Mortgage of Property Without Actual Disbursal Does Not Constitute Financial Debt under IBC: NCLAT Rejects Financial Creditor Classification [Read Order]

The National Company Law Appellate Tribunal (NCLAT) New Delhi Bench has ruled that mortgaging property to facilitate a loan transaction without actual disbursal of money to the corporate debtor cannot be treated as a financial debt under the Insolvency and Bankruptcy Code, 2016 (IBC).

The Tribunal rejected the appellant’s plea seeking recognition as a financial creditor in the Corporate Insolvency ResolutionProcess (CIRP).

The appellant Amisha In Sky Creation Pvt. Ltd., had mortgaged its properties in favour of the State Bank of India to enable the Corporate Debtor to secure loan facilities. A notarised Deed of Agreement executed between the parties in 2016 provided that the Corporate Debtor would repay the bank loan within three years and additionally pay interest at 1.5% per month to the appellant on the amount borrowed from SBI.

Following initiation of CIRP against the Corporate Debtor the appellant filed a claim exceeding Rs. 81 crore before the Resolution Professional (RP), asserting its status as a financial creditor. It contended that the transaction had the commercial effect of borrowing and fulfilled the ingredients of financial debt under Section 5(8) of the IBC.

The appellant further argued that the agreed interest payments and indemnity obligations established consideration for time value of money.

The RP opposed the claim, arguing that the appellant had never disbursed any money directly to the Corporate Debtor which is a mandatory requirement for classification as a financial creditor. It was further contended that the mortgage merely enabled SBI to extend credit and did not create a lender-borrower relationship between the appellant and the Corporate Debtor. The RP also pointed out that post-dated cheques issued to the appellant were only promises to pay and did not create any security interest.

The bench comprising Justice Ashok Bhushan, Chairperson, and Barun Mitra, Member (Technical), held that disbursal against consideration for time value of money is the essential ingredient of financial debt under Section 5(8) of the IBC.

The Tribunal observed that the appellant had only permitted its properties to be used as collateral security for SBI loans and had not advanced funds to the Corporate Debtor.

Accordingly, the Tribunal held that mortgage of property cannot be equated with disbursal of debt, the bench concluded that the appellant could not be classified either as a financial creditor or secured financial creditor under the IBC.

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