Secured Creditor Can Claim Priority Only To Extent Of Available Security, Even If Debt Is Higher: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at Delhi has held that a secured creditor can claim priority in the payment of dues only to the extent of the security available in its favour.

It ruled that a creditor is not automatically entitled to the entire liquidation value merely because its admitted debt exceeds that amount. The tribunal dismissed the appeals filed by Assets Care & Reconstruction Enterprise Ltd. (ACRE) and Dhankalash Distributors Pvt. Ltd.

It, however, directed reconsideration of the New Okhla Industrial Development Authority's (NOIDA) claim as a secured creditor.

A bench of Chairperson Justice Ashok Bhushan and Technical Member Indevar Pandey held:

"....the amount of debt and the value of the security interest are two different concepts. A secured creditor can claim priority only to the extent of the security actually available in its favour. Merely because the admitted debt is larger than the liquidation value does not automatically entitle the creditor to the entire liquidation value irrespective of the extent of its security.”

The dispute arose from the resolution plan for Arena Superstructures Pvt. Ltd., the developer of the "Lotus Arena-I" project in Noida. The company entered the Corporate Insolvency Resolution Process in October 2020 on a petition filed by Dhankalash Distributors. Punjab National Bank Housing Finance Ltd. later assigned its debt to ACRE, which became the sole institutional secured financial creditor.

Homebuyers held a majority voting share in the Committee of Creditors, which approved the resolution plan submitted by Purvanchal Projects Pvt. Ltd.

ACRE argued that its debt was fully secured by a mortgage over the project land and hypothecation of receivables from sold and unsold units. It claimed the security was worth nearly ₹550 crore and contended that it should receive the entire liquidation value of about ₹151 crore.

The Resolution Professional and the successful resolution applicant argued that ACRE's security extended only to the unsold units because flats already allotted to homebuyers could not form part of its security interest.

The tribunal noted that even the original lender had not claimed a charge over all the units in the project. It found that when the mortgage was created, 806 flats, representing about 74.36% of the project area, had already been allotted. Only 274 flats remained unsold.

The tribunal observed, “The value of a secured creditor's security interest can only be determined on the basis of the assets that were actually available as security. Since only 274 flats remained unsold when the mortgage was created, the Resolution Professional rightly proceeded on the basis that only those flats formed part of the Appellant's security interest.”

It also rejected ACRE's claim over future receivables, holding that they depended on completion of the project and were not independent assets. The tribunal concluded that the value of ACRE's security was about ₹38.71 crore. Since the resolution plan allocated ₹70 crore to ACRE, it held that the statutory requirement had been satisfied.

The tribunal also dismissed Dhankalash's appeal. It held that, as an unsecured financial creditor, Dhankalash ranked lower in the distribution waterfall. It also found no material to support its allegations of procedural irregularities or collusion.

In NOIDA's appeal, the tribunal held that the registered sub-lease deed created a contractual first charge in its favour, giving it a security interest under the Insolvency and Bankruptcy Code.

The tribunal directed the Resolution Professional to place an addendum to the resolution plan treating NOIDA as a secured creditor and to revise the proposed distribution accordingly.