Case Citation
- Court Name: Supreme Court of India
- Case Title: China Development Bank vs. Doha Bank Q.P.S.C. & Ors.
- Case Numbers: Civil Appeal No. 7298 of 2022 and connected appeals
- Date of Judgment: December 20, 2024
- Judges: Justice Abhay S. Oka
Facts of the Case
The case arose from disputes during the Corporate Insolvency Resolution Process (CIRP) of Reliance Infratel Limited (RITL) under the Insolvency and Bankruptcy Code, 2016 (IBC). Appellants, including the China Development Bank, sought recognition as Financial Creditors in the CIRP based on Deeds of Hypothecation (DoH) executed with RITL and other entities of the Reliance group. While initially admitted as Financial Creditors, their classification was challenged by Doha Bank before the NCLT. Doha Bank argued that the DoH lacked the nature of a guarantee, disqualifying the appellants as Financial Creditors. The NCLAT ruled against the appellants, leading to this appeal before the Supreme Court.
Contentions of the Appellant
The appellants argued that the DoH constituted a contract of guarantee under Section 126 of the Indian Contract Act, 1872. They contended that the Corporate Debtor (RITL) undertook to repay any shortfall in obligations owed by other Reliance entities in the event of default, thereby creating a liability akin to a guarantee. The appellants emphasized that the CIRP process was conducted with their participation as Financial Creditors, and the Resolution Plan was approved on that basis. They also argued that the moratorium under Section 14 of the IBC did not extinguish their claims or rights as secured creditors.
Contentions of the Respondent
The respondents, including Doha Bank, contended that the DoH was merely a standard hypothecation document and did not create any guarantee. They argued that the DoH lacked the necessary elements of a guarantee, such as an express promise to discharge the liabilities of a third party. Additionally, they maintained that the moratorium under the IBC barred enforcement of hypothecated security and that the appellants’ claims were contingent and not crystallized.
Issues on This Judgment
- Whether the Deeds of Hypothecation executed by RITL constituted a contract of guarantee under Section 126 of the Indian Contract Act, 1872?
- Whether the appellants qualified as Financial Creditors under Section 5(8) of the IBC based on the DoH?
- Whether the claims of the appellants were extinguished due to the moratorium under Section 14 of the IBC?
Observations/Findings of the Supreme Court
The Supreme Court held that the DoH executed by RITL created an obligation to pay shortfalls arising from defaults by other entities in the group, thereby satisfying the criteria of a contract of guarantee under Section 126 of the Indian Contract Act. The Court observed that the appellants were entitled to classification as Financial Creditors under Section 5(8) of the IBC, as their claims were based on guarantees for financial debts. The Court further clarified that the moratorium imposed under Section 14 of the IBC did not extinguish claims but only barred their enforcement during the CIRP. It emphasized the importance of interpreting contractual documents in their entirety, rather than relying solely on their nomenclature.
Principles Laid Down by the Court
- Contracts must be interpreted holistically, considering their substance over their title or form.
- A contract of guarantee is established when one party undertakes to discharge the liabilities of a third party in case of default.
- Financial Creditors under the IBC include parties whose claims arise from guarantees of financial debts.
- The moratorium under Section 14 of the IBC restricts enforcement but does not extinguish claims or liabilities.
Final Order
The Supreme Court allowed the appeals, setting aside the judgment of the NCLAT. It restored the classification of the appellants as Financial Creditors under the IBC, reaffirming their rights to participate in the CIRP and receive payouts commensurate with their claims.
Importance of This Judgment to Society
This judgment underscores the critical role of accurate classification in insolvency proceedings, ensuring that creditors’ rights are upheld while maintaining the integrity of the resolution process. By interpreting contracts in light of their substantive obligations, the Court reinforced principles of commercial fairness and equity. The decision also clarified the interplay between moratorium provisions and creditors’ claims, strengthening confidence in the IBC framework as a tool for financial rehabilitation and resolution.
