a person other than a related party
during the period of one year preceding the insolvency C
commencement date.
Section 44. Orders in case of preferential transactions.-
(1) The Adjudicating Authority, may, on an application made by
the resolution professional or liquidator under sub-section (1) of D
section 43, by an order:
(a) require any property transferred in connection with the giving
of the preference to be vested in the corporate debtor;
(b) require any property to be so vested if it represents the
application either of the proceeds of sale of property so transferred E
or of money so transferred;
(c) release or discharge (in whole or in part) of any security interest
created by the corporate debtor;
(d) require any person to pay such sums in respect of benefits
received by him from the corporate debtor, such sums to the F
liquidator or the resolution professional, as the Adjudicating
Authority may direct;
(e) direct any guarantor, whose financial debts or operational debts
owed to any person were released or discharged (in whole or in
part) by the giving of the preference, to be under such new or G
revived financial debts or operational debts to that person as the
Adjudicating Authority deems appropriate;
(f) direct for providing security or charge on any property for the
discharge of any financial debt or operational debt under the order,
H
342 SUPREME COURT REPORTS [2020] 8 S.C.R.

A and such security or charge to have the same priority as a security
or charge released or discharged wholly or in part by the giving of
the preference; and
(g) direct for providing the extent to which any person whose
property is so vested in the corporate debtor, or on whom financial
B debts or operational debts are imposed by the order, are to be
proved in the liquidation or the corporate insolvency resolution
process for financial debts or operational debts which arose from,
or were released or discharged wholly or in part by the giving of
the preference:
C Provided that an order under this section shall not—
(a) affect any interest in property which was acquired from a
person other than the corporate debtor or any interest derived
from such interest and was acquired in good faith and for value;
(b) require a person, who received a benefit from the preferential
D transaction in good faith and for value to pay a sum to the liquidator
or the resolution professional.
Explanation I.-For the purpose of this section, it is clarified that
where a person, who has acquired an interest in property from
another person other than the corporate debtor, or who has
E received a benefit from the preference or such another person to
whom the corporate debtor gave the preference, —
(i) had sufficient information of the initiation or commencement
of insolvency resolution process of the corporate debtor;
(ii) is a related party,
F
it shall be presumed that the interest was acquired or the benefit
was received otherwise than in good faith unless the contrary is
shown.
Explanation II.-A person shall be deemed to have sufficient
G information or opportunity to avail such information if a public
announcement regarding the corporate insolvency resolution
process has been made under section 13.”
12.3. As the transactions in question are the mortgage(s) of the
assets of corporate debtor JIL, the concept and connotations of mortgage,
H
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 343
INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

as occurring in Section 58 of the Transfer of Property Act, 1882 23, could A
also be usefully noticed as under:-
“58. “Mortgage”, “mortgagor”, “mortgagee”, “mortgage-
money” and “mortgage-deed” defined.-
(a) A mortgage is the transfer of an interest in specific immoveable
B
property for the purpose of securing the payment of money
advanced or to be advanced by way of loan, an existing or future
debt, or the performance of an engagement which may give rise
to a pecuniary liability.
The transferor is called a mortgagor, the transferee a mortgagee;
the principal money and interest of which payment is secured for C
the time being are called the mortgage-money, and the instrument
(if any) by which the transfer is effected is called a mortgage-
deed.
(b) Simple mortgage.-Where, without delivering possession of
the mortgaged property, the mortgagor binds himself personally D
to pay the mortgage-money, and agrees, expressly or impliedly,
that, in the event of his failing to pay according to his contract, the
mortgagee shall have a right to cause the mortgaged property to
be sold and the proceeds of sale to be applied, so far as may be
necessary, in payment of the mortgage-money, the transaction is E
called a simple mortgage and the mortgagee a simple mortgagee.
(c) Mortgage by conditional sale.-Where, the mortgagor
ostensibly sells the mortgaged property-
on condition that on default of payment of the mortgage-
money on a certain date the sale shall become absolute, or F
on condition that on such payment being made the sale shall
become void, or
on condition that on such payment being made the buyer
shall transfer the property to the seller,
G
the transaction is called a mortgage by conditional sale and
the mortgagee a mortgagee by conditional sale:

23 Hereinafter also referred to as ’the Transfer of Property Act’. H
344 SUPREME COURT REPORTS [2020] 8 S.C.R.

A Provided that no such transaction shall be deemed to be a
mortgage, unless the condition is embodied in the document which
effects or purports to effect the sale.
(d) Usufructuary mortgage.-Where the mortgagor delivers
possession or expressly or by implication binds himself to deliver
B possession of the mortgaged property to the mortgagee, and
authorises him to retain such possession until payment of the
mortgage-money, and to receive the rents and profits accruing
from the property or any part of such rents and profits and to
appropriate the same in lieu of interest, or in payment of the
mortgage-money, or partly in lieu of interest or partly in payment
C
of the mortgage-money, the transaction is called an usufructuary
mortgage and the mortgagee an usufructuary mortgagee.
(e) English mortgage.-Where the mortgagor binds himself to
repay the mortgage-money on a certain date, and transfers the
mortgaged property absolutely to the mortgagee, but subject to a
D proviso that he will re-transfer it to the mortgagor upon payment
of the mortgage-money as agreed, the transaction is called an
English mortgage.
(f) Mortgage by deposit of title-deeds.-Where a person in
any of the following towns, namely, the towns of Calcutta, Madras,
E and Bombay, and in any other town which the State Government
concerned may, by notification in the Official Gazette, specify in
this behalf, delivers to a creditor or his agent documents of title to
immoveable property, with intent to create a security thereon, the
transaction is called a mortgage by deposit of title-deeds.
F (g) Anomalous mortgage.- A mortgage which is not a simple
mortgage, a mortgage by conditional sale, an usufructuary
mortgage, an English mortgage or a mortgage by deposit of title-
deeds within the meaning of this section is called an anomalous
mortgage.”
G 12.4. The provisions contained in Sections 124, 126 and 127 of
the Indian Contract Act, 187224 shall also have bearing on the issues at
hand and hence, the same may also be noted as follows:-
“124. “Contract of indemnity” defined.- A contract by which
one party promises to save the other from loss caused to him by
H 24 Hereinafter also referred to as ‘the Contract Act’.
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 345
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the conduct of the promisor himself, or by the conduct of any A
other person, is called a “contract of indemnity.”
126. ‘Contract of guarantee’, ‘surety’, ‘principal debtor’
and ‘creditor’ – A ‘contract of guarantee’ is a contract to perform
the promise, or discharge the liability, of a third person in case of
his default. The person who gives the guarantee is called the B
‘surety’; the person in respect of whose default the guarantee is
given is called the ‘principal debtor’, and the person to whom the
guarantee is given is called the ‘creditor’. A guarantee may be
either oral or written.
127. Consideration for guarantee.- Anything done, or any C
promise made, for the benefit of the principal debtor, may be a
sufficient consideration to the surety for giving the guarantee.”
WHETHER THE TRANSACTIONS IN QUESTION ARE
PREFERENTIAL
Broad features of rival contentions and submissions D

13. As noticed, being aggrieved by the order so passed by NCLAT,
three sets of parties have preferred these appeals. Multidimensional and
wide-ranging submissions have been made by learned counsel for the
respective parties, raising the issues as to whether the transactions in
question could be said to be preferential and/or undervalued and/or E
fraudulent, essentially within the meaning of Sections 43, 45, 49 and 66
of the Code. Elaborate submissions have also been made raising the
issue as to whether the lenders of JAL, in whose favour the security
interest by way of impugned transactions were created, would fall in the
category of ‘financial creditors’ of the corporate debtor JIL. F
14. Having regard to the overall circumstances, appropriate it
would be to deal, at the first, with the contentions related with the issue
as to whether the transactions in question are preferential transactions
within the meaning of Section 43 of the Code. We may briefly summarize
the contentions of the appellants, with particular focus on this issue as G
infra:
Interim Resolution Professional for Jaypee Infratech Limited
– the appellant In C.A. No. 8512-8527 of 2019
14.1. It has been contended on behalf of the appellant Interim
Resolution Professional, who moved the application for avoidance of H
346 SUPREME COURT REPORTS [2020] 8 S.C.R.

A the transactions in question, that the impugned transactions have the
effect of putting JAL, which is an equity shareholder and an operational
creditor (for an amount of Rs. 261.77 crores) of the corporate debtor
JIL, in a beneficial position than it would have been in the event of
distribution of assets under Section 53 of the Code vis-à-vis other
creditors; and that if the transactions are held to be valid, the liability of
B
JAL towards its own creditors gets secured and becomes realisable
from the value of the mortgaged properties whereby, JAL’s liabilities
are reduced and JAL gets benefitted in exclusion of creditors of the
corporate debtor JIL. It is submitted that, in the event of distribution of
assets in terms of Section 53 of IBC, for the sake of argument, even if
C JAL is to get full value of its shares (Rs. 995 crores), such amount is
significantly less than the value of assets which have been mortgaged
by way of impugned transactions for satisfaction of debts owed by JAL
to its lenders.
14.1.1. It is submitted on behalf of the appellant Interim Resolution
D Profession that the assets in question were released from the earlier
mortgages and fresh mortgages were created during the look-back period
with increased/enhanced amount of facilities as provided under each
individual transaction. The said so-called re-mortgage essentially amounts
to a fresh mortgage within the relevant time of two years before the
date of commencement of CIRP and was not done in the ordinary course
E
of business of JIL and hence, is hit by Section 43 of the Code.
14.1.2. It is further urged that in the exclusionary clause under
Section 43(3)(a), which pertains to the transfer being made in the ordinary
course of the business or financial affairs of the corporate debtor or the
transferee, the expression “or” will have to be read conjunctively and
F not in the alternative. That is to say, the word “or” will have to be read
as “and”. This is because if “or” is read textually, it would mean that an
overwhelming majority of transactions like the present one, whereby
banks who would accept the security interest over properties belonging
to a third party, after disbursing financial facilities to its loan, would get
G out of the net of “preferential transactions”, even if the transfer in question
is not made in the ordinary course of business of the corporate debtor. It
is submitted that the intention of legislature behind enacting a provision
like Section 43 is that preferential transactions are avoided so that such
assets would be available either with the resolution professional or with
the liquidator, as the case may be, to put the corporate debtor back on its
H
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 347
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wheels or if that is not possible, to ensure that the creditors of the A
corporate debtor get a fair deal. With reference to the decisions of this
Court in State of Bombay v. R.M.D. Chamarbaugwala and Anr.:
1957 SCR 874 and Mazagaon Dock Ltd v. Commissioner of Income-
Tax and Excess Profits Tax: 1959 SCR 848, it is submitted that on
the well-known cannons of interpretation, “or” could be read as “and” if
B
it is warranted to bring the provision in question in sync with the intention
of the legislature which is to be discerned.
14.1.3. It is contended that Section 43 ought to be read keeping in
mind the intention of the legislature in introducing such provision, which
had been to protect the creditors against siphoning away of corporate
C
assets by the management of the company, who have special knowledge
of the company’s financial troubles by virtue of its position.
India Infrastructure Finance Company Limited – the appellant
in C.A.@ D No. 32881 of 2019.
14.2. This appellant is one of the entities who has advanced loan D
to JIL and has preferred appeal with permission, assailing the order passed
by NCLAT and maintaining, inter alia, that in any case, the lenders of
JAL cannot be taken as ‘financial creditors’ of JIL. While referring to
the theory behind the provisions for avoidance of certain transactions, it
is submitted on behalf of this appellant that the Court should consider
substance rather than legal form in evaluating the true economic effect E
of a transaction or a set of transactions in applying the relevant provisions.
On behalf of this appellant, the following submissions have been made in
regard to the relevant expressions and phrases occurring in the provisions
under consideration:
Ordinary Course of Business F
14.2.1. It is submitted that mortgages could not have been made
in the ordinary course of business of the corporate debtor JIL, as it is
difficult to fathom why a subsidiary would furnish security to its parent
company in the ordinary course and, on the contrary, it is the parent
company which at times furnishes security on behalf of its subsidiary G
since it derives economic value from the subsidiary. According to the
appellant, it is difficult to appreciate that when the corporate debtor JIL
was itself reeling under financial stress, why it would routinely undertake
to secure the indebtedness of JAL by furnishing such high valued
securities and that too when the amount of debt secured by way of
H
348 SUPREME COURT REPORTS [2020] 8 S.C.R.

A mortgaging the assets of the corporate debtor increased from Rs. 3,000
crores to approximately Rs. 24,000 crores and the number of creditors
also went up from 2 to 24 with respect to the consortium mortgage. It is
submitted that even though creation of third party security is a normal
practice, the creation of every third party security cannot be always
deemed to have been done in the ordinary course of business; that such
B
‘ordinary course’ has to be determined under the circumstances when
such transactions were entered into; and, considering that JIL was
declared NPA and had defaulted on its indebtedness to some of its lenders,
securing of JAL’s indebtedness under such circumstances cannot be
construed to have been done in the ordinary course of business of the
C corporate debtor JIL. The learned counsel for the appellant has referred,
inter alia, to the decision in Downs Distributing Co Pty Ltd v.
Associated Blue Star Stores Pty Ltd (in liq): (1948) 76 CLR 463.
Relevant Period and Related Party
14.2.2. It is further submitted that the term ‘transaction’ under
D the Code includes an agreement or arrangement in writing for the transfer
of assets, or funds, goods or services from or to the corporate debtor.
The use of the word ‘include’ would signify its natural import and is to
be given a wide interpretation. It is submitted that as JAL was not only
ad idem to the terms of the transaction but was also the beneficiary
E thereof, it cannot be said that the transaction was only between the
corporate debtor and the lenders of JAL; rather, the transaction was
with a ‘related party’ and the look-back period would be two years.
Home buyers – the appellants in C.A. No. 6777-97/2019
14.3. On behalf of the home buyers, who have invested in the
F projects of the corporate debtor and whose interests would be diluted if
the impugned transactions are upheld, the flow of transactions in question
has been referred and essentially, the same contentions have been urged
with respect to Section 43 of the Code, with reliance on the decision in
Downs Distributing Co (supra), that the impugned transactions were
G not made in the ordinary course of business of the corporate debtor JIL;
and had been preferential transactions, putting JAL in a beneficial position
at the cost of bona fide creditors of JIL, including the home buyers. We
are not re-narrating all their contentions to avoid repetition. However,
we may observe that to substantiate their arguments with respect to
Section 43 of the Code, on behalf of these appellants, reliance is also
H
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placed on the interim report of the Bankruptcy Law Reforms Committee A
(February 2015) and the decision of this Court in Macquarie Bank
Ltd. v. Shilpi Cable Technologies Ltd.: (2018) 2 SCC 674.
The respondents
15. The contesting respondents have refuted the contentions of
the appellants with essentially similar submissions that the transactions B
in question cannot be termed as preferential transactions within the
meaning of Section 43 of the Code.
15.1. The respondents, particularly the lenders of JAL, while
maintaining a consistent stand that the transactions in question are not
preferential and do not fall under Section 43 of the Code, have submitted C
that they being the bankers and financial institutions, are regularly engaged
in the business of extending loans and other facilities which form the
backbone of economic growth; and taking of such securities, including
third party security, is one of the normal and ordinary feature of their
business and dealings, particularly that of corporate money lending. D
According to these respondents, if at all such third party securities are
avoided on the allegation of being preferential, it is likely to have a
devastating effect on the entire economy because the bankers and
financial institutions would then be left high and dry; and for future
dealings, they shall have no alternative but to restrict their activities only
to the direct party securities which would, in turn, result in retardation E
and regression. It is submitted that in a given case, the borrower may
not be able to offer matching security to secure the entire advance
requisite for its business and growth; and legally it is not impermissible
between the related companies that one may provide security towards
the loan/advance/facility obtained by the other. According to the F
respondents, the scheme of the Code, and particularly its Part II, has
never been to allow the processes of insolvency resolution or liquidation
to operate detrimental to the interests of the financers like themselves
(lenders of JAL). It is contended that on the true scope of the provisions
contained under Section 43 of the Code, with reference to the intent and
object, the transactions in question, representing the security and G
guarantee extended by the corporate debtor JIL, cannot be construed as
preferential, particularly when they were entered into in the ordinary
course of business and financial affairs of the corporate debtor as also
the transferees.
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350 SUPREME COURT REPORTS [2020] 8 S.C.R.

A 15.2. Apart from expressing such concerns about likely prejudice
to themselves and to the economy if the transactions in question are held
preferential, a variety of contentions have been advanced on behalf of
the respondents, while refuting those of the appellants. We may briefly
summarize the leading contentions on behalf of the contesting respondents
while omitting repetitions.
B
Axis Bank
15.3. While maintaining that the impugned transactions cannot be
considered as preferential within the meaning of Section 43 of the Code,
the principal contentions on behalf of this respondent are as under: -
C a. The transactions did not occur within the ‘relevant time’.
15.3.1. It is contended that the ‘relevant time’ in the present
circumstances could be only one year as the transfer of property interest
was to this respondent, which is a Bank and an unrelated party. It is
further contended that, in any event, the land parcels were mortgaged
D on 24.02.2015, which is beyond even the two years formulation, the
relevant time being from 10.08.2015 to 09.08.2017. The subsequent re-
execution of the mortgage deeds on 15.09.2015 and then again on
29.12.2016 cannot be considered to be a substantive event since the
nature and identity of the security remained the same and no fresh
E encumbrances were created. The re-mortgage was done to reflect the
increase in the amount of facilities and number of members in the
consortium. It is not the case that the existing facilities were paid, the
mortgage satisfied, and fresh facilities were created for which a fresh
mortgage was required.

F b. Without prejudice to the above, the ingredients of Section
43(2) are not met.
15.3.2. It is further submitted that Sections 43/44 of the Code are
expropriating provisions as they affect concluded transactions and have
the potential to render void the transfers of property done through the
transactions which are otherwise legitimate and hence, such provisions
G
must be strictly construed. The decisions of this Court in Devinder Singh
& Ors v. State of Punjab & Ors: (2008) 1 SCC 728 and Nareshbhai
v. Union of India : (2019) SCC Online SC 1027 have been relied
upon.

H
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 351
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15.3.3. It is submitted that the requirements set out under Section A
43(2) must be strictly construed and in the instant case, the two prongs
under Section 43(2) have not been satisfied. With reference to
UNCITRAL Legislative Guide on Insolvency Law at para 177, it
is submitted that as per Section 43(2)(a), a preference could only be
given to an existing creditor such that he is preferred over other creditors
B
but in this matter, the security was provided for the benefit of the
respondent bank, which did not have a pre-existing creditor-debtor
relationship with the corporate debtor. Further, the security was provided
on account of the debt obligations of JAL, and not any antecedent debt
obligations of the corporate debtor.
15.3.4. It is further submitted, without prejudice to the above, that C
even if JAL is taken to be a creditor within the meaning of Section
43(2)(a), then the requirements of Section 43(2)(b), the second prong of
the two-fold requirement for a transaction to be a preference, are not
met. It is submitted that the transfer in the instant case has no effect
whatsoever on the relative position of JAL in the distribution waterfall – D
it remains an operational creditor without any security interest.
c. Without prejudice to the above, security was provided in
the ordinary course of business.
15.3.5. While pointing out that Section 43(3)(a) carves out
exception for the transactions made in the ordinary course of business E
or financial affairs of either the corporate debtor or the transferee, it is
contended that no material particulars/evidence have been produced to
show that the provision of the security was not in the ordinary course of
business of the corporate debtor. On the contrary, according to the
respondent, (i) creation of third party security is an established commercial F
business practice; (ii) the corporate debtor has continuously disclosed
details of the security in its annual reports beginning from the financial
year ending 31.03.2015 and thus, creation of security was known to all
and disclosed in public documents; and (iii) no evidence of dissent from
any existing creditor of the corporate debtor has been shown at the time
of creation of the security. The transaction in question, according to the G
respondent, had been in the ordinary course of business of the corporate
debtor and remains unexceptionable.
15.3.6. It is further contended that the provision of security was
also in the ordinary course of business of the respondent who is a
H
352 SUPREME COURT REPORTS [2020] 8 S.C.R.

A scheduled commercial bank and is duly authorized by statute to carry
out the business of commercial lending on a secured basis [per Section
6(1)(a) of the Banking Regulation Act, 1949]; and is statutorily entitled
to seek credit enhancement on account of outstanding debts by way of
creation of security interests by borrowers or their related entities. For
this reason too, with the transaction being in the ordinary course of
B
business of the transferee i.e., the respondent, it cannot be termed as a
preferential transaction.
15.3.7. It is yet further submitted that the contention of IRP that
the corporate debtor ought not to have given the security as its accounts
had turned NPA with certain banks is fallacious as it conflates the
C
concepts of ‘NPA’ and ‘willful defaulter’ and ignores that the security
was given to the respondent even before the account turned NPA qua
certain banks. With reference to the interim report of the Bankruptcy
Law Reforms Committee issued in February 2015, it is submitted that as
per the said report, avoidance transactions relate to ‘willful defaulters’
D and not ‘NPAs’. It is further argued that the distinctive position of a
willful defaulter and an NPA is also indicated in Section 29A of Code,
where Section 29A(b) provides that a willful defaulter can never be a
resolution applicant whereas, Section 29A(c) provides that a company
whose account has become non-performing may only be disqualified if
the account has remained non-performing for a period of one year. It is
E
submitted that RBI Master Circular on asset classification issued in July
2015 and June 2019 set out that an account may turn NPA qua a particular
bank if the debts are not being serviced regularly but this does not mean
that a particular company’s accounts would have turned non-performing
qua all its lenders. It is also submitted that the other account of corporate
F debtor with this respondent turned NPA only in 2017, i.e., much after the
creation of security in question. It is further contended that a company’s
account may easily become standard if, inter alia, the company
regularizes its payment timelines or if lenders decide to revise the
company’s repayment obligations. Reliance is placed on the decisions of
this Court in Keshavlal Khemchand & Sons Pvt. Ltd. & Ors v. Union
G
of India & Ors: (2015) 4 SCC 770 and State Bank of India v. Jah
Developers Pvt. Ltd. & Ors.: (2019) 6 SCC 787.
d. Section 44 does not come into operation unless a
transaction is made out to be preferential under Section 43.

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ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 353
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15.3.8. It is further submitted that the jurisdictional condition of A
exercising power under Section 44 is the finding that a transaction is
preferential under Section 43, as is evident from the heading of Section
44 i.e., ‘Orders in cases of preferential transactions’; and, for the
transaction in question being not preferential under Section 43, no orders
could be made under Section 44.
B
Standard Chartered Bank
15.4. Most of the contentions urged on behalf of this respondent
are analogous to the contentions noticed in the preceding paragraphs
and, therefore, we are not repeating the same. It is maintained on behalf
of this respondent that in whatever way the relevant time is reckoned C
for the purpose of Section 43 of the Code, its transactions would not fall
therein because the initial mortgage in favour of this respondent was
made in the year 2012, which is beyond the two years formulation. The
further submission is that the subsequent conversion of registered
mortgage into an equitable mortgage on 04.11.2015 and thereafter, re-
conversion from equitable mortgage to registered mortgage on D
24.05.2016, in relation to the same subject property as a security, cannot
be considered as a fresh creation of mortgage and hence, the transaction
in question does not fall within relevant time.
ICICI Bank
E
15.5. Again, for most of the contentions on behalf of this respondent
being similar in nature, we are not repeating the same. However, we
may notice that with reference to Section 43(4) of the Code, it has been
contended that since this respondent bank is an unrelated party to both
the corporate debtor and JAL, the relevant look-back period would be
one year and not two years. It is submitted that the mortgages were F
created on 15.09.2015 and the same property was re-mortgaged on
29.12.2016, which is much before the look-back period of one year and
thereby, this transaction could not be challenged as being preferential.
The decisions of the Bombay High Court in Monarch Enterprises v.
Kishan Tulpule & Ors : (1992) 74 Comp Case 89 (Bom) and that of G
Madras High Court in IDBI Bank Ltd. v. The Administrator, Kothari
Orient Finance Ltd., the Official Liquidator & S. Ramaiah : (2009)
152 Comp Case 282 (Mad) have been referred while submitting that
a mere transfer of the assets within the look-back period would not
make the transaction preferential except when it is coupled with the
intent to prefer one creditor over the other. Further, for contending that H
354 SUPREME COURT REPORTS [2020] 8 S.C.R.

