Creditor Obtaining Award Directing Real Estate Firm To Not Create Third-Party Interest In Specified Units Doesn't Amount To 'Security Interest': NCLAT

The National Company Law Appellate Tribunal (NCLAT) New Delhi bench of Justice Ashok Bhushan (Judicial Member) and Mr. Barun Mitra (Technical Member) has held that merely obtaining an arbitral award in which the corporate debtor was directed not to create any third‑party interest in specified units does not amount to creating a “security interest” within the meaning of Section 3(31) of the Insolvency and Bankruptcy Code, 2016 (Code). Therefore, a creditor relying solely on such an award cannot be classified as a secured financial creditor especially when no Builder‑Buyer Agreement was executed to evidence transfer of the unit to that creditor. Brief Facts: M/s. Dream Procon Private Limited (Corporate debtor) is a Real Estate Company which has commenced construction of Multi-storey Housing and Commercial Complex by entering into the Joint Development Agreement with M/s. Logix City Developers Ltd. Six Articles of Agreement were entered into between the appellant and the corporate debtor, where the appellant agreed to invest in six residential units in the Victory Ace project. These agreements were made in 2015 and again on 13.04.2017. The appellant claims that Rs. 37 lakhs was paid for one unit. The appellant initiated arbitration proceedings against the corporate debtor, and an award dated 28.08.2019 was issued in favor of the appellant. Prior to this award, an application under Section 7 was filed by Priyanshi Arora, a homebuyer, leading to the initiation of Corporate Insolvency Resolution Process (CIRP) proceedings against the corporate debtor by order dated 06.09.2019. The appellant was reclassified from secured financial creditor to financial creditor with 'Nil' security on 17.06.2020. On 20.06.2020, the appellant objected to this reclassification and filed I.A. 3962/2020 before the adjudicating authority, seeking reclassification as a secured financial creditor or, alternatively, as a financial creditor in the homebuyer class. The adjudicating authority rejected I.A. 3962/2020 by order dated 05.12.2023. Against this order, the present appeal has been filed. Contentions: The Appellant submitted that the appellant is a secured financial creditor of the corporate debtor based on the arbitration award dated 28.08.2019. Since the RP admitted the appellant as a secured financial creditor, the RP is estopped from reclassifying the appellant's status. It was also submitted that the arbitrator's order also directed payment to the appellant and restrained the corporate debtor from creating third-party rights over the subject units, thereby establishing a security interest in favor of the appellant. Per contra, the Respondent submitted that no security interest was created in favor of the appellant. In the claim 'Form-C' dated 28.10.2019, the appellant stated there was security interest on the units, but provided no material support other than the arbitration award. Additionally, no Builder Buyer Agreement (BBA) was executed for the units mentioned, as they were already allotted to other allottees with a BBA, which was executed before the appellant's Articles of Agreement. To claim rights as a creditor in a class, the appellant needed a BBA. Observations: The Tribunal noted that the second party agreed to invest in the residential unit mentioned in the agreement, while the first party agreed to allot the said residential area. The second party, at their sole discretion, had the option to cancel the booking. It further added that the agreement, titled as "Articles of Agreement," was not a Builders' Buyer Agreement. While the agreement contained a provision for the first party to allot the residential area, the Articles of Agreement itself cannot be considered as an allotment. The Tribunal further observed that the arbitral award merely enjoins the corporate debtor from allotting, alienating, or otherwise dealing with the disputed properties; it does not determine, nor could it, whether the underlying agreement created a “security interest” under the IBC. Hence, the injunction cannot be construed as creating any security interest in those assets. It noted that the Calcutta High Court in “Frederick Peacock vs. Madan Gopal and Ors. 1902 the question was whether attachment by creditor there shall be any charge or lien upon the attached property. The question was answered by the full Bench holding that by mere attachment, there will be no charge or lien. Based on the above, it held that any direction in the Arbitral Award restraining the corporate debtor shall not create any charge or security interest in the assets. The Tribunal further noted that in the case of Vishal Chelani and Ors. Vs. Debashis Nanda- (2023) the appellants had obtained decrees from RERA, which recognized them as homebuyers. The Supreme Court held that possessing these decrees did not disqualify them from being classified as...

Creditor Obtaining Award Directing Real Estate Firm To Not Create Third-Party Interest In Specified Units Doesn't Amount To 'Security Interest': NCLAT

Mohd Malik Chauhan

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Creditor Obtaining Award Directing Real Estate Firm To Not Create Third-Party Interest In Specified Units Doesn't Amount To 'Security Interest': NCLAT

Mohd Malik Chauhan

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