Insolvency and Bankruptcy Code – Section 14- Section 14(1) imposes an embargo or prohibition on certain acts. However, it does extinguish the claim- 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- Definition of ‘claim’ under Section 3(6) of the IBC. If the right to payment exists or if a breach of contract gives rise to a right to payment, the definition of ‘claim’ is attracted. Even if that right cannot be enforced by reason of the applicability of the moratorium, the claim will still exist. (Para 63-65)
Insolvency and Bankruptcy Code – Section 7, 5(8) – There is no requirement incorporated that a debt becomes financial debt only when default occurs. Under Section 5(7) of the IBC, any person to whom financial debt is owed becomes a Financial Creditor even if there is no default in payment of debt – This definition of ‘default’ becomes relevant only while invoking the provisions of Section 7(1) of the IBC when the CIRP is sought to be initiated by the Financial Creditor. Section 7(1) provides that a Financial Creditor can initiate CIRP against the Corporate Debtor when there is a default on the part of the Corporate Debtor. There is no requirement under Section 5(8) of the IBC that there can be a debt only when there is a default. The moment it is established that the financial debt is owed to any person, he/she becomes a Financial Creditor. (Para 61-62)
Indian Contract Act 1872 – Section 126- Guarantee – 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. (Para 50)
Hypothecation – 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. (Para 52)
Interpretation of Deeds- Only the title or name of a document cannot be a decisive factor in deciding the nature of the document or the transactions affected by the document.a sentence or a term in a contract does not determine the real nature of the contract. It is true that the Courts should not rewrite the contract while making an attempt to interpret it. (Para 53)