Pranav B Prem

The National Company Law Appellate Tribunal (NCLAT), New Delhi, has held that an unenforced equitable mortgage continues to remain an asset of the corporate debtor and cannot be treated as margin money once the related Letters of Credit (LCs), Foreign Letters of Credit (FLCs), or Bank Guarantees (BGs) have devolved before the commencement of the Corporate Insolvency Resolution Process (CIRP).

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A bench comprising Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member) set aside an order of the National Company Law Tribunal (NCLT), Mumbai, which had directed that an amount equivalent to 5% of the value of FLCs, LCs, and BGs be excluded from the asset pool of Frost International Limited and allocated to Bank of India (BOI) as margin money. The Appellate Tribunal held, “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.”

Background

Frost International Limited was admitted into CIRP on February 9, 2023. A consortium of banks, including Indian Overseas Bank (IOB) and Bank of India (BOI), had extended credit facilities worth ₹756.75 crore to the corporate debtor, with a 10% margin in the form of Term Deposit Receipts (TDRs) and an additional 5% secured by an equitable mortgage over an immovable property located at One BKC, Mumbai. During the meetings of the Committee of Creditors (CoC), it was resolved by majority that the distribution of assets would be made on the basis of admitted claims rather than on the basis of security interests. However, BOI objected to this and asserted that the 5% margin held through the mortgage should be treated as its exclusive asset and excluded from the liquidation estate. The Adjudicating Authority (NCLT) accepted BOI’s contention, holding that the said portion represented margin money held in trust for the bank. Aggrieved by this, Indian Overseas Bank preferred an appeal before the NCLAT.

Contentions

The appellant, IOB, argued that the NCLT erred in treating the equitable mortgage as margin money and excluding it from the corporate debtor’s assets. It was contended that such treatment violated the commercial wisdom of the CoC, which had decided that distribution would be based on admitted claims. IOB submitted that the mortgage constituted a security interest and not a trust asset, and since it was never enforced prior to the commencement of CIRP, ownership continued to vest with the corporate debtor.

Per contra, BOI contended that as per the sanction letter, the mortgage was held in trust as margin money and ceased to belong to the corporate debtor once created. It was argued that the bank retained beneficial ownership over the margin portion.

Findings

After examining the record, the Appellate Tribunal noted that the sanction letter and Form C claim filed by BOI both described the property as collateral security and not as margin money. The Tribunal observed that even if the purpose of creating the security was to provide margin, the character of the mortgage remained that of a security interest and could not be automatically converted into trust property. It held, “Even if the purpose of the security was towards margin, it did not materially alter the fact that the security was held as an equitable mortgage — a form of security interest.”

The NCLAT further distinguished the present case from the ruling in Supriyo Kumar Choudhary v. Union of India, clarifying that the ratio of that case applied only to subsisting or alive performance guarantees. Since all the FLCs, LCs, and BGs had already devolved before the commencement of CIRP, the question of any continuing obligation did not arise. The bench noted, “When the margin money was not in the form of deposit like TDR but in the nature of security interest through an equitable mortgage, unless this mortgage was enforced, the subject property clearly remained an asset of the Corporate Debtor. The security unless enforced does not acquire the character of a trust property.”  The Tribunal held that since the guarantees were no longer alive, there was no continuing obligation requiring any portion of the property to be held in trust. It further observed that the NCLT, by allowing exclusion of 5% from the asset pool, had effectively permitted enforcement of a security interest during the moratorium, contrary to Section 14 of the Insolvency and Bankruptcy Code (IBC).

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Holding that the unenforced equitable mortgage remained an asset of the corporate debtor and could not be treated as margin money, the NCLAT set aside the NCLT’s order. The Appellate Tribunal allowed the appeal filed by Indian Overseas Bank and ruled that the NCLT erred in directing exclusion of the mortgaged property from the corporate debtor’s assets.

Appearance

For Appellant: Mr. Abhijeet Sinha, Sr. Advocate with Mr. J. Rajesh, Mr. Arshlan Ahmed, Yashudhan Agarwal, Dhrupad Vaghani, Gayatri Mohite, Kamakshi Maine and Ajiz MK, Advocates.

For Respondent: Mr. Krishnendu Datta, Sr. Advocate with Ms. Smriti Churiwal, Mr. Jaiveer Kant, Mr. Indrajeet Deshmukh, Ms. Meher Thapar, Mr. Harsh Gurbani, Advocates. Mr. Harshit Chowdhary and Mr. Yash Tandon, Advocates for R1. Mr. Varun Kalra and Shohan Ulla, Advocates for R2.

Cause Title: Indian Overseas Bank v. Bank of India & Anr.

Case No: Company Appeal (AT) (Insolvency) No. 1349 of 2025

Coram: Justice Ashok Bhushan (Chairperson), Mr. Barun Mitra (Technical Member)