NCLAT (2026.05.19) in Suraksha Realty Ltd. Vs. Vithal M. Dahake (RP) and Ors. [(2026) ibclaw.in 686 NCLAT, Company Appeal (AT) (Ins.) No. 1754 of 2025] held that;-.
# 62. We note that prior to execution of the Mortgage Deed, the Appellant was admittedly an unsecured financial creditor. By virtue of the Mortgage Deed, the Appellant acquired the status of a secured creditor, though as a second charge holder. Under the waterfall mechanism provided under Section 53 of the Code, even a second charge holder occupies a significantly better position than an unsecured financial creditor. Therefore, the transaction undoubtedly improved the position of the Appellant in the event of distribution of assets under Section 53. This improvement itself is sufficient to satisfy the requirement of Section 43(2)(b).
# 67. The Appellant has repeatedly argued that the mortgage created only a second charge subordinate to Yes Bank and therefore no real benefit was conferred upon it. We are unable to accept this submission. Even a second charge constitutes a secured interest in law. The test under Section 43 is not whether the creditor became the highest-ranking secured creditor, but whether the creditor was placed in a more beneficial position, than it would otherwise have occupied under Section 53. In the present case, the answer to this question is clearly in the affirmative,
Blogger’s Comments; In my opinion, Hon'ble NCLAT failed to take notice of the following amendment in IBC, through which following Explanation has been added in sub-section 1, clause (b), in sub-clause (ii) in section 53, which might have the effect of rendering the appeal infructuous.
“Explanation.––For the removal of doubts, it is hereby clarified that where the value of the security interest relinquished by the secured creditor is less than the total debt owed to such secured creditor by the corporate debtor, he shall be a secured creditor to the extent of the value of such security interest, determined in such manner as may be specified, and for the remaining value of such debt, he shall be considered to be an unsecured creditor;”
Excerpts of the Order;
The present Appeal has been filed by Suraksha Realty Limited/Appellant under Section 61 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the ‘Code’) assailing the Order dated 10.10.2025 passed by the Ld. National Company Law Tribunal, Mumbai Bench (‘Adjudicating Authority’) in I.A. No. 4504 of 2024 in C.P. (IB) No. 380 of 2021, whereby the application filed by Mr. Vithal M. Dahake, Resolution Professional of Radius Estate Projects Private Limited/ Respondent No.1 under Sections 43, 45 and 49 of the Code came to be allowed. By the said Impugned Order, the Adjudicating Authority held that the Deed of Mortgage dated 29.07.2021 executed between Radius Estate Projects Private Limited/ Corporate Debtor, and the Suraksha Realty Limited/ Appellant constituted a preferential transaction, and consequently directed that the security interest created in favour of the Appellant be released and discharged. Respondent Nos. 2-5 are the promoters and ex-Directors of the Corporate Debtor. Being aggrieved by the said findings of Ld. Adjudicating Authority in particular the treatment of the mortgage as a preferential transaction, despite it being a perfection of security arising from the Debenture Subscription Agreement dated 18.12.2014, the present Appeal has been preferred before this Appellate Tribunal.
Facts of the Case
# 2. The brief facts of the case relevant for deciding the same are reproduced below: –
i. The Corporate Debtor/Radius Estate Projects Private Limited, had entered into a Memorandum of Understanding with Sumer Buildcorp Private Limited in or about December 2014 for joint development of a real estate project known as “Avenue 54” situated at Willingdon Catholic Colony, Bandra, Mumbai, envisaging development of approximately 10,00,000 square feet of saleable area, for which substantial financial assistance was required.
ii. In order to meet its financial requirements for acquisition of development rights and execution of the project, the Corporate Debtor approached the Appellant; pursuant to which a Debenture Subscription Agreement (DSA) dated 18.12.2014 came to be executed, under which the Appellant subscribed to 225 secured redeemable non-convertible debentures of face value Rs.50,00,000 each, thereby investing a total sum of Rs.1,12,50,00,000/- in the Corporate Debtor.
iii. The said Debenture Subscription Agreement, had a provision for creating a first charge by the Corporate Debtor in favour of the Appellant over approximately 50,000 square feet of saleable area in the project. The Corporate Debtor had further undertaken to execute necessary documents including mortgage deeds to perfect such security.
