Non-Registration of “Charge” u/s 77 of Companies Act does not remove “Secured Creditor” Under IBC during CIRP: NCLAT [Read Order]

The National Company Law Appellate Tribunal (NCLAT), New Delhi held that  a creditor may be considered a "Secured Creditor" under section 3(30) of the Insolvency and Bankruptcy Code, 2016 (IBC) by the Resolution Professional (RP) even if they have not registered a "charge" in accordance with Section 77 of the Companies Act, 2013.

Home Kraft Avenues, the Appellant had granted a loan of Rs.11 crores to the Corporate Debtor by a loan agreement on 29.10.2015. Two options were given qua interest payable on such loan: (a) the interest @ 18% or (b) four flats could be transferred in favour of the appellant towards interest in its full and final payment. The agreement stated that if the Corporate Debtor did not pay the principal amount, then also the four apartments would be transferred in favour of appellant. The Corporate Debtor couldn't pay the principal amount.

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The Corporate Debtor was admitted to CIRP on June 29, 2020. In order to collect interest, the appellant filed two claims: one for Rs. 11 crore as a "secured financial creditor" and another as the owner of four apartments. The appellant's claim as a property buyer about the four apartments given in lieu of interest was accepted by the RP.

The appellant's request to be considered a secured creditor for the principal amount of the loan was denied by the contested ruling of 02.05.2023 on the grounds that the "charge" was not recorded in accordance with Section 77 of the Companies Act of 2013. Disappointed that it had been classified as an unsecured financial creditor rather than a secured creditor, the appellant filed the appeal.

The appellant's senior attorney, Mr. Krishnendu Datta, argued that the appellant had a first charge on four apartments secured for principal repayment. He cited the IBC's Sections 3(4), 3(31), and 3(33). The appellant should be regarded as a secured creditor, he contended.

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The Tribunal noted that because "secured creditors" and "security interests" are treated completely differently in the liquidation process than they are during the CIRP, the legislature never intended for Section 77 of the Companies Act to be applied to the CIRP. Further clarified that under the liquidation process, a secured creditor has an indefeasible right to realize its security interest by excluding its assets from the Liquidation Estate per Section 52.

A secured creditor must establish a registered "charge" in accordance with Section 77 of the Companies Act if it wishes to enforce its security outside of the waterfall mechanism under Section 53. According to Section 36(3)(g), secured assets are only included in the Liquidation Estate in the event that the secured creditor gives up its interest. Sections 18(1)(f) and 25(2)(a), on the other hand, mandate that the RP assume ownership of "all assets" during CIRP, regardless of encumbrances. Furthermore, during CIRP, no secured creditor has the right to realize its security interest.

The Tribunal composed of Mr. Arun Baroka, a technical member, and Justice Yogesh Khanna, a judicial member, noted that although Regulation 21 of the IBBI ('Liquidation' Process) Regulations, 2016 specifies evidence to prove "security interest," the IBBI (CIRP) Regulations, 2016 did not contain a similar clause. "The question of charge under section 77 only arises during the liquidation process, and it has nothing to do with "CIRP."

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While allowing the appeal, the bench observed that non-registration of charge per Section 77 of Companies Act, 2013 would not make a difference in the claim of the Applicant being treated as a Secured Creditor. The Tribunal found that the Appellant was a “secured financial creditor” as there existed a 'debt' and the Corporate Debtor had secured it by security interest/charge.

To Read the full text of the Order CLICK HERE

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