Creation of Additional Security is not novation of the terms of facility documents

Brief Overview:

While interpreting the terms of a contract between the parties, the National Company Law Appellate Tribunal, New Delhi (“NCLAT”) observed that:

1) a deed of security which was executed as additional security document does not novate the terms of the facility document or consent terms; and

2) creation of additional security does not dilute/discharge the financial debt of a creditor which arises from the facility documents.

Technical Details:

1) The claim of certain lenders was rejected by the resolution professional (“RP”) in view of a registered deed of security. Aggrieved by the same the lenders approached the Adjudicating Authority (“AA”).

2) The AA accepted the claim of these lenders as the financial creditor of the corporate debtor (“CD”). This was challenged by other financial creditors of the CD.

3) The NCLAT adjudicated upon whether the decision of the AA in classifying these lenders as financial creditor would amount to rewriting the agreement between the parties. In this regard, the NCLAT observed that:

(a) there is admission of the debt by the CD and the security agreement was in furtherance to the same and ONLY to provide an additional security.

(b) thus, the additional security cannot be read to override or novate the facility documents but only supplement the same as to ensure payments.

JC takeaway:

NCLAT chose not to rewrite the bargain between the parties. The current case is yet another instance of specious reasoning to reject claims, though these do not ultimately succeed.

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