2021 (5) TMI 318 - Tri - Insolvency and Bankruptcy

Applicant's Claim Rejected as Unsecured & Time-Barred

The Tribunal concluded that the Applicant's claim was rightly classified as 'Unsecured' due to the failure to register the charge as required by law. The ... Classification of claims in liquidation as secured or unsecured - duty to register charges and effect of non-registration under Section 77(3) of the Companies Act, 2013 - obligation of creditors to appeal liquidator's decision within the limitation prescribed under Section 42 of the Insolvency and Bankruptcy Code, 2016 - discretion and duties of the liquidator under the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (including Regulation 21) - effect of failure to furnish ROC/CERSAI evidence of chargeClassification of claims in liquidation as secured or unsecured - duty to register charges and effect of non-registration under Section 77(3) of the Companies Act, 2013 - effect of failure to furnish ROC/CERSAI evidence of charge - Whether the liquidator rightly classified the Applicant as an unsecured financial creditor in the liquidation process in absence of registered charge documentation. - HELD THAT: - The Tribunal found that the liquidator requested documentary proof of registration of the alleged charge (ROC charge registration certificate or CERSAI search reports) and the Applicant failed to furnish such documents despite repeated opportunities. Section 77(3) of the Companies Act, 2013 provides that no charge created by a company shall be taken into account by a liquidator unless it is duly registered and a certificate of registration is issued. Regulation 21 of the Liquidation Regulations and the statutory scheme were held to support the liquidator's approach of not recognising an unregistered charge for classification as a secured claim. Reliance was placed on authoritative precedent that unregistered charges cannot be enforced against the liquidator/creditors. In these circumstances, and given absence of the mandatory registration evidence, the liquidator acted in accordance with law in classifying the claim as unsecured. [Paras 31, 34, 35, 36]The claim was correctly classified as unsecured in the liquidation process because the Applicant did not produce evidence of registration of the charge as required by law; the liquidator was justified in refusing to treat the claim as secured.Obligation of creditors to appeal liquidator's decision within the limitation prescribed under Section 42 of the Insolvency and Bankruptcy Code, 2016 - discretion and duties of the liquidator under the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (including Regulation 21) - Whether the Applicant's belated challenge to classification (filed after substantial delay) could be entertained despite the statutory 14-day appeal period under Section 42 of the IB Code. - HELD THAT: - The Tribunal recorded that the liquidator's classification decision was communicated in July 2019 and Section 42 permits a creditor to appeal to the Adjudicating Authority within fourteen days of receipt of such decision. The present application was filed after a delay of around 551 days and the Applicant did not seek condonation of delay or furnish any sufficient cause for the inaction. The Applicant had participated in CoC meetings after classification and did not object earlier, which the Tribunal considered relevant to the question of delay. In view of the statutory time-limit and absence of any justification to excuse the delay, the Tribunal treated the application as time-barred and declined to exercise jurisdiction to reopen the classification. [Paras 34, 37, 39]The belated application challenging the liquidator's classification is barred by limitation under Section 42 and is not maintainable; the Tribunal rejected the application on that ground.Final Conclusion: The application filed by the Applicant to reclassify its claim as secured was rejected: the liquidator lawfully classified the claim as unsecured because the mandatory registration evidence for the charge was not produced, and the Applicant's challenge was time-barred under Section 42 of the Insolvency and Bankruptcy Code, 2016. Issues Involved:1. Classification of the Applicant's claim as 'Unsecured' instead of 'Secured.'2. Timeliness of the application filed by the Applicant.3. Compliance with Section 77(3) of the Companies Act, 2013 and Regulation 21 of the Liquidation Regulations.Detailed Analysis:1. Classification of the Applicant's Claim as 'Unsecured' Instead of 'Secured':The Applicant filed an application under Section 60(5) of the IB Code to rectify the classification of its claim as 'Unsecured' and categorize it as 'Secured.' The Applicant argued that the Corporate Debtor had provided securities, including a Deed of Hypothecation, Indenture of Collateral Security, and a Deed of Guarantee, to secure a Medium Terms Loan of Rs. 90 Crores. Additionally, an Escrow Account was established to secure the Shipbuilding Subsidy Scheme receivables.The Applicant contended that the Corporate Debtor's security interest was acknowledged during the CIRP as 'Secured' and should be maintained during the liquidation process. The Applicant further argued that the Liquidator's classification of the claim as 'Unsecured' was arbitrary and lacked justification.2. Timeliness of the Application Filed by the Applicant:The Respondent/Liquidator argued that the application was time-barred, as it was filed 551 days after the Liquidator's decision on July 5, 2019, classifying the Applicant as an unsecured financial creditor. According to Section 42 of the IB Code, a creditor must appeal the Liquidator's decision within 14 days of receipt. The Respondent emphasized that the Applicant failed to object to the classification within the stipulated period and raised concerns only after an undue delay.The Tribunal noted that the application was indeed filed after a significant delay of 551 days, and the Applicant did not provide any justification or seek condonation of the delay.3. Compliance with Section 77(3) of the Companies Act, 2013 and Regulation 21 of the Liquidation Regulations:The Liquidator argued that the Applicant failed to furnish documents such as the ROC charge registration certificate or CERSAI search reports to substantiate its security interest. Section 77(3) of the Companies Act, 2013, mandates that no charge created by a company shall be taken into account by the Liquidator unless it is duly registered. The Liquidator emphasized that the Applicant did not comply with this requirement, and therefore, the claim could not be recognized as 'Secured.'The Tribunal upheld the Liquidator's stance, citing the express provisions of Section 77(3) of the Companies Act, 2013, and Regulation 21 of the Liquidation Regulations. The Tribunal referenced various case laws, including the Hon'ble Supreme Court's judgment in Kerala State Financial Enterprises Ltd. Vs. Official Liquidator, which held that unregistered charges are void against the Liquidator or creditors.Conclusion:The Tribunal concluded that the Applicant's claim was rightly classified as 'Unsecured' due to the failure to register the charge as required by law. The application was also deemed time-barred, as it was filed well beyond the 14-day period stipulated under Section 42 of the IB Code. Consequently, the Tribunal rejected the application, emphasizing the importance of adhering to specific rules and regulations to maintain the sanctity of the liquidation process.