A the impugned transactions were made in the ordinary course of business
of both the respondent Bank and the corporate debtor, the Annual Reports
of corporate debtor JIL have been referred with the submissions that
the mortgaged properties were disclosed as ‘inventories’ for the corporate
debtor being a real estate company; and hence, dealing with the
‘inventories’/‘stock-in-trade’ is in the ordinary course of business.
B
15.5.1. It is further submitted that there is no relation between the
financial position of the corporate debtor and the impugned transaction
for another reason that as on the date of commencement of insolvency
proceedings, the corporate debtor had 740 acres of unencumbered land,
which could have been used to create security for the creditors of
C
corporate debtor. While pointing out that 11 out of 13 lenders of the
corporate debtor JIL are also a part of the consortium of JAL lenders
whose loans were secured by mortgages made by the corporate debtor,
it is submitted that prior to 15.09.2015, when the questioned Consortium
of Mortgages was created, only Jammu and Kashmir Bank had declared
D the corporate debtor as NPA, which was followed by the other lenders
declaring the corporate debtor as NPA. It is contended that prior to the
said declaration, the transactions with this respondent had been made as
also the mortgages created on 15.09.2015, which had also secured the
interests of Jammu and Kashmir Bank and, therefore, the impugned
transactions could not be said to be preferential.
E
Other respondent-lenders
15.6. Broadly speaking, similar submissions as noted above have
been made on behalf of other respondent-lenders while maintaining that
the impugned transactions are covered by the exclusion clause under
F Section 43 inasmuch as the transfers had been made in the ordinary
course of business of the corporate debtor as also the transferees; and
that for the purpose of Section 43 of the Code, the relationship between
the respondent-lenders and JIL ought to be looked into rather than
assuming JAL to be the primary transferee. It has also been argued,
while relying on the decision of this Court in Purbanchal Cables &
G Conductors Pvt. Ltd. & Ors v. Assam State Electricity Board & Ors
: (2012) 7 SCC 462, that the provisions of Section 43 of the Code, by
their very nature, would come into operation at least one year after the
enactment of the Code i.e., it would have only the prospective effect
and cannot be given retrospective effect so as to operate over any period
H prior to the enactment.
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 355
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Jaiprakash Associates Ltd. (JAL) A
15.7. As noticed, this respondent JAL is the holding company of
corporate debtor JIL; and the transactions in question had been for
securing the loans/facilities obtained by this respondent. Even while
broadly adopting the contentions advanced by other respondents, further
submissions have been made on behalf of this respondent to assert on B
the credence of the transactions in question. With reference to its
relationship with JIL, it is contended on behalf of this respondent that
being the holding company, JAL had been providing financial, technical
and strategic support to JIL in various ways being: (i) Investment made
in 99,50,00,000 shares of JIL (paid up value Rs. 995 crores) at its very
nascent stage, which means contribution of substantial funds for the C
business of JIL without interest; (ii) Pledge of its 70,83,56,087 equity
shares held in JIL in favour of the lender of JIL; (iii) Promoter Support
Agreement to meet the Debt Service Reserve Account (DSRA)
obligation of JIL towards its lenders; and (iv) Bank Guarantees of Rs.
212 crores in aggregate to meet the DSRA obligation of JIL for the D
financial assistance obtained by JIL. It is submitted that such dealings/
transactions by JAL in favour of JIL depict the nature of business
relationship between JAL and JIL and makes it amply clear that the
impugned transactions were done in the ordinary course of business and
financial affairs of JIL. It is further submitted that the mortgage of 858
acres of land made in favour of lenders of JAL fall within the ambit of E
Section 186 of Companies Act, 201325 and is not unauthorized.
15.7.1. It is contended that avoidance of preferential transactions
applies to a case where the company’s accounts has become stressed
and there is a strong likelihood of it going into liquidation but in the present
case, it is a matter of record that the accounts of JIL had been categorised F
as NPA only to an extent of 29.04% whereas the remaining accounts
were still ‘standard’. According to the respondent JAL, this fact was
specifically pleaded at the stage of opposing the application filed before
the NCLT for initiating CIRP against JIL but JIL gave its consent for
CIRP on the bona fide belief that it would be able to restructure its loans G
and get back the management of JIL. The submission is that, in the
given economic scenario, JIL was not in any such stress or problem that
it could not have continued with the existing mortgages for securing the
facilities advanced to JAL by the lender banks and financial institutions.
25 Hereinafter also referred to as ‘the Act of 2013’. H
356 SUPREME COURT REPORTS [2020] 8 S.C.R.

A Insolvency and Bankruptcy Code, 2016: historical
background, objects, scheme and structure of the relevant parts
16. The basic issue raised in the matter being related with the
effect and operation of Section 43 of the Code, concerning ‘Preferential
transactions and relevant time’, appropriate it shall be to comprehend
B the principles underlying the concept of ‘preferential transactions’. A
little insight into the objects sought to be achieved by the Insolvency and
Bankruptcy Code, 2016 and its historical background shall be apposite.
16.1. As noticed from Preamble, the Code came to be enacted to
consolidate and amend the laws relating to reorganisation and insolvency
C resolution of corporate persons and even of partnership firms and
individuals in a time bound manner; the objectives, inter alia, being for
maximisation of value of assets of such persons and balance of interest
of all the stakeholders.
16.1.1. In the case of Swiss Ribbons Private Limited and Anr.
D v. Union of India and Ors.: (2019) 4 SCC 1726, this Court had the
occasion to traverse through the historical background and scheme of
the Code in the wake of challenge to the constitutional validity of various
provisions therein. One part of such challenge had also been founded on
the ground that classification between ‘financial creditor’ and ‘operational
creditor’ was discriminatory and violative of Article 14 of the Constitution
E of India.27 This ground as also several other grounds pertaining to various
provisions of the Code were rejected by this Court after elaborate dilation
on the vast variety of rival contentions and the provisions so contained in
the Code were upheld as valid. In the course of such distillation, this
Court took note, inter alia, of the pre-existing state of law as also the
F objects and reasons for enactment of the Code. While observing that
the focus of the Code was to ensure revival and continuation of the
corporate debtor, where liquidation is to be availed of only as a last
resort, this Court pointed out that on its scheme and frame work, the
Code was a beneficial legislation to put the corporate debtor on its feet,
and not a mere recovery legislation for the creditors. This Court said,-
G
26Hereinafter also referred to as the case of ‘Swiss Ribbons’.
27The law declared by this Court in this case of Swiss Ribbons, while rejecting the
contentions that the classification between ‘financial creditor’ and ‘operational creditor’
was discriminatory and violative of Article 14, shall have some bearing on the issues at
hand, particularly in relation to the second issue on the claim of the respondent-lenders
H for being treated a financial creditors of JIL, as shall be noticed hereafter later.
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 357
INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

“27. As is discernible, the Preamble gives an insight into what is A
sought to be achieved by the Code. The Code is first and foremost,
a Code for reorganisation and insolvency resolution of corporate
debtors. Unless such reorganisation is effected in a time-bound
manner, the value of the assets of such persons will deplete.
Therefore, maximisation of value of the assets of such persons so
B
that they are efficiently run as going concerns is another very
important objective of the Code. This, in turn, will promote
entrepreneurship as the persons in management of the corporate
debtor are removed and replaced by entrepreneurs. When,
therefore, a resolution plan takes off and the corporate debtor is
brought back into the economic mainstream, it is able to repay its C
debts, which, in turn, enhances the viability of credit in the hands
of banks and financial institutions. Above all, ultimately, the
interests of all stakeholders are looked after as the corporate debtor
itself becomes a beneficiary of the resolution scheme—workers
are paid, the creditors in the long run will be repaid in full, and
D
shareholders/investors are able to maximise their investment.
Timely resolution of a corporate debtor who is in the red, by an
effective legal framework, would go a long way to support the
development of credit markets. Since more investment can be
made with funds that have come back into the economy, business
then eases up, which leads, overall, to higher economic growth E
and development of the Indian economy. What is interesting to
note is that the Preamble does not, in any manner, refer to
liquidation, which is only availed of as a last resort if there is
either no resolution plan or the resolution plans submitted are not
up to the mark. Even in liquidation, the liquidator can sell the
F
business of the corporate debtor as a going concern. (See
ArcelorMittal28 at para 83, fn 3)
28. It can thus be seen that the primary focus of the legislation is
to ensure revival and continuation of the corporate debtor by
protecting the corporate debtor from its own management and
G
from a corporate death by liquidation. The Code is thus a beneficial
legislation which puts the corporate debtor back on its feet, not
being a mere recovery legislation for creditors. The interests of
the corporate debtor have, therefore, been bifurcated and

28 ArcelorMittal India (P) Ltd. v. Satish Kumar Gupta & Ors: (2019) 2 SCC 1 H
358 SUPREME COURT REPORTS [2020] 8 S.C.R.

A separated from that of its promoters/those who are in management.
Thus, the resolution process is not adversarial to the corporate
debtor but, in fact, protective of its interests. The moratorium
imposed by Section 14 is in the interest of the corporate debtor
itself, thereby preserving the assets of the corporate debtor during
the resolution process. The timelines within which the resolution
B
process is to take place again protects the corporate debtor’s
assets from further dilution, and also protects all its creditors and
workers by seeing that the resolution process goes through as
fast as possible so that another management can, through its
entrepreneurial skills, resuscitate the corporate debtor to achieve
C all these ends.”
16.2. Keeping in view the objectives, discernible from the Preamble
as also from the Statement of Objects and Reasons of the Code and the
observations of this Court, we may now take an overview of the scheme
and structure of the relevant parts of the Code. Part I thereof contains
D the provisions regarding title, extent, commencement and application of
the Code as also defines various expressions used and employed in the
Code. Different provisions have come into force on different dates, as
permissible under proviso to sub-section (3) of Section 1. Part II of the
Code deals with insolvency resolution and liquidation for corporate
persons. Chapter I of Part II makes provision for its applicability and
E also defines various expressions used in this Part (Sections 4 and 5).
Chapter II of Part II contains the provisions for corporate insolvency
resolution process in Sections 6 to 32 whereas Chapter III of this Part II
contains the provisions for liquidation process in Sections 33 to 54 29.
16.3. Though the provisions relating to ‘preferential transactions
F and relevant time’ (in Section 43 of the Code) occur in Chapter III of
Part II, relating to liquidation process, but such provisions being for
avoidance of certain transactions and having bearing on the resolution
process too, by their very nature, equally operate over the corporate
insolvency resolution process, and hence, the resolution professional is
G obligated, by virtue of clause (j) of sub-section (2) of Section 25 of the
Code, to file application for avoidance of the stated transactions in
accordance with Chapter III. That being the position, Section 43 of the
Code comes into full effect in CIRP too.

29Sections 4 to 33 came into force on 01.12.2016 whereas Section 33 to 54 came into
H force on 15.12.2016.
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 359
INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

Preferential transaction at a relevant time: concept and A
connotations
17. Having regard to the questions involved, a brief insight into
the theory relating to avoidance of certain transactions as being
preferential would be pertinent at this stage.
B
17.1.The basic concept of ‘preference’ as per the law dictionaries
and lexicons is the act of ‘paying or securing to one or more of his
creditors, by an insolvent debtor, the whole or part of their claims,
to the exclusion of the rest’.30 We may usefully take note of the meaning,
definition and basic ingredients of ‘preference’ and ‘preferential transfer’,
as defined in Black’s Law Dictionary31: C
“preference. (15c) 1. The favouring of one person or thing over
another. 2. The person or thing so favoured. 3. The quality, state,
or condition of treating some persons or things more
advantageously than others. 4. Priority of payment given to one
or more creditors by a debtor; a creditor’s right to receive such D
priority. 5. Bankruptcy.
PREFERENTIAL TRANSFER.
insider preference. (1981) A transfer of property by a
bankruptcy debtor to an insider more than 90 days before but
within one year after the filing of the bankruptcy petition. E

liquidation preference. (1936) A preferred shareholder’s
right, once the corporation is liquidated, to receive a specified
distribution before common shareholders receive anything.
voidable preference .See PREFERENTIAL TRANSFER” F
*** *** ***
“preferential transfer. (1874) Bankruptcy. A prebankruptcy
transfer made by an insolvent debtor to or for the benefit of a
creditor, thereby allowing the creditor to receive more than its
G
proportionate share of the debtor’s assets; specif., an insolvent
debtor’s transfer of a property interest for the benefit of a creditor
who is owed on an earlier debt, when the transfer occurs no more
than 90 days before the date when the bankruptcy petition is filed
30 P. Ramanatha Aiyar’s Advanced Law Lexicon (5 th Ed.-Vol 3, p.4002)
31 10th Edition – pp. 1369 and 1370 H
360 SUPREME COURT REPORTS [2020] 8 S.C.R.

A or (if the creditor is an insider) within one year of the filing, so that
the creditor receives more than it would otherwise receive through
the distribution of the bankruptcy estate.
Under the circumstances described in 11 USCA §547, the
bankruptcy trustee may, for the estate’s benefit, recover a
B preferential transfer from the transferee. – Also termed
preference; voidable preference; voidable transfer;
preferential assignment; preferential debt payment….”
17.2. It could be readily noticed that as far back as from 15th
century, the concept of ‘preference’ has been taken note of and the
C principles relating to avoidance of certain preferences have evolved,
particularly in the fields of mercantile laws and more particularly in the
laws governing insolvency and bankruptcy32; and definitively from 1874,
various jurisdictions have defined, described and dealt with ‘preferential
transfer’ as being the transaction where an insolvent debtor makes
transfer to or for the benefit of a creditor so that such beneficiary would
D receive more than what it would have otherwise received through the
distribution of bankruptcy estate. Section 547 of US Bankruptcy Code
provides for the circumstances in which a bankruptcy trustee may, for
the benefit of the estate in question, recover a preferential transfer from
the transferee. Section 239 of the UK Insolvency Act, 1986 also provides
E for the same measures for avoidance of preference given to any person
at the relevant time. The time factor also plays a crucial role in such
measures of avoidance. This ‘relevant time’ for the purpose of avoidance
of preferential transactions is now commonly referred to as the ‘look-
back’ period. Significantly, when the preferential transaction is with an
unconnected party, the look-back period is comparatively lesser than
F that of the transaction with a connected party, who is referred to as
‘insider’ or ‘related party’33
32
It may in the passing be observed that ‘an insolvency’ essentially refers to financial
distress, i.e., financial state in which a person or entity is unable to pay its dues or meet
with other akin obligations. Insolvency may be temporary in character. ‘A bankruptcy’,
G on the other hand, essentially refers to the legal process to regulate as to how an
insolvent entity shall pay off his dues.
As noticed, the primary focus of IBC is ‘to ensure revival and continuation of the
corporate debtor by protecting the corporate debtor from its own management and
from a corporate death by liquidation ’. In other words, insolvency resolution is the
main object; and liquidation with bankruptcy is the last resort.
33
We may also indicate that any attempt by an insolvent, of alienating or encumbering
H the assets in favour of one person so as to cause harm to the interest of a bona fide
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 361
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17.3. Coming now to the corporate personalities, it is elementary A
that by the very nature and legal implications of incorporation, ordinarily,
several individuals and entities are involved in the affairs of a corporate
person; and impact of the activities of a corporate person reaches far
and wide, with the creditors being one of the important set of stakeholders.
If the corporate person is in crisis, where either insolvency resolution is
B
to take place or liquidation is imminent; and the transactions by such
corporate person are under scanner, any such transaction, which has an
adverse bearing on the financial health of the distressed corporate person
or turns the scales in favour of one or a few of its creditors or third
parties, at the cost of the other stakeholders, has always been viewed
with considerable disfavour34. C
creditor had been sternly dealt with by the legislature even in relation to the individuals,as
could be readily noticed from the provisions contained in the erstwhile Presidency
- Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920. These enactments
stand repealed by IBC but the relevant provisions therein give an insight into the
concepts. Section 56 of the Act of 1909 provided thus:
“56. Avoidance of preference in certain cases. - (1) Every transfer of property, D
every payment made, every obligation incurred, and every judicial proceeding taken or
suffered by any person unable to pay his debts as they became due from his own
money in favour of any creditor, with a view of giving that creditor a preference over
the other creditors, shall, if such person is adjudged insolvent on a petition presented
within three months after the date thereof, be deemed fraudulent and void as against the
official assignee.
(2) This section shall not affect the rights of any person making title in good E
faith and for valuable consideration through or under a creditor of the insolvent.”
The relevant part of Section 69 of the Act of 1920 had been as under:
“69. Offences by debtors. – If a debtor, whether before or after the making of
an order of adjudication, -
*** *** ***
(c) fraudulently with intent to diminish the sum to be divided among his creditors
or to give an undue preference to any of his creditors, - F
(i) has discharged or concealed any debt due to or from him, or
(ii) has made away with, charged, mortgaged or concealed any part of his
property of any kind whatsoever, he shall be punishable on conviction with
imprisonment which may extend to one year.”
34
In relation to the corporate personalities, the concept of ‘fraudulent preference’,
earlier embodied in Section 531 of the Companies Act, 1956 now occurs in its modified
G
form in Sections 328 and 329 of the Companies Act, 2013. Tersely put, fraudulent
preference means parting with assets of the corporate person in favour of one or a few
of its creditors, which has the effect of defeating the claim of other creditors. Per
Section 329 of the Act of 2013, any transfer of property by a company, other than that
in the ordinary course of business, if made within a period of one year before presentation
of a petition for winding up by the Tribunal and not in good faith and for valuable
consideration, is regarded as void against the liquidator. Per Section 328 of the Act of H
362 SUPREME COURT REPORTS [2020] 8 S.C.R.

A 17.4. Noteworthy distinctive features, in the scheme of the
Companies Act, 2013 and Insolvency and Bankruptcy Code, 2016,as
regards preferences in relation to the corporate personalities, are that
while Section 328 of the Act of 2013 deals with fraudulent preference
and Section 329 thereof deals with transfers not in good faith but, on the
other hand, in the Code, separate provisions are made as regards the
B
transactions intended at defrauding the creditors (Section 49 IBC) as
also for fraudulent trading or wrongful trading (Section 66 IBC). The
provisions contained in Section 43 of the Code, however, indicate the
intention of legislature that when a transaction falls within the coordinates
defined therein, the same shall be deemed to be a preference given at a
C relevant time and shall not be countenanced. Therefore, intent may not
be of a defence or support of any preferential transaction that falls within
the ambit of Section 43 of the Code.
17.5. At this juncture, we may usefully refer to paragraph 177 of
UNCITRAL Legislative Guide on Insolvency Law, as referred to and
D relied upon by learned counsel for the respondent as also paragraphs
178 and 179 thereof, to indicate the basic theory and principles governing
the provisions under consideration. In the said Guide, while dealing with
the topic of treatment of assets on commencement of insolvency
proceedings, it is stated broadly on the theory of avoidance of preferential
transactions as follows:
E
“(c) Preferential transactions
(i) Criteria
177. Preferential transactions may be subject to avoidance where:
(a) the transaction took place within the specified suspect period;
F (b) the transaction involved a transfer to a creditor on account of
a pre-existing debt; and (c) as a result of the transaction, the
creditor received a larger percentage of its claim from the debtor’s
2013, if a company has given preference to one of its creditors or a surety or a
guarantor for any of the debts or other liabilities and the company does or suffers
anything which has the effect of putting that person in a better position in the event of
G company going into liquidation than the position he would have been in but for such
preference prior to six months of making winding up application, the Tribunal, on being
satisfied that the transaction was of a fraudulent preference, may order for restoring the
position to what it would have been if the preference had not been given. More
particularly, as regards transfer of property, it is provided in sub-section (2) of Section
328 that if the transaction is made six months before winding up application, the
H Tribunal may declare such transaction invalid and restore the position.
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 363
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assets than other creditors of the same rank or class (in other A
words, a preference). Many insolvency laws also require that the
debtor was insolvent or close to insolvent when the transaction
took place and some further require that the debtor have an
intention to create a preference. The rationale for including these
types of transaction within the scope of avoidance provisions is B
that, when they occur very close to the commencement of
proceedings, a state of insolvency is likely to exist and they breach
the key objective of equitable treatment of similarly situated
creditors by giving one member of a class more than they would
otherwise legally be entitled to receive.
C
178. Examples of preferential transactions may include payment
or set-off of debts not yet due; performance of acts that the debtor
was under no obligation to perform; granting of a security interest
to secure existing unsecured debts; unusual methods of payment,
for example, other than in money, of debts that are due; payment
of a debt of considerable size in comparison to the assets of the D
debtor; and, in some circumstances, payment of debts in response
to extreme pressure from a creditor, such as litigation or
attachment, where that pressure has a doubtful basis. A set-off,
while not avoidable as such, may be considered prejudicial when
it occurs within a short period of time before the application for
E
commencement of the insolvency proceedings and has the effect
of altering the balance of the debt between the parties in such a
way as to create a preference or where it involves transfer or
assignment of claims between creditors to build up set-offs. A
set-off may also be subject to avoidance where it occurs in
irregular circumstances, such as where there is no contract F
between the parties to the set-off.
(ii) Defences
179. One defence to an allegation that a transaction was
preferential may be to show that, although containing the elements
of a preference, the transaction was in fact consistent with normal G
commercial practice and, in particular, with the ordinary course
of business between the parties to the transaction. For example, a
payment made on receipt of goods that are regularly delivered
and paid for may not be preferential, even if made within proximity
to the commencement of insolvency proceedings. This approach H
364 SUPREME COURT REPORTS [2020] 8 S.C.R.

A encourages suppliers of goods and services to continue to do
business with a debtor that may be having financial problems, but
which is still potentially viable. Other defences available under
insolvency laws include that the counterparty extended credit to
the debtor after the transaction and that credit has not been paid
(the defence is limited to the amount of the new credit); that the
B
counterparty gave new value for which it was not granted a
security interest; the counterparty can show that it did not know a
preference would be created; that the counterparty did not know
or could not have known that the debtor was insolvent at the time
of the transaction; or that the debtor’s assets exceeded its liabilities
C at the time of the transaction. Some of these latter defences, in
particular those involving the intent of the parties to the transaction,
suffer from the disadvantage of being difficult to prove and may
make avoidance proceedings complex, unpredictable and lengthy.”
Analysing Section 43 of the Code
D 18. In the backdrop of the foregoing, we may now scrutinise
Sections 43 and 44 of the Code. Section 44 provides for the consequences
of an offending35 preferential transaction i.e., when the preference is
given at a relevant time. Under Section 44, the Adjudicating Authority
may pass such orders as to reverse the effect of an offending preferential
E transaction. Amongst others, the Adjudicating Authority may require any
property transferred in connection with giving of preference to be vested
in the corporate debtor; it may also release or discharge (wholly or in
part) any security interest created by the corporate debtor. The
consequences of offending preferential transaction are, obviously, drastic
and practically operate towards annulling the effect of such transaction.
F Looking to the contents, context and consequences, we are at one with
the contentions urged on behalf of the respondents with reference to the
decisions in Devinder Singh (supra) and other cited cases, that these
provisions need to be strictly construed. However, even if we proceed
on strict construction of Section 43 of the Code, the underlying principles
G and the object cannot be lost sight of. In other words, the construction
has to be such that leads towards achieving the object of these provisions.
18.1. Looking at the broad features of Section 43 of the Code, it is
noticed that as per sub-section (1) thereof, when the liquidator or the
35Note: Here the expression ‘offending’ is only to denote the unacceptability of such
H transaction and not any criminality.
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 365
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resolution professional, as the case may be, is of the opinion that the A
corporate debtor has, at a relevant time, given a preference in such
transactions and in such manner as specified in sub-section (2), to any
person/persons as referred to in sub-section (4), he is required to apply
to the Adjudicating Authority for avoidance of preferential transactions
and for one or more of the orders referred to in Section 44. If twin
B
conditions specified in sub-section (2) of Section 43 are satisfied, the
transaction would be deemed to be of preference. As per clause (a) of
sub-section (2) of Section 43, the transaction, of transfer of property or
an interest thereof of the corporate debtor, ought to be for the benefit36
of a creditor or a surety or a guarantor for or on account of an antecedent
financial debt or operational debt or other liabilities owed by the corporate C
debtor; and as per clause (b) thereof, such transfer ought to be of the
effect of putting such creditor or surety or guarantor in beneficial position
than it would have been in the event of distribution of assets under Section
53. 37
18.2. However, merely giving of the preference and putting the D
beneficiary in a better position is not enough. For a preference to become
an offending one for the purpose of Section 43 of the Code, another
essential and rather prime requirement is to be satisfied that such event,
of giving preference, ought to have happened within and during the
specified time, referred to as “relevant time”. The relevant time is
reckoned, as per sub-section (4) of Section 43 of the Code, in two ways: E
(a) if the preference is given to a related party (other than an employee),
the relevant time is a period of two years preceding the insolvency
commencement date; and (b) if the preference is given to a person
other than a related party, the relevant time is a period of one year
preceding such commencement date. In other words, for a transaction F
to fall within the mischief sought to be remedied by Sections 43 and 44
of the Code, it ought to be a preferential one answering to the
requirements of sub-section (2) of Section 43; and the preference ought
to have been given at a relevant time, as specified in sub-section (4) of
Section 43.
G
18.3. However, even if a transaction of transfer otherwise answers
to and comes within the scope of sub-sections (4) and (2) of Section 43
36It may be intended benefit or may even be unintended benefit
37Section 53 IBC makes provision for distribution of the proceeds from sale of the
liquidation assets, in case of liquidation of the corporate debtor. H
366 SUPREME COURT REPORTS [2020] 8 S.C.R.

A of the Code, it may yet remain outside the ambit of sub-section (2) because
of the exclusion provided in sub-section (3) of Section 43.
18.4. Sub-section (3) of Section 43 specifically excludes some of
the transfers from the ambit of sub-section (2). Such exclusion is provided
to: (a) a transfer made in the ordinary course of business or financial
B affairs of the corporate debtor or transferee38; (b) a transfer creating
security interest in a property acquired by the corporate debtor to the
extent that such security interest secures new value and was given at
the time specified in sub-clause (i) of clause (b) of Section 43(3) and
subject to fulfilment of other requirements of sub-clause (ii) thereof.
The meaning of the expression “new value” has also been explained in
C this provision.
Indicting parts – deemed preference at a relevant time
19. In order to understand and imbibe the provisions concerning
preference at a relevant time, it is necessary to notice that as per the
D charging parts of Section 43 of the Code i.e., sub-sections (4) and (2)
thereof, a corporate debtor shall be deemed to have given preference at
a relevant time if the twin requirements of clauses (a) and (b) of sub-
section (2) coupled with the applicable requirements of either clause (a)
or clause (b) of sub-section (4), as the case may be, are satisfied.

E 19.1. To put it more explicit, the sum total of sub-sections (2) and
(4) is that a corporate debtor shall be deemed to have given a preference
at a relevant time if: (i) the transaction is of transfer of property or the
interest thereof of the corporate debtor, for the benefit of a creditor or
surety or guarantor for or on account of an antecedent financial debt or
operational debt or other liability; (ii) such transfer has the effect of
F putting such creditor or surety or guarantor in a beneficial position than
it would have been in the event of distribution of assets in accordance
with Section 53; and (iii) preference is given, either during the period of
two years preceding the insolvency commencement date when the
beneficiary is a related party (other than an employee), or during the
G period of one year preceding the insolvency commencement date when
the beneficiary is an unrelated party.

