The Kochi Bench of the National Company Law Tribunal (NCLT) has held that under the insolvency process, only a security interest created over the assets of the Corporate Debtor can confer the status of secured financial debt. Where no such security interest exists in favour of the creditor over the assets of the Corporate Debtor, the debt cannot be treated as secured financial debt notwithstanding the existence of security over the personal assets of the promoters.
Once it is evident that the Corporate Debtor never created a security interest in favour of the creditor, such creditor cannot claim to be a secured creditor qua the Corporate Debtor during CIRP. Accordingly, the debt owed to Yes Bank could not be classified as secured financial debt merely on the basis of security provided by the promoters. The Tribunal therefore directed that the amount of Rs. 4.92 crores be reclassified as unsecured financial debt.
The Division Bench comprising Vinay Goel (Judicial Member) and Ravichandran Ramasamy (Technical Member) observed that the documents relied upon by Yes Bank, namely the Memorandum of Deposit of Title Deeds, were not executed by the Corporate Debtor but by another entity, Phoenix Cars India Pvt Ltd., and certain individuals in their personal capacities. It noted that under the Insolvency and Bankruptcy Code, 2016, secured financial debt refers to a financial debt backed by a valid security interest over the assets of the Corporate Debtor, created through mortgage, charge, hypothecation, pledge, or any other form of security interest executed by an agreement between the Corporate Debtor and the charge holder, whereas unsecured financial debt is not supported by such security interest.
The Tribunal further observed that although the distinction between secured and unsecured financial debt has limited relevance during CIRP for voting share in the CoC, as voting share depends on the quantum of admitted debt, the distinction becomes significant in insolvency and liquidation because secured creditors enjoy statutory privileges and options in relation to enforcement and distribution. Therefore, an erroneous classification as secured financial debt may adversely affect the rights and entitlements of other secured creditors.
The Tribunal also observed that Yes Bank claimed security only over the personal assets of the promoters of the Corporate Debtor and that no security interest had been created over the assets of the Corporate Debtor itself. It noted that a secured financial creditor is a financial creditor whose debt is secured by a charge on the assets of the corporate debtor, and that a charge is a security interest created by a company on its assets in favour of a lender to secure a debt. The Tribunal therefore held that financial institutions already holding security over the assets of the Corporate Debtor cannot be compelled to share their security interest and the benefits arising therefrom with Yes Bank merely because Yes Bank held security over promoters’ personal assets.
Briefly, the Resolution Professional of M/s Roofco Trading Company Private Limited filed an application under Section 60(5) of the Insolvency and Bankruptcy Code, 2016 read with Rule 11 of the NCLT Rules, 2016, seeking reclassification of Yes Bank Limited’s claim of Rs. 4.92 crores from secured financial debt to unsecured financial debt. The Yes Bank had filed a total claim of Rs. 13.92 crores, comprising Rs. 4.92 crores towards a loan extended to the Corporate Debtor and Rs. 9 crores
towards loans extended to the promoters, for which the Corporate Debtor had furnished a corporate guarantee. Based on the documents initially available, the Resolution Professional had admitted Rs. 4.92 crores as secured financial debt and Rs. 9 crores as unsecured financial debt. Thereafter, State Bank of India objected to the classification of the first component as secured financial debt on the ground that the alleged security related to properties of the promoters and not to assets of the Corporate Debtor, following which the issue was placed before the Committee of Creditors.
