The National Company Law Appellate Tribunal has clarified that a secured creditor’s entitlement under the Insolvency and Bankruptcy Code is strictly limited to the realizable value of its security interest, which in real estate projects excludes units already allotted to homebuyers under the Real Estate (Regulation and Development) Act, 2016. The judgment also establishes that statutory dues arising from a registered lease deed may constitute a valid security interest under the Code.
Background & Facts
The Dispute
The Corporate Insolvency Resolution Process (CIRP) was initiated against Arena Superstructures Private Limited, a real estate developer that had launched the residential project "Lotus Arena-I" in Sector 79, Noida. The project comprised 1,080 residential units. The CIRP was triggered by a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), filed by Dhankalash Distributors Private Limited, an unsecured financial creditor. The National Company Law Tribunal (NCLT) admitted the petition on 29.10.2020 and appointed Mr. Pawan Kumar Singhal as Interim Resolution Professional. On 09.06.2021, Mr. Viswanadha Sarma was appointed as the Resolution Professional.
Key Facts
- The Corporate Debtor had entered into a registered Sub-Lease Deed dated 19.10.2012 with New Okhla Industrial Development Authority (NOIDA), under which it leased Plot No. SC-01/A2, Sector 79, Noida, for 90 years.
- The Sub-Lease Deed contained a clause granting NOIDA a "first charge on the plot towards payment of all dues."
- Punjab National Bank Housing Finance Limited (PNBHFL) extended two loan facilities to the Corporate Debtor and co-borrowers on 08.03.2017, secured by mortgage over the project land and hypothecation over receivables.
- The mortgage was created on 20.03.2017. By that date, 806 units (74.36% of the project) had already been allotted to homebuyers under Builder-Buyer Agreements (BBAs).
- On the insolvency commencement date (29.10.2020), 858 units (79.44%) had been allotted to homebuyers.
- ACRE, a financial institution, acquired PNBHFL’s debt and security interest through assignment on 25.04.2022 and became the sole secured financial creditor with an admitted claim of Rs. 200,27,42,110/-.
- Two registered valuers, Mr. Anil Saxena and Mr. Ashish Kumar, initially valued the liquidation value of the Corporate Debtor at approximately Rs. 428 crores and Rs. 412 crores respectively.
- After receiving additional information from the Resolution Professional, both valuers revised the liquidation value downward to Rs. 159,20,79,150/- and Rs. 141,89,58,164/- respectively.
- The Resolution Professional applied the proportion of unsold units (25.64%) to the liquidation value of Rs. 151,00,41,336/- to determine ACRE’s security interest at Rs. 38,71,74,598.55/-.
- The Resolution Plan submitted by Purvanchal Projects Private Limited offered ACRE Rs. 70 crores payable in four tranches over 42 months, and preserved its rights against co-borrowers and third-party securities.
- Dhankalash Distributors Private Limited, an unsecured financial creditor with an admitted claim of Rs. 2,02,11,057/-, was offered Rs. 50 lakhs under the plan.
- NOIDA filed a claim of Rs. 84.19 crores, of which Rs. 68.90 crores was admitted, but was classified as an operational creditor and offered only Rs. 7-8 crores under the plan.
Procedural History
- 29.10.2020: NCLT admitted CIRP petition filed by Dhankalash Distributors Private Limited under Section 7 of IBC.
- 09.06.2021: Mr. Viswanadha Sarma appointed as Resolution Professional.
- 30.06.2021: Fresh Form-G issued inviting new resolution applicants.
- 08.09.2021: 10th CoC meeting held; valuers’ revised reports submitted.
- 25.04.2022: ACRE acquired PNBHFL’s claim and became secured creditor.
- 18.05.2022: 16th CoC meeting approved 16.06.2022 as deadline for revised plans.
- 17.06.2022: 17th CoC meeting; ACRE raised objections to Section 30(2)(b) compliance.
- 01.07.2022: 19th CoC meeting held; voting conducted from 03.07.2022 to 09.07.2022.
- 10.07.2022: Purvanchal Projects Private Limited’s plan approved with 71.11% voting share.
- 19.07.2023: NCLT approved Resolution Plan, rejected objections of ACRE, Dhankalash, and NOIDA.
- 12.07.2023: ACRE filed CA (AT) (Ins.) No. 949 of 2023.