38Whether the expression “or”, as occurring in between the expressions ‘corporate
debtor’ and ‘transferee’ in clause (a) of sub-section (3) of Section 43, is to be read as
“and” has been one of the significant questions raised in this matter and shall be dealt
H with hereafter later.
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 367
INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

19.2. By way of these statutory provisions, legal fictions are created A
whereby preference is deemed to have been given; and is deemed to
have been given at a relevant time, if the stated requirements are satisfied.
Variegated features of a deeming provision have been discussed by this
Court in the case of Pioneer Urban (supra) with reference to several
of the past decisions, albeit in the context of such deeming expression B
occurring in the Explanation added to sub-clause (f) of Section 5(8) of
the Code39. We may usefully extract some of the relevant passages
from the said decision in Pioneer Urban as follows:
19.2.1. As regards construction of a deeming fiction, this Court
pointed out the basic and settled principles in the following:
C
“88. In every case in which a deeming fiction is to be construed,
the observations of Lord Asquith in a concurring judgment in East
End Dwellings Co. Ltd. v. Finsbury Borough Council: 1952
AC 109 (HL) are cited. These observations read as follows: (AC
pp. 132-133)
D
“If you are bidden to treat an imaginary state of affairs as
real, you must surely, unless prohibited from doing so, also imagine
as real the consequences and incidents which, if the putative state
of affairs had in fact existed, must inevitably have flowed from or
accompanied it.... The statute says that you must imagine a certain
state of affairs. It does not say that, having done so, you must E
cause or permit your imagination to boggle when it comes to the
inevitable corollaries of that state of affairs.”
These observations have been followed time out of number by
the decisions of this Court. (See, for example, M. Venugopal v.
Divisional Manager, LIC: (1994) 2 SCC 323 at page 329). F

*** *** ***
94. Although a deeming provision is to deem what is not there in
reality, thereby requiring the subject-matter to be treated as if it
were real, yet several authorities and judgments show that a G
39Such discussion in Pioneer Urban essentially led to this Court holding that the said
deeming provision was clarificatory of the true legal position as it already obtained; and
was to put beyond the pale of doubt the fact that allottees are to be regarded as financial
creditors within the meaning of the enacting part contained in Section 5(8)(f) of the
Code. The crucial aspects relating to Section 5(8) of the Code shall be dilated hereafter
during the discussion on the second issue involved in these matters. H
368 SUPREME COURT REPORTS [2020] 8 S.C.R.

A deeming fiction can also be used to put beyond doubt a particular
construction that might otherwise be uncertain. Thus, Stroud’s
Judicial Dictionary of Words and Phrases (7th Edition, 2008),
defines “deemed” as follows:
“Deemed”- as used in statutory definitions “to extend the
B denotation of the defined term to things it would not in ordinary
parlance denote”, is often a convenient device for reducing the
verbiage or an enactment, but that does not mean that wherever
it is used it has that effect; to deem means simply to judge or
reach a conclusion about something, and the words “deem” and
“deemed” when used in a statute thus simply state the effect or
C meaning which some matter or things has-the way in which it is
to be adjudged; this need not import artificiality or fiction; it may
simply be the statement of an indisputable conclusion.”
19.2.2. In Pioneer Urban, this Court further extracted extensively
from the decision in Hindustan Cooperative Housing Building Society
D Limited v. Registrar, Cooperative Societies and Anr.: (2009) 14 SCC
302 on various features of the processes of construction of different
deeming provisions in different contexts. Some of the relevant parts of
such extraction (as occurring in paragraph 95 of PioneerUrban) read
as follows (in SCC at pp. 524):
E “ ‘… The word “deemed” is used a great deal in modern
legislation. Sometimes it is used to impose for the purposes of a
statute an artificial construction of a word or phrase that would
not otherwise prevail. Sometimes it is used to put beyond doubt a
particular construction that might otherwise be uncertain.
F Sometimes it is used to give a comprehensive description that
includes what is obvious, what is uncertain and what is, in the
ordinary sense, impossible.’
(Per Lord Radcliffe in St. Aubyn v. Attorney General:1952 AC
15 (HL), AC p. 53)
G 14. ‘Deemed’, as used in statutory definitions [is meant]
‘to extend the denotation of the defined term to things it would not
in ordinary parlance denote, is often a convenient devise for
reducing the verbiage of an enactment, but that does not mean
that wherever it is used it has that effect; to deem means simply
H
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 369
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to judge or reach a conclusion about something, and the words A
“deem” and “deemed” when used in a statute thus simply state
the effect or meaning which some matter or thing has — the way
in which it is to be adjudged; this need not import artificiality or
fiction; it may simply be the statement of an undisputable
conclusion.’
B
(Per Windener, J. in Hunter Douglas Australia Pty. v. Perma
Blinds: (1970) 44 Aust LJ R 257)
15. When a thing is to be “deemed” something else, it is to
be treated as that something else with the attendant consequences,
but it is not that something else (per Cave, J., in R. v. Norfolk C
County Court: (1891) 60 LJ QB 379).
‘When a statute gives a definition and then adds that certain
things shall be “deemed” to be covered by the definition, it matters
not whether without that addition the definition would have covered
them or not.’ (Per Lord President Cooper in Ferguson v. McMillan D
: 1954 SLT 109 (Scot))
16. Whether the word “deemed” when used in a statute
established a conclusive or a rebuttable presumption depended
upon the context (see St. Leon Village Consolidated School
District v. Ronceray: (1960) 23 DLR (2d) 32 (Can)). E
‘…. I … regard its primary function as to bring in something
which would otherwise be excluded.’
(Per Viscount Simonds in Barclays Bank Ltd. v. IRC: 1961 AC
509 at AC p. 523.)
F
‘ “Deems” means “is of opinion” or “considers” or
“decides” and there is no implication of steps to be taken before
the opinion is formed or the decision is taken.’
[See R. v. Brixton Prison (Governor), ex p Soblen: (1963) 2
QB 243 at QB p. 315.]’”
G
19.3. On a conspectus of the principles so enunciated, it is clear
that although the word ‘deemed’ is employed for different purposes in
different contexts but one of its principal purpose, in essence, is to deem
what may or may not be in reality, thereby requiring the subject-matter
to be treated as if real. Applying the principles to the provision at hand
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370 SUPREME COURT REPORTS [2020] 8 S.C.R.

A i.e., Section 43 of the Code, it could reasonably be concluded that any
transaction that answers to the descriptions contained in sub-sections
(4) and (2) is presumed to be a preferential transaction at a relevant
time, even though it may not be so in reality. In other words, since sub-
sections (4) and (2) are deeming provisions, upon existence of the
ingredients stated therein, the legal fiction would come into play; and
B
such transaction entered into by a corporate debtor would be regarded
as preferential transaction with the attendant consequences as per
Section 44 of the Code, irrespective whether the transaction was in fact
intended or even anticipated to be so.
Exclusion part
C
19.4. Even when the above-stated indicting parts of Section 43 as
occurring in sub-sections (4) and (2) are satisfied and the corporate
debtor is deemed to have given preference at a relevant time to a related
party or unrelated party, as the case may be, such deemed preference
may yet not be an offending preference, if it falls into any or both of the
D exclusions provided by sub-section (3) i.e., having been entered into
during the ordinary course of business of the corporate debtor or40
transferee or resulting in acquisition of new value for the corporate debtor.
Net concentrate of Section 43

E 19.5. Thus, the net concentrate of Section 43 is that if a transaction
entered into by a corporate debtor is not falling in either of the exceptions
provided by sub-section (3) and satisfies the three-fold requirements of
sub-sections (4) and (2), it would be deemed to be a preference during a
relevant time, whether or not in fact it were so; and whether or not it
were intended or anticipated to be so.
F
20. The analysis foregoing leads to the position that in order to
find as to whether a transaction, of transfer of property or an interest
thereof of the corporate debtor, falls squarely within the ambit of Section
43 of the Code, ordinarily, the following questions shall have to be
examined in a given case:
G
(i). As to whether such transfer is for the benefit of a creditor or
a surety or a guarantor?

40As noticed, whether this expression “or”, as occurring in between the expressions
‘corporate debtor’ and ‘transferee’ in clause (a) of sub-section (3) of Section 43, is to be
H read as “and” remains a question to be dealt with.
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 371
INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

(ii). As to whether such transfer is for or on account of an A
antecedent financial debt or operational debt or other liabilities
owed by the corporate debtor?
(iii). 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 B
accordance with Section 53?
(iv). If such transfer had been for the benefit of a related party
(other than an employee), as to 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 C
of an unrelated party, as to whether the same was made during
the period of one year preceding the insolvency commencement
date?
(v) As to whether such transfer is not an excluded transaction in
terms of sub-section (3) of Section 43? D
21. Having taken note of the salient features of Section 43 of the
Code and the questions germane for its applicability over any transaction,
we may now examine the questions calling for determination in these
appeals. Obviously, if the transactions in question are to fall squarely
within the mischief of Section 43, they must satisfy all the specifications E
and ingredients of sub-sections (2) and (4) of Section 43 and ought not
to be within the exclusion provided in sub-section (3) thereof.
Whether impugned transactions are preferential, falling
within the ambit of sub-section (2) of Section 43 IBC
22. For the purpose of dealing with the crucial question as to F
whether the impugned transactions are preferential and fall within the
prescription of sub-section (2) of Section 43 of the Code, appropriate it
shall be to recapitulate and summarize the overall scenario of this case.
22.1. The fact that JAL, a public listed company with more than 5
lakh individual shareholders, is the holding company of the corporate G
debtor JIL is neither of any doubt nor of any dispute. As on 31.03.2017,
JAL owned 71.64% of shares of JIL, having a value of Rupees 995
crores. The background had been that when in the year 2003, JAL was
awarded the rights for construction of an expressway and a concession
agreement was entered into with the Yamuna Expressway Industrial
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372 SUPREME COURT REPORTS [2020] 8 S.C.R.

A Development Authority, JIL was set up as a special purpose vehicle.
Finance was obtained from a consortium of banks against partial
mortgage of land acquired and pledge of 51% of the shareholding of
JAL. Housing plans were envisaged for construction of real estate projects
in two locations of the land acquired, one in Wish Town, Noida and
another in Mirzapur.
B
22.1.1. Shorn of other details which may not be necessary for the
present purpose, relevant it is to notice that JIL was declared NPA by
Life Insurance Corporation of India on 30.09.2015 and by some of its
other lenders on 31.03.2016. Then, IDBI Bank Limited instituted a petition
under Section 7 of the Code before NCLT, seeking initiation of Corporate
C
Insolvency Resolution Process against JIL, while alleging that JIL had
committed a default to the tune of Rs. 526.11 crores in repayment of its
dues. On 09.08.2017, NCLTpassed an order under Section 7 of the Code
and appointed an Interim Resolution Professional41-42. The IRP made
an application on 06.02.2018, seeking directions that the transactions
D entered into by the directors and promoters of corporate debtor creating
mortgages of 858 acres of immovable property owned by it to secure
the debts of JAL are preferential, undervalued, wrongful, and fraudulent;
and hence, the security interest created by corporate debtor JIL in favour
of the lenders of JAL be discharged and such properties be deemed to
be vested in corporate debtor. The NCLT allowed the said application
E
on 16.05.2018 with respect to six of the impugned transactions covering
about 758 acres of land. On the appeals filed by lenders of JAL,
NCLAT,by its impugned order dated 01.08.2019, set aside the order
passed by NCLT and held that such lenders of JAL were entitled to
exercise their rights under the Code.
F 22.2. At this juncture, we may again take note of the transactions
that were questioned by IRP for the purpose of the application for
avoidance, which had been the following: 1. Mortgage deed dated
29.12.2016 for 167.229 acres of land (Property No. 1) executed by JIL
in favour of Axis Trustee Services Limited to provide an additional
G security for term loans of Rs. 21081.5 crores sanctioned as a consortium
to JAL; 2. Mortgage deed dated 29.12.2016 for 167.9615 acres of land
(Property No. 2), again executed by JIL in favour of Axis Trustee
41 CIRP in relation to JIL is underway by virtue of the orders passed by this Court on
09.08.2018 and 06.11.2019 (as referred to in paragraphs 6.2 and 6.3.1 - supra)
42 This date i.e., 09.08.2017 is the “insolvency commencement date” for the purpose of

H the questions under consideration
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 373
INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

Services Limited to provide an additional security for term loans of A
Rs.21081.5 crores sanctioned by the consortium to JAL; 3. Mortgage
deed dated 07.03.2017 for 158.1739 acres of land (Property No. 3)
executed by JIL in favour of IDBI Trustee-ship Services Limited for
term loan of Rs.1200 crores granted by ICICI Bank to JAL; 4. Mortgage
deed dated 07.03.2017 for 151.0063 acres of land (Property No. 4),
B
again executed by JIL in favour of IDBI Trustee-ship Services Limited
for term loan of Rs.1200 crores granted by ICICI Bank to JAL; 5.
Mortgage deed dated 24.05.2016 for 25.0040 acres of land (Property
No. 5) executed by JIL in favour of IDBI Trustee-ship Services Limited,
as additional security against the facility agreement dated 29.08.2012
between Standard Chartered Bank and JAL for Rs.400 crores and other C
facilities, respectively for Rs.450 crores, Rs.538.16 crores and Rs.81.84
crores as also for working capital facility of Rs.297 crores; and 6.
Mortgage deed dated 04.03.2016 for 90 acres of land (Property No. 6),
executed by JIL in favour of State Bank of India for Short Term Loan
Facility to JAL to the tune of Rs.1000 crores.
D
22.2.1. As noticed, 09.08.2017 is the insolvency commencement
date in this case. The transactions in question, even if of putting the
concerned properties under mortgage with the lenders, carry the ultimate
effect of working towards the benefit and advantage of the borrower
i.e., JAL who obtained loans and finances by virtue of such transactions.
It is true that there had not been any creditor-debtor relationship between E
the lender banks and corporate debtor JIL but that will not be decisive of
the question of the ultimate beneficiary of these transactions. The
mortgage deeds in question, entered by the corporate debtor JIL to secure
the debts of JAL, obviously, amount to creation of security interest to
the benefit of JAL. F
22.2.2. Now, the capacity of JAL is admittedly that of the holding
company of JIL as its largest equity shareholder (with approximately
71.64% shareholding). Moreover, JAL had admittedly been the
operational creditor of JIL, for an amount of approximately Rs. 261.77
crores. JAL itself maintains that it had been providing financial, technical G
and strategic support to JIL in various ways. It is the assertion that apart
from making investment in terms of equity shareholding to the tune of
Rs. 995 crores, JAL had pledged its 70,83,56,087 equity shares held in
JIL in favour of the lenders of JIL; had also entered into Promoter Support
Agreement to the lenders of JIL to meet the DSRA obligation of JIL
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374 SUPREME COURT REPORTS [2020] 8 S.C.R.

A towards its lenders; and had further extended Bank Guarantees of Rs.
212 crores to meet the DSRA obligation of JIL. These assertions, in our
view, put JAL in such capacity that it is a related party to JIL and is a
creditor as also surety of JIL. In other words, the corporate debtor JIL
owed antecedent financial debts as also operational debts and other
B liabilities towards JAL.
22.3. In the scenario taken into comprehension hereinabove, there
is nothing to doubt that the corporate debtor JIL has given a preference
by way of the mortgage transactions in question for the benefit of its
related person JAL (who has been the creditor as also surety for JIL)
for and on account of antecedent financial debts, operational debts and
C
other liabilities owed to such related person. In the given fact situation, it
is plain and clear that the transactions in question meet with all the
requirements of clause (a) of sub-section (2) of Section 43.
22.4. It is also not far to seek that in the given scenario, the
requirements of clause (b) of sub-section (2) of Section 43 are also met
D
fair and square. On behalf of the respondents, emphasis is laid on the
fact that in the distribution waterfall in case of liquidation (per Section 53
of the Code), JAL, as an operational creditor, stands much lower in
priority than the other creditors and stakeholders. Such submissions, in
our view, only strengthen the position that by way of the impugned
E transfers, JAL is put in a much beneficial position than it would have
been in the absence of such transfers. It has rightly been contended on
behalf of the appellants that with the transactions in question, JAL has
been put in an advantageous position vis-à-vis other creditors on the
counts that: a) JAL received a huge working capital (approx. Rupees
30000 crores), by way of loans and facilities extended to it by the
F respondent-lenders; and b) by way of the transactions in question, JAL’s
liability towards its own creditors shall be reduced, in so far as the value
of the mortgaged properties is concerned, which is said to be
approximately Rs. 6000 crores. As a necessary corollary of the beneficial
and advantageous position of the related party JAL with creation of
G such security interest over the properties of JIL, in the eventuality of
distribution of assets under Section 53, the other creditors and
stakeholders of JIL shall have to bear the brunt of the corresponding
disadvantage because such heavily encumbered assets will not form the
part of available estate of the corporate debtor. Obviously, JAL stands
dearly benefited and has derivedsuch benefits at the cost, and in exclusion,
H
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 375
INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

of the other creditors and stakeholders of the corporate debtor JIL. The A
applicability of clauses (a) and (b) of sub-section (2) of Section 43 of the
Code is clear and complete in relation to the impugned six transactions.
22.5. Therefore, in relation to the present case, the answers to
questions (i), (ii) and (iii) as referred in paragraph 20 are that: the
impugned transactions had been of transfers for the benefit of JAL, B
who is a related party of the corporate debtor JIL and is its creditor and
surety by virtue of antecedent operational debts as also other facilities
extended by it; and the impugned transactions have the effect of putting
JAL in a beneficial position than it would have been in the event of
distribution of assets being made in accordance with Section 53 of the C
Code. Thus, the corporate debtor JIL has given a preference in the
manner laid down in sub-section (2) of Section 43 of the Code.
The requirements of sub-section (4) of Section 43 IBC -
related party and look-back period
23. Even when all the requirements of sub-section (2) of Section D
43 of the Code are satisfied, in order to fall within the mischief sought to
be remedied by Section 43, the questioned preference ought to have
been given at a relevant time. In other words, for a preference to become
an avoidable one, it ought to have been given within the period specified
in sub-section (4) of Section 43. The extent of ‘relevant time’ is different
E
with reference to the relationship of the beneficiary with the corporate
debtor inasmuch as, for the persons falling within the expression ‘related
party’ within the meaning of Section 5 (24) of the Code, such period is of
two years before the insolvency commencement date whereas it is one
year in relation to the person other than a related party. The conceptions
of, and rationale behind, such provisions could be noticed in the excerpts F
from the interim report of Law Reforms Committee, as referred on
behalf of the appellants. We may usefully extract the same as under: -
“c. TRANSACTIONS WITH RELATED PARTIES
The law on avoidance in the UK provides for close scrutiny
of transactions entered into with persons connected with the G
company (other than employees) by incorporating longer time
periods in relation to which such transactions can be challenged.
Thus, while the relevant time period for avoiding preferences is
six months prior to the onset of insolvency, the time period is
increased to two years in the case of persons connected with the H
376 SUPREME COURT REPORTS [2020] 8 S.C.R.

A company. Similarly, for late floating charges other than for new
value, the vulnerability period for non-connected persons is twelve
months while it is two years in the case of connected persons.
The avoidance provisions under the CA 2013 does not provide for
longer time periods in case the transactions are with connected
B persons. It is submitted that providing for longer time periods for
vulnerability would be significant in improving the efficacy of these
provisions. This is because a wider range of transactions
diminishing creditor wealth entered into with insiders occur not in
the ‘zone of insolvency’ but as soon as early signals of trouble are
visible. Such insiders have superior information of the company’s
C deteriorating financial position and may raid corporate assets
knowing that the company may become insolvent. These
provisions are of special significance in the Indian context where
even the larger corporates are often promoter/family controlled
with such insiders often enjoying significant informational
D advantages over even well-advised secured lenders.”
23.1. Before examining as to whether the questioned preferences
were given at the relevant time as specified in sub-section (4) of Section
43, we may deal with one part of the submissions made on behalf of
some of the respondents that in view of the look-back periods provided
E in sub-section (4), the provisions of Section 43 of the Code, by their very
nature, would come into operation at least one year after the enactment
of the Code and else, it would be giving retrospective effect to these
provisions which is not permissible. The submissions, in our view, remain
bereft of substance.
23.1.1. The scheme of IBC is to disapprove and disregard such
F
preferential transaction which falls within the ambit of Section 43 and to
ensure that any property likely to have been lost due to such transaction
is brought back to the corporate debtor; and if any encumbrance is
created, to remove such encumbrance so as to bring the corporate debtor
back on its wheels or in other event (of liquidation), to ensure pro rata,
G equitable and just distribution of its assets. Such provisions as contained
in Sections 43 and 44 came into operation as the comprehensive scheme
of corporate insolvency resolution and liquidation from the date of being
made effective; and merely because look-back period is envisaged, for
the purpose of finding ‘relevant time’, it cannot be said that the provision
itself is retrospective in operation. Reference to the decision of this Court
H
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 377
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in the case of Purbanchal Cables (supra) is entirely inapt. In the said A
case, by virtue of the enactment in question, i.e., Interest on Delayed
Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993,
a new liability of high rate of interest was created against the buyer in
displacement of the general principles of Section 34 of the Code of Civil
Procedure. Hence, this Court found that the enactment creating new
B
liability would only be prospective in operation. As noticed, fraudulent
preferences in the affairs of corporate persons had been dealt with by
the legislature in the Companies Act, 1956 and have also been dealt with
in the Act of 2013. Though therein, essentially, the fraudulent preferences
and transfers not in good faith are dealt with whereas, in the scheme of
IBC, separate provisions are made as regards the transactions intended C
at defrauding the creditors (Section 49 IBC) as also for fraudulent trading
or wrongful trading (Section 66 IBC). The provisions contained in Section
43, however, indicate the intention of legislature that when a preference
is given at a relevant time and thereby, the beneficiary of preference
acquires unwarranted better position in the event of distribution of assets,
D
the same may not be countenanced. Looking to the scheme of IBC and
the principles applicable for the conduct of the affairs of a corporate
person, it cannot be said that anything of a new liability has been imposed
or a new right has been created. Maximisation of value of assets of
corporate persons and balancing the interests of all the stakeholders
being the objectives of the Code, the provisions therein need to be given E
fuller effect in conformity with the intention of the legislature.
23.1.2. We may also observe that if the contentions urged on
behalf of the respondents were to be accepted, the result would be of
postponing the effective date of operation of sub-section (4) of Section
43 by two years in the case of related party and to one year in the case F
of unrelated party, and thereby, effectively postponing the application of
entire Section 43 for a period of two years! That cannot be and had
never been the intention of legislature. It is also noteworthy that by virtue
of proviso to sub-section (3) of Section 1 of the Code, different dates
can be provided for enforcement of different provisions of the Code;
G
and in fact, different provisions have been brought into effect on different
dates. However, after coming into force of the provisions, if a look-back
period is provided for the purpose of any particular enquiry, it cannot be
said that the operation of the provision itself would remain in hibernation
until such look-back period from the date of commencement of the
provision comes to an end. There is nothing in the Code to indicate that H
378 SUPREME COURT REPORTS [2020] 8 S.C.R.

A any provision in Chapter II or Chapter III be taken out and put in operation
at a later date than the date notified. Such contentions being totally devoid
of substance, deserve to be, and are, rejected.
24. We may now take up the question as to which of the
transactions in question would entail in giving preference at a relevant
B time or otherwise. As noticed, the preference is given to JAL who is a
related party of JIL. Hence, the look-back period is two years preceding
insolvency commencement date i.e., 09.08.2017 per clause (a) of sub-
section (4) of Section 43; and accordingly, the point of enquiry would be
as to whether the preference had been given during the period of two
years preceding 09.08.2017. Therefore, the transactions commencing
C
from 10.08.2015 until the date of insolvency commencement shall fall
under the scanner. As noticed, it has been one of the major contentions
of the respondents that most of the impugned transactions were not of
creation of any new encumbrance by JIL and in fact, most of the properties
in question had already been under mortgage with the respective lenders
D much before the period under consideration i.e., much before 10.08.2015.
24.1. It may at once be noticed that the transaction that was clearly
falling beyond the period under consideration was, in fact, kept out of
the purview of Section 43 of the Code by NCLT itself, being that relating
to Property No. 7 (as mentioned in paragraph 4.5 hereinbefore).
E 24.2. So far as the transaction relating to Property No. 6 is
concerned, being the mortgage deed dated 04.03.2016, towards Short-
Term Loan Facility to JAL of Rs. 1000 crores by State Bank of India,
the same obviously falls within the look-back period. Even if JAL had
allegedly entered into the facility agreement with this lender bank on
F 26.03.2015, this date is hardly of any bearing so far as transaction by the
corporate debtor JIL is concerned, which was made only on 04.03.2016.
24.3. In relation to the transactions concerning Property No. 1
and Property No. 2, for securing loans by the Consortium to JAL, it is
submitted that there had been initial mortgage dated 24.02.2015 that
G was released on 15.09.2015 and a so-called re-mortgage was made on
15.09.2015 and thereafter, this was also released on 29.12.2016 and
again the so-called re-mortgage was made on 29.12.2016. It is sought to
be asserted that it had not been a case of creation of a fresh mortgage.
Similarly, in relation to the transactions concerning Property No. 3, it is
alleged that there had been initial mortgage dated 12.05.2014 for 433.35
H
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 379
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acres of land of which, 240 acres was released on 30.12.2015, 35.05 A
acres was released on 24.06.2016 and the remaining 158.1739 acres of
land was also released on 07.03.2017 but was re-mortgaged on this very
date 07.03.2017. As regards Property No. 4, it is alleged that the same
was put under mortgage initially on 12.05.2014, was released on
07.03.2017 and was re-mortgaged on this very date 07.03.2017. As
B
regards Property No. 5, it is alleged that the same was put under mortgage
initially on 24.06.2009, the mortgage was extended on 27.11.2012 and
on 23.03.2013; it was released on 04.11.2015 and was re-mortgaged on
24.05.2016.
24.3.1. It has been one of the major contentions of the respondents
that most of the impugned transactions were not of creation of any new C
encumbrance by JIL and in fact, most of the properties in question had
already been under mortgage with the respective lenders. The
submissions of respondents in relation to the aforesaid five transactions,
that they had been of so-called re-mortgage/s, carry their own
shortcomings and cannot be accepted. In the first place, we are clearly D
of the view that on release by the mortgagee, the mortgage ceases to
exist and it is difficult to countenance the concept of a so-called re-
mortgage. The so-called re-mortgage, on all its legal effects and
connotations, could only be regarded as a fresh mortgage; and it obviously
befalls on the mortgagor to consider at the time of creating any fresh
mortgage as whether such a transaction is expedient and whether it E
should be entered into at all. Noticeable it is that in relation to Property
No. 1 and 2, even if the initial mortgage had been dated 24.02.2015
falling beyond the look-back period, it was released on 15.09.2015 and
this date (15.09.2015) falls within the look-back period. Even if the same
property has been again mortgaged with the same lender/s on the same F
day of release, the same cannot be countenanced for the transaction
operates towards extending unwarranted preference to JAL by the
corporate debtor JIL. Significant it is to notice that while making this
mortgage dated 15.09.2015, the facility amount being obtained by JAL
got swelled from Rs. 3250 crores to a whopping Rs. 24109 crores and
the number of creditors went up from 2 to 24. Such a transaction, in our G
view, had only been of a fresh mortgage to secure extra facilities obtained
by JAL and thereby, extending unwarranted advantage to JAL at the
cost of the estate of JIL. In the other transaction dated 29.12.2016, by
which the properties in question were again put under mortgage with the
lender/s, the facility amount was shown as Rs. 23491 crores. The H
380 SUPREME COURT REPORTS [2020] 8 S.C.R.

