Proof of security interest and financial debt in liquidation: collateral alone is insufficient without an enforceable debtor obligation.

In liquidation, a creditor is treated as secured only where security interest is proved through the prescribed records under the Insolvency and Bankruptcy Code and Liquidation Regulations; where CERSAI registration and other acceptable proof were not available within the verification period, the claim could not be enforced as a secured claim and was rejected. Amounts advanced to group companies against the corporate debtor's fixed deposits did not constitute financial debt because the documents showed only collateral use of assets, not any enforceable payment obligation of the corporate debtor. The liquidator's rejection of the secured status and the related claim was upheld.

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Issues: (i) whether the applicant could be treated as a secured creditor entitled to realise security interest in respect of the vehicle loans in the absence of timely proof of charge; (ii) whether the amounts advanced against fixed deposits to group companies of the corporate debtor constituted financial debt owed by the corporate debtor.

Issue (i): whether the applicant could be treated as a secured creditor entitled to realise security interest in respect of the vehicle loans in the absence of timely proof of charge

Analysis: Section 52(3) of the Insolvency and Bankruptcy Code, 2016 and Regulation 21 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 require a secured creditor to prove the existence of security interest by acceptable records, including registration with the Registrar of Companies, information utility records, or proof of registration with CERSAI. The applicant's claim was filed before the CERSAI registrations were effected, and the liquidator verified the claim on the basis of the documents then available. On the record, the security interest for the vehicle loans was not established within the verification period.

Conclusion: The applicant could not be treated as a secured creditor for the vehicle loans and was not entitled to realise security interest; the finding is against the applicant.

Issue (ii): whether the amounts advanced against fixed deposits to group companies of the corporate debtor constituted financial debt owed by the corporate debtor

Analysis: The documents relied upon showed only authorisation by the corporate debtor for use of its fixed deposits as collateral for loans to borrowing companies. No guarantee deed or payment obligation undertaken by the corporate debtor was shown. A person becomes a financial creditor only when a financial debt, meaning an enforceable liability or obligation in respect of a claim, is owed by the corporate debtor. Mere security over the corporate debtor's assets, without a corresponding debt owed by the corporate debtor, does not create financial creditor status.

Conclusion: The amounts advanced to the group companies against the fixed deposits did not constitute financial debt of the corporate debtor, and the claim was rightly rejected; the finding is against the applicant.

Final Conclusion: The liquidator's rejection of the applicant's claim and classification of the applicant as unsecured in relation to the vehicle loans, together with rejection of the claim based on the fixed-deposit backed third-party loans, was upheld.

Ratio Decidendi: In liquidation, a creditor can be treated as secured only on proof of security interest in the manner prescribed under the Code and the Liquidation Regulations, and a claim backed merely by collateral over the corporate debtor's assets does not amount to financial debt unless the corporate debtor itself bears the payment obligation.

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