Calcutta High Court Grants Interim Protection To Srei Equipment Finance Over Unsecured ₹273.48 Crore Loan

The Calcutta High Court has granted interim protection to Srei Equipment Finance Ltd in a dispute over a loan extended to Bengal Shristi Infrastructure Development Ltd for the Shristi Nagar Project.

The court held that the lender had established a prima facie case because the loan remained unsecured to the extent that the mortgage contemplated under the financing documents had not been created.

A division bench of Justices Debangsu Basak and Md. Shabbar Rashidi directed Bengal Shristi to create a Debt Service Reserve in accordance with the loan agreement. The reserve must be created within a fortnight of being called upon by Srei to do so.

“In view of the loan remaining unsecured to the extent of non creation of mortgage, the appellant makes out of prima facie case for grant of interim protection. The balance of convenience and inconvenience also lies in favour of the appellant for grant of interim protection. Non grant of interim protection is likely to prejudice the appellant,” the court held.

Srei and Bengal Shristi entered into a Rupee Term Loan Agreement on April 2, 2019 for financing the Shristi Nagar Project. The lender agreed to extend ₹275 crore and ultimately disbursed ₹273.48 crore. The parties later executed an amendatory and supplementary agreement on May 6, 2020.

According to Srei, Bengal Shristi was required to create both hypothecation and mortgage security in favour of the lender. While hypothecation was created, the mortgage over the project assets was never perfected.

Bengal Shristi argued that the mortgage could not be created because the Asansol Durgapur Development Authority had not issued the no-objection certificate required for that purpose. It also maintained that there was no payment default. Monthly instalments under the loan agreement, it contended, continued to be paid.

The court noted that the financing documents envisaged creation of a mortgage as security for the loan. That security had not yet come into existence.

“The amount lend and advanced by the appellant to the respondent as on date, remains unsecured to the extent of no mortgage being created while, the agreement between the parties postulated creation of mortgage as security for the loan,” the court observed.

Srei had recalled the loan facility and initiated insolvency proceedings against Bengal Shristi. The court held that this did not prevent the lender from seeking interim protection in relation to its security interests.

“Appellant has recalled the entire loan facility and proceeded under the Insolvency and Bankruptcy Code, 2016 as against the respondent. Appellant is nonetheless entitled to canvass the issue of security under Section 9 of the Act of 1996. Arbitral Tribunal is yet to be constituted. Nothing has been placed before us to suggest that the present appeal is affected by moratorium under the Insolvency and Bankruptcy Code, 2016,” the court held.

The bench also found that Bengal Shristi had not discharged its obligation to create a Debt Service Reserve under the loan agreement.

“In such circumstances, it would be appropriate to direct the respondent to create a Debt Service Reserve in term of Article 2.11 of the Rupee Term Loan Agreement within a fortnight from the date of requirement to do so by the appellant. Appellant is at liberty to apply for reliefs before the appropriate forum on the failure of the respondent to comply with the order,” the court held.

The appeal was disposed of with directions for creation of the Debt Service Reserve. Srei was also given liberty to seek appropriate reliefs in the event of non-compliance.