iv. The Corporate Debtor did not perfect the security in favour of the Appellant and, instead, subsequently availed financial assistance from Yes Bank Limited in or about December 2014 without obtaining any prior consent or No Objection Certificate from the Appellant. The Corporate Debtor created mortgage charges in favour of Yes Bank through registered deeds executed in December 2015 and May 2016 (read with a supplementary deed dated 06.02.2018), thereby creating a first charge over the project in favour of Yes Bank.
v. Thereafter, additional financial assistance was availed through a joint venture entity, Sumer Radius Realty Private Limited, which obtained funding of approximately Rs.350,00,00,000/- from Yes Bank in January 2016, further strengthening the encumbrances over the project assets and affecting the priority structure of charges.
vi. In July 2018, the Corporate Debtor and its joint venture entity approached DHFL for further funding, which was agreed to by DHFL subject to creation of a first charge over the entire project. A mortgage deed dated 30.07.2018 was executed in favour of DHFL creating a first charge over the project. Yes Bank had issued a conditional NOC for the creation of such charge on 31.07.2018, subject to the Corporate Debtor fulfilling the repayment conditions as prescribed in the aforesaid conditional NOC. As Corporate Debtor failed to fulfil its repayment obligations, the conditional NOC stood revoked. The DHFL charge was thereafter converted to second charge on the property of CD.
vii. Subsequently, due to the subsisting charges and lack of discharge of Yes Bank’s dues, the Corporate Debtor and the Appellant agreed upon a commercial arrangement, whereby a second charge would be created in favour of the Appellant over the identified 61,803 square feet area, with a provision for its upgradation to a first charge upon satisfaction of prior charges. In furtherance of the aforesaid arrangement a registered Deed of Mortgage dated 29.07.2021 came to be executed, creating a second charge in favour of the Appellant over 29 identified units aggregating to 61,803 square feet carpet area, with an express stipulation that the said charge would be upgraded upon repayment of Yes Bank facilities, thereby formalizing and perfecting the pre-existing contractual security.
viii. The Corporate Insolvency Resolution Process of the Corporate Debtor was initiated by the order of Adjudicating Authority on 06.09.2021 and the Respondent No.1 was appointed as Interim Resolution Professional and subsequently confirmed as Resolution Professional.
ix. The Appellant submitted its claim in Form ‘C’ on 28.10.2021 for an amount aggregating to Rs.430,08,00,000/-, supported by relevant documents, asserting its status as a secured financial creditor on the basis of the Debenture Subscription Agreement and the registered mortgage. The Resolution Professional, by email dated 01.12.2021, provisionally admitted a part of the claim amounting to Rs.98,35,38,914/- as secured, while keeping the remaining amount under verification. The Committee of Creditors was constituted and the Appellant was inducted as a secured financial creditor holding 3.74% voting share. The Resolution Professional included the Appellant in the list of secured creditors published on 07.03.2023 and again on 19.04.2023 on the IBBI website, thereby acknowledging its secured status at that stage.
x. The RP initiated a Transaction audit of the CD in April 2023 by an audit firm M/s Bagchi & Gupta, who ultimately classified the mortgage transaction in favour of the Appellant as a preferential transaction.
xi. Consequent to the findings of the Transaction audit, Resolution Professional revised the claim of the Appellant admitting Rs.1,02,05,26,027/- as unsecured debt and rejected a substantial portion of claim amounting to Rs.3,28,02,73,973/-.
xii. further, the Resolution Professional filed an avoidance application being I.A. No. 4504 of 2024 on 11.04.2024 seeking, inter alia, declaration of the mortgage as void and release of the security interest created in favour of the Appellant. Adjudicating Authority after hearing the parties passed the Impugned Order on 10.10.2025. The Adjudicating Authority held the Appellant to be an unsecured creditor prior to execution of the mortgage, and further held that the mortgage was executed within the look-back period and not in the ordinary course of business, and consequently treated the same as a preferential transaction under Section 43 of the Code, thereby directing release of the security interest, which has led to the filing of the present Appeal.
ANALYSIS AND FINDINGS
# 49. We have heard both the parties at length and perused the documents on record. The appellant and Respondent No. 1 have also submitted their written submission. Respondent Nos. 2-5 are treated as Performa Respondents.
