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Legal Case Shots

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Legal Case Shots is a searchable database of Supreme Court of India judgments, each broken down into the case type, the court's key holding, and a practical lesson learnt, with the full judgment available as a PDF for citation or deeper reading.

Company & Insolvency LawSupreme Court of India

Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited

Civil Appeal · 2020 INSC 227Decided 26 Feb 2020
Civil Appeal Nos. 8512-8527 of 2019
Justice A.M. Khanwilkar · Justice Dinesh Maheshwari

Background

Jaypee Infratech Limited (JIL), a company that later went into insolvency, had mortgaged its own land and buildings as collateral security for loans that various banks had given to its parent company, Jaiprakash Associates Limited (JAL), not to JIL itself. When JIL's insolvency process began, its court-appointed Resolution Professional asked the tribunal to cancel ("avoid") these mortgage transactions as unfair preferences, while the lender banks argued they should be recognized as "financial creditors" of JIL because of the mortgage security they held over its property.

Decision Breakdown

The Supreme Court held that these mortgages were "preferential transactions" under Section 43 of the Insolvency and Bankruptcy Code because they gave JAL's lenders an advantage over JIL's genuine creditors without JIL receiving any corresponding benefit, restoring the insolvency tribunal's original order cancelling the mortgages and reversing the appellate tribunal's decision in the banks' favour. The Court further held that merely holding mortgaged security over a company's assets does not make a lender a "financial creditor" of that company for insolvency purposes; that status under Section 5(8) of the Code requires that money actually be disbursed to, or for the direct benefit of, the company whose insolvency is in question, which never happened here, since the money went to JIL's parent company, not to JIL.

Lesson Learnt

Using a company's assets to guarantee a parent or group company's debt can be struck down in that company's insolvency if it unfairly favours the group's lenders over its own creditors; and simply holding a mortgage over a company's property does not automatically entitle a lender to be treated as that company's "financial creditor" with a say in its insolvency proceedings.

Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited – Legal Case Shots | LegalAware