NCLAT: Non-Registration Of Charge Not A Barrier For Secured Creditor Status Under IBC
NCLAT: Non-Registration Of Charge Not A Barrier For Secured Creditor Status Under IBC
The National Company Law Appellate Tribunal (NCLAT), New Delhi bench, comprising Justice Yogesh Khanna (Judicial Member) and Mr. Arun Baroka (Technical Member), recently ruled that non-registration of a “charge” under Section 77 of the Companies Act, 2013, is not a prerequisite for a creditor to be classified as a “secured creditor” under Section 3(30) of the Insolvency and Bankruptcy Code, 2016 (IBC) by the Resolution Professional (RP).
The Tribunal noted that the intent of the legislature was never to apply Section 77 of the Companies Act to the Corporate Insolvency Resolution Process (CIRP), as the treatment of “secured creditor” and “security interest” in the liquidation process differs from their treatment during the CIRP.
The Appellant had provided a loan of Rs. 11 crores to the Corporate Debtor through a loan agreement dated 29.10.2015. The agreement allowed the Corporate Debtor two options for interest payment: (a) interest at 18%, or (b) four flats could be transferred in favor of the appellant as full and final payment. The Corporate Debtor failed to pay the principal amount, and the flats were to be transferred.
On 29.06.2020, the Corporate Debtor was admitted to CIRP. The appellant filed two claims: one for Rs. 11 crores as a “secured financial creditor” and another for the four flats as interest payable. The RP accepted the appellant's claim as a homebuyer for the four flats but rejected the claim for secured creditor status for the principal loan amount, citing the non-registration of the charge under Section 77 of the Companies Act.
The Appellant, argued that the appellant held a first charge on the four flats as security for the repayment of the principal loan and should be treated as a secured creditor under Sections 3(4), 3(31), and 3(33) of the IBC.
The Respondent, however, relied on the reasoning of the impugned order, which stated that the security of the four flats had not been registered with the Registrar of Companies under Section 77 of the Companies Act.
The Tribunal addressed the issue of whether the appellant should be classified as a secured creditor. Section 77(3) of the Companies Act mandates that no charge created by a company can be considered by the liquidator unless it is registered under Section 77(1). However, the Tribunal clarified that this obligation applies only to the liquidator, not to the RP.
The Tribunal further explained that Section 77 of the Companies Act applies only during the liquidation process, where a secured creditor has an indefeasible right to realize its security interest, provided the creditor has registered the charge. In contrast, during CIRP, no secured creditor has the right to realize its security interest, as the RP must take control of all assets, irrespective of encumbrances.
The Tribunal referred to previous judgments, including Canara Bank vs. Mr. S. Rajendran, Liquidator of M/s Cape Engineers Pvt. Ltd., where it was held that the non-registration of the mortgage under Section 77 does not preclude a creditor from being considered a “secured creditor.” The Tribunal emphasized that the registration of the charge is not a requirement for being treated as a secured creditor under the IBC.
In light of these observations, the Tribunal ruled that the appellant should be classified as a “secured financial creditor,” given that the debt was secured by the four flats as per the loan agreement.
The Tribunal allowed the appeal and set aside the impugned order, reaffirming that non-registration of a charge under Section 77 of the Companies Act does not prevent a creditor from being treated as a secured creditor under the IBC.