# 50. The only issue which arises for consideration in the present Appeal is:
# 51. The Appellant has argued that the Mortgage Deed merely perfected a pre-existing security which was already contemplated under the DSA and that no new benefit was created in its favour. According to the Appellant, the DSA itself contemplated creation of security over approximately 50,000 square feet of saleable area and, therefore, the subsequent Mortgage Deed was only a formal crystallisation of an already existing arrangement. The Appellant has further submitted that the mortgage was executed in the ordinary course of business, that it created only a second charge subordinate to Yes Bank, and that no preferential benefit was granted to the Appellant. It has also been argued that the Adjudicating Authority exceeded its jurisdiction while examining the transaction as a preferential transaction.
# 52. Per contra, the Resolution Professional/Respondent 1 has contended that for nearly seven years after execution of the DSA, no perfected security interest existed in favour of the Appellant. According to the Respondent, until execution of the Mortgage Deed dated 29.07.2021, the Appellant admittedly remained only an unsecured financial creditor. It has been submitted that the mortgage was executed merely two months prior to commencement of CIRP and solely for securing liabilities arising out of the DSA of 2014. Therefore, according to the Resolution Professional, every ingredient of Section 43 of the Code stands fully satisfied.
# 53. The factual chronology in the present case assumes considerable importance. The DSA was executed on 18.12.2014 and accordingly a sum of Rs.112.50 crores was disbursed to the Corporate Debtor by the Appellant in consideration of Debentures issued by the Corporate Debtor. The Appellant itself has stated that the DSA contemplated further steps were required for perfection of the security, including execution of formal mortgage documents. The relevant clauses of Debenture Security Agreement (DSA) are extracted below:
“1.1.20 “Deed of Mortgage” shall mean the deed of mortgage to be entered into among the issuer, Corporate Promoters, the Promoters and the Investor under the terms of this DSA;
8. Securities For the consideration of the said Amount as aforesaid and as security for the repayment of the principal amount of the NCDs, payment of all interest, prepayment charges, liquidated damages, costs, charges and expenses and all other monies as may be payable under this DSA and all costs, charges and expenses, including but not limited to the costs, legal expenses, if any, of preserving the Securities and/ or enforcement thereof, incurred by the Investor in the performance of its duties and obligations under this DSA, the Issuer shall within a period of 30 days from the date of this Agreement create the following Securities:
8.2 Primary Charge
8.2.1 The Issuer hereby grants, conveys, assigns, assures, charges and transfer unto and in favour of the Investor, by way of a First charge in favour of the Investor, flats/premises consisting of Issuer Premises in aggregate admeasuring approx. 50,000 sq. ft. saleable area and hypothecation of all the receivables accruing there from being constructed on the Project Security -1 and written TOGETHER WITH all the amenities and facilities attached and associated with the Issuer Premises, to subsist & continue until repayment by the Issuer to the Investor of the principal amounts of the NCDs in full and also payment of all interest and all other monies as may be payable under this DSA with a provision for redemption by way of re-transfer and release or otherwise upon conversion of NCDs in to Equity Shares at the conversion price as agreed between the Parties.
8.2.2 First Charge on the Security Premises 50% of the total development rights /F.S.I. and any saleable area -unsold units relating to following land parcels located at Santacruz, Mumbai comprising of approximately 5.38 acres of plot area.”
(Emphasis supplied)
# 54. Two things clearly arise from the aforesaid clauses of the DSA. Firstly, the security, thereby meaning mortgage of the property was to be done within 30 days from the date of DSA which was 18.12.2014. Accordingly, the Deed of Mortgage should have been executed by 17.01.2015. Secondly the security was to be the first charge on the property.
# 55. However, no registered mortgage, charge, or perfected security interest was created in favour of the Appellant for almost seven years thereafter. During this period, the Corporate Debtor created substantial first charges in favour of Yes Bank in the years 2015 and 2016 and thereafter further encumbrances in favour of DHFL in 2018. Despite all these developments, the Appellant did not take steps to ensure perfection of its alleged security. This prolonged delay cannot be ignored while examining whether the later Mortgage Deed was merely a formal act or whether it materially changed the legal position of the Appellant.
