Mortgage by deposit of title deeds requires clear intent; unsecured status, 18% interest, and natural justice concerns were addressed.

Deposit of title deeds creates a mortgage only where the surrounding documents and conduct clearly show an intention to create security; on the facts, that intent was absent, so secured creditor status was rejected while the financial creditor status remained undisturbed. An agreed 18% interest rate on the admitted financial claim was upheld because the underlying transaction was treated as a financial debt and the repayment understanding supported interest. Adverse restriction of one creditor's claim and adverse comments on another's claim were set aside because they were made without hearing the affected parties, violating natural justice. The replacement of the resolution professional and the forensic audit direction were also set aside for lack of sufficient basis.

---

---

Issues: (i) whether Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. were financial creditors and secured financial creditors of the corporate debtor; (ii) whether interest at 18% per annum on their admitted claims was sustainable; (iii) whether the admitted claim of Arrow Engineering Ltd. and the claim of Central Bank of India could be adversely reduced or commented upon without hearing them; (iv) whether the resolution professional could be replaced and a forensic audit ordered on the record before the Tribunal.

Issue (i): whether Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. were financial creditors and secured financial creditors of the corporate debtor.

Analysis: The order declaring Suraksha Realty Ltd. and Sheth Developers Pvt. Ltd. as financial creditors had attained finality and could not be reopened in these appeals. On security, the transaction of 26.12.2009 showed deposit of title deeds with an escrow agent only to hold the documents pending performance of obligations, not with intent to create a security. The arrangement was reduced into writing, and the surrounding circumstances, including the earlier Supreme Court finding that the underlying arrangement had lost legal force, negatived creation of a mortgage by deposit of title deeds.

Conclusion: The status as financial creditors was not open to challenge and the claim to secured creditor status was rejected.

Issue (ii): whether interest at 18% per annum on their admitted claims was sustainable.

Analysis: The admitted advance was a financial transaction and the materials on record, including the memorandum and the corporate debtor's own pleadings, supported refund with interest. The Tribunal accepted that the contractual understanding contemplated repayment with 18% interest upon failure of the development arrangement, and the unenforceability of the memorandum did not erase the underlying financial debt.

Conclusion: The grant of interest at 18% per annum was upheld.

Issue (iii): whether the admitted claim of Arrow Engineering Ltd. and the claim of Central Bank of India could be adversely reduced or commented upon without hearing them.

Analysis: Arrow Engineering Ltd. had not been impleaded in the relevant applications and was denied participation; adverse restriction of its claim was therefore made without hearing and offended natural justice. Likewise, Central Bank of India was neither a party to nor heard in those applications, yet adverse observations were made about inflation of its claim. Those observations and directions could not be sustained.

Conclusion: The restriction of Arrow Engineering Ltd.'s claim and the adverse observations against Central Bank of India were set aside.

Issue (iv): whether the resolution professional could be replaced and a forensic audit ordered on the record before the Tribunal.

Analysis: The replacement of the resolution professional rested on adverse findings that were themselves unsustainable, including the criticism regarding Central Bank of India and the claim restriction relating to Arrow Engineering Ltd. No sufficient material justified stigmatic removal. The direction for a forensic audit was also found unwarranted because the disputes before the Tribunal concerned claim character and quantum, not a basis for a fresh forensic exercise, and the CIRP was already delayed.

Conclusion: The replacement of the resolution professional and the direction for forensic audit were set aside.

Final Conclusion: The appeals were disposed of with mixed results: the challenge to secured creditor status failed, the interest claim was sustained, adverse directions against Arrow Engineering Ltd. and Central Bank of India were deleted, the replacement of the resolution professional and forensic audit direction were set aside, and the remaining pending claim disputes were directed to be decided afresh in accordance with law.

Ratio Decidendi: A title-deed deposit creates a mortgage only where the surrounding documents and conduct show a clear intent to create security, and adverse claim-related directions in insolvency proceedings cannot be sustained against a creditor who was not heard or impleaded.

---