Can a Mortgagee under an English Mortgage initiate action U/s. 7 of the Insolvency & Bankruptcy Code?

By Pallavi Ghaisas

The Hon’ble Supreme Court vide its judgement dated 26^th July 2021 in the matter of M/s. Orator Marketing Pvt. Ltd. Vs. M/s. SamtexDesinzPvt. Ltd. [1] reiterated that the trigger for initiation of the Corporate Insolvency Resolution Process (“CIRP”)by a Financial Creditor under Section 7 of theInsolvency & Bankruptcy Code, 2016 is the occurrence of a default by the Corporate Debtor.

On an earlier occasion, in the matter of IDBI Trusteeship Services Limited v/s. Ornate Spaces Private Limiteddecided on 29^th June 2020, the proceeding U/s. 7 of the IBC(“said Code”) was initiated by the Petitioner being Debenture Trustee/Mortgagee under the Debenture Trust Deed, and despite the Petitioner being Mortgagee under an enforceable English mortgage,the said Petition was admitted by National Company Law Tribunal (“NCLT”)(Mumbai Bench).

However, recently the NCLT (Mumbai Bench) passed an order on 7^th October 2021,in the matter of Beacon Trusteeship Limited v/s. Neptune Ventures and Developers Private Limited (“said Order”), wherein theNCLThas taken a different perspective on the rights of Mortgagee under an English mortgage. By the said Order, the NCLT held that since the Petitioner is a mortgagee under an English mortgage, it has absolute rights in the mortgaged property and cannot initiate any action under Section 7 ofthe said Code.

Facts:

1. The Petitioner and the Corporate Debtor had executed the Debenture Trust Deed cum Indenture of Mortgage registered on 10^th January, 2018 and terms and conditions of debenture interest rate thereof were amended by a supplementary Debenture Trust Deed dated 20^th September, 2019 executed by both parties (collectively “said Deed”);

1. The Corporate Debtor had issued Series A and Series B debentures aggregating to an amount of Rs.25,00,00,000/- and registered the secured charge with MCA in CHG-9 on 20^th January, 2020;

1. Under the said Deed, the debentures were secured by way of a registered mortgage of commercial premises of the Corporate Debtor located in Bhandup and receivables thereof were also hypothecated and the promoters of Corporate Debtor had also given personal guarantee;

1. The Corporate Debtor defaulted in the payment terms of the said Deed and hence an amount of Rs.32,08,76,450/- (inclusive of principal amount, interest and default interest) was claimed by the Petitioner as on 31^st December, 2019 and accordingly the Petitioner sought to initiate Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor by filing Company Petition under Section 7 of the said Code.

Findings of NCLT:

The Hon’ble NCLT decidedthat as per Clause 13 of the said Deed, an English mortgage was created in favour of the Petitionerbeing Debenture Trustee therein for the benefit of Debenture Holders and therefore, the title, ownership, possession, interest, benefits, claim and demand including any lease hold rights in respect of mortgaged property already stood transferred to the Debenture Trustee absolutely.

The Hon’ble NCLT held as follows and hencedismissed the petition :

1. The said Deed is a complete understanding which sets out consequences of default and redemption of debentures;

• Petitioner has acquired absolute rights in the mortgaged property;

• It was agreed between the Parties that the Debenture Holder and Debenture Trustee can take properties without intervention of court.

• The non-payment of dues by the Corporate Debtor does not constitute a default for the purpose of issuance of proceedings U/s. 7 of the said Code;

• The Petitioner has agreed to a recourse envisaged under the said Deed and the same enables the Petitioner to sell the mortgaged assets and recover its dues.

Conclusion:

As per Definition of ‘Mortgage’ under Section 58 of the Transfer of Property Act, 1882 (“TP Act”), a mortgage is only a ‘transfer of an interest in specific immovable property’. An English mortgage is defined under the same section as “Where the Mortgagor binds himself to repay the mortgage-money on a certain date, and transfers the mortgaged property absolutely the mortgagee, but subject to proviso that he will re-transfer it to the mortgagor upon payment of mortgage-money as agreed, the transaction is called an English mortgage”.

In Indian law, the right of redemption is conferred upon the mortgagor by Section 60 of the TP Act. Hence, what is transferred under an ‘English Mortgage’ is right of ownership subject to a condition. Therefore, even in an English mortgage, there is transfer only of ‘some interest’ and not the transfer of the whole interest of mortgagor. The word ‘interest’ as opposed to ‘ownership’ is a limited right and not an absolute right.[2]

In view of the above,on one hand the mortgagee under English mortgage is deprived of its rights to initiate proceedings under the said Code and on the other handtransfer in his favour is not absolute but subject to the right of redemption of mortgagor. Hence, following questions need to be answered regarding rights mortgagee under English mortgage vis-à-vis the said Code.

Before initiating proceedings U/s. 7 of the said Code,should a mortgagee be compelled to enforce security as per the mortgage document?

If the sale proceeds from the mortgaged property are insufficient to cover the principal debt and interest, then can it constitute ‘default’ and a petition U/s. 7 of the said Code be admitted?

Advocate Pallavi Ghaisas currently works at Federal and Company (Advocates and Solicitors) in Mumbai. She specializes in Conveyancing and Real Estate Practice. She has done her B.L.S./LL.B from Government Law College (GLC), Mumbai and is also a qualified Company Secretary.

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[1]Civil Appeal No. 2231 of 2021

[2]Ram Kinkar Banerjee and Ors. Vs.Satya CharanSrimani and Ors. AIR 1939 PC 14