National Company Law Tribunal on Friday rejected Axis Bank Ltd.’s claim to be recognised as a financial creditor of Reliance Capital Ltd.
An indemnity wouldn’t constitute financial debt, the order said. The bank has failed to prove any disbursement of money to the corporate debtor and, therefore, the question of default on their part does not arise, says the order.
Reliance Capital, on its failure to repay its lenders, went into insolvency in 2021. These include 1,670 financial creditors and 18 operational creditors with major names such as Reliance Home Finance Ltd., and IndusInd Bank Ltd. The superseded the proceedings and Nageswar Rao Y was appointed as the administrator.
Axis Bank approached the administrator for recognition of their claim as financial debt in December 2021 and again in February 2022, which was rejected by the administrator. The bank approached the National Company Law Tribunal, Mumbai seeking recognition as a financial creditor for its claim of Rs 145 crore.
The claim arose from a tripartite obligor undertaking between the bank, Reliance Capital and Reliance Housing Finance Ltd. Reliance Capital had agreed to utilise its stake in Nippon Life Asset Management Ltd. for the repayment of commercial paper issued by RHFL. The bank was a subscriber to a part of the commercial paper worth Rs 124 crore. Reliance Housing Finance had failed to meet the redemption schedule despite several extensions.
The insolvent company, despite diluting its stake in Nippon Life Management, failed to redeem it. Then, Reliance Capital was admitted to insolvency and Axis Bank filed an application seeking recognition of the claim, which the administrator rejected calling it a mere “undertaking”.
The court order said the insolvent company had no commercial interest in the commercial paper and Axis Bank’s claim that the undertaking constitutes a financial debt does not hold. As the indemnity guaranteed under the undertaking relates to a breach of agreement and not the issue of commercial paper, such an indemnity can’t be recognised as financial debt, the order said.
The court also pointed out that the insolvent company has not acknowledged the “undertaking” as a liability in any of its books and, therefore, it cannot be construed as financial debt as per the code.