A transactions on 15.09.2015 and 29.12.2016 cannot be given credence
with reference to the previous mortgage deed dated 24.02.2015. Similar
is the case in relation to Property No. 3. Even when the previous
mortgage was given on 12.05.2014 i.e., beyond the look-back period,
there had been release deeds on 30.12.2015 and 26.06.2016 as regards
certain parcels of land. So far the release of land to JIL is concerned,
B
the same causes no problem and only works to the benefit of JIL and its
stakeholders. However, when the remaining land was also released on
07.03.2017, its fresh mortgage, even if on the same date, cannot be
countenanced and is hit by Section 43, being a deemed preference. The
very same considerations apply in relation to the Property No. 4 too. As
C regards Property No. 5, even if there had been certain previous mortgage
transactions falling beyond the look-back period, the property got released
on 04.11.2015; and thereafter, the fresh mortgage on 24.05.2016, with
increased facility amount from Rs. 1470 crores to Rs. 1767 crores, suffers
from the same vice, of being a deemed preference to a related party
during the period of two years preceding the insolvency commencement
D
date.
24.4. For what has been discussed hereinabove, the conclusion is
inevitable that the impugned preference was given to a related party
during a relevant time. However, before concluding on this part of
discussion, we may also observe that reference to the decisions of Madras
E
and Bombay High Courts in the case of IDBI Bank Ltd and Monarch
Enterprises respectively, is neither apposite nor advances the cause of
the respondents for the reason that the said decisions had essentially
been on the question/s as to whether the impugned transactions were of
fraudulent preference per Section 531 or lacking in good faith per Section
F 531A of the Companies Act, 1956. In fact, in the case of IDBI Bank
(supra) the corporate debtor attempted to transfer one of its property to
the appellant bank, who was one of its creditors and in that regard,
certain transactions like agreement for sale and handing over possession
were suggested and it was alleged that the contract for sale was partly
performed about one year and four months prior to the winding-up
G
proceedings; and such being beyond the look-back period of six months
as envisaged by Section 531 of the Companies Act, 1956, it was argued
that it had not been a fraudulent transfer. The contentions were not
accepted by the Single Judge and by the Division Bench of the High
Court for the reason that mere handing over of possession or documents
H did not complete the sale; rather the Court was of the view that such
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 381
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documents were created only in order to avoid the transaction being A
called a fraudulent preference. Apart that the element of fraud is not the
essential ingredient of Section 43 of the Code, the said decision in IDBI
Bank, on the approach of the Courts towards corporate transactions
makes it clear that any transaction favouring one stakeholder at the cost
of the other is viewed with disfavour and is disapproved, particularly if it
B
takes place during the prescribed look-back period.
24.5. For what has been discussed hereinabove, the answer to
question (iv) as referred in paragraph 20 is that the transactions in question
had been of deemed preference to related party JAL by the corporate
debtor JIL during the look-back period of two years and have rightly
C
been held covered within the period envisaged by sub-section (4) of
Section 43 of the Code.
Ordinary course of business or financial affairs
25. Even when it is held that the impugned transactions answer to
the requirements of sub-section (2) of Section 43 and fall within the D
period specified in sub-section (4) thereof, the question still remains as
to whether the impugned transactions do or do not fall within the exclusion
provided by sub-section (3) of Section 43 of the Code? As noticed, two
types of transfers, as specified in clauses (a) and (b) of sub-section (3)
of Section 43, are not to be treated as preference for the purpose of sub-
section (2). It has been the mainstay of respondent-lenders that, in any E
case, the transfers in question were made in the ordinary course of their
business and hence, fall within clause (a) of Section 43(3) that excludes
the transfer made in the ordinary course of business or financial affairs
of the corporate debtor or the transferee. It has been forcefully argued
that the lenders of JAL are the transferees in the transactions in question F
and their ordinary course of business being of providing financial support
with loans and advances, such transfers are not included in sub-section
(2) of Section 43 by virtue of the exclusion provided in sub-section (3)
thereof. On the other hand, the main plank of submissions on behalf of
the appellants has been that the expression “or” occurring in clause (a)
of sub-section (3) of Section 43, seemingly disjunctive of corporate debtor G
on one hand and transferee on the other, is required to be read as “and”
so as to be conjunctive and covering only the transfers made in the
ordinary course of business or financial affairs of the corporate debtor
and the transferee. It is submitted on behalf of the appellants that such
mortgage transactions had neither been in the ordinary course of business H
382 SUPREME COURT REPORTS [2020] 8 S.C.R.

A or financial affairs of the corporate debtor JIL nor secure new value in
the property acquired by the corporate debtor and hence, are not excepted
transactions within the meaning of sub-section (3) of Section 43 of the
Code.
25.1. Having taken into comprehension the scheme of the Code
B and the purpose and purport of the provisions contained in Section 43,
we find force and substance in the submissions made on behalf of the
appellants.
25.2. As noticed, in the scheme of such provisions in the Code,
the underlying concept is to disregard and practically annul such
C transactions which appear, in the course of insolvency resolution or
liquidation, to be preferential so as to minimise the potential loss to other
stakeholders in the affairs of the corporate debtor, particularly its
creditors. What is to be examined for the purpose of Section 43 is the
conduct and affairs of the corporate debtor. If the beneficiary of the
transaction in question is a related party of the corporate debtor, the
D period of enquiry is enlarged to two years whereas this period is one
year in other cases. During such scanning, by virtue of sub-section (3)
of Section 43, two types of transfers are kept out of the purview of sub-
section (2), which would not be treated as preference. Though in the
present case, we are concerned only with the phraseology occurring in
E clause (a) of sub-section (3) but, we may usefully refer to clause (b)
thereof, for an insight into the underlying concept for providing exception
in regard to certain transfers and keeping them out of the purview of
‘preference’.
25.2.1. By virtue of clause (b) of sub-section (3) [read with
F Explanation thereto], any transfer creating a security interest in the
property ‘acquired’ by the corporate debtor is not to be treated as
preference to the extent that such security interest secures new value in
monetary terms or in terms of goods, services or new credit or in release
of a previously transferred property. Any micro dissection of clause (b)
of sub-section (3) of Section 43 is not required in the present case.
G Suffice it to notice that even a bare look at the provision brings forth the
concept that value enhancement or strengthening of the corporate debtor
ought to be the result of a transfer, if it is to remain out of the ambit of
sub-section (2) and not to fall within the mischief of being preferential.
25.2.2. Another feature of vital importance is that the matter is
H examined with reference to the dealing and conduct of the corporate
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debtor; and qua the health and prospects of the corporate debtor. A
Applying the well-known principles of noscitur a sociis, whereunder
the questionable meaning of a doubtful word could be derived and
understood from its associates and context; and usefully recapping that
the scheme of Section 43 of the Code is essentially of scanning through
the affairs of the corporate debtor and to discredit and disregard such
B
transaction by the corporate debtor which tends to give unwarranted
benefit to one of its creditor/surety/guarantor over others, in our view,
the purport of clause (a) of sub-section (3) of Section 43 is also principally
directed towards the corporate debtor’s dealings. In other words, the
whole of conspectus of sub-section (3) is that only if any transfer is
found to have been made by the corporate debtor, either in the ordinary C
course of its business or financial affairs or in the process of acquiring
any enhancement in its value or worth, that might be considered as having
been done without any tinge of favour to any person in preference to
others and thus, might stand excluded from the purview of being
preferential, subject to fulfilment of other requirements of sub-section
D
(3) of Section 43.
25.3. Needless to reiterate that if the transfer is examined with
reference to the ordinary course of business or financial affairs of the
transferee alone, it may conveniently get excluded from the rigour of
sub-section (2) of Section 43, even if not standing within the scope of
E
ordinary course of business or financial affairs of the corporate debtor.
Such had never been the scheme of the Code nor the intent of Section
43 thereof. It has rightly been contended on behalf of the appellants that
for the purpose of exception under clause (a) of sub-section (3) of Section
43, the intent of legislature is required to be kept in view. If the ordinary
course of business or financial affairs of the transferee (lenders of JAL F
in the present case) would itself be decisive for exclusion, almost every
transfer made to the transferees like the lender-banks/financial institutions
would be taken out of the net, which would practically result in frustrating
the provision itself.
25.4. It remains trite that an interpretation that defeats the scheme, G
intent and object of the statutory provision is to be eschewed and for
that matter, if necessary, by applying the principles of purposive
interpretation rather than literal. In the case of R.M.D.
Chamarbaugwala (supra), the Constitution Bench of this Court has
held that well known cannons of construction of statutes permit the Court
H
384 SUPREME COURT REPORTS [2020] 8 S.C.R.

A to read the word “or” as “and” after looking at the clear intention of the
legislature. In the case of Mazagaon Dock Ltd (supra), when the
expression “or” occurring in sub-section (2) of Section 42 of the Income
Tax Act, 1922 did appear bringing out the result which could not have
been intended, the same was read in the context as meaning “and”. This
Court said:
B
“10. The word “or” in the clause would appear to be rather
inappropriate, as it is susceptible of the interpretation that when
some profits are made but they are less than normal profits, tax
could only be imposed either on the one or on the other, and that
accordingly a tax on the actual profits earned would bar the
C
imposition of tax on profits which might have been received.
Obviously, that could not have been intended, and the word “or”
would have to be read in the context as meaning “and”….”
25.5. Looking to the scheme and intent of the provisions in question
and applying the principles aforesaid, we have no hesitation in accepting
D the submissions made on behalf of the appellants that the said contents
of clause (a) of sub-section (3) of Section 43 call for purposive
interpretation so as to ensure that the provision operates in sync with the
intention of legislature and achieves the avowed objectives. Therefore,
the expression “or”, appearing as disjunctive between the expressions
E “corporate debtor” and “transferee”, ought to be read as “and”; so as to
be conjunctive of the two expressions i.e., “corporate debtor” and
“transferee”. Thus read, clause (a) of sub-section (3) of Section 43 shall
mean that, for the purposes of sub-section (2), a preference shall not
include the transfer made in the ordinary course of the business or
financial affairs of the corporate debtor and the transferee. Only
F by way of such reading of “or” as “and”, it could be ensured that the
principal focus of the enquiry on dealings and affairs of the corporate
debtor is not distracted and remains on its trajectory, so as to reach to
the final answer of the core question as to whether corporate debtor has
done anything which falls foul of its corporate responsibilities.
G 25.6. The result of discussion in the foregoing paragraphs is that
the transfers in question could be considered outside the purview of sub-
section (2) of Section 43 of the Code only if it could be shown that same
were made in the ‘ordinary course of business or financial affairs’ of the
corporate debtor JIL and the transferees. Even if transferees submit
H
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that such transfers had been in the ordinary course of their business, the A
question would still remain if the transfers were made in the ordinary
course of business or financial affairs of the corporate debtor JIL so as
to fall within the exception provided by clause (a) of sub-section (3) of
Section 43 of the Code.
25.6.1. Thus, the enquiry now boils down to the question as to B
whether the impugned transfers were made in the ordinary course of
business or financial affairs of the corporate debtor JIL. It remains trite
that an activity could be regarded as‘business’ if there is a courseof
dealings,which are either actually continued or contemplated to be
continued with a profit motive.43 As regards the meaning and essence
of the expression ‘ordinary course of business’, reference made by the C
appellants to the decision of the High Court of Australia in Downs
Distributing Co (supra), could be usefully recounted as under:-
“As was pointed out in Burns v. McFarlane the issues in sub-s.
2(b) of s. 95 of the Bankruptcy Act 1924-1933 are “(1) good
faith; (2) valuable consideration; and (3) ordinary course of D
business.” This last expression it was said “does not require an
investigation of the course pursued in any particular trade or
vocation and it does not refer to what is normal or usual in the
business of the debtor or that of the creditor.” It is an additional
requirement and is cumulative upon good faith and valuable E
consideration. It is, therefore, not so much a question of fairness
and absence of symptoms of bankruptcy as of the everyday usual
or normal character of the transaction. The provision does not
require that the transaction shall be in the course of any particular
trade, vocation or business. It speaks of the course of business in
general. But it does suppose that according to the ordinary and F
common flow of transactions in affairs of business there is a course,
an ordinary course. It means that the transaction must fall
into place as part of the undistinguished common flow of
business done, that it should form part of the ordinary
course of business as carried on, calling for no remark and G
arising out of no special or particular situation.”
(emphasis supplied)

43vide State of Andhra Pradesh v. H. Abdul Bakshi and Bros.: 1964 STC 644 (at p.
647). H
386 SUPREME COURT REPORTS [2020] 8 S.C.R.

A 25.6.2. Taking up the transactions in question, we are clearly of
the view that even when furnishing a security may be one of normal
business practices, it would become a part of ‘ordinary course of business’
of a particular corporate entity only if it falls in place as part of ‘the
undistinguished common flow of business done’; and is not arising out of
‘any special or particular situation’, as rightly expressed in Downs
B
Distributing Co (supra). Though we may assume that the transactions
in question were entered in the ordinary course of business of bankers
and financial institutions like the present respondents but on the given
set of facts, we have not an iota of doubt that the impugned transactions
do not fall within the ordinary course of business of the corporate debtor
C JIL. As noticed, the corporate debtor has been promoted as a special
purpose vehicle by JAL for construction and operation of Yamuna
Expressway and for development of the parcels of land along with the
expressway for residential, commercial and other use. It is difficult to
even surmise that the business of JIL, of ensuring execution of the works
assigned to its holding company and for execution of housing/building
D
projects, in its ordinary course, had inflated itself to the extent of routinely
mortgaging its assets and/or inventories to secure the debts of its holding
company. It had also not been the ordinary course of financial affairs of
JIL that it would create encumbrances over its properties to secure the
debts of its holding company. In other words, we are clearly of the view
E that the ordinary course of business or financial affairs of the corporate
debtor JIL cannot be taken to be that of providing mortgages to secure
the loans and facilities obtained by its holding company; and that too at
the cost of its own financial health. As noticed, JIL was already reeling
under debts with its accounts with some of the lenders having been
declared NPA; and it was also under heavy pressure to honour its
F
commitment to the home buyers. In the given circumstances, we have
no hesitation in concluding that the transfers in questions were not made
in ordinary course of business or financial affairs of the corporate debtor
JIL.
25.7. The submissions that security was disclosed in the Annual
G Reports or that none of the creditors expressed dissent are of no effect
because such disclosure or want of objection by creditors, by themselves,
do not operate as estoppel against anybody nor would take the transaction
out of the purview of the legal fiction predicated in Section 43, if it is
otherwise of a preference at a relevant time. Similarly, the distinction
H between ‘NPA’ and ‘wilful default’; the submission that NPA could be
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regularised; and further the submission that the mortgages were created A
before JIL was declared NPA, are hardly of any bearing on the question
as to whether the impugned transactions had been in the ordinary course
of business or financial affairs of JIL. Thus, reference to the decisions
like that in Keshavlal Khemchand and Jah Developers (supra) is not
of any consequence and need not be dilated upon. The answer to this
B
question, in our view, could only be in the negative. That is to say that the
impugned transactions had not been in the ordinary course of business
or financial affairs of JIL.
25.8. Therefore, the answer to question (v) as referred in paragraph
20 is that the impugned transactions are not of excepted transfers in
C
terms of sub-section (3) of Section 43 of the Code.
The concern expressed by lenders of JAL is legally
untenable
26. The argument of lenders, that holding the transactions in
question as preferential would result in impacting large number of D
transactions undertaken by the bankers/financial institutions, of financing
in the ordinary course of their business; and the consequences may be
devastating and irreversible on the economy, has only been noted to be
rejected.
26.1. It needs hardly any emphasis that in the ordinary course of E
their business, when the bankers or financial institutions examine any
proposal for loan or advance or akin facility, they are supposed to, and
they indeed, take up the exercise commonly termed as ‘due diligence’ 44
so as to study the viability of the proposed enterprise as also to ensure,
inter alia, that the security against such loan/advance/facility is genuine
and adequate; and would be available for enforcement at any point of F
time. Given the nature of transaction, the lenders must prefer a clean
security to justify the transaction as being in the ordinary course of their
business. In the same exercise, in the ordinary course of their business,
if they are at all entering into a transaction whereby a third party security,
As regards the present context, the term ‘due diligence’ is explained in P. Ramanatha
44
G
Aiyar’s Advanced Law Lexicon (5 th Ed.-Vol 2, p.1654) in the following:
“The detailed review of the borrower/issuer’s overall position,
which is supposed to be undertaken by the lead manager of a new financing in
conjunction with the preparation of legal documentation.
Analysis of the financial status and prospects of company before
it receives a major investment of capital. It is usually carried out by an
independent accountant.” H
388 SUPREME COURT REPORTS [2020] 8 S.C.R.

A including that of a subsidiary company, is to be taken as collateral, they
are obliged to undertake further due diligence so as to ensure that such
third party security is a prudent and viable one and is not likely to be hit
by any law. In that sequence, they remain under obligation to assure
themselves that such third party whose security is being taken, is not
already indebted or in red and is not likely to fail in dealing with its own
B
indebtedness. In the context of IBC, such requirement is moreover
imperative on a bare look at the provisions contained in Part II thereof.
Interesting it is to notice on the facts of the present case that in fact,
several of the respondent lenders are shown to be the direct creditors of
JIL too, to the extent of the advances made to JIL. They and the co-
C respondents cannot plead ignorance about the actual state of affairs and
financial position of JIL. Despite such knowledge, if they chose to take
the business risk of accepting security from JIL and that too, for securing
the loans/advances/facilities made over to JAL, who was a directly
related party of JIL for being its holding company, they themselves remain
responsible for present legal consequences.
D
Summation: The transactions in question are hit by Section
43 IBC
27. For what has been discussed hereinabove, we are clearly of
the view that the transactions in question are hit by Section 43 of the
E Code and the Adjudicating Authority, having rightly held so, had been
justified in issuing necessary directions in terms of Section 44 of the
Code in relation to the transactions concerning Property Nos. 1 to 6.
NCLAT, in our view, had not been right in interfering with the well-
considered and justified order passed by NCLT in this regard.

F Search and commandeering of preference at a relevant time
28. Although we have analysed the transactions in question on
the anvil of Section 43 with reference to the submissions made and the
facts of the present case but, before moving on to other aspects, we
deem it appropriate to point out the manner in which the provisions
G concerning preference at a relevant time are expected to be applied,
particularly by the resolution professional, in a given case. It could be
readily recapitulated that as per the charging parts of Section 43 i.e.,
sub-sections (4) and (2) thereof, a corporate debtor shall be deemed to
have given preference at a relevant time if the twin requirements of
clauses (a) and (b) of sub-section (2) coupled with the applicable
H requirements of either clause (a) or clause (b) of sub-section (4), as the
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case may be, are satisfied. However, even if the requirements of sub- A
sections (4) and (2) are satisfied, a transaction may not be regarded as
an offending preference if it falls in either or both of the exceptions
provided by sub-section (3) of Section 43.
28.1. Looking to the legal fictions created by Section 43 and looking
to the duties and responsibilities per Section 25, in our view, for the B
purpose of application of Section 43 of the Code in any insolvency
resolution process, what a resolution professional is ordinarily required
to do could be illustrated as follows:
1. In the first place, the resolution professional shall have to take
two major but distinct steps. One shall be of sifting through the C
entire cargo of transactions relating to the property or an interest
thereof of the corporate debtor backwards from the date of
commencement of insolvency and up to the preceding two years.
The other distinct step shall be of identifying the persons involved
in such transactions and of putting them in two categories; one
being of the persons who fall within the definition of ‘related party’ D
in terms of Section 5(24) of the Code and another of the remaining
persons.
2. In the next step, the resolution professional ought to identify as
to in which of the said transactions of preceding two years, the
beneficiary is a related party of the corporate debtor and in which E
the beneficiary is not a related party. It would lead to bifurcation
of the identified transactions into two sub-sets: One concerning
related party/parties and other concerning unrelated party/parties
with each sub-set requiring different analysis. The sub-set
concerning unrelated party/parties shall further be trimmed to F
include only the transactions of preceding one year from the date
of commencement of insolvency.
3. Having thus obtained two sub-sets of transactions to scan, the
steps thereafter would be to examine every transaction in each of
these sub-sets to find: (i) as to whether the transaction is of transfer G
of property or an interest thereof of the corporate debtor; and (ii)
as to whether the beneficiary involved in the transaction stands in
the capacity of creditor or surety or guarantor qua the corporate
debtor. These steps shall lead to shortlisting of such transactions
which carry the potential of being preferential.
H
390 SUPREME COURT REPORTS [2020] 8 S.C.R.

A 4. In the next step, the said shortlisted transactions would be
scrutinised to find if the transfer in question is made for or on
account of an antecedent financial debt or operational debt or
other liability owed by the corporate debtor. The transactions which
are so found would be answering to clause (a) of sub-section (2)
of Section 43.
B
5. In yet further step, such of the scanned and scrutinised
transactions that are found covered by clause (a) of sub-section
(2) of Section 43 shall have to be examined on another touchstone
as to whether the transfer in question has the effect of putting
such creditor or surety or guarantor in a beneficial position than it
C
would have been in the event of distribution of assets per Section
53 of the Code. If answer to this question is in the affirmative, the
transaction under examination shall be deemed to be of preference
within a relevant time, provided it does not fall within the exclusion
provided by sub-section (3) of Section 43.
D 6. In the next and equally necessary step, the transaction which
otherwise is to be of deemed preference, will have to pass through
another filtration to find if it does not answer to either of the clauses
(a) and (b) of sub-section (3) of Section 43.
7. After the resolution professional has carried out the aforesaid
E volumetric as also gravimetric analysis of the transactions on the
defined coordinates, he shall be required to apply to the
Adjudicating Authority for necessary order/s in relation to the
transaction/s that had passed through all the positive tests of sub-
section (4) and sub-section (2) as also negative test of sub-section
F (3).
28.2. On a motion made by the resolution professional after and
in terms of the exercise aforesaid, the Adjudicating Authority, in its turn,
shall have to examine if the referred transaction answers to all the
descriptions noted above and shall then decide as to what order is required
G to be passed, for avoidance of the impugned transaction or otherwise.
28.3. In our view, looking to the legal fictions created by Section
43 and looking to the duties and responsibilities of the resolution
professional and the Adjudicating Authority, ordinarily an adherence to
the process illustrated hereinabove shall ensure reasonable clarity and
less confusion; and would aid in optimum utilization of time in any
H
insolvency resolution process.
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Other aspects of the application made by IRP – allegations A
of transactions being undervalued and fraudulent
29. Having found that the transactions in question cannot be
countenanced, for being of preference during a relevant time to a related
party; and having approved the order passed by NCLT in that regard,
we do not consider it necessary to deal with the other length of arguments B
advanced by the learned counsel for parties on the questions as to whether
the transactions are undervalued and/or fraudulent too. In the totality of
circumstances, we would prefer leaving the said questions at that only,
while also leaving all the related questions of law open; to be examined
in an appropriate case.
C
29.1. However, we are impelled to make one comment as regards
the application made by IRP. It is noticed that in the present case, the
IRP moved one composite application purportedly under Sections 43, 45
and 66 of the Code while alleging that the transactions in question were
preferential as also undervalued and fraudulent. In our view, in the scheme
of the Code, the parameters and the requisite enquiries as also the D
consequences in relation to these aspects are different and such
difference is explicit in the related provisions. As noticed, the question of
intent is not involved in Section 43 and by virtue of legal fiction, upon
existence of the given ingredients, a transaction is deemed to be of giving
preference at a relevant time. However, whether a transaction is E
undervalued requires a different enquiry as per Sections 45 and 46 of
the Code and significantly, such application can also be made by the
creditor under Section 47 of the Code. The consequences of
undervaluation are contained in Sections 48 and 49. Per Section 49, if
the undervalued transaction is referable to sub-section (2) of Section 45,
the Adjudicating Authority may look at the intent to examine if such F
undervaluation was to defraud the creditors. On the other hand, the
provisions of Section 66 related to fraudulent trading and wrongful trading
entail the liabilities on the persons responsible therefor. We are not
elaborating on all these aspects for being not necessary as the transactions
in question are already held preferential and hence, the order for their G
avoidance is required to be approved; but it appears expedient to observe
that the arena and scope of the requisite enquiries, to find if the transaction
is undervalued or is intended to defraud the creditors or had been of
wrongful/fraudulent trading are entirely different. Specific material facts
are required to be pleaded if a transaction is sought to be brought under
H
392 SUPREME COURT REPORTS [2020] 8 S.C.R.

