NCLT rejects JC Flowers’ claim against HDIL, says collateral alone doesn’t meet IBC standards

The Nationwide Firm Regulation Tribunal (NCLT) dismissed a legal responsibility declare by JC Flowers ARC Pvt Ltd in opposition to Housing Growth & Infrastructure Ltd. (HDIL), ruling that the debt didn’t qualify as a “monetary debt” below the Insolvency and Chapter Code (IBC) because it was not due or payable on the time of HDIL’s company insolvency decision course of (CIRP) graduation.

The choice, by NCLT members Charanjeet Singh Gulati and Lakshmi Gurung, units a precedent for lenders with comparable claims that will not meet the IBC’s threshold for monetary debt recognition.

On this case, initially Yes Bank had prolonged a mortgage of Rs 70 crore to Carnival Movies, with HDIL offering three multiplex properties in Mumbai and Vasai as collateral. In its declare, Sure Financial institution argued that HDIL, because the mortgagee of the secured properties, must be thought of a monetary debtor because of its legal responsibility to cowl any deficiency in debt compensation. On March 16, 2022, Sure Financial institution assigned the mortgage to JC Flowers ARC together with all rights, titles and pursuits.

The tribunal dominated that though HDIL had mortgaged its properties to safe the mortgage, it didn’t qualify as a monetary creditor to Carnival Movies below the IBC, as HDIL had not obtained any direct disbursement from the mortgage.

Referencing a number of Supreme Court docket and Nationwide Firm Regulation Appellate Tribunal rulings, the NCLT emphasised {that a} monetary debt should contain disbursed funds to the company debtor, or a assure issued on its behalf, neither of which utilized to HDIL on this case.

The tribunal in its order noticed {that a} mere mortgage or collateral association doesn’t mechanically translate to a monetary debt below part 5(8) of the IBC.The money owed in query are within the type of third-party safety, given by HDIL to safe loans granted to Carnival Movies, the order mentioned. Such a debt can’t be labeled as monetary debt throughout the which means of the IBC and therefore Sure Financial institution can’t be thought of a monetary creditor of HDIL, it mentioned.The lender’s declare was additional undermined by the truth that no default had occurred as of HDIL’s CIRP graduation in August 2019. The mortgage compensation schedule was structured to start solely after a 27-month moratorium, which means no portion of the mortgage was due when HDIL’s insolvency course of started.

Accordingly, Sure Financial institution’s discover to Carnival Movies demanding compensation was issued practically two years after the CIRP initiation, which the NCLT famous rendered the declare ineligible below the IBC.

Faiza Dhanani, accomplice at Cue Authorized, mentioned the ruling would possible impression how secured lenders method third-party collateral in insolvency instances, clarifying that holding safety doesn’t mechanically grant creditor standing throughout the insolvency framework. For the lender, the choice underscores the restrictions in pursuing collateral-based claims throughout the CIRP when the collateral supplier just isn’t a direct beneficiary of the mortgage, she mentioned.

The ruling additionally underscores the significance of declare timing and nature, reminding lenders that solely money owed due as of the insolvency graduation date might be admitted into the CIRP course of, Dhanani mentioned. It reaffirms the necessity for collectors to make sure compliance with IBC necessities, as collateral preparations alone is not going to suffice for monetary debt classification, she mentioned.