TaxTMI 
TaxTMI 
2025 (11) TMI 525
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.... passed by the Adjudicating Authority (National Company Law Tribunal, Mumbai Bench-I) in I.A. No. 2921 of 2025 in C.P. (IB) 973 (MB) of 2020. By the impugned order, the Adjudicating Authority has directed that an amount equivalent to 5% of the FLC/LC/BG be excluded from the total assets of the Corporate Debtor subject to maximum of the fair value of the subject property and that such amount would belong to the Respondent No.1. Aggrieved by the impugned order, the present appeal has been preferred by the Appellant. 2. Coming to the brief facts of the case, the Corporate Debtor-Frost International Ltd. was admitted into CIRP on 09.02.2023. A consortium of banks including the Appellant, Respondent No.1 and other banks had sanctioned multiple credit facilities aggregating to an amount of Rs 756.75 Cr. to the Corporate Debtor vide sanction letter dated 05.09.2017. Barring Rs 30.75 Cr. which had been sanctioned as fund-based facilities, the remainder was for non- fund-based facilities viz. Foreign Letters of Credit ("FLC" in short); Letters of Credit ("LC" in short) and Bank Guarantees ("BG" in short). For the non-fund- based facilities, the Respondent No.1-Bank of India ("BOI" in sho....
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....he matter came up before the Adjudicating Authority, it directed that an amount equivalent to 5% of the FLC/LC/BG be excluded from the total assets of the Corporate Debtor subject to maximum of the fair value of the subject property and that such amount would belong to the Respondent No.1. Aggrieved by the impugned order, the Appellant-Indian Overseas Bank ("IOB" in short) which is also a Secured Financial Creditor and is a member of the CoC with 20.95% vote share has preferred this appeal by contending that the Respondent No.1 having accepted margin to the extent of 5% as collateral security in the form of equitable mortgage of the subject property cannot seek to appropriate the margin without enforcing its security interest. 3. Making his submissions, Shri Abhijeet Sinha, Ld. Senior Advocate on behalf of the Appellant submitted that following the issue of public announcement by the RP, the Respondent No.1 had filed their claim of which an amount of Rs 10,12,49,15,522/- was admitted and an amount of Rs 33,17,240/- was kept under verification. Basis the admitted claims, the RP had invited Expression of Interest from prospective applicants which was reflected in the Information M....
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....in accordance with judicial precedents. This amounted to effectively rewriting the distribution mechanism by the CoC and substitution of the views of the CoC. 6. Refuting the contentions of the Appellant, Shri Krishnendu Datta, Ld. Senior Advocate on behalf of Respondent No.1 submitted that the Respondent No.1 had provided FLC/LC/BGs to the Corporate Debtor. To secure the FLC/LC/BGs, the Corporate Debtor had issued TDRs as margin to the extent of 10%. All the other members of the CoC including Respondent No.1 had already appropriated the margin money held in the form of TDR. In addition to the TDRs, a 5% margin had also been secured in the form of exclusive charge over the subject property and this was clearly mentioned in the sanction letter dated 05.09.2017. It was contended that since the subject property was part of margin, the subject property ceased to be the property of the Corporate Debtor and was only held in trust by the Corporate Debtor. To buttress their contention, it was contended that in terms of the Supriyo judgment supra margin money is construed as a substratum of trust created to pay the beneficiary. Once the asset goes into trust by documentation for the bene....
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.... in the subject property held as collateral security. 8. It is the case of the Appellant that following the initiation of CIRP of the Corporate Debtor, all assets of the Corporate Debtor including those subject to security interest were to be consolidated together for distribution of proceeds amongst the creditors towards facilitating resolution of the Corporate Debtor. Submission was pressed that the resolution applicants had already structured their resolution plans by factoring together all the assets of the Corporate Debtor including those subject to security interest. Contention was also made that without recognizing the fact that the subject property in the form of equitable mortgage was in the nature of security interest, the Adjudicating Authority had erroneously treated the subject property as margin and allowed exclusion of the same from the assets of the Corporate Debtor. The impugned order by treating the subject property as margin and excluding the same from the asset of the Corporate Debtor and assigning the same to the Respondent No.1 amounted to liquidation of the subject property akin to Section 52 of the IBC which is impermissible during CIRP. In any case, with....