A the mischief sought to be remedied by Sections 45/46/47 or Section 66
of the Code. As noticed, the scope of enquiry in relation to the questions
as to whether a transaction is of giving preference at a relevant time, is
entirely different. Hence, it would be expected of any resolution
professional to keep such requirements in view while making a motion
to the Adjudicating Authority.
B
29.2. In the present case, it is noticed that NCLT in its detailed
and considered order essentially dealt with the features of the transaction
in question being preferential at a relevant time but recorded combined
findings on all these three aspects that the impugned transactions were
preferential, undervalued and fraudulent. Appropriate it would have been
C to deal with all these aspects separately and distinctively.
29.3. We are conscious of the fact that IBC is comparatively a
new legislation and various aspects expected therein are in the progression
of taking proper shape, particularly in the adjudicatory processes
envisaged. Having said so, we would leave this aspect at that only, while
D expecting all the concerned to be more attentive to the scheme, object
and requirements of the provisions contained in the Code.
SECOND ISSUE: WHETHER LENDERS OF JAL COULD
BE CATEGORISED AS FINANCIAL CREDITORS OF JIL

E Preliminary and background
30. The discussion and summation in the foregoing paragraphs
and conclusion on the first issue itself would have been the end of the
matter because the transactions in question stand disapproved as being
preferential. However, there remains another significant issue to be
F adjudicated herein, which, though not adverted to by NCLAT, is indeed
involved in these matters.
30.1. The issue is as to whether the lenders of JAL could be
categorised as financial creditors of JIL for the purpose of IBC?
31. The issue aforesaid was raised before NCLT by two of the
G respondent banks namely, ICICI Bank Limited and Axis Bank Limited
by way of separate applications under Section 60(5) of the Code, seeking
to question the decision of IRP rejecting their claims to be recognized as
financial creditors of the corporate debtor JIL on account of the securities
provided by JIL for the facilities granted to JAL. The NCLT rejected
the applications so filed, by way of its orders dated 09.05.2018 and
H
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15.05.2018 respectively, while concluding that on the strength of the A
mortgages created by the corporate debtor JIL, as collateral security of
the debts of its holding company JAL, the applicants cannot be treated
as financial creditors of the corporate debtor JIL.
31.1. The aforesaid orders dated 09.05.2018 and 15.05.2018 were
questioned before NCLAT by the said lenders of JAL in Comp. App B
(AT) (Ins) No. 353 of 2018 and Comp. App (AT) (Ins) No. 301 of 2018
respectively. These appeals formed part of the bunch of appeals decided
by NCLAT by way of the impugned common order dated 01.08.2019
and, as per the final result recorded therein, these two appeals also stand
allowed. However, fact of the matter remains that nothing has been
C
discussed by NCLAT in the impugned order dated 01.08.2019 as regards
the subject-matter of these two appeals i.e., as to whether the said lenders
of JAL could be categorised as financial creditors of JIL or not; and the
entire discussion in the impugned order and the final conclusion therein
had only been in relation to the order dated 16.05.2018 that was passed
by NCLT on the application for avoidance filed by IRP. D
31.2. The appellant of Civil Appeal D. No. 32881 of 2019, IIFCL,
apart from raising other contentions, has also questioned this aspect of
the order impugned that the aforesaid two appeals, involving the issue as
to whether the mortgagees of the corporate debtor could be taken as
financial creditors, have been allowed by NCLAT without recording any E
findings and without any discussion in that regard.
31.3. Though, ordinarily, such omission in the impugned order dated
01.08.2019 might have resulted in the matter being remitted to the
Appellate Tribunal for appropriate consideration and finding but, as
aforesaid, in the entire process, adherence to the time limit is also of F
significance; and in view of the fact that learned counsel for the respective
parties have advanced elaborate submissions on the merits of the issue
as to whether such lenders of JAL could be treated as financial creditors
of the corporate debtor JIL and have invited the decision of this Court,
we deem it just, proper and expedient to finally decide the relevant
questions in this regard. G
31.4. We may, of course, reiterate that in view of the conclusion
that we have reached in relation to the principal issue, the transactions in
question are denuded of their value and worth, per the force of the order
by NCLT under Section 44 of the Code, which has been approved by
H
394 SUPREME COURT REPORTS [2020] 8 S.C.R.

A us. To be more specific, the security interests created by the corporate
debtor JIL over the properties in question stand discharged in whole.
Therefore, the respondent-lenders cannot claim any status as creditors
of the corporate debtor JIL and there could arise no question of their
making any claim to be treated as financial creditors as such. However,
for its relevance, we deem it appropriate to determine the issue as to
B
whether the lenders of JAL, because of creation of the mortgages in
question, could be treated as financial creditors of JIL, independent of
the finding that the transactions in question are hit by Section 43 of the
Code.
32. Before proceeding further, apposite it would be to take note
C of the reasons assigned by NCLT in its impugned orders for rejecting
the claim of two of the lender banks to be treated as financial creditors
of JIL.
Reasoning and Findings of NCLT
33. The Adjudicating Authority, NCLT, in its order dated 09.05.2018
D as passed on the application moved by ICICI Bank Limited, with
reference to the nature of transaction in question, whereby JIL had
extended collateral security towards the facility extended to its holding
company JAL as also with reference to the definition and connotations
of the expressions ‘financial debt’ and ‘financial creditor’ as occurring
E in IBC, essentially proceeded to find that in such a transaction, as regards
the corporate debtor JIL, no consideration for time value for money was
involved; and hence, the transaction in question did not qualify as ‘financial
debt’ qua the corporate debtor JIL. The NCLT, interalia, observed as
under:-
“9. In the present case undisputedly corporate debtor has
F mortgaged its property for creating collateral security for the debt
of its holding company JAL. The Corporate debtor is not a
borrower, it has created a mortgage in favour of financial institutions
for creating collateral security for the money borrowed by its
holding company JAL. In the said transaction time value of money
G is not involved. The corporate debtor’s liability is not regarding
the debt owed by its holding company JAL. In case of default in
making payment by the principal borrower, for which security
interest has been created by the corporate debtor by mortgaging
its property in favour of Applicant bank, the debt amount can be
realized from the sale of the mortgaged property but not from the
H corporate debtor, i.e. Jaypee Infratech Ltd.
*** *** ***
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 395
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9.2 In this case, the applicant has not disbursed the debt along A
with interest against the consideration for the time value of money.
It is also not the case of the applicant that the corporate debtor
has borrowed money against payment of interest from the
applicant. It is also not the case that the corporate debtor has
raised any amount from the applicant under any credit facility. It
B
is not the case of the applicant that there is any liability towards
the corporate debtor in respect of any lease or higher purchase
contract. It is further not the case of an applicant that any
receivables been sold or discounted. It is further not the case of
the applicant that any amount has been raised for the corporate
debtor under any other transaction having the commercial effect C
of borrowing to the corporate debtor. It is not the case of the
applicant that any derivative transaction has been entered with
the corporate debtor. It is also not the case of the applicant that
any counter indemnity obligation in respect of a guarantee,
indemnity, bond, documentary, letter of credit or any other
D
instrument issued by a bank or a financial institution for the
corporate debtor. Further, no amount of any liability in respect of
any of the guarantee or indemnity for any of the items referred to
above has been issued by the corporate debtor.”
33.1. The NCLT also distinguished the decision of this Court in
the case of Rajkumari Kaushalya Devi v. Bawa Pritam Singh & E
Anr.: AIR 1960 SC 1030, as relied upon by the learned counsel for the
applicant, while pointing out the distinct context of the said decision and
while observing that the connotations of the expressions ‘debt’, ‘financial
debt’, ‘financial creditor’ and ‘creditor’ in the present context would be
limited to the definitions given in the Code. The NCLT further F
distinguished the decision of Gujarat High Court in the case of State
Bank of India v. Smt. Kusum Vallabhdas Thakkar: 1991 SCC
Online Guj 14, while again pointing out that in the present case, the
corporate debtor has created a mortgage of its property in favour of
third party without any consideration for time value of money.
G
33.2. Yet further, the NCLT rejected the contentions that the
transaction in question could be termed as either ‘guarantee’ or
‘indemnity’ while observing, inter alia, as under:-
“13. The contention of the applicant that mortgage created by the
corporate debtor can be termed as either a guarantee or indemnity H
396 SUPREME COURT REPORTS [2020] 8 S.C.R.

A is not tenable. In terms of the mortgage deeds the corporate debtor
has created a mortgage over its immovable properties, which is
either money borrowed against payment of interest nor indemnity
or a guarantee as claimed by the applicant and therefore, the
same does not fall within the definition of the financial debt in
terms of Sec. 5 (8) of IBC. It is stated that the corporate debtor
B
has neither issued any guarantee nor has provided an indemnity
to the applicant in respect of the financial assistance granted to
JAL.
14. The Resolution Professional further submitted that the mortgage
deed shows that the corporate debtor has only agreed to create a
C mortgage in favour of the applicant towards the financial assistance
granted to its holding company, i.e. JAL. On perusal of mortgage
it is clear that the corporate debtor has neither given any guarantee
to repay or any indemnity qua the repayment of the loans granted
by the applicant to JAL. The definition of Mortgage Debt as per
D the mortgage deed dated 7th March 2017 is as under : -
“Mortgage debt shall mean the principal amount of the facility,
all interest therein additional interest, default interest, liquidated
damages, fees, costs, charges, expenses, any other amounts
due and payable to secured parties under the transaction
E documents, premia on prepayment, costs, charges, and
expenses and other monies whatsoever stipulated in or payable
together with other debts and liabilities of JAL to lender under
the transaction document and/or these presents.”

It is important to point out that sec. 124 of the Indian Contract Act
F defines a “Contract of Indemnity” as being a contract by which
one party promises to save the other from loss caused to him by
the conduct of the promisor himself or by the conduct of any
other person. In the instant case, as per the Mortgage deed the
repayment obligation of the loan granted to JAL by the applicant
is upon JAL as stated above and therefore, no contract of
G indemnity as claimed by the applicant has been entered even by
conduct of the corporate debtor, and therefore, the contention of
the applicant that the applicant is a financial creditor of the
corporate debtor is completely untenable in law.”

33.3. While observing that in the scheme of the Code and CIRP
H
Regulations thereunder, the claims are invited from the creditors
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 397
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of the corporate debtor i.e., financial creditors, operational creditors A
and other creditors, and not from any person or creditors of the
holding company of the corporate debtor; and while further
observing that the resolution professional had righty observed that
the mortgages in questions were not like guarantee or indemnity,
NCLT observed that the basic ingredient of financial debt i.e.,
B
‘debt alongwith interest disbursed against time value of money’
was lacking in the impugned transactions. NCLT also referred to
the interpretation of the expression ‘financial creditors’ by NCLAT
in the case of Nikhil Mehta and Sons v. AMR Infrastructure
Ltd. Company: Appeal (AT) (Insolvency) No. 07 of
2017andendorsed the decision of IRP while holding that,- C

“15. ….On the above basis, we are of the view that The
Resolution Professional has correctly rejected the claim of the
applicant on the ground that the Applicant is not a financial
creditor of the corporate debtor concerning the Mortgages and
the Mortgaged Debt. The resolution professional has rightly D
observed that guarantee and indemnity are distinct documents
under the relevant laws and the mortgages executed by the
corporate debtor are not like guarantee and indemnity. The
basic ingredient of the financial debt as defined under the Code
is that debt along with interest disbursed against time value of E
money lacks in the impugned transaction….”

33.4. Accordingly, NCLT rejected the application of ICICI Bank
Limited by way of its order dated 09.05.2018, while concluding as under:-
“…Therefore, by the mortgage created by the corporate debtor, F
as collateral security by the debt of its holding company, i.e.
Jaiprakash Associates Ltd. (“JAL”) in favour of the Applicant
i.e. ICICI Bank, the applicant cannot be treated as Financial
Creditor of the Corporate Debtor. Therefore in our view, Resolution
Professional has rightly rejected the claim of the applicant, which
was filed by the Applicant in the capacity of Financial Creditors G
of the corporate debtor, i.e. Jaypee Infratech Ltd. (“JIL”)”.
33.4.1. Thereafter, the other application filed by Axis Bank Limited
was rejected by NCLT on 15.05.2018, while following the earlier order
dated 09.05.2018.
H
398 SUPREME COURT REPORTS [2020] 8 S.C.R.

A 34. As noticed, the aforesaid orders dated 09.05.2018 and
15.05.2018 were questioned in two appeals before NCLAT by the said
lenders of JAL; and the said appeals stand allowed in the impugned
order dated 01.08.2019 without any discussion as regards the issue
involved therein. We have heard learned counsel for the parties at length
in relation to this issue too, and, in the circumstances of the case, as
B
noticed, we had indicated prima facie view in the order dated
10.12.201945, that such lenders of JAL cannot be categorised as financial
creditors of JIL and had stayed the operation of impugned order to that
extent.
Rival submissions
C
35. Having noticed the relevant background, we may now take
note of the contentions of learned counsel for the parties in regard to the
issue under consideration.
Submissions on behalf of the appellant
D 36. It has essentially been argued on behalf of the appellant IIFCL
that as per sub-section (7) of Section 5 of the Code, only such creditor
could be the ‘financial creditor’ of the corporate debtor to whom a
‘financial debt’ is owed by the corporate debtor; and, as per sub-section
(8) of Section 5 of the Code, the key requirement of a financial debt is
E ‘disbursal against the consideration for the time value of money’,
which includes the events or modes of disbursement as enumerated in
sub-clauses (a) to (i) of Section 5(8). It is submitted that in the present
case, the lenders of JAL having not disbursed any debt against the
consideration for the time value of money to the corporate debtor JIL,
the corporate debtor does not owe any ‘financial debt’ to such lenders;
F and the transactions in question do not fall within the brackets of ‘financial
debt’ only for the reason that the corporate debtor JIL created mortgages
as collateral security in favour of lender banks for the money borrowed
by JAL. Concisely put, the submission is that in the said mortgage
transactions, disbursal against the consideration for the time value of
G money qua the corporate debtor JIL being not involved, the lenders of
JAL are not the ‘financial creditors’ of JIL and cannot be included in the
Committee of Creditors46, as to be constituted per Section 21 of the
Code.

45 Reproduced in paragraph 7 hereinbefore.
H 46 ‘CoC’ for short
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 399
INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

36.1. It is further submitted that the said lenders of JAL have no A
right to demand the mortgage money from the corporate debtor nor is
the corporate debtor JIL under any liability to pay the same; and mere
holding of security interest, which too had not been extended for direct
disbursement of any credit to JIL, cannot make the JAL lenders as
financial creditors of JIL within the meaning of IBC. Learned counsel
B
for the appellant has referred to the judgment and order dated 22.12.2017
by the NCLAT in Dr. B.V.S. Lakshmi v. Geometrix Laser Solutions
(P) Ltd.:Company Appeal (AT) (Insolvency) No. 38 of 2017, to
substantiate this submission.
36.2. It is contended on behalf of the appellant that though the
definition of ‘financial debt’ extends to include various types of C
transactions, yet it does not include a mortgage, as could be gathered
from a plain and simple reading of the said provision. The counsel for
the appellant has further relied on the judgment of this Court in Swiss
Ribbons (supra), wherein the concept of ‘financial creditor’ has been
explicated to mean and include a person who has direct engagement in D
the functioning of corporate debtor right from the beginning, while
assessing the viability of corporate debtor; and who would also engage
in restructuring of debts and reorganising the corporate business in case
of financial stress. With reference to the case at hand, it is submitted
that mere holding of security interest, not meant for direct disbursement
of any credit to corporate debtor JIL, cannot convert the lenders of JAL E
into the financial creditors of JIL.
36.2.1. It is also contended that the respondents, the lenders of
JAL to whom mortgages were extended by the corporate debtor JIL,
could at best be construed as plain creditors, who are entitled to file
Form F and to specify their security in column 8 thereof; and in any F
case, they cannot become financial creditors of JIL.
36.2.2. It is further contended that a secured creditor under the
Code can be a financial creditor under two circumstances i.e., (i) when
corporate debtor directly avails a debt from the creditor and such a debt
is a secured debt; and (ii) if corporate debtor furnishes a guarantee to G
any person. Learned counsel for the appellant submits that a mortgagee,
who has not disbursed any debt to the corporate debtor, may be a secured
creditor because of the corporate debtor creating a security to secure
the payment of a third party but cannot be a financial creditor of the
corporate debtor within the meaning of Section 5(8) of the Code. H
400 SUPREME COURT REPORTS [2020] 8 S.C.R.

A 36.3. Elaborating on the submissions relating to the nature of
transactions, learned counsel for the appellant has strenuously argued
that ‘mortgage’ is not included within the framework of Section 5(8) of
the Code and its sub-clauses (a) to (i); and that ‘financial debt’ is limited
only to the transactions enumerated thereunder and its coverage cannot
be enlarged while interpreting the provision. It is also argued that
B
‘mortgage’ cannot be deemed to mean ‘guarantee’, for a mortgagor has
no intentions to undertake to discharge the liability of a third person in
case of his default in repayment of debts. In other words, only where
the debtor and the mortgagor are the same person that the mortgagor
would be liable to pay his debts and else, the mortgage itself does not
C create a pecuniary liability. Moreover, in the present case, when there is
a tri-partite contract wherein, the mortgagor and debtor are different,
the impugned transactions do not satisfy the ingredients of Section 126
of the Contract Act, as JIL has not undertaken specifically to discharge
the liability of JAL nor has entered into a ‘contract of guarantee’ with
the lenders of JAL nor has provided any indemnity; and therefore, the
D
corporate debtor JIL is not bound by any liabilities and obligations incurred
by JAL. To support the contention that liability always flows from debt
and not from the security created under the mortgage, learned counsel
for the appellant has also relied on several decisions including that in
Ramchand Sur v. Ishwar Chandra Giri: 61 Ind Cases 539.
E 36.4. It is submitted that a general reference to the transaction
documents would not be sufficient to fasten liability for JIL to pay any
outstanding debt of JAL because any payment obligation has to be
unequivocal and ought to be of specific undertaking to discharge such
obligations; and that general words of incorporation or general covenant
F in some mortgage deeds cannot bind JIL to all the terms and conditions
of the documents, particularly any liability to incur JAL’s indebtedness
by fastening payment obligations. It is further submitted that when the
intention of parties is ascertained with reference to the terms of documents
and all the surrounding factors, it cannot be inferred that JIL undertook
the liability to discharge the indebtedness of JAL when it was itself reeling
G under financial stress, was declared NPA and had surmounting liabilities
towards home buyers and its own lenders. With reference to the financial
statements of JIL, it is pointed out that therein, it was specifically disclosed
that the mortgages had been provided as a security for the financial
assistance availed by JAL but such mortgages were not declared either
H as contingent or as direct liability. It is also submitted that the common
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 401
INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

loan agreement between JIL and its lenders, including the appellant, A
contained negative covenants prohibiting JIL from creating, assuming or
incurring any additional indebtedness or from encumbering any property
or creating any security on the assets of JIL. The sum and substance of
such submissions had been that the corporate debtor JIL could have
neither incurred a liability to discharge the indebtedness of JAL nor it
B
had done so under the mortgages in question.
36.5. As regards the decision of this Court in Committee of
Creditors of Essar Steel India Limited through Authorised Signatory
v. Satish Kumar Gupta : 2019 SCC OnLine SC 147847, as relied
upon by the respondents, learned counsel for the appellant has submitted
that the generalised assertion on the part of the respondents, that per the C
force of the said decision, a secured creditor ipso facto becomes financial
creditor, is not a correct appreciation of the ratio thereof. It is submitted
that in the scheme of the Code, a secured creditor could also be a financial
creditor under two circumstances: First, when the corporate debtor directly
avails a debt from the creditor and such debt is secured by a security D
interest like in the form of a charge or mortgage or hypothecation; and
such a creditor, the secured one, is regarded as financial creditor because
of direct disbursement of debt to the corporate debtor; and secondly,
when the corporate debtor furnishes guarantee to any person, such person
would also become a financial creditor and a secured creditor by virtue
of sub-clause (i) of Section 5(8) of the Code, of course, such guarantee E
may even be to secure the debt obligation of a third party. However,
according to the counsel for the appellant, when the corporate debtor
creates mortgage to secure payment obligation of a third party, without
disbursement of any debt to itself (the corporate debtor), the mortgagee,
even if becoming a secured creditor because of creation of mortgage, F
could only be described as ‘indirect secured creditor’ and cannot be
treated as a ‘direct secured creditor’ so as to become a ‘financial creditor’
because, the mortgage transaction is not envisaged to be a ‘financial
debt’ in Section 5(8) with its sub-clauses (a) to (i).
36.5.1. It is submitted that Essar Steel judgment envisages the G
position and priorities of secured creditors, mainly in the context of a
creditor who has disbursed direct debt to the corporate debtor and has
secured its debt by a security interest, who should have priority over
unsecured creditors of the corporate debtor. However, the said decision,
47 Hereinafter also referred to as the case of ‘Essar Steel’. H
402 SUPREME COURT REPORTS [2020] 8 S.C.R.

A according to the learned counsel, cannot be read to the effect that even
the indirect secured creditor be also necessarily construed as financial
creditor. It is submitted that the crux of the said decision is that creditors
not similarly situated cannot be at par; that the arrangements of the
corporate debtor with its creditors must be taken into consideration; and
that the aim of equitable treatment is based on the notion that creditors
B
with similar legal rights should be treated evenly while receiving
distribution in accordance with their relative ranking and interest. It is
submitted that Essar Steel cannot be read as laying down the law that
even the lenders of third party, who hold mortgages from the corporate
debtor, be also treated as such secured creditors who would fall within
C the sect of ‘financial creditors’.
36.6. Learned counsel for the appellant would further submit that
existence of a security interest is not relevant while construing whether
a creditor is financial creditor or not because, in the composition of CoC,
even a non-secured creditor could also be a financial creditor, if the
D ingredients of Section 5(8) of the Code are satisfied. It is also argued
that the financial facilities availed by JAL from the respondents were
not utilized for any business operation of JIL and hence, the respondents
cannot be construed as financial creditors of JIL.
Submissions on behalf of respondents
E 37. Learned counsel for the contesting respondents have made
elaborate submissions in support of the counter-assertion that on account
of security provided by the corporate debtor JIL, the respective lenders
have become financial creditors of JIL for the purpose of proceedings
under the Code. We may briefly summarise the principal facets of the
F contentions urged on behalf of the main contesting respondents in this
regard as infra.
Axis Bank
37.1. It has been strenuously argued on behalf of this respondent
that the nature and character of a ‘mortgage’ is such that it secures a
G debt; and in the present case, the mortgage in question, as made by JIL,
had been to secure the debt obligations of its holding company JAL.
With reference to Section 58 of the Transfer of Property Act and the
decision of this Court in Prithvi Nath Singh & Ors. v. Suraj Ahir &
Ors. : (1963) 3 SCR 302 as also the decision of Mysore High Court in
Dassappa & Ors v. Jogaiah & Ors : (1964) ILR 545, it is submitted
H
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 403
INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

that the purpose of ‘mortgage’ is to secure a debt; and with reference to A
the decision in Manik Chand Raut v. BaldeoChaudhary & Ors:
(1949) SCC Online Pat 64, it is also contended that mortgage, by its
very nature, presupposes existence of a debt and the transaction by
which a debt is extinguished is not a mortgage but a sale. Further, with
reference to the aforementioned decision of this Court in case of
B
Rajkumari Kaushalya Devi v. Bawa Pritam Singh & Anr: AIR 1960
SC 1030, it is contended that a mortgage debt creates pecuniary liability
upon the mortgagor; and that a mortgagor who transfers an interest in
immovable property so as to secure a debt, incurs a mortgage debt. With
reference to the decision of Delhi High Court in the case of State Bank
of India v. Samneel Engineering Co. & Ors: 1995 (35) DRJ 485, it C
is further submitted that a mortgage is both a promise by a debtor to
repay the loan as well as a real property right; of course, the right being
intended to secure the due payment of the debt; and a suit on a mortgage
is essentially a suit for recovery of a debt.
37.1.1. With reference to principles aforesaid, it is contended that D
a mortgage debt is a ‘debt’ within the meaning of Section 3(11) of the
Code; that a debt can be classified to be a debt due from ‘any person’
and not necessarily restricted to the borrower alone. The aforementioned
decision of Gujarat High Court in State Bank of India v. Smt. Kusum
Vallabhdas Thakkar: 1991 SCCOnline GUJ 14 has again been
referred to submit that Indian Law recognizes that a person, other than E
the borrower, can also execute a mortgage to secure the debt of the
borrower. In this context, learned counsel for the respondent has also
relied upon the provisions contained in Section 126 of the Contract Act,
to contend that JIL stands in the position of a guarantor for the debts
owed by JAL. The learned counsel has also referred to an order dated F
13.03.2019 in M.A. No. 1584/2019 in CP No. 402 of 2018 as passed
by NCLT (Mumbai Bench) in the case of SREI Infrastructure Finance
Limited v. Sterling International Enterprises Ltd., wherein it is held
that a third party mortgagor, who mortgages the property to secure the
financial obligation of another party, stands in the position of a guarantor;
and the mortgagee is a financial creditor of the third party mortgagor.In G
the case at hand, it is submitted, the corporate debtor JIL stands in the
position of a guarantor with respect to the security provided to this
respondent and hence, the impugned mortgage transactions are covered
within the meaning of Section 5(8)(i) of the Code.
H
404 SUPREME COURT REPORTS [2020] 8 S.C.R.

