Yes Bank Loan Secured on Promoters’ Property Reclassified as Unsecured in Roofco Trading Insolvency: NCLT [Read Order]

In a recent ruling, the National Company Law Tribunal (NCLT) Kochi Bench has directed the reclassification of Yes Bank’s ₹4.92 crore loan to Roofco Trading Company Private Limited as unsecured financial debt, holding that the mortgage relied upon by the bank was created over the promoters’ personal properties and not the corporate debtor’s assets.

The application was filed by the Resolution Professional of the appellant Roofco Trading Company Private Limited under Section 60(5) of the Insolvency andBankruptcy Code, 2016, seeking correction of the classification recorded during the Corporate Insolvency Resolution Process (CIRP). Yes Bank had originally submitted a total claim of ₹13.92 crore: ₹4.92 crore as loans to the corporate debtor and ₹9 crore as loans to the promoters backed by a corporate guarantee.

The State Bank of India, a member of the Committee of Creditors (CoC), objected to the classification, arguing that the mortgages relied upon by Yes Bank were executed by the promoters and another entity, Phoenix Cars India Pvt. Ltd., and not by Roofco Trading itself. The CoC obtained a legal opinion supporting this view, prompting the Resolution Professional to seek adjudication from the Tribunal.

After examining the “Memorandum of Deposit of Title Deeds” produced by Yes Bank, the Bench comprising Judicial Member Vinay Goel and Technical Member Ravichandran Ramasamy observed that the documents were executed by individuals and entities other than the corporate debtor.

The bench observed that “Only a security interest created over the assets of the Corporate Debtor can confer the status of a secured financial debt. Where no such security interest exists, the debt cannot be treated as secured merely based on security provided by the promoters.”

Citing the NCLAT’s ruling in Bizloan Pvt. Ltd. v. Amit Chandrashekhar Poddar (Liquidator), the Bench reiterated that a secured financial creditor must hold a valid charge over the corporate debtor’s assets to enjoy priority in insolvency or liquidation.

While clarifying that Yes Bank may still enforce its rights against the mortgagors who created security in its favour, the Tribunal directed that, for the purposes of CIRP, the ₹4.92 crore claim be treated as unsecured financial debt. The Resolution Professional was instructed to reconstitute the CoC accordingly