# 56. The Appellant in its reply to IA No. 4304 of 2024 in Ld. NCLT had made the following averments:
“e. Pursuant to the execution of the DSA, the Corporate Debtor was in need of additional funds for the Project. Accordingly, the Corporate Debtor had approached Yes Bank Limited for the purpose of raising the additional funds. Yes Bank Limited was amenable to advance the additional funds to the Corporate Debtor. However, Yes Bank Limited had sought a first charge on the entire entitlement of the Corporate Debtor in the Project to secure the facilities to be availed by the Corporate Debtor. As the Corporate Debtor required the funds for the Project, the Corporate Debtor executed a Deed of Mortgage dated 23rd December 2015 as well as Deed of Mortgage dated 12th May 2016 read with Supplementary Deed dated 6th February 2018, in favour of Yes Bank Limited, thereby creating a first charge on its entitlement in the Project.
f. Pertinently, as per Clause 13 (f) of Schedule 7 of the DSA, the Corporate Debtor had undertaken that it shall not create any charge, lien or encumbrance (which included mortgages) whatsoever over the Securities or any part thereof in favour of any person/bank/financial institution other than Respondent No. 1. Furthermore, as per Clause 13 (h) of Schedule 7 of the DSA, the Corporate Debtor had undertaken that it shall not sell, transfer, assign, mortgage, alienate or otherwise dispose off any of the assets of Corporate Debtor which are charged in favour of Respondent No. I without its approval. Accordingly, upon learning about the execution of the said deed of mortgage in favour of Yes Bank Limited, Respondent No. 1 had approached the Corporate Debtor and sought its explanation for the same. Respondent No. 1 had further raised the issue that the said deed of mortgage was executed in favour of Yes Bank Limited without obtaining its NOC/consent/prior approval. At the said time, the Corporate Debtor informed Respondent No. I that it was in urgent need of additional funds for the Project. The Corporate Debtor further represented and assured to Respondent No. 1 that the Corporate Debtor was committed in complying with its obligations under the DSA and that the Corporate Debtor would soon satisfy the facilities obtained from Yes Bank Limited and execute requisite deed of mortgage in favour of Respondent No. 1. The Corporate Debtor also represented to Respondent No. 1 that the Project had a lot of potential and that the Corporate Debtor would soon be in a position to satisfy the facilities availed from Yes Bank Limited as well as to comply with the Secured Obligations under the DSA. Relying upon the representations of the Corporate Debtor and believing it to be true, Respondent No. 1 waited for the Corporate Debtor to comply with its obligations under the DSA and to take steps for perfection of security interest (already created under the DSA) in favour of Respondent No. 1.
g. Post the execution of DSA, Respondent No. 1 was regularly following up with the Corporate Debtor. As a result, Respondent No. 1 was able to realize a sum of Rs.99,00,00,000/- (Rupees Ninety-Nine Crores Only) from the Corporate Debtor. However, the Corporate Debtor failed to honour the Secured Obligations under the DSA. Accordingly, Respondent No. 1 approached the Corporate Debtor and sought its explanation for the same. At the said time, the Corporate Debtor represented to Respondent No. 1 that the Project was slightly delayed due to factors beyond its control. At the said time, the Corporate Debtor reiterated its commitment to honour its obligations under the DSA, however, the Corporate Debtor requested Respondent No. 1 to be patient and to grant some additional time to the Corporate Debtor to comply with its obligations under the DSA. Being from the real estate industry, Respondent No. 1 was conscious that projects of such magnitude can get delayed. Respondent No.1 was further mindful of the fact that the Project had a lot of potential to enable the Corporate Debtor to meet its obligations under the DSA. Accordingly, Respondent No.1 waited for the Corporate Debtor to comply with its obligations under the DSA.”(Emphasis Supplied)
# 57. It comes out very clearly from the above averments of Appellant before the Ld. Adjudicating Authority that it was aware of the fact that the Corporate Debtor has created the first charge on its entire entitlements of the project in favour of Yes Bank and in spite of awareness about its rights and obligations of Corporate Debtor in terms of the DSA, the Appellant did not take any legal action to perfect its security. The security is executed by the Corporate Debtor in July 2021 as second charge on the portion of the property, which has been held by Yes Bank as first charge from December 2015 onwards i.e. after a lapse of five and half years from the creation of first charge in favour of Yes Bank. More importantly such a security interest was created by the Corporate Debtor without NOC from the Yes Bank the first charge holder.