A 37.1.2. It is also submitted that looking to the nature of transaction
in question, the question whether JAL has defaulted on repayment and
consequently, the security is to be invoked is irrelevant for the purposes
of the issue at hand; and whether JAL committed default or not is not
decisive of the question as to whether the mortgage debt in question is
financial debt or not.
B
37.1.3. It is further submitted that in the present case, the mortgage
transactions were executed to secure the payment of debts/liabilities of
JAL; and that such creation of mortgage undoubtedly is a ‘security
interest’ as defined in Section 3(31) of the Code inasmuch as, a security
interest includes any creation of right/title/interest/claim in property for
C the purpose of securing the payment or performance of an obligation;
and also includes a mortgage. Hence it is contended that the respondent
bank comes within the ambit of ‘secured creditor’ per Section 3(30) of
the Code.
37.1.4. It is emphasised by learned counsel for this respondent
D that a mortgage debt constitutes a ‘financial debt’ within the meaning of
Section 5(8) of the Code even if no amount is directly disbursed to the
corporate debtor. While relying on the decision of this Court in Pioneer
Urban Land and Infrastructure Ltd. & Anr. v. Union of India &
Ors.: (2019) 8 SCC 41648, it is contended thatthe definition of ‘financial
E debt’ under Section 5(8) of Code has been given an extended meaning
so as to include the situations which may not directly involve disbursal
against the consideration for time value money.
37.1.5. Further, with reference to the aforementioned UNCITRAL
Legislative Guide on Insolvency Law and the decisions of this Court in
F the cases of Essar Steel and Swiss Ribbons, it is submitted that a holistic
interpretation of the Code would support the position that the respondent,
being a secured creditor and a financial creditor, should be included in
CoC so as to protect its security interest.
37.2. The submissions and contentions made on behalf of this
G respondent largely cover the stand of other respondents too. Hence, we
may only notice, in brief, the other or additional part of major submissions
on behalf of other respondents, while avoiding repetition.
Standard Chartered Bank

H 48 Hereinafter also referred to as the case of ‘Pioneer Urban’
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 405
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37.3. It is submitted on behalf of this respondent that the terms A
envisaged in the mortgage deed dated 24.05.2016 make it abundantly
clear that the corporate debtor JIL had unequivocally promised to pay to
this respondent the debts/liabilities owed by JAL in accordance with the
terms and conditions of the secured financing documents executed
between this respondent and JAL49. Hence, it is contended that though
B
the claim of this respondent is limited to the extent of the value of the
properties mentioned in the Schedule to the Mortgage Deed but, to that
extent, it remains a financial creditor of JIL.
37.3.1.As regards similar arguments with respect to Section 58
of the Transfer of Property Act, that a mortgage presupposes the
subsistence of a debt and hence it is a secured debt, apart from above C
referred decisions, learned counsel has also referred to the decision in
Pomal Khanji Govindji & Ors. v. Brajlal Karsandas Purohit & Ors:
(1989) 1 SCC 458.
37.3.2. It is contended that when the objective of the Code is to
revive the corporate debtor, the resolution plan ought to contain all claims D
against the corporate debtor, whether matured or not, so that if the liability
again creeps in, the Company may be prevented from being dragged
into insolvency or liquidation proceedings. It is further submitted that this
respondent, who is holding public money, ought to be a part of CoC; and
its absence in CoC would be defeating the very object of the Code E
because the resolution plan may provide for various measures which
might take away the security interest created in favor of this respondent;
and without its participation, the entire process would be prejudicial to
the interest of this respondent. It is submitted that as per the ratio in K.
Sashidhar v. Indian Overseas Bank and Ors. : 2019 SCC OnLine
SC 257 read with the decision in the case of Essar Steel, once a resolution F
plan is approved by the wisdom of the CoC, the same cannot be
challenged and looking to the scheme of the Code, presence of the
mortgagees like this respondent in the CoC of JIL is necessary and is
rather unavoidable.
ICICI Bank G
37.4. On behalf of this respondent, it is maintained that in view of
Section 5(8)(i) read with Section 5(8)(a) of the Code, the creation of
impugned mortgage had resulted in creation of a ‘financial debt’ as defined
49 Clause B & B(a) of the Mortgage Deed produced as Annexure-1 at Pg. 8-43 H
406 SUPREME COURT REPORTS [2020] 8 S.C.R.

A under the Code, for the transaction being akin to that of a ‘guarantee’ as
defined under Section 126 of the Contract Act. Again, with reference to
the decision in Smt. Kusum (supra), it is submitted that even a third party
mortgage leads to creation of an implied guarantee with an obligation to
pay the mortgage debt. In other words, since the definition of ‘financial
debt’ is not exhaustive, any transaction which is akin to creation of a
B
guarantee would come under the purview of the definition of ‘financial
debt’ and as such, the mortgage provided by the corporate debtor JIL,
being akin to the guarantee, would be squarely within the definition of
‘financial debt’. It is further submitted that in the given scenario, this
respondent takes on the role of a ‘financial creditor’ of the corporate
C debtor JIL within the meaning of Section 5(8)(i) of the Code and hence,
ought to be admitted as a member of the CoC.
37.4.1.It is submitted on behalf of this respondent that on a holistic
reading of the mortgage deeds, it is clear that ‘exclusive mortgages’
were executed in favour of this respondent with express clauses whereby,
D the corporate debtor JIL had undertaken to either discharge the debt or
to ensure repayment of facilities extended to JAL and in the event of
default, this respondent shall have the right to sell the mortgaged
properties. Such stipulations, it is contended, clearly put the respondent
in the category of ‘financial creditors’.
E 37.4.2.With reference to the duties of IRP as laid out in the Code,
and with analysis of the definition of ‘claim’ as found in Section 3(6) of
the Code, it is submitted that the definition of ‘claim’ is wide enough to
include all stakeholders of the corporate debtor, even if a claim had not
matured on the date of insolvency commencement. The Report of
Banking Law Reform Committee has also been referred in this regard.
F
37.4.3.It is further submitted that Regulations 12, 13 and 14 of the
Insolvency and Bankruptcy Board of India (Insolvency Resolution
Process for Corporate Persons) Regulations, 2016 require the IRP to
admit all claims, including contingent claims, as on the insolvency
commencement date; that as per Section 29 of the Code, the IRP ought
G to prepare an information memorandum for formulating a resolution plan;
that as per Regulation 37 of CIRP Regulations, the insolvency resolution
of the corporate debtor should include sale of all or part of the assets,
irrespective of whether they are subject to security interest and
satisfaction or modification of any security interest; and that sub-section
H (4) of Section 30 of the Insolvency and Bankruptcy (Amendment) Act,
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 407
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2019 clarifies that priority of secured creditors has to be considered. A
With reference to the processes so envisaged by the Code, it is contended
that the secured creditors like the respondent cannot be kept away from
the class of financial creditors.
Central Bank of India
37.5. Apart from the submissions carrying essentially the substance B
as above-noted, it is also contended that this respondent, being a secured
creditor, would be entitled to enforce its security interest in the mortgaged
property upon vacation of the order of moratorium in terms of the
Securitisation and Reconstruction Of Financial Assets and Enforcement
of Security Interest Act, 200250; and that the resolution plan, without C
including the secured creditors, would be unenforceable, as the secured
creditors will then seek enforcement against mortgage property under
the SARFAESI Act. It is, therefore, contended that the secured creditor,
like the respondent, needs to be recognized as financial creditor, and
thereby a participant in CoC of the corporate debtor JIL.
D
Bank of Maharashtra
37.6. While going in tandem with the submissions aforesaid, it is
asserted on behalf of this respondent that the corporate debtor JIL is
under a pecuniary obligation to discharge the liability in view of the
Indenture of Mortgage (IOM) dated 29.12.2016, which is a contract of E
guarantee and, therefore, the relationship between the parties cannot be
classified merely as that of mortgagor and mortgagee, but is also of a
guarantor and guarantee which, in turn, is covered under Section 5(8) of
the Code and thereby, this respondent is a ‘financial creditor’ within the
meaning of Section 5(7) of the Code.
F
Unique position of financial creditor- as explained in Swiss
Ribbons
38. Having taken note of the rival contentions on the issue as to
whether the lenders of JAL could be categorised as ‘financial creditors’
of JIL for the purpose of CIRP in question, gist of the matter is as to
G
whether the subject transactions could be categorised as ‘financial debts’
within the meaning of Section 5(8) of the Code so as to confer the status
of ‘financial creditors’ upon the respondents, lenders of JAL.

50 Herein after also referred to as ‘the SARFAESI Act’
H
408 SUPREME COURT REPORTS [2020] 8 S.C.R.

A 38.1. The expressions “financial creditor” and “financial debt” as
occurring in the Code have come up for consideration before this Court
in several decisions, including those in the above-mentioned cases of
Swiss Ribbons (decided on 25.01.2019), Pioneer Urban (decided on
09.08.2019) and Essar Steel (decided on 15.11.2019), which have been
referred to and relied upon by learned counsel for the parties for one
B
proposition or another. In fact, the observations as occurring in the last
of the said decisions, in the case of Essar Steel, as relied upon by the
learned counsel for the respondents, are based on those occurring in the
decision in Swiss Ribbons51.
39. As indicated hereinbefore, the law declared by this Court in
C the case of Swiss Ribbons, while rejecting the contentions that
classification between financial creditor and operational creditor was
discriminatory and violative of Article 14, shall have some bearing on the
claim of the respondent-lenders for being treated as financial creditors
of JIL. Having regard to the submissions made, it shall now be pertinent
D to take note of the relevant aspects from the said decision in requisite
details.
39.1. The broad features of the expressions used in Sections 5(7)
and 5(8) of the Code in defining the terms “financial creditor” and
“financial debt” were indicated by this Court in the case of Swiss Ribbons
E in the following:
“42. A perusal of the definition of “financial creditor” and “financial
debt” makes it clear that a financial debt is a debt together with
interest, if any, which is disbursed against the consideration for
time value of money. It may further be money that is borrowed or
F raised in any of the manners prescribed in Section 5(8) or otherwise,
as Section 5(8) is an inclusive definition. On the other hand, an
“operational debt” would include a claim in respect of the provision
of goods or services, including employment, or a debt in respect

G 51We have referred to the case of Swiss Ribbons in paragraph 16.1.1 hereinbefore while
pointing out that in Swiss Ribbons, this Court had traversed through the historical
background and scheme of the Code in the wake of challenge to the constitutional
validity of various provisions of the Code and while rejecting such challenge, this Court
had observed that the focus of the Code was to ensure revival and continuation of the
corporate debtor, where liquidation is to be availed of only as a last resort; and that the
Code was a beneficial legislation to put the corporate debtor on its feet, and not a mere
H recovery legislation for the creditors.
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of payment of dues arising under any law and payable to the A
Government or any local authority.”
39.2. The unique position assigned to a ‘financial creditor’, who
plays a crucial role in insolvency resolution process as against the role of
other creditors, has been extensively explained by this Court in the case
of Swiss Ribbons, albeit in the context of its differentiation with the B
category of ‘operational creditor’, in the following:
“50. According to us, it is clear that most financial creditors,
particularly banks and financial institutions, are secured creditors
whereas most operational creditors are unsecured, payments for
goods and services as well as payments to workers not being C
secured by mortgaged documents and the like. The distinction
between secured and unsecured creditors is a distinction which
has obtained since the earliest of the Companies Acts both in the
United Kingdom and in this country. Apart from the above, the
nature of loan agreements with financial creditors is different from
contracts with operational creditors for supplying goods and D
services. Financial creditors generally lend finance on a term
loan or for working capital that enables the corporate debtor
to either set up and/or operate its business. On the other
hand, contracts with operational creditors are relatable to supply
of goods and services in the operation of business. Financial E
contracts generally involve large sums of money. By way of
contrast, operational contracts have dues whose quantum is
generally less. In the running of a business, operational creditors
can be many as opposed to financial creditors, who lend finance
for the set-up or working of business. Also, financial creditors
have specified repayment schedules, and defaults entitle F
financial creditors to recall a loan in totality. Contracts with
operational creditors do not have any such stipulations. Also, the
forum in which dispute resolution takes place is completely
different. Contracts with operational creditors can and do have
arbitration clauses where dispute resolution is done privately. G
Operational debts also tend to be recurring in nature and the
possibility of genuine disputes in case of operational debts is much
higher when compared to financial debts. A simple example will
suffice. Goods that are supplied may be substandard. Services
that are provided may be substandard. Goods may not have been
H
410 SUPREME COURT REPORTS [2020] 8 S.C.R.

A supplied at all. All these qua operational debts are matters to be
proved in arbitration or in the courts of law. On the other hand,
financial debts made to banks and financial institutions are well
documented and defaults made are easily verifiable.
51. Most importantly, financial creditors are, from the very
B beginning, involved with assessing the viability of the
corporate debtor. They can, and therefore do, engage in
restructuring of the loan as well as reorganisation of the
corporate debtor’s business when there is financial stress,
which are things operational creditors do not and cannot do. Thus,
preserving the corporate debtor as a going concern, while ensuring
C maximum recovery for all creditors being the objective of the
Code, financial creditors are clearly different from operational
creditors and therefore, there is obviously an intelligible differentia
between the two which has a direct relation to the objects sought
to be achieved by the Code.
D *** *** ***
75. Since the financial creditors are in the business of
moneylending, banks and financial institutions are best equipped
to assess viability and feasibility of the business of the corporate
debtor. Even at the time of granting loans, these banks and financial
E institutions undertake a detailed market study which includes a
techno-economic valuation report, evaluation of business, financial
projection, etc. Since this detailed study has already been
undertaken before sanctioning a loan, and since financial creditors
have trained employees to assess viability and feasibility, they are
F in a good position to evaluate the contents of a resolution plan. On
the other hand, operational creditors, who provide goods and
services, are involved only in recovering amounts that are paid
for such goods and services, and are typically unable to assess
viability and feasibility of business. The BLRC Report, already
quoted above, makes this abundantly clear.”
G
(emphasis supplied)
39.3. The enunciation aforementioned illuminates the reasons as
to why at all a financial creditor is conferred with a major, rather pivotal,
role in the processes contemplated by Part II of the Code. It is the
financial creditor who lends finance on a term loan or for working capital
H
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 411
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that enables the corporate debtor to set up and/or operate its business; A
and who has specified repayment schedules with default consequences.
The most important feature, as this Court has said, is that a financial
creditor is, from the very beginning, involved in assessing the viability of
the corporate debtor who can, and indeed, engage in restructuring of the
loan as well as reorganisation of the corporate debtor’s business when
B
there is financial stress. Hence, a financial creditor is not only about in
terrorem clauses for repayment of dues; it has the unique parental and
nursing roles too. In short, the financial creditor is the one whose stakes
are intrinsically inter-woven with the well-being of the corporate debtor.
Financial debt - ratio of Pioneer Urban
C
40. Having imbibed the basic features associated with a ‘financial
creditor’, we need to examine as to who could at all fall in this category.
In order to address this core question, delving into the finer connotations
of the expression “financial debt”, as defined in Section 5(8) of the Code
is, obviously, necessary. As noticed, while defining ‘financial creditor’
and ‘financial debt’ in Section 5(7) and Section 5(8) of the Code, both D
the expressions “means” and “includes” have been used. As per the
definition, while “financial creditor” means a person to whom a “financial
debt” is owed, it also includes a person to whom such debt has been
legally assigned or transferred to. Obviously, a comprehension of this
definition of “financial creditor” cannot be complete without taking into E
account as to what is the meaning assigned to the expression “financial
debt”. Again, the term “financial debt” has also been defined with the
expressions “means” and “includes”. A “financial debt” means a debt
along with interest, if any, which is disbursed against the consideration
for the time value of money; and it includes the money borrowed or
raised or protected in any of the manners prescribed in sub-clauses (a) F
to (i) of Section 5(8).
41. The larger parts of the expressions employed in the definition
of “financial debt” in sub-section (8) of Section 5 of the Code with their
connotations were explicated in Pioneer Urban bya three-Judge Bench
of this Court; and, in view of the contentions urged, it would be G
appropriate to take a deeper look into the exposition of law by this Court,
while also keeping in view the plain basic principle that a decision of the
Court is required to be understood in the context of the facts and issues
involved therein.
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412 SUPREME COURT REPORTS [2020] 8 S.C.R.

A 41.1. In the case of Pioneer Urban, this Court was concerned
with the challenge to the constitutional validity of amendments made to
the Code pursuant to a report dated 26.03.2018 prepared by the
Insolvency and Bankruptcy Law Committee. The amendments were
essentially to the effect of putting the allottees of real estate projects
into the sect of ‘financial creditors’ and thereby investing them with the
B
rights and entitlement to trigger the proceedings under Section 7 of the
Code against the real estate developers and to be represented in the
Committee of Creditors. In the background of such amendments had
been certain important decisions/orders by NCLAT and by this Court.
One had been the order dated 21.07.2017 by the NCLAT in the case of
C Nikhil Mehta and Sons (HUF) v. AMR Infrastructure Limited:
(2017) SCC Online NCLAT 859, where it was held that the amount
raised by the developers had the commercial effect of a borrowing and
the allottees of such developers were financial creditors within the
meaning of Section 5(7) of the Code. The other one had been the order
dated 11.09.2017 passed by this Court in Chitra Sharma (supra) whereby,
D
a representative of the home buyers was appointed to participate in the
meetings of the Committee of Creditors for protection of their interests.
Yet another order was passed by this Court on 22.11.2017, on practically
the same lines, qua another group of builders in the case of Bikram
Chatterjee v. Union of India: 2019 (8) SCC 527. In the wake of such
E orders, the Insolvency Committee Report suggested for amendment to
the Code that ultimately culminated into the Insolvency and Bankruptcy
(Second Amendment) Act, 2018. The amendments were made, inter
alia, with insertion of Explanation to sub-clause (f) of Section 5(8) of
the Code and with the co-related insertion of sub-section (6A) to Section
21 as also with further insertion of Section 25-A in the Code. These
F
amendments were under challenge in Pioneer Urban. Several
contentions were urged before this Court questioning the treatment of
allottees as financial creditors. In this context and in the wake of such
issues this Court dealt with the contentions related with Section 5(8),
particularly sub-clause (f) thereof. The relevant part of the consideration
G of this Court in Pioneer Urban under the heading ‘Interpretation of
Section 5(8)(f) of the Code’ needs to be noticed and is extracted as
under:-
“66. Section 5(8)(f) of the Code has been set out in the beginning
of this judgment. What has been argued by learned counsel on
H behalf of the petitioners is that Section 5(8)(f), as it originally
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 413
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stood, is an exhaustive provision which must be read noscitur a A
sociis, and if so read, sub-clause (f) must take colour from the
other clauses of the provision, all of which show that the sine qua
non of a “financial debt” is a loan of money made with or without
interest, which must then be returned as money. This, according
to the learned counsel for the petitioners, is clear from even a
B
cursory reading of Section 5(8). Secondly, according to learned
counsel for the petitioners, by no stretch of imagination, could an
allottee under a real estate project fall within Section 5(8)(f), as it
originally stood and the Explanation must then be read prospectively
i.e. only on and from the date of the Amendment Act. Several
sub-arguments were made on the effect of deeming fictions C
generally and on the functions of an explanation to a section. Let
us address all of these arguments.
*** *** ***
68. Thus, in order to be a “debt”, there ought to be a liability or
obligation in respect of a “claim” which is due from any person. D
“Claim” then means either a right to payment or a right to payment
arising out of breach of contract, and this claim can be made
whether or not such right to payment is reduced to judgment.
Then comes “default”, which in turn refers to non-payment of
debt when whole or any part of the debt has become due and E
payable and is not paid by the corporate debtor. Learned counsel
for the petitioners relied upon the judgment in Union of India v.
Raman Iron Foundry : (1974) 2 SCC 231, and, in particular relied
strongly upon the sentence reading: (SCC p.243, para 11)
“11....Now the law is well settled that a claim for unliquidated F
damages does not give rise to a debt until the liability is
adjudicated and damages assessed by a decree or order of a
court or other adjudicatory authority.”
69. It is precisely to do away with judgments such as Raman Iron
Foundry (supra) that “claim” is defined to mean a right to payment G
or a right to remedy for breach of contract whether or not such
right is reduced to judgment. What is clear, therefore, is that a
debt is a liability or obligation in respect of a right to payment,
even if it arises out of breach of contract, which is due from any
person, notwithstanding that there is no adjudication of the said
breach, followed by a judgment or decree or order. The expression H
414 SUPREME COURT REPORTS [2020] 8 S.C.R.

A “payment” is again an expression which is elastic enough to include
“recompense”, and includes repayment. For this purpose, see H.P.
Housing and Urban Development Authority v. Ranjit Singh
Rana : (2012) 4 SCC 505 (at paragraphs 13 and 14 therein), where
the Webster’s Comprehensive Dictionary (International Edn.)
Vol. 2 and the Law Lexicon by P. Ramanatha Aiyar (2nd Edn.,
B
Reprint) are quoted.
70. The definition of “financial debt” in Section 5(8) then goes on
to state that a “debt” must be “disbursed” against the consideration
for time value of money. “Disbursement” is defined in Black’s
Law Dictionary (10th Edn.) to mean:
C
“1. The act of paying out money, commonly from a fund or in
settlement of a debt or account payable. 2. The money so paid;
an amount of money given for a particular purpose.”
71. In the present context, it is clear that the expression “disburse”
D would refer to the payment of instalments by the allottee to the
real estate developer for the particular purpose of funding the
real estate project in which the allottee is to be allotted a flat/
apartment. The expression “disbursed” refers to money which
has been paid against consideration for the “time value of money”.
In short, the “disbursal” must be money and must be against
E consideration for the “time value of money”, meaning thereby,
the fact that such money is now no longer with the lender, but is
with the borrower, who then utilises the money. Thus far, it is
clear that an allottee “disburses” money in the form of advance
payments made towards construction of the real estate project.
F We were shown the Dictionary of Banking Terms (2nd Edn.)
by Thomas P. Fitch in which “time value for money” was defined
thus:
“present value: today’s value of a payment or a stream of
payment amount due and payable at some specified future date,
G discounted by a compound interest rate of DISCOUNT RATE.
Also called the time value of money. Today’s value of a stream
of cash flows is worth less than the sum of the cash flows to
be received or saved over time. Present value accounting is
widely used in DISCOUNTED CASH FLOW analysis.”
(emphasis supplied)
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That this is against consideration for the time value of money is A
also clear as the money that is “disbursed” is no longer with the
allottee, but, as has just been stated, is with the real estate developer
who is legally obliged to give money’s equivalent back to the
allottee, having used it in the construction of the project, and being
at a discounted value so far as the allottee is concerned (in the
B
sense of the allottee having to pay less by way of instalments than
he would if he were to pay for the ultimate price of the flat/
apartment).
*** *** ***
74. What is clear from what Shri Venugopal has read to us is that C
a wide range of transactions are subsumed by para (f) and that
the precise scope of para (f) is uncertain. Equally, para (f) seems
to be a “catch all” provision which is really residuary in nature,
and which would subsume within it transactions which do not, in
fact, fall under any of the other sub-clauses of Section 5(8).
D
75. And now to the precise language of Section 5(8)(f). First and
foremost, the sub-clause does appear to be a residuary provision
which is “catch all” in nature. This is clear from the words “any
amount” and “any other transaction” which means that amounts
that are “raised” under “transactions” not covered by any of the
other clauses, would amount to a financial debt if they had the E
commercial effect of a borrowing. The expression “transaction”
is defined by Section 3(33) of the Code as follows:
3.(33) “transaction” includes an agreement or arrangement in
writing for the transfer of assets, or funds, goods or services,
from or to the corporate debtor; F
As correctly argued by the learned Additional Solicitor General,
the expression “any other transaction” would include an
arrangement in writing for the transfer of funds to the corporate
debtor and would thus clearly include the kind of financing
arrangement by allottees to real estate developers when they pay G
instalments at various stages of construction, so that they
themselves then fund the project either partially or completely.
76. Sub-clause (f) Section 5(8) thus read would subsume within it
amounts raised under transactions which are not necessarily loan
transactions, so long as they have the commercial effect of a H
416 SUPREME COURT REPORTS [2020] 8 S.C.R.

