The National Company Law Appellate Tribunal has clarified that the delayed perfection of a security interest, even if contractually contemplated, cannot escape classification as a preferential transaction under Section 43 of the Insolvency and Bankruptcy Code if executed within the statutory look-back period and without fresh consideration. This ruling reinforces the statutory objective of equitable creditor treatment during the insolvency twilight zone.
Background & Facts
The Dispute
Suraksha Realty Limited (Appellant) advanced Rs. 1,12,50,00,000 to Radius Estate Projects Private Limited (Corporate Debtor) under a Debenture Subscription Agreement (DSA) dated 18.12.2014. The DSA mandated the Corporate Debtor to create a first charge over approximately 50,000 square feet of saleable area within 30 days of execution. Despite this obligation, no mortgage or perfected security interest was registered in favour of the Appellant for nearly seven years.
Key Facts
- The DSA dated 18.12.2014 required execution of a Deed of Mortgage within 30 days (by 17.01.2015) to create a first charge.
- The Corporate Debtor failed to execute any mortgage deed by the stipulated date.
- In December 2015 and May 2016, the Corporate Debtor executed registered mortgage deeds in favour of Yes Bank, creating a first charge over the entire project.
- A supplementary deed dated 06.02.2018 further consolidated Yes Bank’s charge.
- In July 2018, the Corporate Debtor approached DHFL for funding, which was conditional upon creation of a first charge; however, the conditional NOC was revoked due to non-repayment.
- On 29.07.2021, nearly seven years after the DSA, the Corporate Debtor executed a registered Deed of Mortgage in favour of Suraksha Realty Limited, creating a second charge over 29 identified units (61,803 sq. ft.) with express subordination to Yes Bank’s prior charge.
- No fresh disbursement was made by the Appellant on 29.07.2021; the mortgage solely secured the pre-existing debt.
- The Corporate Insolvency Resolution Process (CIRP) was initiated on 06.09.2021, following a Section 7 application filed on 20.03.2021 and registered on 22.04.2021.
- The Appellant’s claim was initially provisionally admitted as secured (Rs. 98,35,38,914) but later reclassified as unsecured after a Transaction Audit by M/s Bagchi & Gupta.
- The Resolution Professional filed I.A. No. 4504 of 2024 on 11.04.2024 seeking avoidance of the mortgage as a preferential transaction.
- The NCLT Mumbai Bench, by order dated 10.10.2025, allowed the application, declaring the mortgage void and directing discharge of the security interest.
Procedural History
- 18.12.2014: Debenture Subscription Agreement executed between Suraksha Realty Limited and Radius Estate Projects Private Limited.
- 17.01.2015: Deadline for execution of Deed of Mortgage under DSA (not complied with).
- 23.12.2015: First mortgage executed in favour of Yes Bank.
- 12.05.2016: Second mortgage executed in favour of Yes Bank.
- 06.02.2018: Supplementary deed consolidating Yes Bank’s charge.
- 30.07.2018: Mortgage deed executed in favour of DHFL (later converted to second charge).
- 29.07.2021: Deed of Mortgage executed in favour of Suraksha Realty Limited (second charge).
- 20.03.2021: Section 7 application filed by SBICAP Trustee Co. Ltd. against Corporate Debtor.
- 22.04.2021: Section 7 application registered by NCLT.
- 06.09.2021: CIRP commenced; Vithal M. Dahake appointed Resolution Professional.
- 28.10.2021: Appellant filed claim in Form ‘C’ for Rs. 430,08,00,000.
- 01.12.2021: Resolution Professional provisionally admitted Rs. 98,35,38,914 as secured claim.
- 26.03.2024: Transaction Audit Report classified mortgage as preferential.
- 11.04.2024: Resolution Professional filed I.A. No. 4504 of 2024 seeking avoidance of mortgage.
- 10.10.2025: NCLT Mumbai Bench allowed I.A. 4504/2024, declaring mortgage void.
- 19.05.2026: NCLAT dismissed appeal.
The Parties' Positions
Appellant (Suraksha Realty Limited): Argued that the mortgage dated 29.07.2021 was not a new transaction but a mere perfection of a pre-existing contractual security interest under the DSA. Contended that the delay was due to the Corporate Debtor’s breach and third-party encumbrances, not its own inaction. Relied on equitable principles (commodum ex injuria sua nemo habere debet) and claimed the transaction fell within the ordinary course of business exception under Section 43(3).
Respondent (Resolution Professional): Argued that the mortgage was executed solely to elevate the Appellant from an unsecured to a secured creditor within the statutory look-back period, with no fresh consideration. Emphasised that the transaction altered the Appellant’s position under Section 53, placing it ahead of other unsecured creditors. Asserted that the delay of seven years, coupled with execution mere months after a Section 7 application, rendered it a classic preferential transaction.
Relief Sought
The Appellant sought setting aside of the NCLT’s order dated 10.10.2025, restoration of its status as a secured financial creditor, and reversal of the discharge of the mortgage. It also sought costs and directions to reinstate its voting rights in the Committee of Creditors.
The Legal Issue
Whether the execution of a registered Deed of Mortgage on 29.07.2021, creating a second charge over property seven years after the underlying debt was advanced and two months before the commencement of CIRP, constitutes a preferential transaction under Section 43 of the Insolvency and Bankruptcy Code, despite the existence of a prior contractual obligation to create security?
