Refinancing Creditor Cannot Enforce Security Interest Without NOC from Prior Charge-Holder Holding First Pari-Passu Charge Over Movable Assets

The NCLAT held in a significant ruling that a refinancing creditor cannot enforce its security interest under Section 52 of the Insolvency and Bankruptcy Code, 2016, without obtaining a No Objection Certificate from the prior charge-holder holding a first pari-passu charge over the movable assets.

The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench comprising Justice Rakesh Kumar Jain (Judicial Member) and Mr. Naresh Salecha (Technical Member), while adjudicating an appeal, held that a creditor seeking to exercise rights under Section 52 of the Insolvency and Bankruptcy Code, 2016, must establish an exclusive or first charge over the concerned assets. In the absence of a No Objection Certificate (NOC) from the prior charge-holder, such rights cannot prevail over an existing first pari-passu charge, as governed by the doctrine of priority under Section 48 of the Transfer of Property Act, 1882. The Tribunal further clarified that mere registration of a charge under the Companies Act, 2013, does not override a pre-existing, duly created and subsisting charge.

In the case before the National Company Law Appellate Tribunal (NCLAT), the Appellant, Avil Menezes, Liquidator of Sunil Hitech and Engineers Limited, challenged the order passed by the National Company Law Tribunal, Mumbai Bench-I, which had allowed an application filed by M/s Hinduja Leyland Finance Limited (the Respondent) under Section 42 read with Section 16(5) of the Insolvency and Bankruptcy Code, 2016 (IBC). The appeal arose from a dispute regarding the rights over certain movable assets of the Corporate Debtor, which were allegedly refinanced by the Respondent, but over which the UCO Bank Consortium held a pre-existing charge. The CIRP commenced on 10.09.2018, and liquidation was ordered on 25.06.2019. The Respondent filed its claim for Rs. 30.89 crores with the Liquidator during the liquidation process.

The Appellant argued that the movable assets in question were originally financed by Tata Capital Financial Services Limited (TCFSL), whose dues were later discharged, and subsequently, these assets were charged to the UCO Bank Consortium under a Working Capital Consortium Agreement and a Joint Deed of Hypothecation executed in 2006. The Appellant asserted that the charge in favour of the UCO Bank Consortium was a first and exclusive charge, which crystallised upon repayment of TCFSL's loan, and no No Objection Certificate (NOC) was ever issued by the Consortium in favour of the Respondent. The Liquidator further contended that the Respondent’s claim of charge was vague and unsupported by asset-level documentation identifying the specific movable assets, rendering its right to enforce any security interest under Section 52 of the Code unsustainable. He placed reliance on the NCLAT’s earlier ruling in J.M. Financial Solution Pvt. Ltd. v. Ajanta Pvt. Ltd., to argue that only a creditor with an exclusive charge could exercise such rights under the Code.

The Respondent, however, claimed that it had refinanced specific movable assets that were originally financed by TCFSL and had obtained a valid NOC from TCFSL. It further asserted that the assets refinanced were never part of the UCO Bank Consortium’s charge and that it had registered its charge with the Registrar of Companies. It denied any obligation to obtain a NOC from the UCO Bank Consortium. The Adjudicating Authority accepted the Respondent’s version and directed the Liquidator to hand over possession of the movable assets.

Upon examining the appeal, the NCLAT scrutinised the relevant clauses of the 8th Supplemental Deed of the Consortium Agreement dated 12.06.2016. The Tribunal observed that Clauses 2 and 3 of the 3rd Schedule explicitly created a first pari-passu charge over all present and future movable assets of the Corporate Debtor without any exclusions. Accordingly, it held that once TCFSL's loan was repaid, the UCO Bank Consortium’s charge became absolute and continued to subsist on the refinanced assets. The Tribunal found that the Respondent had failed to demonstrate that the assets it refinanced were not already subject to the prior Consortium charge, nor had it provided any NOC from the Consortium, which was essential under Section 52(3) of the IBC and Regulation 21 of the Liquidation Regulations.

The NCLAT applied the principle of priority embedded in Section 48 of the Transfer of Property Act, 1882, and relied on the Supreme Court’s decision in ICICI Bank Limited v. SIDCO Leathers Limited and Others, REEDLAW 2006 SC 04001, reiterating that a prior charge takes precedence over a subsequent charge regardless of registration with the Registrar of Companies. The Tribunal concluded that the Adjudicating Authority erred in disregarding the binding nature of the Consortium Agreement’s terms and the mandatory requirement of obtaining an NOC before enforcing any claimed charge. As such, the appeal was allowed, and the Liquidator was not required to hand over the movable assets to the Respondent.

Mr. J. Rajesh, Dhrupad Vaghani, Jaitegan Khurana, and Md. A. Ahmed, Advocates, represented the Appellant.

Mr. Prakash Shinde and Ruchita Jain, Advocates, appeared for the Respondent.

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