The Company Law Appellate Tribunal (NCLAT), Chennai Bench comprising Justices M. Venugopal & Sharad Kumar Sharma (Judicial Members) and Jatindranath Swain (Technical Member) was hearing an appeal and held that Failure to duly register security interest, as mandated by Section 77(3) of the Companies Act, 2013, renders the claimant ineligible for secured creditor status. The Appellate Tribunal emphasized strict compliance with registration requirements under the Companies Act and IBBI regulations, rejecting the appellant's argument based on Section 58(f) of the Transfer of Property Act, 1882.
In a recent landmark judgment, the National Company Law Appellate Tribunal (NCLAT) delved into the intricacies of secured creditors' rights, addressing a critical case that challenged the order of the Adjudicating Authority/National Company Law Tribunal (NCLT). The case, Company Appeal (AT) (CH) (Ins) No. 277/2023, involved complex issues surrounding the registration of security interests and the classification of creditors in the context of insolvency proceedings.
Background:
The appellant, a financial institution, filed the appeal against the decision of the Adjudicating Authority, which had dismissed their application under Section 52 of the Insolvency and Bankruptcy Code, 2016 (I&B Code). The key contention revolved around the non-registration of security interests, leading the Adjudicating Authority to rule that the appellant's claim became void against the Liquidator.
Facts of the Case:
The appellant had extended credit facilities to M/s. Sree Ganesh EPC P. Ltd., with M/s. Cape Engineers Pvt. Ltd. acts as the corporate guarantor and offers immovable property as collateral. The borrower entered the Corporate Insolvency Resolution Process (CIRP), and the appellant claimed a substantial voting share. Disputes arose over the registration of the charge, prompting the appellant to seek exclusion from liquidation proceedings under Section 52 of the I&B Code.
Legal Contentions:
The NCLAT took note of the Adjudicating Authority's reliance on Section 77(3) of the Companies Act, 2013, stipulating the mandatory registration of charges. The appellant argued for the precedence of Section 58(f) of the Transfer of Property Act, 1882, asserting that the I&B Code does not affect pre-existing mortgage rights. The appellant also highlighted its registration with the Central Registry of Securitization Asset Reconstruction and Security Interest (CERSAI) and contested its classification as an unsecured financial creditor.
Respondent's Stand:
The Respondent emphasized the appellant's failure to provide necessary documents and register charges in a timely manner. Relying on Section 77(3) of the Companies Act, 2013, and Regulation 21 of IBBI (Liquidation Process) Regulations, 2016, the Respondent argued in favor of classifying the appellant as an unsecured financial creditor.
NCLAT's Considerations:
The NCLAT meticulously considered both parties' contentions, delving into the legal intricacies surrounding charge registration and creditor classification in insolvency proceedings. The court evaluated the appellant's reliance on Section 58(f) of the Transfer of Property Act, emphasizing the prospective nature of the I&B Code and its impact on pre-existing mortgage rights.
Dismissal of the Appeal:
Despite the appellant's arguments, the NCLAT ultimately dismissed the appeal, upholding the Adjudicating Authority's decision. The judgment underscored the paramount importance of complying with registration requirements under the Companies Act and IBBI regulations.
Key Points from the Judgment:
Secured Creditor's Autonomy: The judgment reiterated the principle that a secured creditor is not obligated to resort to its security and can realize its debt outside winding-up proceedings, citing the Gujarat State Financial Corporation v. Official Liquidator case.
Winding-up Petition Rights: A secured creditor has the right to prefer a winding-up petition after obtaining a 'Decree' from the Debt Recovery Tribunal and a Recovery Certificate, as per Swaraj Infrastructure Pvt. Ltd. v. Kotak Mahindra Bank Ltd., 2019 (3) SCC 620.
Section 52 Considerations: The Adjudicating Authority must consider a secured creditor's right to realize security interest before the assets are handed over to the Liquidator, in accordance with Section 52 of the I&B Code.
Options for Secured Creditors: Sections 52 and 53 of the I&B Code provide options for secured creditors to enforce security interest or relinquish it for equal ranking with other secured creditors.
Pari Passu Principle: The judgment elucidated the pari passu principle, ensuring equal distribution of proceeds among equally ranked creditors in case of insolvency.
Ambit of Section 52: Section 52 allows secured creditors to relinquish security interest or realize it outside liquidation proceedings, with deductions for IRP costs and accountability for any surplus.
Liquidator's Role: A liquidator cannot compel a secured creditor to relinquish security interest or prefer a petition under the SARFAESI Act, 2002.
Conclusion:
In conclusion, the NCLAT's judgment on secured creditor's rights provides crucial insights into the legal complexities surrounding charge registration and creditor classification in insolvency proceedings. The case highlights the need for meticulous adherence to registration requirements and the potential consequences for creditors failing to meet these obligations. The decision reaffirms the legal principles governing secured creditors and serves as a guide for practitioners navigating the evolving landscape of insolvency law in India.