NCLAT Holds Charge Registration Not Mandatory Under Companies Act, 2013
In the recent ruling of Home Kraft Avenues vs Jayesh Sanghrajka and Anr.[1], the National Company Law Appellate Tribunal has held that the creditor will be treated as “secured” during corporate insolvency resolution process (CIRP) despite the charge being unregistered under Section 77 of Companies Act 2013. In this article, the author has tried to analyse the said ruling.
Provisions relied upon by NCLAT:
The
Hon’ble NCLAT relied upon the language stipulated in Section 77(3) of Companies
Act 2013, reproduced as follows:
“Notwithstanding anything contained in any other law for the time being in force, no charge created by a company shall be taken into account by the ‘liquidator’ or any other creditor unless it is duly registered under subsection (1) and a certificate of registration of such charge is given by the Registrar under sub-section (2).”
Considering the aforementioned, the Hon’ble Appellate Tribunal observed that the said section casts an obligation only upon “liquidator”, and not the resolution professional (RP), and stated that the intent of legislature was never to apply the said section upon CIRP.
Further explaining the aforesaid, the NCLAT stipulated that treatment of secured creditor and security interest in liquidation is entirely different from that during CIRP. Only under liquidation process a question of charge under section 77 comes into play and the same has nothing to do with CIRP.
a) A secured creditor during liquidation has an indefeasible right to realise its security interest by excluding its assets from the liquidation estate per Section 52 of the Insolvency and Bankruptcy Code, 2016 (IBC), for which the secured creditor has to prove that he has an existing charge. For the said purpose, the liquidator has to recognise the charge registered as per the provisions of section 77 of Companies Act. However, no secured creditor has right to realise its security interest during CIRP.
b) Further, the definition of liquidation estate under 36(3)(g) of IBC includes secured assets only and only if the secured creditor has relinquished its interest. Distinctively, Sections 18(1)(f) and 25(2)(a) of IBC mandates the RP to take control of “all assets” of the corporate debtor, irrespective of any encumbrance.
c) For the same reason while Regulation 21 of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 prescribes evidences for proving security interest, consciously no such corresponding provision has been included in Insolvency and Bankruptcy Board of India (Corporate Insolvency Resolution Process) Regulations, 2016.
Judgments relied upon:
The
Hon’ble NCLAT relied upon the judgment of Canara Bank vs. Mr. S. Rajendran, Liquidator
of M/s Cape Engineers Pvt. Ltd. 2024 SCC OnLine NCLAT 390[2],
wherein it was contended that is a settled law that right of a mortgagee under
the Transfer of Property Act, 1882 cannot be taken away only because of
non-registration of the charge u/s 77 of the Companies Act, 2013.
Further, the Hon’le NCLAT observed that in the case of Paschimanchal Vidyut Vitran Nigam Ltd vs. Raman Ispat Private Limited & Ors. 2023 SCC OnLine SC 842.[3], the Hon’ble Supreme Court has clarified Section 3(31) of IBC is wider than Section 77 and 78 of Companies Act and defines security interest, however, the issue of non-registration of charge was kept open.
Observations:
1. The contention that since the Appellate Tribunal, in the case of Paschimanchal Vidyut (supra), has not discussed the issue of non- registration of charge, the said issue remains open for discussion is highly misconstrued.
2. The Hon’ble NCLAT has failed to consider the judgment of Indiabulls Housing Finance Ltd vs. Samir Kumar Bhattacharya & Anr 2019 SCC OnLine NCLAT 1307[4]. In the said case, the Appellant (unregistered charge holder) was aggrieved that it has been treated as an “unsecured” financial creditor by the resolution professional and subsequently, by the resolution applicant in the resolution plan, though the Appellant had obtained equitable mortgage by taking deposit of title deeds. The Hon’ble NCLAT relied upon the provisions of Section 78 of Companies Act, 2013 and stipulated that while the initial onus is on the corporate debtor to register the charge under Section 77 of the Companies Act, 2013, in case the corporate debtor fails to do so, the creditor has a right to apply under Section 78 of Companies Act, 2013 for registration of its charge. Further, the NCLAT indicated that in case the creditor fails to take appropriate steps for protection of its security interest, will be treated as “unsecured”.
3. In the author’s humble opinion, the principle of limitation law should be applied here as well, and a person who did not promptly act to enforce his rights should lose them. The principle which forms the basis of this rule is expressed in the maximum vigilantibus, non dermientibus, jura sub-veniunt, i.e. the laws give help to those who are watchful and not to those who sleep. The parties who seek to uphold their legal right cannot sleep over the matter and at a later stage seek to enforce their rights which are likely to cause prejudice to the other parties.
4.The Hon’ble NCLAT has taken a narrow interpretation of Section 77. The wordings used in Section 77 are “no charge created by a company shall be taken into account by the liquidator or any other creditor unless it is duly registered..”, implying that the secured creditor who has failed to register its charge, and later claiming any superiority over unsecured creditors, will not be entitled to do so.
5. If it is held that registration is not compulsory, the very purpose of Section 77 shall stand defeated. In fact the registration of charge is a public notice that a charge exists against the corporate debtor’s property, and in case a creditor provides unsecured loan to the corporate debtor unaware of a security interest, he should not be made to suffer.
6. The provisions contained in Section 77 were present even in Companies Act, 1956, when the concept of insolvency and insolvency professionals were not present, and when an amendment to the Companies Act, 2013 was made basis the Insolvency and Bankruptcy Code, 2016, the law makers have inadvertently missed to include the wordings “insolvency professionals” and it does not seem to be an deliberate omission.
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