- 18.07.2023: Dhankalash filed CA (AT) (Ins.) No. 1117 of 2023.
- 19.07.2023: NOIDA filed CA (AT) (Ins.) No. 1231 of 2023.
- 30.06.2026: NCLAT delivered judgment.
The Parties' Positions
- ACRE: Argued it was entitled to the entire liquidation value of Rs. 151 crores under Section 30(2)(b) read with Section 53, as the sole secured creditor, and that its security interest extended to all 1,080 units including those allotted to homebuyers.
- Resolution Professional and Purvanchal Projects: Contended that ACRE’s security interest was limited to 274 unsold units (25.64% of project) under RERA and SARFAESI, and that its claim of Rs. 200 crores could not exceed the realizable value of its security interest.
- Dhankalash: Alleged procedural irregularities, manipulation of valuation, and non-adjudication of its restoration application, and claimed its payment of Rs. 50 lakhs was below liquidation entitlement.
- NOIDA: Claimed it was a secured creditor under the registered Sub-Lease Deed and statutory provisions of the Uttar Pradesh Industrial Area Development Act, 1976, and should have been treated as such.
Relief Sought
- ACRE sought setting aside of the NCLT order, declaration of non-compliance with Section 30(2)(b), and payment of Rs. 144,91,91,358/- as liquidation value.
- Dhankalash sought quashing of the Resolution Plan, restoration of its application, and re-conduct of voting.
- NOIDA sought reclassification as a secured creditor, revision of its payment to reflect statutory dues, and setting aside of the impugned order.
The Legal Issue
The central questions were: (1) Whether a secured creditor’s entitlement under Section 30(2)(b) of the IBC is limited to the realizable value of its security interest, excluding units already allotted to homebuyers under RERA; and (2) Whether a statutory charge arising from a registered lease deed constitutes a "security interest" under Section 3(31) of the IBC.
Arguments Presented
For the Appellant/Petitioner
ACRE relied on Section 30(2)(b) and Section 53 of the IBC to argue that as the sole secured creditor, it was entitled to the full liquidation value of Rs. 151 crores after deduction of CIRP costs. It contended that its mortgage and hypothecation rights extended to all project assets, including receivables from sold units, and that RERA Section 11(4)(h) only protects homebuyers’ rights but does not extinguish the mortgage. It cited Jaypee Kensington Boulevard and Essar Steel to argue that judicial review is permissible to enforce statutory entitlements.
Dhankalash argued that the CIRP process was vitiated by non-adjudication of its restoration application, manipulation of valuation, and failure to assess feasibility of competing plans. It claimed its payment of Rs. 50 lakhs was below the liquidation value under Section 53(1)(d).
NOIDA contended that its claim arose from a registered Sub-Lease Deed creating a first charge on the land, which qualified as a "security interest" under Section 3(31) of the IBC. It relied on Swiss Ribbons, Anuj Jain, and Greater Noida v. Prabhjit Singh Soni to argue that statutory dues backed by a charge must be treated as secured claims.
For the Respondent/State
The Resolution Professional and Purvanchal Projects argued that Section 53 limits a secured creditor’s priority to the realizable value of its security interest, not the full admitted debt. They relied on SARFAESI Notice dated 22.02.2022, which limited PNBHFL’s security to 171 unsold units, and Section 11(4)(h) of RERA to argue that mortgages on allotted units are void. They cited Bikram Chatterji and Kotak Mahindra Bank to support the exclusion of allotted units from the liquidation estate. They further argued that future receivables cannot be included in liquidation value under Regulation 2(k) of the CIRP Regulations.
Dhankalash’s objections were dismissed as commercial disagreements with the CoC’s decision, which is final under Essar Steel. The payment of Rs. 50 lakhs was deemed compliant with the waterfall under Section 53(1)(d).
NOIDA was argued to be estopped from claiming secured status after having filed its claim as an operational creditor in Form-C. The Respondents relied on the 2026 Amendment to Section 3(31), which excludes charges created by operation of law, and Regulation 21 of the Liquidation Regulations to argue that NOIDA failed to prove a registered charge.
The Court's Analysis
The NCLAT undertook a detailed analysis of the statutory framework under the IBC and RERA. It held that Section 30(2)(b) mandates that a dissenting financial creditor receive an amount not less than what it would receive in liquidation under Section 53. However, Section 53(1)(b) does not entitle a secured creditor to the full admitted debt; it entitles it only to the realizable value of its security interest. The Court emphasized that the admitted debt and the value of security are distinct concepts.