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....n letter has been placed on record by the Respondent No.1 at page 9 of their additional affidavit. We propose to extract Annexure-III of the said sanction letter on the securities proposed which is as under: Sanction Letter Ref.No.KMC/ADV/17-18/025 To: Dated: 05.09.2017 M/s Frost International Ltd. 402, Kalpana Plaza, 24/147-B, Birhana Road, Kanpur - 208001. Your request for Credit facility(ies) Sanction/Review of Credit Facility(ies) We invite reference to your request for credit facility(ies)/enhancement in credit facility(ies) and are pleased to offer you, the credit facility(ies) as per Annexure-1 on the broad terms and conditions mentioned in Annexure II to Annexure VI of this letter. Notwithstanding anything to the contrary stated or suggested herein, the outstanding indebtedness, whether actual or contingent, under these facilities is subject to liquidation by you, on first demand by us. This letter is issued in duplicate. Please return du....
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....s did not materially alter the fact that the margin was held as security interest in the subject property was held in the form of equitable mortgage. 12. Now that we have already looked at the sanction letter, it may now be appropriate to look at the claim filed in Form-C by the Respondent No.1 on how the subject property has been treated therein. The Form-C is as reproduced below: FORM C SUBMISSION OF CLAIM BY FINANCIAL CREDITORS (Under Regulation 8 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016) 23.02.2023 Relevant Particular (1) (2) (3) 4. Details of claim, if it is made against corporate debtor as principal borrower: i. Amount of claim ii. Amount of claim covered by security interest, if any (Please provide details of security interest, the value of the security, and the date it was given) iii. Amount of claim covered by guarantee, if any (Please provide details of guarantee held, the value of the guarantee, and the date it was given) iv. Name and address of the guarantor(s) Present outstanding Rs. 6049161651.48 Uncharged Interest Rs. 4075809684.15 Paid....
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....r the same or not discussed this point in any of the earlier CoC meetings. The Chairman informed that if CoC decide to go ahead with Distribution pattern after factoring Security Interest on the basis of exclusive charge, he has no issue with the same. He is just giving factual statement that it was decided earlier that distribution will happen on the basis of admitted claim ratio. The Chairman said that if CoC thinks that we should opt for different mechanism of distribution then we can go ahead with the same and he has no issue. He further apprised that as per his understanding, no lenders have given details of any exclusive security except IOB, who has exclusive security of Windmill related assets, whose value is not substantial. DSK Legal has worked out the Security Interest table accordingly. He further said that the lenders who have exclusive charge on Security Interest have never approached him and said that they want distribution on the basis of security interest and now if CoC wants different mechanism for the distribution then let us discuss in today's CoC meeting and change the same. It is CoC's prerogative to finalize the same. He then requested CoC members to d....
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....exclusive charge over One BKC property for both its individual lending and as part of BOI's share of consortium lending. b. IOB has an exclusive charge over windmill Project at Chennai and Greater Kailash Property at New Delhi for their tending for specific projects. The chairman said that these changes have happened with respect to the Security Interests of the lenders from last CoC meeting. He requested CoC members to discuss, debate and decide how they would like to proceed.... .... Then, BOI brought Section 30(2)(b) of IBC to the notice of all the CoC members and said that in case BoI would become dissenting financial creditors, BOI would get Rs. 43 Crs, as per distribution working shared by them and there is no incentive for BOI to accept Rs. 23 Crs. which is their share on the basis of Admitted Claim Ratio as per the H1 plan, i.e., the plan submitted by Greensward Enterprise Private Limited ("Greensward")...." (Emphasis supplied) When we look at the above minutes of the 41st CoC meeting it is clear that the RP had placed on record the fact that the present Appellant and Respondent No.1 had exclusive charge over certain properties.....
