The National Company Law Tribunal (NCLT) dismissed a liability claim by JC Flowers ARC Pvt Ltd against Housing Development & Infrastructure Ltd. (HDIL), ruling that the debt did not qualify as a “financial debt” under the Insolvency and Bankruptcy Code (IBC) as it was not due or payable at the time of HDIL’s corporate insolvency resolution process (CIRP) commencement.
The decision, by NCLT members Charanjeet Singh Gulati and Lakshmi Gurung, sets a precedent for lenders with similar claims that may not meet the IBC’s threshold for financial debt recognition.
In this case, originally Yes Bank had extended a loan of Rs 70 crore to Carnival Films, with HDIL providing three multiplex properties in Mumbai and Vasai as collateral. In its claim, Yes Bank argued that HDIL, as the mortgagee of the secured properties, should be considered a financial debtor due to its liability to cover any deficiency in debt repayment. On March 16, 2022, Yes Bank assigned the loan to JC Flowers ARC along with all rights, titles and interests.
The tribunal ruled that although HDIL had mortgaged its properties to secure the loan, it did not qualify as a financial creditor to Carnival Films under the IBC, as HDIL had not received any direct disbursement from the loan.
Referencing several Supreme Court and National Company Law Appellate Tribunal rulings, the NCLT emphasised that a financial debt must involve disbursed funds to the corporate debtor, or a guarantee issued on its behalf, neither of which applied to HDIL in this case.
The tribunal in its order observed that a mere mortgage or collateral arrangement does not automatically translate to a financial debt under section 5(8) of the IBC.
The debts in question are in the form of third-party security, given by HDIL to secure loans granted to Carnival Films, the order said. Such a debt cannot be classified as financial debt within the meaning of the IBC and hence Yes Bank cannot be considered a financial creditor of HDIL, it said.
The lender’s claim was further undermined by the fact that no default had occurred as of HDIL’s CIRP commencement in August 2019. The loan repayment schedule was structured to commence only after a 27-month moratorium, meaning no portion of the loan was due when HDIL’s insolvency process began.
Accordingly, Yes Bank’s notice to Carnival Films demanding repayment was issued nearly two years after the CIRP initiation, which the NCLT noted rendered the claim ineligible under the IBC.
Faiza Dhanani, partner at Cue Legal, said the ruling would likely impact how secured lenders approach third-party collateral in insolvency cases, clarifying that holding security does not automatically grant creditor status within the insolvency framework. For the lender, the decision underscores the limitations in pursuing collateral-based claims within the CIRP when the collateral provider is not a direct beneficiary of the loan, she said.
The ruling also underscores the importance of claim timing and nature, reminding lenders that only debts due as of the insolvency commencement date will be admitted into the CIRP process, Dhanani said. It reaffirms the need for creditors to ensure compliance with IBC requirements, as collateral arrangements alone will not suffice for financial debt classification, she said.