A borrowing. We were referred to Collins English Dictionary &
Thesaurus (2nd Edn., 2000) for the meaning of the expression
“borrow” and the meaning of the expression “commercial”. They
are set out hereinbelow:
“borrow-vb 1. to obtain or receive (something, such as money)
B on loan for temporary use, intending to give it, or something
equivalent back to the lender. 2. to adopt (ideas, words, etc.) from
another source; appropriate. 3. Not standard. to lend. 4. (intr)
Golf. To putt the ball uphill of the direct path to the hole: make
sure you borrow enough.”
C *** *** ***
“commercial. -adj. 1. of or engaged in commerce. 2. sponsored
or paid for by an advertiser: commercial television. 3. having
profit as the main aim: commercial music. 4. (of chemicals, etc.)
unrefined and produced in bulk for use in industry. 5. a commercially
D sponsored advertisement on radio or television.”
77. A perusal of these definitions would show that even though
the petitioners may be right in stating that a “borrowing” is a loan
of money for temporary use, they are not necessarily right in
stating that the transaction must culminate in money being given
E back to the lender. The expression “borrow” is wide enough to
include an advance given by the homebuyers to a real estate
developer for “temporary use” i.e. for use in the construction
project so long as it is intended by the agreement to give “something
equivalent” to money back to the homebuyers. The “something
equivalent” in these matters is obviously the flat/apartment. Also
F of importance is the expression “commercial effect”.
“Commercial” would generally involve transactions having profit
as their main aim. Piecing the threads together, therefore, so long
as an amount is “raised” under a real estate agreement, which is
done with profit as the main aim, such amount would be subsumed
G within Section 5(8)(f) as the sale agreement between developer
and home buyer would have the “commercial effect” of a
borrowing, in that, money is paid in advance for temporary use so
that a flat/apartment is given back to the lender. Both parties have
“commercial” interests in the same – the real estate developer
seeking to make a profit on the sale of the apartment, and the flat/
H
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apartment purchaser profiting by the sale of the apartment. Thus A
construed, there can be no difficulty in stating that the amounts
raised from allottees under real estate projects would, in fact, be
subsumed within Section 5(8)(f) even without adverting to the
explanation introduced by the Amendment Act.
*** *** *** B
79. That this amendment is in fact clarificatory is also made clear
by the Insolvency Committee Report, which expressly uses the
word “clarify”, indicating that the Insolvency Law Committee also
thought that since there were differing judgments and doubts raised
on whether homebuyers would or would not be included within C
Section 5(8)(f), it was best to set these doubts at rest by explicitly
stating that they would be so covered by adding an explanation to
Section 5(8)(f). Incidentally, the Insolvency Law Committee itself
had no doubt that given the “financing” of the project by the
allottees, they would fall within Section 5(8)(f) of the Code as
originally enacted.” D

41.1.1. It is, therefore, evident that this Court, even while
interpreting sub-clause (f) of Section 5(8) on the question as to whether
an allottee under a real estate project could fall thereunder, analysed the
gamut of the relevant expressions of ‘disbursement’, ‘borrowing’ and
‘time value of money’, being the root ingredients of ‘financial debt’ within E
the meaning of the Code.
41.1.2. It is significant to notice that in the case of Pioneer Urban,
one line of arguments on behalf of the petitioners, who led challenge to
the amendments, had been that the use of expression “means and
includes” in Section 5(8) was indicative that the provision was exhaustive F
and in that position, alien subject-matter such as home buyers could not
have been inserted therein. The decision of this Court in the case of
P. Kasilingam & Ors. v. P.S.G. College of Technology & Ors : (1995)
Suppl. 2 SCC 348 was relied upon by the petitioners wherein, this
Court had rejected an argument that the expression “means and includes” G
indicated that the definition was inclusive in nature and would also cover
the categories which were not mentioned therein. In P. Kasilingam, this
Court had said that the use of the word ‘means’ indicates that the
definition is a hard and fast definition and no other meaning could be
assigned to the expression than is put down in the definition. As regards
H
418 SUPREME COURT REPORTS [2020] 8 S.C.R.

A the word ‘includes’, this Court said that it enlarges the meaning of the
expression defined so as to comprehend not only such things as they
signify according to their natural import but also those things which the
clause declares that they shall include. Further, this Court said that the
words ‘means and includes’, on the other hand, indicate ‘an exhaustive
explanation’ of the meaning which, for the purposes of the Act, must
B
invariably be attached to these words or expressions. On the other hand,
another decision of this Court in Krishi Utapadan Mandi Samiti &
Anr v. M/s Shankar Industries & Ors: 1993 Suppl. (3) SCC 361
was referred on behalf of the respondents wherein, the Court had
considered a definition clause whereby the expression “agricultural
C produce” was defined to mean such items of produce of agriculture,
horticulture, viticulture, apiculture, sericulture, pisciculture, animal
husbandry, or forest as specified in the Schedule and then, the definition
included therein admixture of two or more of such items, and further
included any such item in processed form and yet further included specific
items like gur, rub, shakkar, khandsari and jaggery. While examining such
D
definition in Krishi Utapadan Mandi Samiti, the Court proceeded to
say that under the rules of interpretation, when the words ‘means and
includes’ are used in a definition, they are to be given a wider meaning
and are not exhaustive or restricted to the items contained therein. This
statement of law in Krishi Utapadan Mandi Samitiwas held by the
E three-Judge Bench of this Court in Pioneer Urban to be not that of
good law for it ignored the earlier precedents of larger and coordinate
Benches and was also out of sync with the later decisions on the same
point. However, and at the same time, the arguments on behalf of the
petitioners, that sub-clauses (a) to (i) of Section 5(8) of the Code must
necessarily reflect the fact that the financial debt could only be a debt
F
disbursed against the consideration for the time value of money and
which permeates sub-clauses (a) to (i), was also not accepted as a matter
of statutory interpretation while observing that the expression “and
includes” speaks of the subject matter which may not necessarily be
reflected in the main part of the definition. These observations of the
G Court, after reproduction of the relevant extracts from the referred
decisions, read as under:
“82. This statement of the law, as can be seen from the quotation
hereinabove, is without citation of any authority. In fact, in Jagir
Singh. v. State of Bihar.: (1976) 2 SCC 942 at paras 11 and 19 to
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21 and Mahalakshmi Oil Mills v. State of A.P.: (1989) 1 SCC A
164, at paras 8 and 11 (which has been cited in P. Kasilingam :
1995 Supp (2) SCC 348) this Court set out definition sections
where the expression “means” was followed by some words, after
which came the expression “and includes” followed by other
words, just as in the Krishi Utpadan Mandi Samiti case : 1993
B
Supp (3) SCC 361 (2). In two other recent judgments, Bharat
Coop. Bank (Mumbai) Ltd. v. Employees Union: (2007) 4 SCC
685, at paras 12 and 23 and State of W.B. v. Associated
Contractors : (2015) 1 SCC 32 at para 14, this Court has held
that wherever the expression “means” is followed by the expression
“and includes” whether with or without additional words separating C
“means” from “includes”, these expressions indicate that the
definition provision is exhaustive as a matter of statutory
interpretation. It has also been held that the expression “and
includes” is an expression which extends the definition contained
in words which follow the expression “means”. From this
D
discussion, two things follow. Krishi Utpadan Mandi Samiti
cannot be said to be good law insofar as its exposition on
“means” and “includes” is concerned, as it ignores earlier
precedents of larger and coordinate Benches and is out of sync
with later decisions on the same point. Equally, Dr. Singhvi’s
argument that clauses (a) to (i) of Section 5(8) of the Code E
must all necessarily reflect the fact that a financial debt can
only be a debt which is disbursed against the consideration
for the time value of money, and which permeates clauses
(a) to (i), cannot be accepted as a matter of statutory
interpretation, as the expression “and includes” speaks of
F
subject-matters which may not necessarily be reflected in
the main part of the definition.”
(emphasis supplied)
41.1.3. In the end, however, this Court rejected the contentions
urged on behalf of the petitioners while accepting other line of submissions G
on behalf of the respondents that the legislature is not precluded by way
of amendment from inserting words into what may even be an exhaustive
definition and while observing that an exhaustive definition is exhaustive
only for the purposes of interpretation of a statute by the Courts. This
Court said,-
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A “83. In any event, as was correctly argued by learned Additional
Solicitor General Mrs. Madhavi Divan, the legislature is not
precluded by way of amendment from inserting words into what
may even be an exhaustive definition. What is an exhaustive
definition is exhaustive for purposes of interpretation of a statute
by the courts, which cannot bind the legislature when it adds
B
something to the statute by way of amendment. On this score
also, there is no substance in the aforesaid argument.”
41.1.4. This Court ultimately found that the Explanation was
added by the Amendment Act only to clarify the doubt that had arisen as
to whether home buyers/allottees were subsumed within Section 5(8)(f)
C of the Code. In essence, the amendment in question was interpreted to
be clarificatory in nature so as to put beyond doubt that allottees are to
be regarded as financial creditors within the enacting part of Section
5(8)(f) of the Code. The Amendment Act was upheld with this Court
holding as under:
D “96. In the present case, it is clear that the deeming fiction that is
used by the Explanation is to put beyond doubt the fact that allottees
are to be regarded as financial creditors within the enacting part
contained in Section 5(8)(f) of the Code.
97. It was also argued that an explanation does not enlarge the
E scope of the original section and for this purpose S. Sundaram
Pillai : (1985) 1 SCC 591 was relied upon. This very judgment
recognises, in para 46, that an explanation does not ordinarily enlarge
the scope of the original section. But if it does, effect must be
given to the legislative intent notwithstanding the fact that the
F legislature has named a provision as an explanation. [See Hiralal
Ratanlal v. State of U.P.: (1973) 1 SCC 216 at p. 225, followed in
para 51 of Sundram Pillai]. In any case, it has been found by
us that the Explanation was added by the Amendment Act
only to clarify doubts that had arisen as to whether
homebuyers/allottees were subsumed within Section 5(8)(f).
G The Explanation added to Section 5(8)(f) of the Code by
the Amendment Act does not in fact enlarge the scope of
the original section as homebuyers/allottees would be
subsumed within Section 5(8)(f) as it originally stood as has
been held by us hereinabove. As a matter of statutory interpretation,
H that interpretation, which accords with the objects of the statute
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in question, particularly when we are dealing with a beneficial A
legislation, is always the better interpretation or the “creative
interpretation” which is the modern trend of authority, and which
is reflected in the concurring judgment of Eera v. State (NCT of
Delhi) : (2017) 15 SCC 133 paras 122 and 127. This argument
must, therefore, also be rejected.
B
98. We, therefore, hold that allottees/homebuyers were
included in the main provision, i.e. Section 5(8)(f) with effect
from the inception of the Code, the explanation being added
in 2018 merely to clarify doubts that had arisen.”
(emphasis supplied) C
41.1.5. For taking into comprehension the ratio of Pioneer Urban
(supra) and for its application to the question at hand, appropriate it
would be to recount the basic principles expounded and explained by a
three-Judge Bench in the case of Haryana Financial Corporation
and Anr. v. Jagdamba Oil Mills and Anr.: (2002) 3 SCC 496 that D
the observations of the Court in a judgment are always required to be
read in the context in which they appear. This Court has said,-
“19. Courts should not place reliance on decisions without
discussing as to how the factual situation fits in with the fact
situation of the decision on which reliance is placed. Observations E
of courts are not to be read as Euclid’s theorems nor as provisions
of the statute. These observations must be read in the context in
which they appear. Judgments of courts are not to be construed
as statutes. To interpret words, phrases and provisions of a statute,
it may become necessary for Judges to embark upon lengthy
discussions but the discussion is meant to explain and not to define. F
Judges interpret statutes, they do not interpret judgments. They
interpret words of statutes, their words are not to be interpreted
as statutes. In London Graving Dock Co. Ltd. v. Horton : 1951
AC 737 (at p. 761) Lord MacDermot observed: (All ER p. 14C-
D) G
“The matter cannot, of course, be settled merely by treating
the ipsissima verba of Willes, J., as though they were part of
an Act of Parliament and applying the rules of interpretation
appropriate thereto. This is not to detract from the great weight
to be given to the language actually used by that most
H
distinguished Judge.”
422 SUPREME COURT REPORTS [2020] 8 S.C.R.

A 20. In Home Office v. Dorset Yacht Co. : (1970) 2 All ER 294
Lord Reid said (at All ER p. 297g-h), “Lord Atkin’s speech … is
not to be treated as if it were a statutory definition. It will require
qualification in new circumstances”. Megarry, J. in (1971) 1 WLR
1062 observed: “One must not, of course, construe even a reserved
judgment of even Russell, L.J. as if it were an Act of Parliament.”
B
And, in Herrington v. British Railways Board: (1972) 2 WLR
537 Lord Morris said: (All ER p. 761c)
“There is always peril in treating the words of a speech or a
judgment as though they were words in a legislative enactment,
and it is to be remembered that judicial utterances are made in
C the setting of the facts of a particular case.”
21. Circumstantial flexibility, one additional or different fact may
make a world of difference between conclusions in two cases.
Disposal of cases by blindly placing reliance on a decision is not
proper.”
D
41.1.6. Read as a whole and with reference to its context, it is but
clear that in Pioneer Urban this Court has not enunciated that the scope
of the expression ‘financial debt’ be read as if to encompass any debt of
whatsoever nature. Rather, a submission made therein, with reference
to the decision in Krishi Utapadan Mandi Samiti, that ‘and includes’
E part in a definition may lead to it being extensive, was rejected by this
Court while holding that the said decision was not a good law. However,
the other extreme of submissions, seeking restrictive interpretation with
reference to ‘means’ part of the definition, was also not accepted and, in
that context, the Court observed that the expression ‘and includes’ speaks
F of subject-matters which may not necessarily be reflected in the
main part of the definition. Obviously, there could be several subject-
matters which may not, as such, be found squarely manifested in the
expressions employed in the ‘means’ part of a definition and could be
reasonably found in the ‘includes’ part. However, it has not been laid
down as a rule of statutory interpretation that the ‘includes’ part could
G stand alone, disjunct from and totally alien to the ‘means’ part.
The expressions “means and includes” in the definition
clauses - effect
42. Looking to the frame of the Code, where the significant
expressions “financial creditor” and “financial debt” have been defined
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with the words “means” and “includes”, we may further refer to the A
principles of construction of such a definition clause in a statute. Tersely
put, the law remains settled that where a word is defined to ‘mean’
something, the definition is prime facie restrictive and exhaustive. On
the other hand, where the word defined is declared to ‘include’ something
more, the definition is prima facie extensive. However, a little difficulty
B
arises when the definition contains both the words ‘means’ and
‘includes’52.
42.1. As noticed, in the case of Pioneer Urban, a suggestion
made on behalf of the respondents with reference to the decision in
Krishi Utapadan Mandi Samiti,that when the words ‘means and
includes’ are used in a definition, they are to be given a wider meaning C
and are not exhaustive or restricted to the items contained therein, was
not accepted by this Court; and the statement of law in Krishi Utapadan
Mandi Samiti was held to be not that of good law for it ignored the
earlier precedents of larger and coordinate Benches and was also out of
sync with the later decisions on the same point. However, the other D
extreme of interpretation, as canvassed by the petitioners, that a financial
debt could only be a debt which is disbursed against the consideration
for the time value of money, and such requirement pervades all sub-
clauses (a) to (i), was also not accepted as a matter of statutory
interpretation by this Court while observing that the expression ‘and
includes’ speaks of subject matters which may not necessarily be E
reflected in the main part of the definition. Thus, it is evident that this
Court did not accept either of the extremities suggested by the parties in
Pioneer Urban for interpretation and implication of the expressions
‘means and includes’ in a definition clause of the statute. Significantly, in
Pioneer Urban, none of the extremities had any bearing on the F
conclusion because, eventually, the amendment in question was held to
be only clarificatory in nature; and this Court held that the Explanation
added to Section 5(8)(f) of the Code by the Amendment Act did not
enlarge the scope of the original Section.

52Craise on Statue Law ( Seventh Ed.-Indian reprint 1999 page 213) has stated this
G
feature as follows:
There are two forms of interpretation clause. In one, where the word defined is
declared to “mean” so and so, the definition is explanatory and prima facie restrictive.
In the other, where the word defined is declared to “include” so and so, the definition is
extensive, e.g. “sheriff” includes “under-sheriff”. Sometimes the definition contains the
words “mean and include”,” which in evitably raises a doubt as to interpretation. H
424 SUPREME COURT REPORTS [2020] 8 S.C.R.

A 42.2. Various features of the process of interpretation while dealing
with such definition clauses were explained by this Court in the case of
Delhi Development Authority v. Bhola Nath Sharma (Dead) by LRs
& Ors: (2011) 2 SCC 54 in the following:
“25. The definition of the expressions “local authority” and “person
B interested” are inclusive and not exhaustive. The difference
between exhaustive and inclusive definitions has been explained
in P. Kasilingam v. P.S.G. College of Technology : 1995 Supp
(2) SCC 348 in the following words: (SCC p. 356, para 19)
“19. … A particular expression is often defined by the
C legislature by using the word ‘means’ or the word ‘includes’.
Sometimes the words ‘means and includes’ are used. The use
of the word ‘means’ indicates that ‘definition is a hard-and-
fast definition, and no other meaning can be assigned to the
expression than is put down in definition’. (See Gough v. Gough
: (1891) 2 QB 665 (CA); Punjab Land Development and
D Reclamation Corpn. Ltd. v. Labour Court : (1990) 3 SCC
682, SCC p. 717, para 72.) The word ‘includes’ when used,
enlarges the meaning of the expression defined so as to
comprehend not only such things as they signify according to
their natural import but also those things which the clause
E declares that they shall include. The words ‘means and includes’,
on the other hand, indicate ‘an exhaustive explanation of the
meaning which, for the purposes of the Act, must invariably be
attached to these words or expressions’. [See Dilworth v.
Commr. of Stamps : 1899 AC 99 (Lord Watson); Mahalakshmi
Oil Mills v. State of A.P. : (1989) 1 SCC 164, SCC p. 170,
F para 11.] The use of the words ‘means and includes’ in Rule
2(b) would, therefore, suggest that the definition of ‘college’ is
intended to be exhaustive and not extensive and would cover
only the educational institutions falling in the categories specified
in Rule 2(b) and other educational institutions are not
G comprehended. Insofar as engineering colleges are concerned,
their exclusion may be for the reason that the opening and
running of the private engineering colleges are controlled
through the Board of Technical Education and Training and
the Director of Technical Education in accordance with the
directions issued by the AICTE from time to time.”
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26. In Bharat Coop. Bank (Mumbai) Ltd. v. Employees Union A
: (2007) 4 SCC 685 this Court again considered the difference
between the inclusive and exhaustive definitions and observed:
(SCC p. 695, para 23)
“23. … when in the definition clause given in any statute the
word ‘means’ is used, what follows is intended to speak B
exhaustively. When the word ‘means’ is used in the definition
… it is a ‘hard-and-fast’ definition and no meaning other than
that which is put in the definition can be assigned to the same.
… On the other hand, when the word ‘includes’ is used in the
definition, the legislature does not intend to restrict the definition:
it makes the definition enumerative but not exhaustive. That is C
to say, the term defined will retain its ordinary meaning but its
scope would be extended to bring within it matters, which in its
ordinary meaning may or may not comprise. Therefore, the
use of the word ‘means’ followed by the word ‘includes’ in
[the definition of ‘banking company’ in] Section 2(bb) of the D
ID Act is clearly indicative of the legislative intent to make the
definition exhaustive and would cover only those banking
companies which fall within the purview of the definition and
no other.”
27. In N.D.P. Namboodripad v. Union of India : (2007) 4 SCC E
502 the Court observed: (SCC p. 509, para 18)
“18. The word ‘includes’ has different meanings in different
contexts. Standard dictionaries assign more than one meaning
to the word ‘include’. Webster’s Dictionary defines the word
‘include’ as synonymous with ‘comprise’ or ‘contain’. F
Illustrated Oxford Dictionary defines the word ‘include’ as:
(i) comprise or reckon in as a part of a whole; (ii) treat or
regard as so included. Collins Dictionary of English
Language defines the word ‘includes’ as: (i) to have as
contents or part of the contents; be made up of or contain; (ii)
to add as part of something else; put in as part of a set, group G
or a category; (iii) to contain as a secondary or minor ingredient
or element. It is no doubt true that generally when the word
‘include’ is used in a definition clause, it is used as a word of
enlargement, that is to make the definition extensive and not
restrictive. But the word ‘includes’ is also used to connote a H
426 SUPREME COURT REPORTS [2020] 8 S.C.R.

A specific meaning, that is, as ‘means and includes’ or ‘comprises’
or ‘consists of’.”
(emphasis in original)
28. In Hamdard (Wakf) Laboratories v. Labour Commr. : (2007)
5 SCC 281 it was held as under: (SCC p. 294, para 33)
B
“33. When an interpretation clause uses the word ‘includes’,
it is prima facie extensive. When it uses the word ‘means and
includes’, it will afford an exhaustive explanation to the meaning
which for the purposes of the Act must invariably be attached
to the word or expression.”
C
42.3. In the case of Black Diamond Beverages & Anr. v.
Commercial Tax Office, Central Section, Assessment Wing, Calcutta
& Ors.: (1998) 1 SCC 458, while examining a definition that carried
both ‘means’ and ‘includes’ expressions, this Court pointed out that the
natural meaning of the ‘means’ part of the definition is not narrowed
D down by the ‘includes’ part. This Court extracted the definition in question
and said,-
“5. The 1954 Act generally provides for levy of a single-point tax
at the first stage on commodities notified under Section 25 of that
Act. On the other hand, the 1941 Act is a general statute providing
E for multipoint levy of sales tax on commodities not covered by the
1954 Act. Sub-clause (d) of Section 2 of the 1954 Act reads as
follows:
“2. (d) ‘sale-price’ used in relation to a dealer means the amount
of the money consideration for the sale of notified commodities
F manufactured, made or processed by him in West Bengal, or
brought by him into West Bengal from any place outside West
Bengal, for the purpose of sale in West Bengal, less any sum
allowed as cash discount according to trade practice, but
includes any sum charged for containers or other materials
for the packaging of notified commodities;”
G
(emphasis supplied)
6. We shall first deal with the contention of the appellants’ counsel
based upon the non-inclusion of “freight charges” in the definition
of sale price in Section 2(d) of the 1954 Act.
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7. It is clear that the definition of “sale price” in Section 2(d) uses A
the words “means” and “includes”. The first part of the definition
defines the meaning of the word “sale price” and must, in our
view, be given its ordinary, popular or natural meaning. The
interpretation thereof is in no way controlled or affected by the
second part which “includes” certain other things in the definition.
B
This is a well-settled principle of construction. Craies on Statute
Law (7th Edn., 1.214) says:
“An interpretation clause which extends the meaning of a word
does not take away its ordinary meaning…. Lord Selborne
said in Robinson v. Barton-Eccles Local Board : (1883) 8
AC 798, AC at p. 801: C

‘An interpretation clause of this kind is not meant to prevent
the word receiving its ordinary, popular, and natural sense
whenever that would be properly applicable, but to enable
the word as used in the Act … to be applied to something
to which it would not ordinarily be applicable.’ “ D

(emphasis supplied)
Therefore, the inclusive part of the definition cannot prevent the
main provision from receiving its natural meaning.”
The essentials for financial debt and financial creditor E
43. Applying the aforementioned fundamental principles to the
definition occurring in Section 5(8) of the Code, we have not an iota of
doubt that for a debt to become ‘financial debt’ for the purpose of Part
II of the Code, the basic elements are that it ought to be a disbursal
against the consideration for time value of money. It may include any of F
the methods for raising money or incurring liability by the modes
prescribed in sub-clauses (a) to (f) of Section 5(8); it may also include
any derivative transaction or counter-indemnity obligation as per sub-
clauses (g) and (h) of Section 5(8); and it may also be the amount of any
liability in respect of any of the guarantee or indemnity for any of the
G
items referred to in sub-clauses (a) to (h). The requirement of existence
of a debt, which is disbursed against the consideration for the time value
of money, in our view, remains an essential part even in respect of any
of the transactions/dealings stated in sub-clauses (a) to (i) of Section
5(8), even if it is not necessarily stated therein. In any case, the definition,
by its very frame, cannot be read so expansive, rather infinitely wide, H
428 SUPREME COURT REPORTS [2020] 8 S.C.R.

A that the root requirements of ‘disbursement’ against ‘the consideration
for the time value of money’ could be forsaken in the manner that any
transaction could stand alone to become a financial debt. In other words,
any of the transactions stated in the said sub-clauses (a) to (i) of Section
5(8) would be falling within the ambit of ‘financial debt’ only if it carries
the essential elements stated in the principal clause or at least has the
B
features which could be traced to such essential elements in the principal
clause. In yet other words, the essential element of disbursal, and that
too against the consideration for time value of money, needs to be found
in the genesis of any debt before it may be treated as ‘financial debt’
within the meaning of Section 5(8) of the Code. This debt may be of any
C nature but a part of it is always required to be carrying, or corresponding
to, or at least having some traces of disbursal against consideration for
the time value of money.
44. As noticed, the root requirement for a creditor to become
financial creditor for the purpose of Part II of the Code, there must be a
D financial debt which is owed to that person. He may be the principal
creditor to whom the financial debt is owed or he may be an assignee in
terms of extended meaning of this definition but, and nevertheless, the
requirement of existence of a debt being owed is not forsaken.
45. It is also evident that what is being dealt with and described in
E Section 5(7) and in Section 5(8) is the transaction vis-à-vis the corporate
debtor. Therefore, for a person to be designated as a financial creditor
of the corporate debtor, it has to be shown that the corporate debtor
owes a financial debt to such person. Understood this way, it becomes
clear that a third party to whom the corporate debtor does not owe a
financial debt cannot become its financial creditor for the purpose of
F Part II of the Code.
46. Expounding yet further, in our view, the peculiar elements of
these expressions “financial creditor” and “ financial debt”, as occurring
in Sections 5(7) and 5(8), when visualised and compared with the generic
expressions “creditor” and “debt” respectively, as occurring in Sections
G 3(10) and 3(11) of the Code, the scheme of things envisaged by the
Code becomes clearer. The generic term “creditor” is defined to mean
any person to whom the debt is owed and then, it has also been made
clear that it includes a ‘financial creditor’, a ‘secured creditor’, an
‘unsecured creditor’, an ‘operational creditor’, and a ‘decree-holder’.
H Similarly, a “debt” means a liability or obligation in respect of a claim
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which is due from any person and this expression has also been given an A
extended meaning to include a ‘financial debt’ and an ‘operational debt’.
46.1. The use of the expression “means and includes” in these
clauses, on the very same principles of interpretation as indicated above,
makes it clear that for a person to become a creditor, there has to be a
debt i.e., a liability or obligation in respect of a claim which may be due B
from any person. A “secured creditor” in terms of Section 3(30) means
a creditor in whose favour a security interest is created; and “security
interest”, in terms of Section 3(31), means a right, title or interest or
claim of property created in favour of or provided for a secured creditor
by a transaction which secures payment for the purpose of an obligation
and it includes, amongst others, a mortgage. Thus, any mortgage created C
in favour of a creditor leads to a security interest being created and
thereby, the creditor becomes a secured creditor. However, when all the
defining clauses are read together and harmoniously, it is clear that the
legislature has maintained a distinction amongst the expressions ‘financial
creditor’, ‘operational creditor’, ‘secured creditor’ and ‘unsecured D
creditor’. Every secured creditor would be a creditor; and every financial
creditor would also be a creditor but every secured creditor may not be
a financial creditor. As noticed, the expressions “financial debt” and
“financial creditor”, having their specific and distinct connotations and
roles in insolvency and liquidation process of corporate persons, have
only been defined in Part II whereas the expressions “secured creditor” E
and “security interest” are defined in Part I.
47. A conjoint reading of the statutory provisions with the
enunciation of this Court in Swiss Ribbons (supra), leaves nothing to
doubt that in the scheme of the IBC, what is intended by the expression
‘financial creditor’ is a person who has direct engagement in the F
functioning of the corporate debtor; who is involved right from the
beginning while assessing the viability of the corporate debtor; who would
engage in restructuring of the loan as well as in reorganisation of the
corporate debtor’s business when there is financial stress. In other
words, the financial creditor, by its own direct involvement in a functional G
existence of corporate debtor, acquires unique position, who could be
entrusted with the task of ensuring the sustenance and growth of the
corporate debtor, akin to that of a guardian. In the context of insolvency
resolution process, this class of stakeholders namely, financial creditors,
is entrusted by the legislature with such a role that it would look forward
H
430 SUPREME COURT REPORTS [2020] 8 S.C.R.

