In Brief
Several international banks (China Development Bank, Doha Bank, and others) disputed their classification as Financial Creditors in the insolvency proceedings of Reliance Communications companies. The banks had executed Deeds of Hypothecation creating security over the debtor company's assets to secure loans given to its sister companies. The key issue was whether clause 5(iii) of the Deed—which required the debtor to pay any shortfall after sale of hypothecated assets—constituted a guarantee. The Supreme Court held that it does. The clause amounts to a promise by the non-borrowing company to discharge the debt of sister companies, which satisfies the definition of guarantee under the Indian Contract Act. This obligation qualifies as financial debt under the Insolvency Code, making the lenders Financial Creditors entitled to participate in distribution. The Court allowed the appeals and restored the NCLT's order recognizing their status.
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