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Infrastructure Leasing & Financial Services Limited v. B.P.L. Limited

Civil Appeal · Neutral citation not assigned (Civil Appeal No. 2701 of 2006)Decided 9 Jan 2015
Civil Appeal No. 2701 of 2006
Justice Anil R. Dave · Justice Dipak Misra

Background

BPL Limited, facing severe financial distress, proposed a restructuring scheme under Section 391 of the Companies Act to settle debts with its creditors. Infrastructure Leasing & Financial Services Ltd. (ILFS), which had earlier given BPL a short-term loan secured by a registered hypothecation deed, objected that it was only an unsecured creditor and should not be bound by the scheme meant for secured creditors, arguing that a later arbitration award (passed by consent) that quantified its claim as a simple money decree had effectively erased its secured status. Both the Company Court and the High Court's Division Bench rejected this argument and held ILFS remained a secured creditor bound by the scheme.

Decision Breakdown

The Supreme Court agreed with the lower courts and dismissed ILFS's appeal. It held that a hypothecation deed, once duly executed and registered with the Registrar of Companies, continues to bind the parties unless formally released; merely suing on the underlying debt (here, through arbitration) and obtaining an award does not by itself extinguish or waive the security created by the hypothecation. Relying on the distinction between a pledge/hypothecation and a decree, and on Sections 176-177 of the Contract Act, the Court found that a creditor who sues upon a debt while retaining a registered charge does not lose the charge, and nothing in the consent award recorded any agreement to release ILFS's security. ILFS therefore remained a secured creditor and was bound by the restructuring scheme approved by the requisite majority of secured creditors.

Lesson Learnt

Getting a money decree or arbitration award on a debt does not automatically give up any security (like a registered charge or hypothecation) a creditor already holds over the debtor's assets: the security survives unless it is expressly and formally released.

Official source (sci.gov.in)View Judgment (PDF)

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