# 58. In this context of the factual matrix, and the relevant section 43 of the code, we now examine whether the execution of the Deed of Mortgage as second charge on a portion of the property of the Corporate Debtor on 29.07.2021 can be classified as preferential transaction. To answer this issue, it becomes necessary for us to examine:
(i) the nature and timing of the Mortgage Deed;
(ii) whether the mortgage was created for an antecedent debt;
(iii) whether the transaction placed the Appellant in a more beneficial position in terms of Section 53 of the Code;
(iv) whether the transaction falls within the statutory look-back period under Section 43(4); and
(v) whether the transaction can still be protected as one entered into in the ordinary course of business under Section 43(3) of the Code.
# 59. It is the submission of the Appellant that the genesis of the Deed of Mortgage dated 29.07.2021 is the Debenture Subscription Agreement dated 18.12.2014 (“DSA”). The execution of deed of Mortgage is also not disputed. The dispute before us is limited to the Mortgage Deed’s effect under the avoidance provisions of the Code. Therefore, while examining the impugned transaction, we are required to assess it not merely from the perspective of contractual rights between the parties, but from the broader object of insolvency law, namely preservation of the assets of the Corporate Debtor and equitable treatment of all creditors.
# 60. Section 43 of the Code deals with Preferential Transactions and the same is extracted below: –
“Section 43. Preferential transactions and relevant time
(1) Where the liquidator or the resolution professional, as the case may be, is of the opinion that the corporate debtor has at a relevant time given a preference in such transactions and in such manner as laid down in sub-section (2) to any persons as referred to in sub-section (4), he shall apply to the Adjudicating Authority for avoidance of preferential transactions and for, one or more of the orders referred to in section 44.
(2) A corporate debtor shall be deemed to have given a preference, if-
(a) there is a transfer of property or an interest thereof of the corporate debtor for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor; and
(b) the transfer under clause (a) has the effect of putting such creditor or a surety or a guarantor in a beneficial position than it would have been in the event of a distribution of assets being made in accordance with section 53.
(3) For the purposes of sub-section (2), a preference shall not include the following transfers-
(a) transfer made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee;
(b) any transfer creating a security interest in property acquired by the corporate debtor to the extent that-
(i) such security interest secures new value and was given at the time of or after the signing of a security agreement that contains a description of such property as security interest, and was used by corporate debtor to acquire such property
And
(ii) …….
(4) A preference shall be deemed to be given at a relevant time, if-
(a) …….
(b) a preference is given to a person other than a related party during the period of one year preceding the insolvency commencement date. (Emphasis supplied)
# 61. Section 43(1) of the Code provides that a transaction shall be treated as preferential if it has been given by the Corporate Debtor in the manner prescribed in Section 43(2). As provided by Section 43(2)(a) it involves transfer of a property or interest thereof for the benefit of a creditor. In this case it involves execution of Deed of Mortgage in favour of Appellant who is a financial creditor, which is the transfer of interest and the same has been done for the benefit of a creditor to the Corporate Debtor. The second element of Section 43(2)(a) provides that such transfer of interest should be on account of antecedent debt, which is admittedly the case here. Appellant had given a loan of Rs112.50 Crores under the DSA. Section 43(2)(b) provides that such a transfer has the effect of putting the said creditor in a beneficial position in case of distribution of assets under Section 53 of the code. In this case, the Appellant’s status would change to secured creditor consequent to creation of security interest, instead of unsecured creditor which is the case at present and its share of liquidation estate would go up in priority u/s 53 of the code.
# 62. We note that prior to execution of the Mortgage Deed, the Appellant was admittedly an unsecured financial creditor. By virtue of the Mortgage Deed, the Appellant acquired the status of a secured creditor, though as a second charge holder. Under the waterfall mechanism provided under Section 53 of the Code, even a second charge holder occupies a significantly better position than an unsecured financial creditor. Therefore, the transaction undoubtedly improved the position of the Appellant in the event of distribution of assets under Section 53. This improvement itself is sufficient to satisfy the requirement of Section 43(2)(b).
