Unenforced Equitable Mortgage Remains Corporate Debtor's Asset, Cannot Be Treated As Margin Money: NCLAT
The National Company Law Appellate Tribunal (NCLAT) New Delhi set aside an order passed by National Company Law Tribunal (NCLT) Mumbai by which it directed that an amount equivalent to 5% of the value of Foreign Letters of Credit (FLCs), Letters of Credit (LCs), and Bank Guarantees (BGs) be excluded from the total assets of Frost International Limited and be allocated to Bank of India (BOI)...
The National Company Law Appellate Tribunal (NCLAT) New Delhi set aside an order passed by National Company Law Tribunal (NCLT) Mumbai by which it directed that an amount equivalent to 5% of the value of Foreign Letters of Credit (FLCs), Letters of Credit (LCs), and Bank Guarantees (BGs) be excluded from the total assets of Frost International Limited and be allocated to Bank of India (BOI) as margin money.
A bench of Justice Ashok Bhushan and Mr. Barun Mitra (Technical Member) held that “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:
The corporate debtor was admitted into Corporate Insolvency Resolution Process (CIRP) on February 9, 2023. A consortium of banks including the Appellant and Respondent No. 1 (Bank of India) had given credit facilities of ₹756.75 crore to the corporate debtor with a 105 margin in the form of Term Deposit Receipts (TDRs) and an additional 5% margin secured through equitable mortgage of an immovable property located at One BKC, Mumbai.
It was admitted in the CoC meeting with a majority that the distribution would be based on admitted claims, not on security interests. Bank of India objected to this stating that it exclusively held a 5% margin which should be excluded from the asset pool. The Adjudicating Authority accepted the contentions of BOI and directed exclusion of 5% of FLC/LC/BG value from the assets of the corporate debtor holding that it was held in trust for BOI.
Aggrieved, Indian Overseas Bank had filed an appeal before the NCLAT.
The Appellant submitted that the NCLT erred in treating equitable mortgage as margin money and excluding it from the corporate debtor's assets. It was further submitted that this treatment violated the commercial wisdom of the CoC which had decided to distribute the proceeds on the basis of the admitted claims. It was further argued that the mortgage was a security interest, not an asset held in trust. Furthermore, it was never enforced and therefore it continued to belong to the corporate debtor.
Per contra, the Respondent submitted that the mortgage was held in trust as per the sanction letter. It was further submitted that once margin money is created, it ceases to belong to the corporate debtor's assets.
Findings:
The Tribunal examined the sanction letter and Form C claim submitted by BOI in which the property was described as collateral security, not as margin money in the forms and CoC meetings. It held that “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 Tribunal distinguished the present case from Supriyo Kumar Choudhary holding that the ratio of this judgment is applicable only when the performance guarantees alive are invoked..
It held that “the Supriyo Kumar judgment supra does not come to the rescue of the Respondent No.1 as the FLC/LC/BGs were not alive in the present case during the CIRP period. This ratio does not apply to an unenforced mortgage which remains in the ownership and control of the Corporate Debtor.
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 said.
The Tribunal further held that the BGs and LCs had already been dissolved before CIRP and therefore there were no living guarantees. Thus, the assets could not retain the character of a trust property. It held that “Since the FLC/LC/BG were no longer alive, there was no continuing obligation requiring the margin to be held in trust. The unenforced equitable mortgage could not be treated as margin any longer.”
The Tribunal held that the NCLT effectively allowed the enforcement of the security interest during moratorium which was prohibited under section 14 of the IBC. Accordingly, the Tribunal allowed the appeal holding that the NCLT erred in treating mortgaged property as assets held in trust.
Case Title: Indian Overseas Bank v. Bank of India & Anr.
Case Number:Company Appeal (AT) (Insolvency) No. 1349 of 2025
Judgment Date: 29/10/2025
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.