Arguments Presented
For the Appellant
The Appellant contended that the mortgage was not a fresh transaction but a formalisation of a pre-existing security interest contemplated under the DSA dated 18.12.2014. It argued that the delay in perfection was caused by the Corporate Debtor’s breach and its own reliance on assurances of future compliance. Relied on Mrutunjay Pani v. Narmada Bala Sasmal and Indore Development Authority v. Shailendra to assert that the Corporate Debtor cannot benefit from its own default. Emphasised that the mortgage created only a second charge subordinate to Yes Bank and did not confer any new benefit. Invoked Section 43(3) exception for transactions in the ordinary course of business, citing that the DSA’s terms and contemporaneous recognition by DHFL (via sanction letter and allotment letters) demonstrated continuity of the security arrangement.
For the Respondent
The Resolution Professional argued that the mortgage satisfied all elements of Section 43(2): (a) transfer of interest in property for an antecedent debt, and (b) improvement of the Appellant’s position under Section 53. Highlighted that the Appellant remained an unsecured creditor for seven years, despite the DSA’s 30-day deadline for perfection. Noted that the mortgage was executed only after a Section 7 application was filed and mere months before CIRP commencement. Rejected the ordinary course of business defence, stating that a seven-year delay in securing a debt, especially after third-party charges were created, cannot be considered routine. Cited Anuj Jain v. Axis Bank to affirm that timing and effect on creditor hierarchy are decisive, not contractual intent.
The Court's Analysis
The NCLAT undertook a structured analysis of Section 43, applying the five-pronged test from Anuj Jain v. Axis Bank. It found that all conditions were met: the transfer was for the benefit of a creditor, secured an antecedent debt, improved the creditor’s position under Section 53, occurred within the one-year look-back period, and did not fall within the ordinary course of business exception.
"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."
The Tribunal rejected the Appellant’s argument that the mortgage merely "perfected" a prior right. It noted that the DSA required a first charge, but the mortgage created a second charge without consent from Yes Bank, the prior charge holder. The timing was critical: the mortgage was executed 3 months after the Section 7 application and 7 years after the debt was advanced. The Tribunal held that contractual promises do not equate to perfected security under the Code.
"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 Court dismissed reliance on equitable doctrines like commodum ex injuria sua nemo habere debet, stating that the IBC’s statutory framework overrides general principles of equity when they conflict with its objectives. The Appellant’s participation in the CoC as a secured creditor was deemed procedural and provisional, not determinative of legal status under Section 53.
The Tribunal also found the Transaction Audit Report’s conclusion valid, noting that the Appellant failed to rebut its findings despite multiple opportunities and tribunal directions. The failure to act diligently for seven years, while permitting other secured creditors to register charges, rendered the late mortgage a classic attempt to circumvent the insolvency waterfall.
The Verdict
The appeal was dismissed. The NCLAT upheld the NCLT’s order dated 10.10.2025, declaring the Deed of Mortgage dated 29.07.2021 a preferential transaction under Section 43 of the IBC. The security interest created in favour of Suraksha Realty Limited was ordered to be released and discharged. The Appellant’s claim was reclassified as unsecured, and its voting rights in the Committee of Creditors were to be adjusted accordingly. No costs were awarded. The judgment affirmed that perfection of security after prolonged delay, especially within the look-back period, constitutes preferential treatment regardless of prior contractual intent.
What This Means For Similar Cases
Security Must Be Perfected Promptly - Contractual Promises Are Not Enough
- Practitioners must ensure that security interests under loan agreements are registered within the stipulated timelines, especially where the agreement mandates perfection within days.
- Merely alleging a contractual obligation to create security will not shield a transaction from avoidance under Section 43 if registration is delayed beyond the look-back period.
- The Code prioritises actual enforceability over contractual intent; unperfected security remains unsecured.
Timing of Security Creation Is Decisive - Even Second Charges Are Preferential
- A second charge created within the look-back period, even if subordinate to prior charges, still improves a creditor’s position under Section 53 and qualifies as preferential.
- The absence of a first charge does not negate the benefit conferred; any elevation from unsecured to secured status triggers Section 43.
- Transactions occurring after a Section 7 application is filed are highly suspect and will be scrutinised for intent.
Delayed Perfection Is Not Ordinary Course of Business
- A transaction cannot be deemed ordinary merely because it relates to a long-standing debt. The timing, context, and commercial rationale are paramount.
- Seven-year delays in securing a debt, particularly after third-party charges are created, are inconsistent with ordinary commercial conduct.
- Resolution Professionals may rely on transaction audits to challenge late security creations - courts will uphold such findings if the statutory criteria are met.
Statutory Framework Overrides Equitable Doctrines
- Doctrines like commodum ex injuria sua nemo habere debet cannot override the specific avoidance provisions of the IBC.
- Courts will not permit creditors to use equitable arguments to circumvent the statutory priority regime under Section 53.
- The IBC’s objective of equal treatment of creditors trumps individual fairness claims arising from contractual breaches.
Procedural Recognition Does Not Confer Legal Status
- Provisional admission of a claim as secured in the CIRP process does not preclude subsequent avoidance under Section 43.
- Participation in the Committee of Creditors as a secured creditor is procedural and subject to legal validation.
- Practitioners must not rely on interim CoC participation as a substitute for legal enforceability of security.