# 63. Section 43(3) of the Code provides that the transfers made in ordinary course of business would not be treated as preferential transaction. And lastly Section 43(4) provides a look back period of one year for such transactions. It is an admitted fact that the alleged transaction took place just 2 months prior to initiation of CIRP proceedings, well within one year period provided in the section 43(4) and so it’s covered by it. The only point of dispute in this case relates to whether the execution of aforesaid deed of mortgage is in ordinary course of business and consequently covered by exception as provided u/s 43(3)(a).
# 64. In this case the conduct of the Appellant becomes relevant while examining the true nature of the impugned transaction. From the material placed on record, it is evident that although the DSA dated 18.12.2014 contemplated creation and perfection of security interest as first charge in favour of the Appellant was to be completed within 30 days, but it was not done. We further note that no effective steps were taken by the Appellant for more than six years seven months to ensure creation of a perfected first charge in its favour. During this prolonged period, the Corporate Debtor proceeded to create first charges in favour of Yes Bank in the years 2015 and 2016 and thereafter further encumbrances in favour of DHFL in 2018. Despite being aware of these subsequent transactions and despite claiming that the DSA contained restrictive covenants against creation of further encumbrances, the Appellant admittedly did not initiate timely proceedings for enforcement of its alleged contractual rights or for securing registration and perfection of its charge. Had the Appellant acted diligently and ensured creation of a perfected first charge at the relevant time, its position in law may have stood on a different footing. However, having remained unsecured for nearly seven years and having permitted subsequent lenders to acquire registered security interests over the project assets, the Appellant cannot now contend that the Mortgage Deed dated 29.07.2021 was merely a continuation of an already perfected security. It is also to be noted that the DSA provided for creation of First Charge on the property, but a second charge was created on the same, without even a NOC from the first charge holder Yes Bank. The delayed creation of the mortgage immediately preceding commencement of CIRP materially altered the Appellant’s position from that of an unsecured creditor to a secured creditor and therefore squarely attracts the mischief sought to be prevented under Section 43 of the Code.
# 65. In insolvency law, there is a clear distinction between a contractual promise to create security and an actually perfected security interest enforceable against third parties. The DSA may have contemplated future creation of security; however, until the Mortgage Deed dated 29.07.2021 was executed and registered, the Appellant did not possess a perfected secured interest capable of enforcement against the insolvency estate. As noted above the Mortgage Deed dated 29.07.2021 is also not in consonance with the DSA in view of execution beyond the time frame prescribed in the DSA and creation of second charge instead of first charge as contemplated by DSA. We are therefore unable to accept the submission of the Appellant that the mortgage merely “related back” to the year 2014. This aspect becomes clear from the Clause 3 of the Deed of Mortgage dated 29.07.2021:
“3. In terms of the Debenture Subscription Agreement (“DSA”) dated December 18, 2014 executed, Inter alia, between the Mortgagor and the Mortgagee, the Mortgagor had created a first ranking and exclusive charge in favour of the Mortgagee on certain area/flats/premises part of the Mortgagor’s Share of Santacruz Project to secure the payment of the Secured Obligations (as. defined hereinafter) to the Mortgagee (“Preliminary Mortgage in favour of Mortgagee”) and the Parties had agreed to execute a separate deed of mortgage to capture the detailed terms and conditions of the mortgage and the register the same. However, till date, the said separate deed of mortgage is yet not executed. (Emphasis supplied)
# 66. We further find substance in the submission of the Resolution Professional that the Mortgage Deed was executed solely for securing antecedent debt, as no fresh loan or financial assistance was granted by the Appellant at the time of execution of the Mortgage Deed in July 2021. The mortgage was admittedly created only to secure liabilities arising under the DSA executed nearly seven years earlier.
