The National Company Law Tribunal (NCLT), Hyderabad Bench, ruled that the insolvency law can be invoked only if there is a financial debt, which necessarily involves disbursal of money against consideration for time value. Accordingly, a person who only mortgages his property as collateral security cannot be treated as a financial creditor of the borrower if he has not advanced any money.
The ruling came in reference to the facts that there is no disbursal of money by the applicant to the respondent, which is an essential requirement for constituting a financial debt under the Insolvency and Bankruptcy Code, 2016 (IBC). The Applicant can be said to be a security provider having a security interest, but not a Financial Creditor within the meaning of Sections 5(7) and 5(8) of the IBC.
The Division Bench comprising Rajeev Bhardwaj (Judicial Member) and Sanjay Puri (Technical Member) was dealing with an application under Section 7 of the IBC filed by the Applicant, who had mortgaged his properties to secure credit facilities availed by the Respondent from State Bank of India (SBI). Aggrieved by the actions of SBI in initiating the SARFAESI proceedings calling upon him to discharge the outstanding liability, the Applicant approached the Debt Recovery Tribunal (DRT). The Applicant contended that, by depositing an amount of Rs. 1.5 crore pursuant to the order of DRT, he stepped into the shoes of the Financial Creditor by application of the principle of subrogation.
The Bench observed that the credit facilities in question were sanctioned by the SBI in favour of the Respondent, and not in favour of the Applicant, and it was limited to that of a collateral security provider. It held that the deposit of title deeds, in the absence of disbursal or a covenant creating a primary debt obligation, does not by itself create a financial debt. Reference was made to the decision of the Apex Court in China Development Bank v. Doha Bank Q.P.S.C. and Ors. [(2024) ibclaw.in 340 SC], which ruled that only where a security document contains an express covenant creating a liability to pay, can it be construed as a contract of guarantee.
Relying on settled Supreme Court decisions such as Anuj Jain v. Axis Bank Ltd. (2020) Ibcil.in 06 SCC, Phoenix ARC Pvt. Ltd. v. Spade Financial Services Ltd. (2021) 3 SCC 475, and Phoenix ARC Pvt. Ltd. v. Ketulbhai Ramubhai Patel (2021) 2 SCC 799, the Bench reiterated that disbursal of money against time value is an indispensable element of a financial debt, and that even non-loan transactions fall within the ambit of financial debt only if they have the commercial effect of borrowing.
The NCLT further noted that the sequence of events unmistakably demonstrated that the Applicant has approached one forum after another, not for the resolution of insolvency but with the object of delaying the recovery process and protecting the mortgaged property, which was offered by him as security for the loans availed by the Respondent from SBI. Even the DRT proceedings were confined to interim protection, and not annulment of the security.
Thus, the NCLT concluded that the Applicant was neither a financial creditor nor did the amount claimed constitute a financial debt under the IBC.
Appearances:
Advocates V.K. Sajith, V. Ravi Kumar, and Ramalakshmi, for the Applicant
Advocate Prem Kumar Pothina, for the Respondent
