Unregistered Security Interest in ICD Agreement Doesn't Create a Valid Charge; Subsequent Asset Sale Not Fraudulent Trading Under S.66 IBC: NCLT Kochi - 2025-08-07

NCLT Kochi Dismisses Fraudulent Trading Plea, Rules Unregistered Security Interest Invalid

Kochi, July 30, 2025 – The National Company Law Tribunal (NCLT), Kochi Bench, has dismissed an application alleging fraudulent trading under Section 66 of the Insolvency and Bankruptcy Code (IBC), 2016. The Tribunal, comprising Hon'ble Member (Judicial) Shri. Vinay Goel and Hon'ble Member (Technical) Smt. Madhu Sinha, held that a mere reference to a property as security in an Inter-Corporate Deposit (ICD) agreement, without proper registration, does not create a valid and enforceable charge.

The Bench concluded that the subsequent sale of the property could not be deemed fraudulent, as no legally valid security interest existed in the first place. The NCLT also directed the Resolution Professional (RP) to reclassify the creditor's claim from 'secured' to 'unsecured'.

Case Background

The application was filed by Mr. Sreenivasan P R, the Resolution Professional for M/s. Greenlace Builders and Developers Private Limited (the Corporate Debtor). The RP alleged that the suspended directors of Greenlace had fraudulently sold properties that were supposedly secured in favour of M/s. Asten Realtors Private Limited (Respondent No. 3).

Asten Realtors had filed a claim of Rs. 5.88 crores as a secured financial creditor, based on a 2016 ICD agreement. The agreement mentioned 81.92 acres of land as security for a Rs. 5 crore deposit. However, the RP discovered that the suspended directors had later sold portions of this land to other parties (Respondents No. 4-7) for a total of Rs. 31.59 lakhs between 2019 and 2020. The RP sought cancellation of these sale deeds and a direction for the directors to compensate the corporate debtor for the loss.

Arguments from Both Sides

Applicant's (Resolution Professional) Stance: The RP argued that the sale of the secured land was a fraudulent act under Section 66 of the IBC, intended to dissipate the Corporate Debtor's assets. The RP contended that the suspended directors were aware of the charge created by the ICD agreement and that the non-registration of the charge under the Companies Act did not nullify the security interest between the parties involved.

Respondents' Counter-Arguments: - Suspended Directors (R1 & R2): They argued that no valid charge was ever created or registered with the Registrar of Companies (RoC). They maintained the property sale was conducted in the ordinary course of business and that the purchasers (R4-R7) were bona fide buyers. - Asten Realtors (R3): Interestingly, Asten Realtors, itself under CIRP, supported the RP's application, asserting that its loan was secured by the land and the sale was fraudulent. - The Purchasers (R4, R5, R6 & R7): They collectively argued that they were bona fide purchasers for valuable consideration. They had conducted due diligence, found no registered charge on the property, and completed the transactions through proper banking channels. They contended that the NCLT lacked jurisdiction under Section 66 to cancel validly executed sale deeds.

Tribunal's Findings and Legal Reasoning

The NCLT meticulously analyzed the requirements for fraudulent and wrongful trading under Section 66 of the IBC. The core of its decision rested on the validity of the alleged security interest.

No Valid Charge Created

The Tribunal found that the applicant failed to prove the existence of a legally enforceable charge. It noted:

"A mere reference to the property in the schedule is insufficient to establish a valid and legal charge or security interest... there is no evidence of an equitable mortgage through the deposit of title deeds. At best, the reference to the land in the ICD agreement may create a negative lien, which, as per settled law, does not constitute a charge."

The NCLT emphasized the mandatory requirement of registration for creating a security interest in immovable property under the Transfer of Property Act, 1882, and the Companies Act, 2013. The RP could not produce any evidence of the charge being registered with the RoC or the central registry.

Sale Transactions Not Proven Fraudulent

Since no valid security interest existed, the fundamental premise of the RP's application collapsed. The Tribunal stated:

"To bring the transaction within the purview of Section 66 of the Insolvency and Bankruptcy Code, the applicant must convince this adjudicating authority with documentary evidence... In this case, the applicant has miserably failed to produce any such evidence, and we are not convinced by the contentions made in the application."

The Bench also observed that the sale consideration was in line with the fair value fixed by the government, further weakening the claim of fraud or undervaluation.

Final Order and Implications

The NCLT dismissed the application [IA (IBC)/219/KOB/2024] in its entirety. In a significant directive, the Tribunal criticized the RP for misclassifying Asten Realtors' claim:

"it is astonishing that RP in a mechanical and casual manner categorised the R3 under the heading of ‘Secure Financial Creditor’. Whereas, there was no such legally valid and enforceable security interest ever adjusted in favour of R3."

The RP was directed to reclassify Asten Realtors' claim as an 'unsecured Financial Debt' and adjust its rights in the Committee of Creditors (CoC) accordingly. This judgment serves as a crucial reminder for insolvency professionals to rigorously verify the legal enforceability of security interests before initiating avoidance proceedings and when constituting the CoC.