# 67. The Appellant has repeatedly argued that the mortgage created only a second charge subordinate to Yes Bank and therefore no real benefit was conferred upon it. We are unable to accept this submission. Even a second charge constitutes a secured interest in law. The test under Section 43 is not whether the creditor became the highest-ranking secured creditor, but whether the creditor was placed in a more beneficial position, than it would otherwise have occupied under Section 53. In the present case, the answer to this question is clearly in the affirmative,
# 68. The timing of the transaction is also extremely significant. The Mortgage Deed was executed on 29.07.2021, whereas CIRP commenced on 06.09.2021. We have also verified the records of Ld. NCLT from its portal which shows that the Application for initiating CIRP against the Corporate Debtor was filed by a Financial Creditor SBICAP Trustee Co. Ltd. on 20/03/2021 and the same was registered on 22/04/2021. Thus, the impugned transaction which was entered into by the CD, 3 months after the Sec. 7 Application against the Corporate Debtor was registered in NCLT and barely two months prior to commencement of CIRP and squarely falls within the statutory look-back period prescribed under Section 43(4) of the Code. The fact that the debt itself was nearly seven years old, but the mortgage securing the said debt was created just 3 months after the application under Sec. 7 is filed by a financial creditor against the CD and before commencement of insolvency proceedings, strongly supports the conclusion that the transaction was entered with the intention to secure the Appellant’s interest and had the effect of improving the Appellant’s position at the cost of other creditors.
# 69. We also do not find merit in the submission of the Appellant that the transaction falls within the exception of “ordinary course of business” under Section 43(3). The object of Section 43(3) is to protect routine and ordinary commercial transactions undertaken in the normal course of business. A mortgage executed seven years after disbursement of funds, securing an old debt, and executed after application under Sec. 7 of the Code is registered against the Corporate Debtor and only weeks before commencement of CIRP, cannot be treated as an ordinary commercial transaction. Such delayed creation of security is clearly distinguishable from ordinary financing transactions where security is created contemporaneously with the lending itself.
# 70. Further, as we have noted from the records that the DSA originally contemplated creation of a first charge. However, the Mortgage Deed ultimately created only a second charge arrangement over certain identified units. This itself demonstrates that the Mortgage Deed was not merely a ministerial or mechanical continuation of the DSA, but was a fresh and substantially altered arrangement entered into under changed financial circumstances.
# 71. We also cannot ignore the broader purpose behind the avoidance provisions under the IBC. Sections 43 to 51 of the Code are intended to ensure that, during the twilight period preceding insolvency, the assets of the Corporate Debtor are not used to selectively improve the position of certain creditors at the expense of others. If creditors are permitted to obtain security for old unsecured debts immediately before commencement of CIRP merely on the basis of earlier contractual promises, the entire object of Section 43 would stand defeated.
# 72. The reliance placed by the Resolution Professional on the judgment of the Hon’ble Supreme Court in “Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. Interim Resolution Professional vs. Axis Bank Ltd. & Ors.” [(2020) ibclaw.in 06 SC] : [(2020) 8 SCC 401] is also well founded. The Hon’ble Supreme Court in this case laid down that while determining whether a transaction is preferential, the Court must examine five questions: whether the transfer was for the benefit of a creditor; whether it related to antecedent debt; whether it improved the creditor’s position under Section 53; whether it was within the statutory look-back period; and whether it was excluded under Section 43(3). Applying the above principles to the facts of the present case, we find that all the ingredients of Section 43 stand fully satisfied.
# 73. The Hon’ble Supreme Court in Anuj Jain (Supra) while analysing Section 43 of the Code has laid down 5 questions which have to be answered in order to arrive at the conclusion, whether a transaction is be classified as preferential under Section 43 of the Code or not. The facts of the present case have been analysed through the 5 questions of the aforesaid judgement:
a) whether such transfer is for the benefit of a creditor or a surety or a guarantor – It is an admitted fact that the Appellant is a creditor of the CD and creation of security interest is for the benefit of the creditor.
b) whether such transfer is for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor –It is an admitted fact that such transfer is on account of an antecedent financial debt provided by the Appellant.
c) whether such transfer has the effect of putting such creditor surety or guarantor in a beneficial position than it would have been in the event of distribution of assets being made in accordance with section 53 – Considering the fact that the creation of security interest in favour of the Appellant has changed the status of the Appellant from unsecured creditor to secured creditor thereby placing it on a much beneficial position in case of distribution of assets under Section 53 of the code.
d) if such transfer had been for the benefit of a related party (other than an employee), whether the same was made during the period of two years preceding the insolvency commencement date; and if such transfer had been for the benefit of an unrelated party, as to whether the same was made during the period of one year preceding the insolvency commencement date – It is admitted that the aforesaid security interest has been created within a period one year preceding the insolvency commencement date and therefore is deemed be preferential.
e) whether such transfer is not an excluded transaction in terms of sub-section (3) of section 43 –a transaction is excluded from being ruled as preferential if the same is being carried out in the ordinary course of business of the Corporate Debtor as well the creditor. In this case, the transaction is being carried out 7 years from the date of underlying transaction, wherein the time period provided in the Debenture Security Agreement (DSA) was only 30 days. Such a transaction, by no stretch of imagination could be termed as being conducted in ordinary course of business.