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....rocess until the revision is completed. We attach the following for your ready reference. 1. Sanction letter dated 05.09.2017 (Pl refer Page-5) 2. Sanc Memorandum Dated 22.08.2017 (Pl refer Page 10) (Emphasis supplied) 17. Drawing attention to the definition of 'Margin Money' in Advanced Law Lexicon, 5th Edition by P. Ramanatha Aiyar and Black's Law Dictionary, 8th Edition being like that of a security deposit retained by the banks till the loan is fully settled, it is the contention of the Respondent No.1 that the above e-mail dated 17.06.2025 clearly showed that a part of the margin money was in the form of immovable property and that an exclusive charge on the subject property had been created for the purpose of utilization towards margin money. It was therefore contended that the distribution criteria for payments to the creditors proposed by the CoC was flawed as it ought to have excised and excluded the subject property from the assets of the Corporate Debtor as the subject property having been exclusively charged to the Respondent No.1 for the purposes of maintaining 5% margin money was therefore an asset of the Respondent No.1. 18. Expand....
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....perty in the present case ceased to be the property of the Corporate Debtor as it was held in trust by the Corporate Debtor. Submission was pressed that there can be no differential treatment of margin money whether it is in the liquid form like TDR or in the form of fixed-asset like immovable property. In the present case, when the other members of the CoC had appropriated their margin money in the form of TDR, the breach of facility sanction led as much to the forfeiture of the margin held in the subject property, yet the Respondent No.1 was being prevented from appropriating its 5% margin money over the subject property which was exclusively charged to them. The Adjudicating Authority had therefore correctly passed the impugned order setting aside the margin amount held in the subject property from the amount receivable under the prospective resolution plan to be distributed solely in favour of the Respondent No.1. 20. Coming to our findings, we have no quarrel with the proposition of law laid down in the Supriyo Kumar judgment supra which held that margin money is construed as a substratum of a trust created to pay to the beneficiary to whom BG is given. The relevant paragra....
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..... 22. Having said that we now proceed to find out whether the mortgage was enforced or whether the subject property still remained an asset of the Corporate Debtor. The ratio of the Supriyo Kumar judgment supra was applicable where the performance guarantees which were alive had been invoked. Margin money takes a character of trust property only when deposits are held exclusively to secure the banks obligations to third party beneficiaries under live BGs. We need to find out whether the guarantee was alive in the present facts of the case. In the present case, admittedly the BG had been invoked on 04.07.2012 which date was much prior to the insolvency commencement date. The FLC/LC had also devolved between 11.04.2018 and 10.09.2018 which was again much before CIRP commencement date. On a query made by the RP on 08.07.2025 which is placed at page 32 of the additional affidavit of Respondent No.1 seeking clarification as to whether there were live guarantees in favour of Respondent No.1, we find that the Respondent No.1 in their reply dated 14.07.2025 has admitted that no live guarantees were in existence. The said reply e-mail is as reproduced below: "From: Ranjit Bose o....
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....on-fund based facilities, the bank has taken total margin of 15% out of which 10% in the form of TDR & 5% in the form of exclusive security by creation of equitable mortgage of the property situated at BKC, Mumbai. (Emphasis supplied) Since the FLC/LC/BG were admittedly no longer alive, there was no continuing obligation requiring the margin held in the form of security to be held in trust. Since the FLC/LC/BG had devolved before the CIRP date and the equitable mortgage had not been enforced prior to the CIRP commencement date, the subject property remained an asset of the Corporate Debtor. The margin money in the form of equitable mortgage cannot be said to have remained with the bank since the security interest was not enforced. The unenforced equitable mortgage could not have been treated as margin any longer. The Supriyo Kumar judgment supra does not come to the rescue of the Respondent No.1 as the FLC/LC/BGs were not alive in the present case during the CIRP period. This ratio does not apply to an unenforced mortgage which remains in the ownership and control of the Corporate Debtor. 23. The reliance placed by the Respondent No. 1 on the judgment of the Hon'ble Suprem....
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....erefrom that since the mortgage has not been enforced, with CIRP having commenced and the provisions of moratorium having come into play, the mortgage cannot be enforced as Section 14(1)(c) prohibits "any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002". The Appellant has therefore rightly contended that the Adjudicating Authority has committed a gross infirmity in allowing an action which is otherwise prohibited under Section 14(1)(c) to be carried out by accepting the misplaced plea of the Respondent No.1 that the equitable mortgage was clothed with the character of margin which was held in trust by the Corporate Debtor. 25. From the conspectus of facts of the present case, it appears that the Respondent No.1 on realising that the CoC had by majority decided on inter se distribution in favour of creditors not on the basis of security interest but on pro-rata distribution of proceeds to the creditors on admitted claim basis and that the same would hurt their interests that the....