A to ensure that the corporate debtor is rejuvenated and gets back to its
wheels with reasonable capacity of repaying its debts and to attend on
its other obligations. Protection of the rights of all other stakeholders,
including other creditors, would obviously be concomitant of such
resurgence of the corporate debtor.
B 47.1. Keeping the objectives of the Code in view, the position and
role of a person having only security interest over the assets of the
corporate debtor could easily be contrasted with the role of a financial
creditor because the former shall have only the interest of realising the
value of its security (there being no other stakes involved and least any
stake in the corporate debtor’s growth or equitable liquidation) while the
C latter would, apart from looking at safeguards of its own interests, would
also and simultaneously be interested in rejuvenation, revival and growth
of the corporate debtor. Thus understood, it is clear that if the former
i.e., a person having only security interest over the assets of the corporate
debtor is also included as a financial creditor and thereby allowed to
D have its say in the processes contemplated by Part II of the Code, the
growth and revival of the corporate debtor may be the casualty. Such
result would defeat the very objective and purpose of the Code, particularly
of the provisions aimed at corporate insolvency resolution.
47.2. Therefore, we have no hesitation in saying that a person
E having only security interest over the assets of corporate debtor (like the
instant third party securities), even if falling within the description of
‘secured creditor’ by virtue of collateral security extended by the
corporate debtor, would nevertheless stand outside the sect of ‘financial
creditors’ as per the definitions contained in sub-sections (7) and (8) of
Section 5 of the Code. Differently put, if a corporate debtor has given its
F property in mortgage to secure the debts of a third party, it may lead to
a mortgage debt and, therefore, it may fall within the definition of ‘debt’
under Section 3(10) of the Code. However, it would remain a debt alone
and cannot partake the character of a ‘financial debt’ within the meaning
of Section 5(8) of the Code.
G The respondent mortgagees are not the financial creditors
of corporate debtor JIL
48. Indisputably, the debts in question are in the form of third
party security; said to have been given by the corporate debtor JIL so as
to secure the loans/advances/facilities obtained by JAL from the
H respondent-lenders. Such a ‘debt’ is not and cannot be a ‘financial debt’
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within the meaning of Section 5(8) of the Code; and hence, the A
respondent-lenders, the mortgagees, are not the ‘financial creditors’ of
the corporate debtor JIL.
49. Though several decisions have been cited on behalf of the
respondent-lenders to contend that they do fall within the definition of
‘financial creditor’ but for what has been discussed hereinabove, it does B
not appear necessary to dilate upon all of them. However, it would be
appropriate to take note of the relevant decisions strongly relied upon by
the respondents as infra.
50. Much emphasis is laid on behalf of the respondents on the
observations occurring in another three-Judge Bench decision of this C
Court in the case of Essar Steel and predominantly on the observation
therein, that “secured creditors as a class are subsumed in the class
of financial creditors”. Again, the decisions of the Court are required
to be understood with reference to the context. In the case of Essar
Steel, the questions before the Court related to the roles of resolution
applicant, resolution professional and Committee of Creditors constituted D
under the Code and the jurisdiction of Adjudicating Authority as also the
Appellate Tribunal in questioning the resolution plans. The constitutional
validity of the Insolvency and Bankruptcy (Amendment) Act, 2019 was
also under challenge. The problem arose essentially with the decision of
NCLAT holding that in a resolution plan, there could be no difference E
amongst the creditors in that, a financial creditor and operational creditor
deserve equal treatment under a resolution plan. It was in the setup of
such background that in Essar Steel, this Court made the observations
relied upon by the respondents.
50.1. The referred observations in the case of Essar Steel are F
essentially based on the earlier observations occurring in the case of
Swiss Ribbons. As noticed, the decision in Swiss Ribbons was rendered
by this Court when constitutional validity of various provisions of the
Code was put to challenge. In Essar Steel, this Court reiterated the
enunciations in Swiss Ribbons in paragraph 55 in the following:
G
“55. Financial creditors are in the business of lending money. The
RBI report on Trend and Progress of Banking in India, 2017-2018
reflects that the net interest margin of Indian banks for the financial
year 2017-2018 is averaged at 2.5%. Likewise, the global trend
for net interest margin was at 3.3% for banks in the USA and
1.6% for banks in the UK in the year 2016, as per the data published H
432 SUPREME COURT REPORTS [2020] 8 S.C.R.

A on the website of the bank. Thus, it is clear that financial creditors
earn profit by earning interest on money lent with low margins,
generally being between 1 to 4%. Also, financial creditors are
capital providers for companies, who in turn are able to purchase
assets and provide a working capital to enable such companies to
run their business operation, whereas operational creditors are
B
beneficiaries of amounts lent by financial creditors which are then
used as working capital, and often get paid for goods and services
provided by them to the corporate debtor, out of such working
capital. On the other hand, market research carried out by India
Brand Equity Foundation, a trust established by the Ministry of
C Commerce and Industry, as regards the Oil and Gas sector, has
stated that the business risk of operational creditors who operate
with higher profit margins and shorter cyclical repayments must
needs be higher. Also, operational creditors have an immediate
exit option, by stopping supply to the corporate debtor, once
corporate debtors start defaulting in payment. Financial creditors
D
may exit on their long-term loans, either upon repayment of the
full amount or upon default, by recalling the entire loan facility
and/or enforcing the security interest which is a time consuming
and lengthy process which usually involves litigation. Financial
creditors are also part of a regulated banking system which involves
E not merely declaring defaulters as non-performing assets but also
involves restructuring such loans which often results in foregoing
unpaid amounts of interest either wholly or partially. All these
differences between financial and operational creditors have been
reflected, albeit differently, in the judgment of Swiss Ribbons
(supra)…..”
F
50.2. In the relevant part, the Court found that NCLAT had fallen
in grave error in reading paragraph 77 in Swiss Ribbonsdehors the
earlier paragraphs. In that context this Court said,-
“56. By reading paragraph 77 de hors the earlier paragraphs, the
G Appellate Tribunal has fallen into grave error. Paragraph 76 clearly
refers to the UNCITRAL Legislative Guide which makes it clear
beyond any doubt that equitable treatment is only of similarly
situated creditors. This being so, the observation in paragraph 77
cannot be read to mean that financial and operational creditors
must be paid the same amounts in any resolution plan before it
H
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 433
INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

can pass muster. On the contrary, paragraph 77 itself makes it A
clear that there is a difference in payment of the debts of financial
and operational creditors, operational creditors having to receive
a minimum payment, being not less than liquidation value, which
does not apply to financial creditors. The amended Regulation 38
set out in paragraph 77 again does not lead to the conclusion that
B
financial and operational creditors, or secured and unsecured
creditors, must be paid the same amounts, percentage wise, under
the resolution plan before it can pass muster. Fair and equitable
dealing of operational creditors’ rights under the said Regulation
involves the resolution plan stating as to how it has dealt with the
interests of operational creditors, which is not the same thing as C
saying that they must be paid the same amount of their debt
proportionately. Also, the fact that the operational creditors are
given priority in payment over all financial creditors does not lead
to the conclusion that such payment must necessarily be the same
recovery percentage as financial creditors. So long as the provisions
D
of the Code and the Regulations have been met, it is the
commercial wisdom of the requisite majority of the Committee of
Creditors which is to negotiate and accept a resolution plan, which
may involve differential payment to different classes of creditors,
together with negotiating with a prospective resolution applicant
for better or different terms which may also involve differences E
in distribution of amounts between different classes of creditors.
57. Indeed, by vesting the Committee of Creditors with the
discretion of accepting resolution plans only with financial creditors,
operational creditors having no vote, the Code itself differentiates
between the two types of creditors for the reasons given above. F
Further, as has been reflected in Swiss Ribbons (supra), most
financial creditors are secured creditors, whose security interests
must be protected in order that they do not go ahead and realise
their security in legal proceedings, but instead are incentivised to
act within the framework of the Code as persons who will resolve
stressed assets and bring a corporate debtor back to its feet. Shri G
Sibal’s argument that the expression “secured creditor” does not
find mention in Chapter II of the Code, which deals with the
resolution process, and is only found in Chapter III, which deals
with liquidation, is for the reason that secured creditors as a class
are subsumed in the class of financial creditors, as has been held H
434 SUPREME COURT REPORTS [2020] 8 S.C.R.

A in Swiss Ribbons (supra). Indeed, Regulation 13(1) of the 2016
Regulations mandates that when the resolution professional verifies
claims, the security interest of secured creditors is also looked at
and gets taken care of….”
50.3. While strongly relying upon one of the observations occurring
B in Essar Steel, that secured creditors as a class are subsumed in the
class of financial creditors, learned counsel for the respondents would
assert that secured creditors do become financial creditors. The
submission remains untenable for more than one reason. First, the
submission itself proceeds on the same shortcoming as was existing in
the NCLAT’s decision that was disapproved by this Court in Essar Steel
C i.e., reading of a line in a judgment disjunct from the context. Secondly,
in the decisions above-referred, this Court has never expanded the scope
of ‘financial debt’ as envisaged by Section 5(8) of the Code. Thirdly, the
case of an indirect secured creditor i.e., the person having in its hand
only the security interest over the property of the corporate debtor but
D with no corresponding involvement in the finances and growth of the
corporate debtor, was never under consideration in the said decisions.
50.4. We may usefully elaborate a little. On a contextual reading
of the expositions in Essar Steel and Swiss Ribbons, it is but clear that
the Court had examined the status of direct secured creditor of the
E corporate debtor and there had not been any occasion to examine the
features related with an indirect secured creditor, who is neither involved
in assessing the viability of the corporate debtor nor in lending finances
to the corporate debtor for setting up the business. As noticed, the prime,
rather only, area of interest of such indirect secured creditor is in recovery
of its debt and not in reorganization of the corporate debtor’s business.
F Thus understood, it is absolutely clear that the class of secured creditors
indicated by this Court in Essar Steel and Swiss Ribbons, as being
subsumed in financial creditors, is only that of such secured creditors
who are directly engaged in advancing credit to the corporate debtor
and not the indirect creditors who had extended any loan or facility to a
G third party but had taken a security from the corporate debtor, whose
resolution is under consideration.
50.5. Hence, we are undoubtedly of the view that the decisions in
Swiss Ribbons and Essar Steel do not enure to the benefit of the
respondents; rather on the principles enunciated therein, they only operate
H against the respondents.
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 435
INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

51. The case of Smt. Kusum (supra) has also been repeatedly A
referred by the respondents in support of their contentions that because
of the transactions of mortgage, the corporate debtor JIL owes them the
mortgage debt as a guarantee obligation and hence, it falls within the
ambit of ‘financial debt’ within the meaning of Section 5(8) of the Code.
51.1. We may have a close look at the relevant background aspects B
of the said case of Smt. Kusum. Therein, the appellant-bank had
advanced a loan to the firm of which, husband of the respondent was
the proprietor. The respondent had executed an agreement in favour of
the appellant-bank to the effect that so long as her husband’s firm was
indebted to the bank, she would execute, by way of collateral security, a
legal mortgage of the immoveable property, being a flat belonging to her, C
with or without possession, in favour of the bank within 14 days of
issuance of written requisition for such execution. Later on, when the
bank called upon the respondent to execute the mortgage as per the
agreement, she declined to do so and hence, a suit for specific
performance and in the alternative for damages was filed by the appellant- D
bank. The Trial Court, however, dismissed the suit while holding, inter
alia, that the agreement in question was without consideration. The suit
was dismissed on certain other grounds too with which we are not
concerned herein.
51.2. In appeal by the bank, the High Court, while holding that E
the agreement to create a mortgage was specifically enforceable,
proceeded to examine the question as to whether the promise to create
mortgage, if given by a third party and not by the borrower, is for
consideration and is valid. The High Court held that by making the
promise, the respondent had agreed to provide collateral security and
thereby to discharge the liability to a third party in case of his default. F
The Court observed that such guarantee was limited to the security
offered and no personal liability by the promisor; and thus, the promisor
became a surety and referred to Sections 126, 127 and 128 of the Contract
Act.
51.3. With reference to Section 128 of the Contract Act, the Court G
pointed out that the liability of a surety is ordinarily coextensive with that
of the debtor but in the case at hand, such liability of the surety was as
otherwise provided by the contract; and such liability of the respondent
was to the extent of securing the dues by creation of mortgage. The
Court said that as the principal debtor could create a mortgage of his H
436 SUPREME COURT REPORTS [2020] 8 S.C.R.

A immoveable property, a third person could also agree to create a mortgage
so as to secure the dues of the principal debtor. As regards the
consideration, the Court said that though no direct consideration had
flowed from the appellant to the respondent but, in such tripartite
agreement, anything done for the benefit of the principal debtor is
sufficient consideration to the surety for giving guarantee. For their
B
relevance, we may notice the relevant parts of paragraphs 12,13,14,17
and 21 of the said decision in Smt. Kusum as follows:-
“12.The next question that arises is whether such promise to create
a mortgage, if given by a third party and not by the borrower or
the principle debtor, is for consideration and is valid. The learned
C trial Judge has held that for creating mortgage, the mortgagor
must be a debtor and must have right to redeem mortgage on
payment of the debt and since the present defendant was not the
debtor, she could not create a mortgage in respect of that debt
and that the mortgagor should be a debtor and there must be a
D relationship of debtor and creditor, the mortgage being a security
for the debt. The learned trial Judge has also held that there was
no consideration for giving this promise of executing the mortgage.
Both these aspects are interrelated. By making the promise by
Ex. 20, defendant has agreed to provide collateral security of a
legal mortgage to secure repayment of all the moneys due from
E Nitin Pharmaceuticals. Thus, the defendant has promised to
discharge the liability of a third person (the debtor) in case of his
default. This guarantee is limited to the security offered by the
promisor, namely, the mortgage and no further personal liability is
taken by the promisor. Thus, the promisor has became a surety
F and this would be an agreement to offer security for due
performance of that promise and to that extent. Sections 126, 127
and 128 of the Contract Act read as follows:
*** *** ***
13. The liability of the surety is co-extensive with that of - the
G debtors. However, in the present case, the liability of the surety is
as otherwise provided by the contract Ex. 20. Therefore, the
liability of the defendant is as provided in the agreement and to
that extent of securing dues by a creation of mortgage, no personal
liability is accepted by the surety. It is, therefore, fallacious to say
H that the defendant is not a debtor and, therefore, the defendant
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 437
INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

could not have created a mortgage in favour of the creditor. The A
defendant has rendered himself liable to the dues of Nitin
Pharmaceuticals by agreeing to provide security in the form of
mortgage for the dues. Just as the principal debtor can create a
mortgage of his immovable properties, a third person can also
agree to create a mortgage so as to secure the dues of the principal
B
debtor. In that manner, he becomes a surety to the extent of the
security or the mortgage. If that were not so, the present
commercial and banking transactions would not be possible and
would be hampered to a great extent. In the present day world of
commerce, a person may not have sufficient security to offer for
obtaining advances from financial institutions even though satisfying C
the requirements. In such cases, he draws upon resources of others
by asking them to give guarantee and also security for the
performance of that guarantee and it is a perfectly legitimated
and legal way of conducting such commercial transactions. In
fact, Chapter VIII of the Contract Act deals with indemnity and
D
guarantee and provides for this kind of tripartite arrangement.
14. As regards consideration, it is true that no direct consideration
has flowed from the plaintiff to the defendant who has made the
promise to create a mortgage. But in such tripartite arrangement,
anything done for the benefit of the principal debtor is a sufficient
consideration to the survey for giving guarantee as expressly E
provided in Section 127 of the Contract Act. Thus, even though
there is no consideration to the third party-surety for mortgages,
the consideration of having done anything for the benefit of the
principal debtor is a sufficient consideration.
*** *** *** *** F

17. In the present case, the consideration that anything done for
the benefit of the principal debtor is a sufficient consideration to
the surety. Anything done in the present case is that the loans
advanced to the principal debtor who is the husband of the present
defendant. She has agreed to give collateral security to secure G
the dues in default of payment by her husband. Apart from the
close relationship of husband and wife, there is substantial
consideration by having advanced the loan.
*** *** *** ***
H
438 SUPREME COURT REPORTS [2020] 8 S.C.R.

A 21. Thus, the plaintiff not enforcing the claim against the principal
debtor or even the third person may be sufficient consideration by
the debtor or third person to give security for the debt and the
consideration for such promise is that by such forbearance, the
creditor is delayed and the debtor or third party is benefited. It is
also seen that even in absence of express promise to forbear, a
B
simple forbearance from enforcing the claim can be held to have
been implied in the present case. This promise and agreement
was given in 1975 and it is clear that thereafter for two years, the
claim was not pressed which shows that there is actual forbearance
against the principal debtor after this Ex. 20 was executed. Thus,
C even under the English Law, this consideration is held to be good
and sufficient consideration. Under Indian Law, which is
significantly different from English Law of Contract, past
consideration or the consideration towards third person is statutorily
held to be good consideration as defined in Section 2(d) and as
mentioned in Section 127 of the Contract Act. The observation of
D
the learned trial Judge that as the husband of the defendant had to
pay Rs. 5 lacs to the plaintiff, the writing Ex. 20 which is
subsequently obtained is without consideration, is patently
erroneous. In the present case, it is amply clear that the principal
debtor was a defaulter in meeting his financial obligations to the
E bank and the bank had noticed the irregularities in his accounts
and the, bank could have proceeded against the principal debtor
to effect recovery. At that stage, at the instance of the principal
debtor-husband, wife comes forward and agrees to give collateral
security obviously to secure forbearance against the principal
debtor. Thus, at the desire of the promisor (defendant) the bank
F
has abstained from enforcing its claim against the principal debtor
and has forborne itself from suing the husband. Such forbearance
is sufficient and valid consideration for the promise made by the
defendant to agree to create mortgage and give collateral security.
The learned Trial Judge is in error in observing that “an act done
G at the desire of third party is not a consideration.” It must, therefore,
be held that the suit agreement Ex. 20 is for sufficient and valid
consideration and is valid and enforceable.”
51.4. The said decision in Smt. Kusum, at best, leads to the position
that a promise to create a mortgage, even if given by a third party and
H not by the borrower would be deemed to be for consideration; that even
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 439
INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

if no direct consideration had flown from the plaintiff to the defendant A
who made the promise to create the mortgage, anything done for the
benefit of the principal debtor would be sufficient consideration to the
surety for giving guarantee as provided under Section 127 of the Contract
Act. When the creditor abstained from enforcing the claim against the
principal debtor because of such promise to create mortgage by the
B
defendant, such forbearance was held to be sufficient and valid
consideration. It is difficult to stretch the ratio of the said decision so as
to be applied to the issue at hand concerning the definition of “financial
debt” under Section 5(8) of the Code, which conspicuously omits
mortgage; and which requires “disbursement” against “the consideration
for the time value of money” as the lead elements. As said, the respondent- C
lenders of JAL, while holding the mortgages in their hands, as said to
have been executed by the corporate debtor JIL, may be carrying a
security interest and may be the creditors who may claim to be falling
within the terminology ‘secured creditors’, yet cannot become ‘financial
creditors’ of the corporate debtor JIL who is not owing any ‘financial
D
debt’ to them. The decision in Smt. Kusum does not make out a case in
favour of the respondents, the lenders of JAL.
52. Another decision forming the mainstay of the respondents
had been that in the case of Rajkumari Kaushalya Devi (supra). The
relevant background aspects of the said case had been that the appellant
had executed two usufructuary mortgages with respect to the two E
properties situated in Feroozepore city in favour of the respondent while
also taking the same property on lease on the very same date in 1946.
On default in effecting payments by the appellant, the respondents filed
an application under Section 13 of the Displaced Persons (Debts
Adjustment) Act 70 of 195153 seeking recovery of the principal amount F
together with arrears of rental. While omitting other aspects which may
not be relevant, noticeable it is for the present purpose that one of the
points for consideration in the case had been as to whether the liability
created under the said mortgage was a ‘debt’ within the meaning of
Section 2(6) of the Act 70 of 1951. It was contended on behalf of the
appellant that such liability under the mortgage was not a pecuniary G
liability and, therefore, Section 2(6) did not apply to a mortgage debt.
52.1. The argument aforesaid was rejected by this Court after
taking note of the definition of ‘debt’ as occurring in the said enactment.
53 ‘Act 70 of 1951’ for short H
440 SUPREME COURT REPORTS [2020] 8 S.C.R.

A The principal part of the said definition, relevant for the present purpose
read as under:-
“ ‘Debt’ means any pecuniary liability, whether payable presently
or in future, or under a decree or order of civil or revenue court or
otherwise, or whether ascertained or to be ascertained, which—
B *** *** ***”
52.2. This Court, inter alia, observed, with reference to the
definition aforesaid as occurring in Act 70 of 1951 and the definition of
‘mortgage’ as occurring in the Transfer of Property Act, as under:

C “3….The main contention of the appellant in this connection is
that a mortgage debt is not a pecuniary liability and therefore
does not fall within the definition of debt at all. We are of opinion
that there is no force in this contention. The words “pecuniary
liability” will cover any liability which is of a monetary nature.
Now the definition of a mortgage in Section 58 of the Transfer of
D Property Act 4 of 1882, shows that though it is the transfer of an
interest in specific immovable property, the purpose of the transfer
is to secure the payment of money advanced or to be advanced
by way of loan or to secure an existing or future debt or the
performance of an engagement which may give rise to a pecuniary
E liability. The money advanced by way of loan, for example, which
is secured by a mortgage, obviously creates a pecuniary liability.
It is true that a mortgage in addition to creating the pecuniary
liability also transfers interest in the specific immovable property
to secure that liability; none the less the loan or debt to secure
which the mortgage is created will remain a pecuniary liability of
F the person creating the mortgage. Therefore a mortgage debt
would create a pecuniary liability upon the mortgagor and would
be covered by the definition of the word “debt” in Section 2(6)….”
52.3. The proposition aforesaid, being related with the definition
of ‘debt’ as occurring in the said enactment (Act 70 of 1951), cannot
G have a direct application in the present case. In any event, the said
decision cannot be taken as an authority governing the transaction where
there is no direct debt of the mortgagor himself.
53. The other citations, on various terminologies related with
mercantile law and mortgage transactions, do not advance the cause of
H the respondents because of distinct and rather peculiar requirements of
ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 441
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Section 5(8) of the Code. Of course, the decision of NCLAT in SREI A
Infrastructure Finance Limited (supra) stands disapproved for what
we have held hereinabove. Equally, the other submissions about the
contents of the documents in question as also the entitlement of
respondent-lenders to invoke the security or to take up the proceedings
under SARFAESI Act etc. do not, in any event, make the transactions in
B
question ‘financial debts’ within the meaning of Section 5(8) of the Code.
Such submissions have only been noted to be rejected.
Summation on second issue
54. For what has been discussed hereinabove, on the issue as to
whether lenders of JAL could be treated as financial creditors, we hold C
that such lenders of JAL, on the strength of the mortgages in question,
may fall in the category of secured creditors, but such mortgages being
neither towards any loan, facility or advance to the corporate debtor nor
towards protecting any facility or security of the corporate debtor, it
cannot be said that the corporate debtor owes them any ‘financial debt’
within the meaning of Section 5(8) of the Code; and hence, such lenders D
of JAL do not fall in the category of the ‘financial creditors’ of the
corporate debtor JIL.
Conclusion
55. Accordingly, and in view of the above, these appeals are allowed E
to the extent and in the manner that:
1) The impugned order dated 01.08.2019 as passed by NCLAT in
the batch of appeals is reversed and is set aside.
2) The appeals preferred before NCLAT against the order dated
16.05.2018, as passed by NCLT on the application filed by IRP, are F
dismissed; and consequently, the order dated 16.05.2018 so passed by
NCLT is upheld in regard to the findings that the transactions in question
are preferential within the meaning of Section 43 of the Code. The
directions by NCLT for avoidance of such transactions are also upheld
accordingly.
G
3) The appeals preferred before NCLAT against the orders passed
by NCLT dated 09.05.2018 and 15.05.2018 on the applications filed by
the lender banks are also dismissed and the respective orders passed by
NCLT are restored with the findings that the applicants are not the
financial creditors of the corporate debtor Jaypee Infratech Limited.
H
442 SUPREME COURT REPORTS [2020] 8 S.C.R.

A Acknowledgement
56. While closing on these appeals, we put on record our thanks
and compliments to the learned counsel for the respective parties as
also their associates and researchers for erudite and scholarly presentation
of their respective view-points, in oral as also in written submissions and
B in rendering invaluable assistance to the Court in dealing with the vast
variety of questions involved in these matters.

Kalpana K. Tripathy Appeals allowed

C

D

E

F

G

H