Non-Registration of Mortgage, hypothecation of Security Interest created by virtue of DRT Judgment can’t be classified as Unsecured Creditor: NCLAT [Read Order]

NCLAT - Non-registration of mortgage - DRT judgment - taxscan

The Delhi Bench of National Company Law Appellate Tribunal (NCLAT) held that Non-registration of mortgage, hypothecation of security interest created by virtue of Debt Recovery Tribunal judgment cannot be classified as Unsecured Creditor.

The ABG Shipyard Limited, Corporate Debtor had obtained financial assistance from the Appellant vide sanction letter. A Medium Term Loan was sanctioned by the Appellant to the Corporate Debtor. The Loan Agreement was entered between the Corporate Debtor and the Appellant. Security was provided by the Corporate Debtor for the loan by mortgage and hypothecation.

Mr. Arun Kathpalia submitted that the Adjudicating Authority committed an error in rejecting the Application of the Appellant filed under Section 60 sub-section (5) of the IB Code and not under Section 42, hence limitation provided for filing an Appeal was not applicable. The Appellant was aggrieved with regard to its categorization as ‘unsecured creditor’, which was fully covered by Section 60 sub-section (5), relating to the question of priorities. It is further submitted that Section 77 of the Companies Act, 2013 was not applicable in the present case in view of the fact that there was a Decree in favour of the Appellant by Debt Recovery Tribunal. The claim of the Appellant over shipping subsidies arises and accrues from the DRT judgment.

The definition of ‘security interest’ under Section 3(31) of the Code is wide enough to include the claim of the Appellant. Section 77 sub-section (3) of the Companies Act, 2013 is applicable only to the charge created by a ‘company’ and not on the encumbrance created over an asset of a company pursuant to DRT judgment. It is further submitted that the Liquidator, who was Resolution Professional earlier had categorized the claim of the Appellant as ‘secured creditor’ and the Liquidator after the initiation of liquidation proceedings has changed the categorization from ‘secured creditor’ to ‘unsecured creditor’ relying on a legal opinion, which was misplaced.

On the other hand, Nakul Dewan, Senior Counsel for the Respondent refuting the submissions of the Appellant contends that verification of security interest is mandatory during the liquidation process. In view of the fact that charge of the Appellant was not registered under Section 77 sub-section (3) of the Companies Act, 2013, the same was not binding on the Liquidator. The Appellant failed to prove his security interest as per Regulation 21 of the Liquidation Regulations. The Application filed by the Appellant before the Adjudicating Authority was time barred in terms of Section 42 of the IB Code on account of having been filed after a delay of 551 days. The recovery certificate issued by the Debt Recovery Tribunal is not a Decree. Section 77 sub-section (3) of the Companies Act was fully attracted in the present case and charge of Appellant having not been registered, no illegality has been committed by the Adjudicating Authority in rejecting the claim of the Appellant as ‘secured creditor’.

The coram of Chairperson Justice Ashok Bhushan and Member Technical, Dr. Alok Srivastava held that the Adjudicating Authority committed an error in rejecting the claim of the Appellant to be of ‘secured creditor’. By virtue of judgment and order of the Debt Recovery Tribunal, the Appellants were entitled to recover their dues from the secured assets and they having relinquished the security interest according to Section 52 of the IB Code, as was requested by the Liquidator, in the liquidation proceedings, they have to be treated as ‘secured creditor’. In result, we allow the appeal and set aside the order dated 28th April, 2021 of the Adjudicating Authority and allow the Application being I.A. No.33 of 2021 filed by the Appellant and directed the Respondent/ Liquidator to correct the classification of claim of the Appellant as ‘secured’.

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