Mere security of interest created by mortgage doesn’t constitute a financial debt: NCLAT

Case Details: Doha Bank Q.P.S.C v. Anish Nanavaty, Resolution Professional of Corporate Debtor Deloitte Touche Tohmatsu India LLP - [2022] 144 taxmann.com 75 (NCLAT-New Delhi)

Judiciary and Counsel Details

• • Rakesh Kumar, Judicial Member & Dr Ashok Kumar Mishra, Technical Member
  • Arun Kathpalia, Sr. Adv., Shubhabrata Chakraborti, Ms Sharmistha Ghosh & Jinal Shah, Advs. for the Appellant.
  • Gaurav Joshi, Sr. Adv. Rishabh Jaisani, Ms Mohana Nijhawan, Ms Sumidha Mathur, Mohana Nijhawah, Kriti Kalyani, Advs., Amit Sibal, Sr. Adv., Saksham Dhingra, Kaustabh Prakash, Ms Saloni Thakkar, Nilang Desai, Ms Nafisa Kandeparket, Ayush Chadda, Advs., Pradeep Sancheti, Sr. Adv., Siddharth Ranade, Ms Nishi Bhankharia, Kaazvin Kapadia, Ms Saloni Gupta, Advs., Ramji Srinivasan, Sr. Adv., Ms Rajshree Chaudhary & Jash Shah, Advs. for the Respondent.

Facts of the Case

In the instant case, the Corporate debtor (RTL) had gone under CIRP based on a company petition filed under section 9 and the Resolution Professional (RP) was appointed. The RP made a public announcement inviting claims from creditors of corporate debtor.

The Appellant-secured financial creditor of the corporate debtor stated that R2 to R5 were not lenders of the corporate debtor, nor had the corporate debtor extended any corporate guarantee in favour of R2 to R5 and only ‘Deed of Hypothecation’ was there as per which corporate debtor hypothecated its asset in favour of R-2 to R-5 to secure loans disbursed by them to its group company RCE.

Based on ‘Deed of Hypothecation’ RP considered R2 to R5. The indirect lenders as the financial creditor. The NCLT by an impugned order had held decision of RP as correct. It was noted that ‘Deed of Hypothecation’ is merely creation of security interest and a mere security of interest created by hypothecation or mortgage does not constitute a financial debt

NCLAT Held

The NCLAT observed that ‘Deed of Hypothecation’ discharges liabilities of other borrowers upon their default and is limited to realization value of those hypothecated assets and, hence, it cannot be construed as a contract of guarantee.

The NCLAT held that ‘Deed of Hypothecation’ cannot be a basis to declare parties as financial creditors and thus, impugned order of NCLT was to be set aside and R-2 to R-5 were derecognized as the ‘financial creditors’

List of Cases Reviewed

• • Doha Bank Q.P.S.C. v. Anish Nonavaty (RP of Reliance Infratel Ltd.) [2022] 144 taxmann.com 74 (NCLT – Mum.) (para 12) reversed. [See Annex]

List of Cases Referred to

• • Intesa Sanpaolo S.P.A. v. Videocon Industries Ltd. 2013 SCC Online Bom 1910 (para 5)
  • B.K. Educational Services (P.) Ltd. v. Parag Gupta & Associates [2018] 98 taxmann.com 213/150 SCL 293 (SC) (para 5)
  • Innoventive Industries Ltd. v. ICICI Bank Ltd. [2017] 84 taxmann.com 320/143 SCL 625 (SC)/[2018] 1 SCC 407 (para 5)
  • Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta [2019] 111 taxmann.com 234 (SC)/2019 SCC Online SC 1478 (para 5)
  • Assam Small Scale Ind. Dev. Corp. v. J.D. Pharmaceuticals [2005] 13 SCC 19 (para 8)
  • Housing Development Finance Corpn. Ltd. v. Ariisto Developers (P.) Ltd. [MA Nos. 999 and 1124 of 2019, dated 13-11-2019] (para 8)
  • Swiss Ribbons (P.) Ltd. v. Union of India [2019] 101 taxmann.com 389/157 SCL 365/[2019] 4 SCC 17 (para 10)
  • Export Import Bank of India v. Resolution Professional JEKPL (P.) Ltd. [2018] 97 taxmann.com 194 (NCLAT – New Delhi)/2018 SCC Online NCLAT 465 (para 10)
  • Essar Steel Ltd. v. Gramercy Emerging Market Fund [2002] 40 SCL 848 (Guj.)/2002 SCC Online Guj. 319 (para 10)
  • Anuj Jain v. Axis Bank Ltd. [2020] 114 taxmann.com 656 (SC)/2020 SCC Online SC 237 (para 10).