NCLAT Sets Aside NCLT Order, Holding Exclusion of Secured Assets as Margin Money Violates CoC’s Commercial Wisdom under IBC
- REEDLAW
- Oct 31
- 4 min read
REEDLAW Legal News Network reports: In a decisive ruling, the National Company Law Appellate Tribunal (NCLAT), Principal Bench, set aside the NCLT’s order, which had directed exclusion of secured assets on the ground of being margin money. The Appellate Tribunal held that such exclusion amounted to interference with the Committee of Creditors’ commercial wisdom and constituted enforcement of a security interest during the moratorium period, which is prohibited under the Insolvency and Bankruptcy Code, 2016.
The NCLAT Principal Bench, comprising Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member), while adjudicating the Company Appeal, observed that the Adjudicating Authority had transgressed its jurisdiction by ordering the exclusion of assets treated as margin money. The Bench held that the treatment of such assets falls within the exclusive domain of the Committee of Creditors and that any judicial interference undermines their commercial discretion, which is not permissible under the IBC framework. Consequently, the impugned order was set aside.
The Appellant had preferred the present appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016, challenging the order dated 13.08.2025 passed by the Adjudicating Authority, National Company Law Tribunal, Mumbai Bench-I. By the impugned order, the Adjudicating Authority had directed the exclusion of an amount equivalent to 5% of the Foreign Letters of Credit, Letters of Credit, and Bank Guarantees from the total assets of the Corporate Debtor, subject to the fair value of the secured property, and held that such amount would belong to the Respondent. Aggrieved by this decision, the Appellant, a member of the Committee of Creditors holding 20.95% voting share, assailed the order as being contrary to the terms of the resolution process and the commercial wisdom of the CoC.
The Corporate Debtor had been admitted into CIRP on 09.02.2023 upon a Section 7 application. A consortium of banks, including the Appellant and Respondent, had sanctioned multiple credit facilities aggregating to Rs. 756.75 crores, of which Rs. 30.75 crores were fund-based and the remainder were non-fund-based, secured through Letters of Credit, Bank Guarantees, and Foreign Letters of Credit. The Respondent had taken a margin of 10% through Term Deposit Receipts and a further 5% as collateral security by way of equitable mortgage over a property situated in Bandra. The Respondent had filed its claim in Form-C, which was admitted for Rs. 10,12,49,15,522/-, and was classified as a Financial Creditor. The dispute arose when the CoC resolved, with an 85.69% majority in its 41st meeting, to distribute resolution proceeds on the basis of the admitted claim ratio rather than on the basis of security interests. The Respondent objected to this decision, contending that its exclusive charge over the property representing the 5% margin must be excluded from the common asset pool. The Adjudicating Authority allowed the Respondent’s application, directing exclusion of the margin amount from the total assets.
The Appellant argued that the Adjudicating Authority had erred in treating the property as a margin instead of an equitable mortgage. It was contended that the Respondent could not appropriate the margin without enforcing its security interest and that any such appropriation would violate the moratorium under Section 14 of the Code. The Appellant further asserted that the order effectively modified the approved resolution framework, undermining the CoC’s commercial wisdom and resulting in double benefit to the Respondent at the cost of other creditors.
The Respondent, on the other hand, maintained that the property was held in trust as margin money created prior to CIRP commencement and did not form part of the Corporate Debtor’s assets. Relying on judicial precedent, it argued that margin money constitutes a substratum of trust and once held in trust, the Corporate Debtor ceases to have ownership rights. The Respondent emphasised that its exclusive charge over the property was expressly recorded in the sanction letter dated 05.09.2017, and that the Adjudicating Authority had rightly excluded the margin amount from the asset pool.
Upon examination of the sanction letter and Form-C, the Appellate Tribunal found that the subject property was recorded as “Collateral Security” under an equitable mortgage on a pari passu basis and not as margin money. The CoC minutes also revealed that even during deliberations, the Respondent had referred to its claim as exclusive security, not as margin. The Tribunal observed that while the purpose of the equitable mortgage might have been to secure margin requirements, its legal character remained that of a security interest. The exclusion of the property value from the Corporate Debtor’s asset pool, therefore, amounted to interference with the CoC’s commercial wisdom and the approved distribution framework.
Accordingly, the Tribunal held that the Adjudicating Authority had exceeded its jurisdiction by directing exclusion of the 5% margin equivalent from the Corporate Debtor’s assets. It concluded that such exclusion, in effect, amounted to enforcement of a security interest during a moratorium and modification of the CoC-approved plan, which is impermissible under the Code.
Mr. Abhijeet Sinha, Sr. Advocate with Mr. J. Rajesh, Mr. Arshlan Ahmed, Yashudhan Agarwal, Dhrupad Vaghani, Gayatri Mohite, Kamakshi Maine and Ajiz MK, Advocates, represented the appellant.
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, appeared for the Respondent No. 1.
Mr. Varun Kalra and Shohan Ulla, Advocates, appeared for the Respondent No. 2.
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