NCLAT Rules, Creditor Obtaining Award Directing Real Estate Firm To Not Create Third-Party Interest In Specified Units Doesn't Amount To 'Security Interest'
Pranav B Prem
The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, has ruled that the existence of an arbitral award which directs a corporate debtor not to alienate or create third-party interests in specified real estate units does not, by itself, create a “security interest” under Section 3(31) of the Insolvency and Bankruptcy Code, 2016 (IBC). The Tribunal, comprising Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member), held that such an injunction cannot be treated as a charge or lien on the property and, therefore, cannot convert an unsecured claim into a secured one.
The appellant, M/s. Star Maxx Properties, had challenged an order dated 05.12.2023 passed by the Adjudicating Authority (NCLT, New Delhi Bench – Court III), which dismissed its application (I.A. No. 3962/2020) seeking to reclassify its claim as that of a secured financial creditor or alternatively as a financial creditor belonging to the homebuyer class.
The genesis of the dispute lies in a real estate project titled “Victory Ace” being developed by M/s. Dream Procon Pvt. Ltd., the corporate debtor, in Sector 143, Noida. The corporate debtor entered into a Joint Development Agreement with Logix City Developers Ltd. to undertake the project. Between 2015 and 2017, the appellant entered into six separate "Articles of Agreement" with the corporate debtor, through which it agreed to invest in six residential units. One such agreement dated 17.04.2017 acknowledged receipt of Rs. 37 lakhs from the appellant against Unit No. A1-001.
These agreements included a clause which stated that if the first party defaulted in refunding the investment, “the second party will be the absolute owner of the said residential unit.” The agreements also mentioned the issuance of undated security cheques and stated that the first party would not create any encumbrance on the units in question.
Subsequently, disputes arose between the parties, and the appellant initiated arbitration proceedings, which culminated in an award dated 28.08.2019. The arbitrator directed the corporate debtor to pay a total of Rs. 5,38,95,222, which included the principal sum, interest, and arbitration expenses. Significantly, the arbitrator also permanently restrained the corporate debtor from “allotting or alienating or dealing with or disposing off or creating any sort of third party right or Interest in the secured disputed properties” until the payment of the awarded sum was made.
However, before the award could be enforced, CIRP proceedings were initiated against the corporate debtor on 06.09.2019 following a Section 7 petition filed by a homebuyer. In response to the public notice issued by the IRP, the appellant submitted its claim in Form-C dated 28.10.2019, asserting itself as a secured financial creditor and referring to the agreements and arbitral award as evidence of a security interest.
Initially, the appellant was treated as a secured financial creditor and included in the list of creditors uploaded by the IRP. In the CoC meeting held on 23.12.2019, the minutes recorded that Star Maxx Properties was admitted as a secured financial creditor with respect to seven residential units in the Victory Ace project. However, in a revised list of creditors uploaded on 17.06.2020, the RP changed the classification and noted the security interest as “NIL,” although the total admitted claim remained the same.
Aggrieved by this reclassification, the appellant filed I.A. 3962/2020 before the Adjudicating Authority, arguing that the RP had no jurisdiction to alter the classification once it had been accepted and that the arbitral award established a de facto security interest over the units.
The RP, on the other hand, contended that no document evidencing the creation or registration of a charge had been submitted by the appellant. It was submitted that the arbitral award was a mere money decree and that an injunction against alienation of property did not constitute a security interest. Moreover, no Builder Buyer Agreements (BBAs) had been executed in favor of the appellant, and the said units had already been allotted to other homebuyers, who had valid BBAs executed prior to the Articles of Agreement signed by the appellant.
The NCLAT, after analyzing the arbitral award and the agreements, held that the restraining order in the award merely prevented the corporate debtor from creating third-party interests and did not create any security interest as understood under the IBC. It emphasized that the arbitrator did not examine whether the agreements constituted a security interest within the meaning of Section 3(31) of the Code, and such a determination could not be inferred from the award.
Citing the Calcutta High Court’s decision in Frederick Peacock v. Madan Gopal [1902 SCC OnLine Cal 97], the Tribunal observed that "by mere attachment, there will be no charge or lien." Similarly, an order restraining alienation does not equate to a security interest. It was also noted that the arbitral award did not declare the appellant as an allottee or a homebuyer under the IBC, and the Articles of Agreement could not be treated as equivalent to a Builder Buyer Agreement.
The Tribunal further rejected the appellant’s reliance on Supreme Court decisions in Vishal Chelani v. Debashis Nanda [(2023) 10 SCC 395] and Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd. [2023 SCC OnLine SC 842]. The NCLAT distinguished Vishal Chelani on the ground that the appellants in that case had obtained RERA decrees, which confirmed their status as homebuyers, unlike the arbitral award in the present case. It also held that Paschimanchal Vidyut involved a statutory charge created under specific regulations, which was absent in the present matter.
Addressing the argument that the RP was not empowered to reclassify a creditor’s status, the Tribunal clarified that there was no change in the categorization of the appellant as a financial creditor; only the security interest was revised to ‘nil’ based on lack of evidence. The RP had the authority to update the list of creditors, including accepting or rejecting claims, but this did not imply a change in the fundamental nature of the claim.
Lastly, the Tribunal observed that the appellant had filed its Form-CA to be treated as a homebuyer only after the Committee of Creditors had approved the resolution plan. Relying on the Supreme Court’s decision in RPS Infrastructure v. Mukul Kumar,[ Civil Appeal No.5590 of 2021], the NCLAT held that such belated claims cannot be entertained. Further, in the absence of a BBA, the appellant could not be treated as an allottee. Accordingly, the NCLAT upheld the NCLT’s decision and dismissed the appeal, affirming the appellant’s classification as an unsecured financial creditor.
Appearance
For Appellant: Mr. Gaurav Mitra, Sr. Advocate with Mr. Vaibhav Tyagi, Ms. Lavanya Pathak, Advocates.
For Respondent: Ms. Varsha Banerjee, Mr. Akash Srivastava, Advocates for R1 (RP).
Cause Title: M/s. Star Maxx Properties Through its Authorised Representative Mr. Nakul Goel V. Arunava Sikhdar and Ors.
Case No: Company Appeal (AT) (Insolvency) No. 338 of 2024
Coram: Justice Ashok Bhushan [Chairperson], Barun Mitra [Member (Technical)]
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