NCLT Ahmedabad Holds Consortium Lender Cannot Defeat Co-Creditor's Charge, Rejects SBI's Mortgage Release

The Ahmedabad National Company Law Tribunal (NCLT) on 13 July held that a consortium lender cannot unilaterally release a mortgaged property under a One Time Settlement (OTS) if such release prejudices the pari passu security interest of another secured creditor.

A Bench comprising Judicial Member Chitra Hankare and Technical Member Dr. V.G. Venkata Chalapathy allowed the application and directed the suspended management of Baid Industries to restore Rs. 5,14,24,288 along with 12% simple interest to the liquidator. It observed:

“We observe laxity on the part of SBI to have ceded the charge and even agreed to sub plot the released security even though it was a consortium leader and joint documents were executed, irrespective of whether it went for a OTS Wlth the CD. Ceding of charge without consent/information of other lender is not in the proper course and cannot be considered admissible under any law and practice having created the Memorandum Of Title Deeds (Joint lenders) and also charge of documents.”

Baid Industries, engaged in yarn manufacturing, had availed consortium credit facilities of Rs. 54.39 crore from State Bank of India (SBI) and Dena Bank. The land situated at Plot No. 8, GIDC Panoli, was mortgaged jointly to both lenders under a pari passu arrangement. Dena Bank's debt was subsequently assigned to Meliora ARC in 2017.

After Baid Industries defaulted on its dues and its account was classified as a non-performing asset (NPA), Meliora ARC initiated insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016 (which allows a financial creditor to initiate corporate insolvency proceedings against a corporate debtor) in December 2020. The insolvency petition was admitted in December 2022, following which liquidation proceedings commenced.

During the pendency of the insolvency proceedings, SBI entered into a One Time Settlement with Baid Industries. After receiving partial payment of Rs. 16 crore, SBI issued a No Objection Certificate (NOC) on 2 December 2021 releasing its charge over 37,104 sq. mtrs. of the mortgaged land.

Relying on SBI's NOC, Gujarat Industrial Development Corporation (GIDC) approved the subdivision of the land. The suspended directors thereafter executed multiple deeds of assignment in July and August 2022, transferring the subdivided plots to Respondents 4 to 24.

Meliora ARC challenged the transactions, contending that its charge over the property continued to exist and that the transfers were undertaken to defeat the rights of secured creditors.

The liquidator argued that SBI's release of charge could not extinguish Meliora ARC's pari passu security interest. It further submitted that the corporate debtor entered into fraudulent sale transactions involving secured assets despite the subsisting mortgage.

It also contended that the purchasers had deemed notice of the mortgage as the charges were registered with the Registrar of Companies and reflected in revenue records. It was argued that the transactions, executed without public notice and in favour of a limited group of purchasers, were fraudulent and liable to be set aside under Section 53 of the Transfer of Property Act, 1882 (which deals with fraudulent transfers) and the Insolvency and Bankruptcy Code.

The suspended directors and purchasers argued that SBI, which held 75.91% of the consortium share and acted as the lead bank, had issued the NOC after entering into the OTS. They submitted that the sale proceeds were utilised towards repayment of SBI's dues and were not siphoned off. They further argued that Meliora ARC was aware that the corporate debtor was generating funds through sale and assignment of properties for repayment of consortium dues but did not raise any objection. GIDC also maintained that the subdivision was approved in accordance with its regulations.

The Tribunal held that the property was jointly mortgaged in favour of SBI and Dena Bank and that SBI's unilateral release of the charge could not affect Meliora ARC's security interest. It observed that SBI had acted irregularly by issuing the NOC without the consent or knowledge of the other lender.

Further, the Bench held that GIDC erred in permitting subdivision of the property solely on the basis of SBI's NOC while ignoring Meliora ARC's subsisting charge. It observed:

“As per IBC provisions, there is a responsibility of the co lender under paripassu or under consortium lender to realise the property as per the agreement, but SBI has been paid off on release of charge by the respondent 1 and 2 to reduce the amount of loan outstanding. The property is subsequently sold to third parties.”

Accordingly, the NCLT allowed the application and directed the suspended directors to restore Rs. 5,14,24,288 along with 12% simple interest to the liquidator. The liquidator was directed to adjust the recovered amount between SBI and Meliora ARC.