This article addresses the question of whether a financier can claim the status of 'financial creditor' under the Insolvency and Bankruptcy Code (IB Code) if the hypothecation charge in respect of a vehicle is not registered as per Section 77 of the Companies Act, 2013 ("the Companies Act"). The NCLAT, in the case of
In this case, the Appellant,
According to Section 51 of the Motor Vehicles Act of 1988, the Applicant had notified the liquidator that the "Charge" was properly registered through hypothecation registration with the Regional Transport Office (RTO) (M.V Act). The problem occurred when the liquidator denied the applicant's claim, claiming that it was necessary to register the "Charge" with the Registrar of Companies (ROC).
Section 3(4) of the IB Code defines the term "charge" as an interest or lien created on the property or assets of any person or any of its undertakings or both, as the case may be, as security and includes a mortgage.
The NCLAT, in support of the adjudicating authority's decision in this matter, held the charge was not filed under section 77 of the Companies Act. The NCLAT's position was founded on a clear interpretation of section 77 of the Companies Act. Section 77(3) of the Companies Act, states:
"(3)Not with standing 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 [appointed under this Act or the Insolvency and Bankruptcy Code, 2016, as the case may be,or any other creditor unless it is duly registered under sub-section (1) and a certificate of registration of such charge is given by the Registrar under sub-section (2).
Moreover, The NCLAT held that the liquidator rightly rejected the claim as Regulation 21 of Liquidation Regulations was not complied with. Regulation 21 of the Liquidation Regulations stipulates that the existence of a security interest may be proved by a secured creditor based on:
- the records available in an information utility, if any;
- certificate of registration of charge issued by the Registrar of Companies; or
-
proof of registration of charge with the Central Registry of Securitisation Asset Reconstruction and Security Interest of
India .
Noting that neither the charge was registered with the Central Registry of Securitisation Asset Reconstruction and Security Interest of
The NCLAT also relied on the decision of the Hon'ble Supreme Court in
Further, NCLAT also cited
However, the same issue is yet to be determined in the appeal to the NCLAT's decision by a constitutional bench led by the Chief Justice of
POSITION OF LAW PRIOR TO
The NCLAT in
Section 77(1) speaks of the duty of the company on which the charge is created to get the same registered with the ROC. Section 77(2) entails that a copy of the registered charge will be given to the person in whose favour the charge is created. 77(3) stipulates that the liquidator or any creditor shall consider no charge if the same is not registered. Section 125 of the Companies Act, 1956 also stipulated that a charge will be void against a liquidator and any creditor of the company unless registered in terms of the Act.
Since there was no charge registered in terms of the Companies Act, 2013, the NCLAT held that the creditor could not claim to be a secured creditor. Furthermore, the NCLAT held that since the charge was registered to post the approval of a resolution plan, the same would not allow the appellant creditor to stake a claim of being a secured creditor.24
POSITION OF LAW AFTER
The NCLT determined that there is a requirement of "creation" of charge in the case of
"security interest" means right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person.
While the definition has a clear first component, its second element, which states that a security interest may include a "charge" and "any obligation of any person," also has an inclusive definition.
The NCLT's emphasis on "creation" does not, however, address why a statutory creation is not the establishment of a genuine right. Additionally, it should be emphasized that the NCLT explicitly held that the definition of the phrase "security interest" in the IB Code supersedes that in the Transfer of Property Act. In upholding the decision of the NCLT in
The word "may" used in Regulation 21 of the Liquidation Regulations was also a topic of dispute in the BHEL-NCLT ruling. While the NCLAT judgement is silent on this matter, the NCLT decided on it stating that the Regulation 21 clause is directory and discretionary because it only covers the several ways to demonstrate a security interest. The NCLT while arguing that a claimant could depend on additional methods of establishing its security interest (methods not stated in Regulation 21 also stated that the stage of establishing a security interest only occurs after the creditor's status had previously been established as that of a secured creditor. It also stated that even if the meaning of "charge" is the same in both the Companies Act of 2013 and the IB Code, no requirement for mandatory registration under the IB Code, in contrast to Section 77 of the Companies Act of 2013 is envisaged.
The liquidator asserted that until a charge is lodged under Section 77 of the Companies Act, 2013, the liquidator will not take such a claim into consideration. The NCLT rejected this position and held that the IB Code attains precedence over the Companies Act, 2013. It also held that and even if a charge could be proved by other modes (other than a certificate of registration of charge issued by the Registrar of Companies), the liquidator could still adjudicate on the issue of security interest.
On the contrary, it may be noteworthy that the application of a Mandatory Notification dated 03.05.2019, issued by the
CONCLUSION
In numerous other cases, including
Footnotes
1. CA (AT) (Ins.) No. 02 of 2020
2. (2013) 15 SCC 358
3. (2006) 10 SCC 709
4. 2019 SCC OnLine NCLAT 1307
5. (2015) 5 SCC 300
6. 2019 SCC OnLine NCLT 35415
7. 2020 SCC OnLine NCLAT 618.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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