Secured Creditor Cannot Be Compelled To Issue NOC For Sale Of Secured Assets: NCLT Bengaluru

The National Company Law Tribunal (NCLT) at Bengaluru has recently held that a secured creditor cannot be compelled to issue a No Objection Certificate (NOC) for the sale of secured assets merely because the corporate debtor proposes an alternative mechanism for repayment of its dues.

The tribunal dismissed an application filed by Gulam Mustafa Enterprises Pvt Ltd seeking directions to Piramal Finance Ltd to issue NOCs for sale of certain mortgaged assets.

A bench of Judicial Member Sunil Kumar Aggarwal and Technical Member Radhakrishna Sreepada observed.

“...the relationship between a secured creditor and a borrower is governed by contractual arrangements creating security interests over specified assets and a 'No Objection Certificate' enabling alienation of secured assets cannot be claimed as a matter of right. Moreover, whether such consent ought to be granted or withheld falls primarily within the commercial domain of the secured creditor, subject to the terms governing the security and the applicable law.”

The tribunal added, "The jurisdiction of this Authority under Section 60(5) of the Code may be wide yet cannot be used to compel a secured creditor to part with or dilute its security interest merely because the Corporate Debtor proposes an alternate mechanism for repayment particularly when the FC is not convinced about the proposed terms of resolution in terms of quantum and timeline"

The application was filed by Gulam Mustafa Enterprises Pvt Ltd seeking a direction to Piramal Finance Ltd to issue NOCs. The company sought to sell certain secured assets identified for monetisation and repayment of outstanding liabilities.

The company contended that Piramal Finance had initiated insolvency proceedings against it. It further contended that the parties had previously entered into a compromise recorded by the Karnataka High Court.

The company submitted that substantial payments had already been made to the financial creditor. It also contended that it was willing to make further payments towards settlement of the debt.

According to the company, it had identified prospective investors and purchasers willing to invest in or acquire certain secured assets. It contended that the proceeds from such transactions would enable it to clear outstanding dues and avoid initiation of the corporate insolvency resolution process.

The company submitted that the assets proposed to be sold were mortgaged in favour of Piramal Finance and India Housing Fund Series. It therefore required NOCs from the secured creditors before the transactions could be concluded.

The company further contended that despite being informed of the proposed transaction and participating in discussions with the prospective investor, Piramal Finance had refused to issue the requisite NOCs. It argued that the refusal was contrary to the interests of stakeholders because the proposed transaction would facilitate repayment of debts owed to secured creditors.

The company also contended that permitting the sale of the assets would facilitate completion of its real estate projects. It submitted that the proposed transaction would safeguard the interests of homebuyers and enable repayment of debts due to creditors.

The Tribunal held that a secured creditor could not be compelled to dilute its security interest merely because the corporate debtor had proposed an alternative repayment plan that was not acceptable to the creditor.

The tribunal observed that the applicant was, in substance, seeking a mandatory direction requiring secured creditors to consent to a proposed transaction.

It held that such relief could not be granted, as it would amount to “foisting terms of one party on the unwilling party on the other side.”

On the company's contention regarding homebuyers and other stakeholders, the tribunal observed that “...such considerations by themselves cannot override the proprietary and contractual rights vested in secured creditors who may also be answerable to their shareholders.”

Accordingly, the tribunal dismissed the application.

For Applicant: Arjun Rao

For Respondent: A.S Vishwajith