# 74. It is clear from the discussion above that the Appellant is the financial creditor who is the beneficiary of such transaction; the transaction was executed in respect of antecedent debt; it materially improved the position of the Appellant under Section 53 of the Code; it was executed within the statutory look-back period; and it does not fall within the ordinary course of business exception under Section 43(3). It is therefore squarely covered by the ratio laid down in Anuj Jain (Supra). Accordingly, we are satisfied that the Mortgage Deed dated 29.07.2021 constituted a preferential transaction within the meaning of Section 43 of the Insolvency and Bankruptcy Code, 2016.
# 75. The respondent has relied upon several cases which are discussed below:
(i) In “Mrutunjay Pani & Anr. vs. Narmada Bala Sasmal & Anr.”, the Hon’ble Supreme Court discussed the principle that no person should be allowed to take advantage of his own wrong. The Appellant has relied upon this principle by arguing that since the Corporate Debtor was required under the DSA to perfect the security, the Respondents cannot now rely upon absence of perfected security. However, the issue before us is not limited to contractual obligations between the parties. The issue is whether the Mortgage Deed dated 29.07.2021 amounts to a preferential transaction under Section 43 of the IBC. Even if the Corporate Debtor had originally agreed to create security, the admitted position is that no perfected mortgage or enforceable charge existed in favour of the Appellant for nearly seven years, even though the agreement provided a period of 30 days only. The avoidance provisions under the IBC are concerned with the effect and timing of the transaction on the insolvency process and on other creditors. Therefore, the equitable principle discussed in Mrutunjay Pani (Supra) cannot override the statutory provisions of Section 43. Accordingly, the said judgment is not applicable to the facts of the present case.
(ii) Similarly, Indore Development Authority vs. Shailendra (supra) and Indore Development Authority vs. Manoharlal & Ors. (supra) were rendered in the context of land acquisition matters and interpretation of rights under the Land Acquisition Act. The observations made therein regarding a party not being permitted to take advantage of its own wrong were made in a completely different statutory context. In the present case, the matter is governed by the special provisions of the Insolvency and Bankruptcy Code, particularly Sections 43 and 53. The question before us is whether the impugned transaction improved the position of the Appellant during the look-back period immediately preceding commencement of CIRP. Once the ingredients of Section 43 stand satisfied, general equitable principles cannot dilute the operation of the statutory provisions under the IBC. Therefore, the aforesaid judgments are clearly distinguishable and do not assist the Appellant.
(iii) The appellants reliance placed upon Vistra ITCL (India) Limited (supra) also misplaced. The proceedings in the said case related to interim arrangements concerning voting rights and participation during CIRP. The Adjudicating Authority did not decide the validity of the Mortgage Deed dated 29.07.2021, it did not question the authenticity of the same. The issue before us is whether the Mortgage Deed constitutes a preferential transaction under Section 43 of the code and whether the same is liable to be avoided under the Code. Merely because interim directions may have been passed regarding voting rights or participation in CoC meetings cannot amount to a final finding that the Appellant was a secured creditor for all purposes under the IBC. Further, the Appellant’s argument that its participation as a secured financial creditor is necessary for ensuring fairness in CIRP cannot override the statutory provisions of Sections 43 and 53 of the Code. Once the transaction itself is found to be preferential and avoidable in law, the Appellant cannot claim continuation of secured status merely on the basis of participation in CoC proceedings. Therefore, the said judgment does not help the case of the Appellant.
# 76. In view of findings above, we do not find any infirmity in the Impugned Order. The Appeal, being devoid of merit, stands dismissed. No order as to costs. Pending IA’s if any, are closed.
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