Non-Registration of Charge Under Companies Act Does Not Negate Secured Creditor Status Under CIRP

NCLAT held that non-registration of charge under the Companies Act does not negate secured creditor status under CIRP.

The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench comprising Justice Yogesh Khanna (Judicial Member) and Technical Member Mr. Arun Baroka reviewed an appeal on 14-02-2025 and held that the requirement of charge registration under Section 77 of the Companies Act, 2013, applies to liquidation but not to the Corporate Insolvency Resolution Process (CIRP), and a creditor can be recognized as a secured financial creditor under the Insolvency and Bankruptcy Code, 2016, based on a valid security interest created through an agreement, even if unregistered. The Tribunal reaffirmed that non-registration of a charge does not automatically negate the secured status of a creditor during CIRP.

The appeal was filed against the impugned order dated 02.05.2023, wherein the appellant was categorized as an unsecured creditor instead of a secured creditor. The appellant contended that it had extended a loan of Rs. 11 crores to the Corporate Debtor on 29.10.2015, under a Loan Agreement that provided two options for interest payment: either an 18% interest rate or the transfer of four flats as full and final settlement of interest. The agreement further stipulated that in case of non-payment of the principal amount, four additional flats would be transferred to the appellant. However, the Corporate Debtor failed to repay the principal amount, and the issued cheques were dishonoured due to insufficient funds. Subsequently, the Corporate Debtor was admitted to CIRP on 29.06.2020. The appellant submitted claims under Form C as a secured financial creditor and Form CA for the four flats received towards interest, but the Resolution Professional classified the appellant as an unsecured financial creditor for the principal loan amount.

The appellant argued that it held a first charge on the four flats secured for the repayment of Rs. 11 crores and relied on Sections 3(4), 3(30), and 3(31) of the Insolvency and Bankruptcy Code, 2016, which define charge, secured creditor, and security interest, respectively. The learned senior counsel contended that the appellant should have been recognized as a secured creditor and included in the list accordingly. The appellant had also approached the NCLT seeking recognition of its secured status, but the claim was rejected on the ground that the charge was not registered under Section 77 of the Companies Act, 2013. The impugned order relied on Section 77(3), which states that no charge created by a company shall be taken into account by the liquidator or any other creditor unless registered under Section 77(1).

The NCLAT observed that Section 77(3) casts an obligation upon the liquidator but does not apply to the Corporate Insolvency Resolution Process. The Tribunal noted that the legislature intended different treatment for secured creditors under the liquidation process and CIRP. During CIRP, the Resolution Professional is required to take control of all assets of the Corporate Debtor irrespective of any encumbrance, and no secured creditor has the right to realize its security interest during this phase. The Tribunal further observed that unlike the liquidation process, where secured creditors must prove a registered charge under Section 77, no such requirement exists in CIRP. Additionally, the Tribunal emphasized that the definition of a secured creditor under IBC does not mandate registration under Section 77 of the Companies Act, and a security interest can be created through any arrangement, such as the loan agreement in the present case.

Relying on its previous ruling in Canara Bank v. S. Rajendran, Liquidator of M/s Cape Engineers Private Limited, REEDLAW 2024 NCLAT Chn 03532, the Tribunal reiterated that non-registration of a mortgage under Section 77 of the Companies Act does not automatically negate the secured status of a creditor. The Tribunal held that the appellant had a valid security interest in the four flats under the loan agreement, thereby recognizing the appellant as a secured financial creditor. Consequently, the impugned order was set aside, and the appellant's claim as a secured creditor was upheld.

Mr. Krishnendu Datta, Sr Advocate, Mr. Anuj Tiwari, Mr. Chaitanya Nikte, Ms. Aroshi Pal and Ms. Soumya Kumar, Advocates represented the appellant.

Mr. Tishampati Sen, Ms. Riddhi Sancheti, Mr. Dikshat Mehra, Mr. Chintan Gandhi, Mr. Anurag and Mr. Mukul Kulhari, Advocates appeared for Respondent No. 1.

Mr. Puneet Singh Bindra, Mr. Rishabh Gupta, Advocates appeared for Respondent no. 3.

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REEDLAW 2025 NCLAT Del 02535