China Development Bank v. Doha Bank Q.P.S.C. & Ors.

and includes a financial debt and operational debt;”

48Copy pinpoint48. It is necessary to refer to the definitions of ‘Financial Creditor’ and ‘financial debt’ under sub-sections (7) and (8) of Section 5 of the IBC respectively, which read thus: “5.Definitions:- .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. (7) “Financial Creditor” means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to; (8) “financial debt” means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes– (a) money borrowed against the payment of interest;

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(b) any amount raised by acceptance under any acceptance credit facility or its dematerialised equivalent; (c) any amount raised pursuant to any note purchase facility or 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 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 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 (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); (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; (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;

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(i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clause (a) to (h) of this clause.” (emphasis added)

In terms of sub-section (11) of Section 3, debt is a liability or obligation in respect of a claim which is due from any person and includes a financial debt or operational debt. As noted earlier, a claim is a right to payment whether or not, such right is reduced to judgment and whether it is disputed or undisputed. The right to payment can be legal, equitable, secured or unsecured. Therefore, if there is a liability or obligation in respect of a payment which is disputed, it still becomes a claim. Once there is a liability or obligation in respect of a claim, it becomes a debt. Once there is a financial debt, the person to whom a debt is owed, becomes a Financial Creditor.

49Copy pinpoint49. The appellants are claiming that their case is covered by clause (i) of sub-section (8) of Section 5 of the IBC. Under clause (i), the amount of any liability in respect of any guarantee of the items referred to in clauses (a) to (h) becomes a financial debt. Therefore, when clause (i) of Section 5(8) is applicable, it is not necessary that the Financial Creditor actually tenders any amount to the Corporate Debtor. In this case, the appellants are claiming that the amount of liability covered by clause (i) is in respect of money borrowed by the RCom entities (excluding the Corporate Debtor) against payment of interest under the facility agreements. There is no dispute that facilities were granted by the appellants to RCom entities. The amount of any liability in respect of any of the guarantees for money borrowed against the payment of interest is a financial debt under Section 5(8) of the IBC.

50Copy pinpoint50. “Guarantee” is defined under Section 126 of the Contract Act, which reads thus: “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 “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee

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is given is called the “creditor”. A guarantee may be either oral or written.” A contract becomes a guarantee when the contract is to perform the promise or discharge the liability of a third person in case of default. Thus, when a person enters into a contract to perform or discharge the liability of a third party, the contract becomes a contract of guarantee.

51Copy pinpoint51. Section 127 of the Contract Act reads thus: “127. Consideration for guarantee.-Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee. Hence, any promise made or anything done for the benefit of principal debtor may be sufficient consideration to the surety for giving guarantee.

EFFECT OF CLAUSE 5(iii) OF DOH READ WITH MSTA Relevance of nomenclature of DoH

52Copy pinpoint52. If we go by the title, DoH is a Document creating hypothecation. In short, hypothecation means the process of using an asset as collateral for a loan. It acts as a protection to the lender when the borrower does not repay the loan.

53Copy pinpoint53. Only the title of a document cannot be a decisive factor in deciding the nature of the document or the transactions affected by the document. In the case of C.C., C.E. and S.T. Bangalore (Adjudication) & Ors. v. Northern Operating Systems Pvt. Ltd.,14 in paragraphs 53 to 55, this Court held thus: “53. From the above discussion, it is evident, that prior to July 2012, what had to be seen was whether a (a) person provided service, (b) directly or indirectly, (c) in any manner for recruitment or supply of manpower, (d) temporarily or otherwise. After the amendment, all activities carried out by one person for another, for a consideration,

14 2022 INSC 598 : AIR 2022 SC 2450

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are deemed services, except certain specified excluded categories. One of the excluded category is the provision of service by an employee to the employer in relation to his employment.

54Copy pinpoint54. One of the cardinal principles of interpretation of documents, is that the nomenclature of any contract, or document, is not decisive of its nature. An overall reading of the document, and its effect, is to be seen by the courts. Thus, in State of Orissa v. Titaghur Paper Mills Co. Ltd. [State of Orissa v. Titaghur Paper Mills Co. Ltd., 1985 Supp SCC 280] it was held as follows : (SCC p. 371, para 120) “120. It is true that the nomenclature and description given to a contract is not determinative of the real nature of the document or of the transaction thereunder. These, however, have to be determined from all the terms and clauses of the document and all the rights and results flowing therefrom and not by picking and choosing certain clauses and the ultimate effect or result as the Court did in the Orient Paper Mills case [State of M.P. v. Orient Paper Mills Ltd., (1977) 2 SCC 77].” This principle was reiterated in Prakash Roadlines (P) Ltd. v. Oriental Fire & General Insurance Co. Ltd. [Prakash Roadlines (P) Ltd. v. Oriental Fire & General Insurance Co. Ltd., (2000) 10 SCC 64]

55Copy pinpoint55. The task of this Court, therefore is to, upon an overall reading of the materials presented by the parties, discern the true nature of the relationship between the seconded employees and the assessee, and the nature of the service provided — in that context — by the overseas group company to the assessee.” (emphasis added)

As held in the case of B.K. Muniraju v. State of Karnataka & Ors.,7 a sentence or a term in a contract does not determine the real nature

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of the contract. It is true that the Courts should not rewrite the contract while making an attempt to interpret it. However, in the case of D.N. Revri & Co.,8 in paragraph 7, this Court held thus: “7. It must be remembered that a contract is a commercial document between the parties and it must be interpreted in such a manner as to give efficacy to the contract rather than to invalidate it. It would not be right while interpreting a contract, entered into between two lay parties, to apply strict rules of construction which are ordinarily applicable to a conveyance and other formal documents. The meaning of such a contract must be gathered by adopting a common sense