China Development Bank vs Doha Bank (Supreme Court)

The Supreme Court has clarified in China Development Bank vs Doha Bank CIVIL APPEAL NO. 7298 OF 2022 that a debt doesn’t have to be in default for it to be considered a financial debt under the Insolvency and Bankruptcy Code of 2016. A bench made up of Justice Abhay S Oka and Justice Augustine George Masih stated that according to Section 5(7) of the IBC, anyone owed a financial debt is regarded as a Financial Creditor, even if the debt is being paid on time.

It is clear that for a Financial Creditor to submit a claim, showing that there has been an actual default is not necessary, the Court observed.

“Section 14(1) of the IBC imposes an embargo or prohibition on certain acts. However, it does extinguish the claim. If the argument that the claims of all the creditors of the Corporate Debtor are extinguished once the moratorium comes into force is accepted, no creditor would be able to file a claim. For example, if money advanced is secured by a promissory note or a negotiable instrument, a suit for recovery based on the said documents will not lie once a moratorium comes into force. But, the liability under the documents will continue to exist. In fact, after moratorium, no creditor can recover any dues from the Corporate Debtor. But still, there is a provision for making a claim. Hence, the argument based on moratorium deserves to be rejected. The DoH will continue to be valid. However, on the basis of the DoH, something which is prohibited by Section 14, cannot be done.”

This decision arose from the case of China Development Bank v. Doha Bank Q.P.S.C. & Ors, which involved whether the appellants qualified as financial creditors. The appeal was linked to the insolvency proceedings that were started against Reliance Infratel Limited at the instigation of Ericsson India Private Limited. The appellants claimed their status as Financial Creditors of the Corporate Debtor, and the Resolution Professional accepted these claims and classified the appellants as Financial Creditors.

However, the Respondent-Doha Bank challenged this classification at the NCLT, arguing that the appellants were not direct lenders to the Corporate Debtor and should not be allowed to be considered Financial Creditors based on the terms laid out in the Deeds of Hypothecation. The Court pointed out that under the IBC, a claim becomes a debt as soon as there is a liability or obligation linked to it. When there is a financial debt, the person owed that debt is automatically a Financial Creditor.

The argument that there was no default under the Deeds of Hypothecation was also brought up. In response, the Court clarified that there is nothing in the rules saying that a debt can only be classified as financial if there is a default. Section 5(7) of the IBC makes it clear that anyone owed financial debt is a Financial Creditor, regardless of payment status. Therefore, this argument was dismissed.

Furthermore, the judgment stated that section 5(8) of the IBC does not require a debt to exist only in cases of default. Once it’s clear that a financial debt is owed to someone, that person becomes a Financial Creditor. If someone has a valid claim as defined in Section 3(6), they can present it following the public announcement mentioned in Section 15. In conclusion, the Court reaffirmed that there’s no need for an actual default for a Financial Creditor to submit a claim. (Phoenix ARC Pvt. Ltd Civil Appeal No.7298 of 2022, etc, B.K. Muniraju v. State of Karnataka & Ors Civil Appeal No.7298 of 2022,  referred)