Banks Can Share Sale Proceeds Of Secured Assets Outside Liquidation Estate With Homebuyers Under Compromise Agreement: Kerala High Court

"Properties from which the sale proceeds have been realized and are sought to be distributed fall outside the liquidation proceedings, and the bank is free to enter into such arrangements with those homebuyers as it may deem fit and proper," Kerala High Court, in a significant ruling, held that secured creditors are entitled to distribute sale proceeds realized from assets falling outside the liquidation estate to homebuyers as part of an amicable settlement.

A bench of Chief Justice Soumen Sen and Justice Syam Kumar V.M. observed that when the National Company Law Tribunal (NCLT) confirms such assets do not form part of the insolvency pool, banks are free to exercise their discretion to alleviate the plight of homebuyers. The Court noted that such arrangements do not interfere with ongoing liquidation proceedings if the specific properties were never part of the project financing or the insolvency subject matter.

The matter arose from a series of writ appeals involving a consortium of banks, led by Union Bank of India, and homebuyers of a project by Dewa Projects Private Limited, which is currently undergoing liquidation. While insolvency proceedings were pending before the NCLT regarding project financing, the secured creditors exercised their rights under the SARFAESI Act to sell other mortgaged properties of the borrower that were not covered by the project financing. Approximately 66 homebuyers, who had entered into agreements for sale, approached the lead banker for an amicable settlement, leading to a compromise agreement to share part of the sale proceeds representing their principal amounts.

The primary question before the court was whether sale proceeds realized by secured creditors from properties not forming part of the insolvency pool could be distributed to homebuyers via a settlement agreement. The court was also called upon to determine whether such a distribution would adversely impact other creditors or the ongoing liquidation proceedings pending before the NCLT.

NCLT Confirms Assets Fall Outside Insolvency Proceedings

The Court highlighted that a report was specifically sought from the NCLT to ascertain the status of the mortgaged properties sold by the banks. The NCLT filed a report stating it had no objection to the disbursement of these amounts in favour of the 66 homebuyers. The tribunal clarified that while these buyers might have lodged claims in the insolvency proceeding, they could be paid from the secured assets that do not form part of the sale proceedings under the Insolvency and Bankruptcy Code.

Bank Free To Enter Settlements For Non-Project Assets

The bench observed that the lead banker in the consortium meeting had agreed to the settlement, considering the plight of the homebuyers. The agreement involved sharing a portion of the sale proceeds representing the principal sum without interest as a one-time settlement of all dues. The Court emphasized that since these realized amounts were from properties outside the liquidation proceedings, the bank maintained the autonomy to enter into such arrangements.

"The properties from which the sale proceeds have been realized fall outside the liquidation proceedings, and the bank is free to enter into such arrangements with those homebuyers as it may deem fit and proper."

Treatment Of Claims By Other Homebuyers

Regarding a separate group of homebuyers who alleged they were similarly placed, the Court noted that their claims were still being processed in the liquidation proceedings before the NCLT. However, the bench clarified that the door remains open for these buyers to approach the banking consortium with similar requests for the consideration of their claims. The Court maintained that the bank's discretion in the present settlement did not prejudice the statutory rights of others whose claims are yet to be processed.

Court Explains Scope Of Secured Creditors' Rights Under SARFAESI

The Court underscored that the secured creditors had enforced their rights under Section 13(2) and Section 13(4) of the SARFAESI Act for assets that were not subject to the project financing. The bench found that as long as the assets were distinct from those involved in the insolvency proceedings, the enforcement of security interest and subsequent distribution of proceeds through a compromise was legally permissible.

"The bank is free to enter into such arrangements with those homebuyers as it may deem fit and proper for the distribution of proceeds realized from assets outside the liquidation estate."

Final Directions and Modification of Impugned Order

The Court disposed of the writ appeals by modifying the impugned judgment of the Single Judge to the extent of the reached compromise. It directed that the compromise agreement dated April 3, 2025, shall form a part of the official court order. The bench also took note of the liquidator's submission that certain other claims, such as those by Leena Sasikumar, had been rejected as not maintainable or time-barred, affirming that only the 66 homebuyers included in the settlement were currently eligible for the immediate disbursement.

The High Court successfully facilitated a resolution between the banking consortium and the homebuyers by distinguishing between assets belonging to the liquidation estate and those independently secured under SARFAESI. By incorporating the compromise agreement into its final order, the Court provided a practical exit for the 66 homebuyers while ensuring the integrity of the ongoing NCLT proceedings was preserved. This ruling reinforces the principle that secured creditors may exercise discretion over non-insolvency assets to settle claims with distressed stakeholders.

Date of Decision: 05 June 2026