Non-Registration Of “Charge” U/S 77 Of Companies Act Does Not Bar Creditor From Being Treated As “Secured Creditor” Under IBC During CIRP: NCLAT

The National Company Law Appellate Tribunal (NCLAT), New Delhi bench comprising Justice Yogesh Khanna (Judicial Member) and Mr. Arun Baroka (Technical Member) have held that non-registration of “charge” in terms of Section 77 of Companies Act, 2013 is not a sine qua non for a Creditor to be treated as a “Secured Creditor” under section 3(30) of the Insolvency and Bankruptcy Code, 2016 (IBC) by the Resolution Professional (RP). The Tribunal observed that the intent of legislature was never to apply Section 77 of the Companies Act upon the Corporate Insolvency Resolution Process (CIRP) because the treatment of “secured creditor” and “security interest” in the liquidation process is entirely different from that of during the CIRP. Brief Facts 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. On 29.6.2020, the Corporate Debtor was admitted to CIRP. The appellant filed two claims, one for Rs.11 crore as a “secured financial creditor” and another in as the holder of four flats towards the interest payable. The RP admitted the claim of the appellant as a home buyer qua four flats allotted in lieu of interest. The impugned order dated 02.05.2023 rejected the claim of the appellant to be treated as a secured creditor for the principal amount of the loan granted on the ground the “charge” was not registered under Section 77 of the Companies Act, 2013. The appellant filed the appeal, aggrieved that it had been categorized as an unsecured financial creditor instead of secured creditor. Submissions Mr Krishnendu Datta, Senior counsel for the Appellant submitted the appellant had a first charge on four flats secured for repayment of its principal amount. He relied upon Sections 3(4), 3(31) and 3(33) of the IBC. He argued that the appellant ought to be treated as a secured creditor. The Respondent relied upon the reasoning given in the impugned order, i.e., the security of 4 flats under the loan agreement was not registered with the Registrar of Companies in terms of Section 77 of the Companies Act. Observations The issue before the NCLT was whether the appellant was a secured creditor. Section 77(3) of the Companies Act provides that no charge created by a company shall be taken into account by the liquidator appointed under the act or IBC unless it is duly registered u/s 77(1) and the Registrar gives a certificate of registration. The Tribunal noted that the section casts an obligation only upon 'Liquidator'. As such, the RP is bound to consider a charge. The Tribunal observed that the intent of the legislature was never to apply Section 77 of the Companies Act upon the CIRP because the treatment of “secured creditor” and “security interest” in liquidation process is entirely different from that of during the CIRP. The Tribunal 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. If a secured creditor seeks to enforce its security outside the waterfall mechanism under Section 53, it must prove a registered “charge” under Section 77 of the Companies Act. The Liquidation Estate under Section 36(3)(g) includes secured assets only if the secured creditor relinquishes its interest. In contrast, during CIRP, Sections 18(1)(f) and 25(2)(a) require the RP to take control of “all assets”, regardless of encumbrances. Further, no secured creditor has right to realize its security interest during CIRP. The Tribunal observed that while Regulation 21 of IBBI ('Liquidation' Process) Regulations, 2016 prescribes evidence for proving “security interest”, no such corresponding provision was included in IBBI (CIRP) Regulations, 2016. “Only under liquidation process a question of charge under section 77 comes into play and the same has nothing to do with “CIRP””, the Tribunal remarked. The Tribunal further observed that the Legislature never intended that “registration of charge” under section 77 is the sine qua non to qualify as a “secured creditor”. The creditor was secured by way of any 'arrangement' i.e. the 'loan agreement'. The Tribunal referred to the judgment in Canara Bank vs. Mr. S. Rajendran, Liquidator of M/s Cape Engineers Pvt. Ltd. [Company Appeal (AT) (Ins) No. 277 of 2023], where it was held that the non-registration of the Mortgage as per Section 77 of the Companies Act is not a sufficient ground to hold that the ...

Non-Registration Of “Charge” U/S 77 Of Companies Act Does Not Bar Creditor From Being Treated As “Secured Creditor” Under IBC During CIRP: NCLAT

Tazeen Ahmed

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