"A secured creditor can claim priority only to the extent of the security actually available in its favour. Merely because the admitted debt is larger than the liquidation value does not automatically entitle the creditor to the entire liquidation value irrespective of the extent of its security."
The Court examined the SARFAESI Notice dated 22.02.2022 issued by PNBHFL, which explicitly limited its security interest to 171 unsold units and excluded 909 sold units. Since ACRE derived its rights through assignment, it could not claim a broader interest than its predecessor. The Court further held that Section 11(4)(h) of RERA prohibits creation of a charge on units already allotted to homebuyers, and such charges are void. The valuation reports, which excluded the value of allotted units, were accepted as objective and unchallenged.
Regarding receivables, the Court held that liquidation value is determined as of the insolvency commencement date, under a hypothetical liquidation scenario where future cash flows do not exist. Homebuyers cannot be expected to continue payments for an incomplete project in liquidation. The Court also noted that RERA Section 4(2)(l)(D) mandates that 70% of receivables be held in escrow for construction, and cannot be independently appropriated.
On the issue of NOIDA, the Court found that the registered Sub-Lease Deed dated 19.10.2012 created a first charge on the plot in favour of NOIDA to secure payment of dues. The Court held that this charge was created by a transaction - the lease agreement - and not merely by operation of law. The 2026 Amendment to Section 3(31), while excluding statutory charges created by operation of law, did not negate charges created by written agreement. The Court distinguished Greater Noida v. Prabhjit Singh Soni on facts, noting that in this case, the charge arose from a contractual instrument, not statutory enforcement.
"The rights asserted by NOIDA are intrinsically connected with the very source from which the Corporate Debtor derived its entitlement to occupy and develop the project land."
The Court found that the NCLT failed to examine the nature of NOIDA’s claim under the Sub-Lease Deed, and that approval by the CoC could not override the legal rights arising from a registered agreement. The failure to consider this constituted a material error.
The Verdict
The NCLAT dismissed CA (AT) (Ins.) Nos. 949 and 1117 of 2023. ACRE’s appeal was rejected as its entitlement was correctly limited to Rs. 38.71 crores, and the Resolution Plan’s offer of Rs. 70 crores exceeded its statutory entitlement. Dhankalash’s appeal was dismissed as its payment of Rs. 50 lakhs was compliant with Section 53(1)(d), and the CIRP process was procedurally sound.
The NCLAT allowed CA (AT) (Ins.) No. 1231 of 2023. The Impugned Order was set aside to the limited extent of the distribution proposed to NOIDA. The Resolution Professional was directed to propose an addendum to the Resolution Plan treating NOIDA as a secured creditor, revising its distribution in accordance with the registered Sub-Lease Deed. The revised distribution must be approved by the Committee of Creditors and submitted to the NCLT for final approval. The remainder of the Resolution Plan remained unaffected.
What This Means For Similar Cases
Security Interest Is Limited to Unallotted Units
- Practitioners must now assess a secured creditor’s entitlement in real estate CIRPs by identifying the exact proportion of unsold units at the time of mortgage creation, not the total project size.
- Any claim based on hypothecation over receivables from sold units will be rejected, as such receivables are deemed part of the project’s completion cost under RERA and Regulation 2(k) of CIRP Regulations.
- SARFAESI notices and loan agreements must be scrutinized for explicit limitations on security interest.
Registered Lease Deeds May Constitute Security Interest
- A statutory charge created by operation of law does not qualify as a security interest under Section 3(31) of the IBC.
- However, a charge created by a written agreement - such as a registered lease deed - does qualify, even if supplemented by statutory provisions.
- Creditors must ensure that such charges are documented in writing and registered, as unregistered claims will not be recognized.
Judicial Review Applies to Legal Rights, Not Commercial Wisdom
- While the CoC’s commercial decisions are final, courts retain jurisdiction to examine whether legal rights under contracts or statutes have been ignored.
- Approval of a resolution plan cannot override a registered agreement that creates a security interest.
- Resolution Professionals must independently verify the nature of claims and cannot rely solely on creditor classification in Form-C if a contractual right exists.
