Bank's mortgage rights upheld despite non-registration under Companies Act - secured creditor status confirmed

NCLAT Chennai allowed the appeal, ruling that a bank classified as unsecured financial creditor should be treated as secured creditor in liquidation proceedings. The Tribunal held that mortgage rights under Transfer of Property Act, 1882 and SARFAESI Act cannot be diluted despite non-registration of charge under Companies Act, 2013. Non-registration with Registrar of Companies was insufficient ground to deny secured creditor status. The mortgage was validly registered with SRO office, and CERSAI registration became mandatory only in February 2020, after mortgage creation. The liquidator's classification was set aside as illegal and invalid.

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Issues Involved:
1. Legality of the communication by the Liquidator regarding the classification of the Appellant as an "Unsecured Financial Creditor."
2. Validity of the mortgage rights of the Appellant under the Transfer of Property Act, 1882 and SARFAESI Act, in light of non-registration under Section 77 of the Companies Act, 2013.

Summary:

Issue 1: Legality of Liquidator's Communication
The Appellant challenged the Liquidator's decision communicated via email on 01.07.2022, which classified the Appellant as an "Unsecured Financial Creditor" due to the non-registration of the charge before the Registrar of Companies. The Liquidator based this decision on Section 77(3) of the Companies Act, 2013, which states that no charge created by a company shall be taken into account unless it is duly registered. The Appellant argued that their mortgage rights, conferred under the Transfer of Property Act, 1882, should not be negated by the non-registration of the charge.

Issue 2: Validity of Mortgage Rights
The Appellant contended that their mortgage rights, established by a registered Mortgage Deed (MOD) on 07.07.2015, should be recognized despite the charge not being registered with the Registrar of Companies. They argued that the Transfer of Property Act, 1882, and SARFAESI Act provide absolute rights to the Mortgagee, which should prevail over the requirements of the Companies Act, 2013. The Appellant also cited the decision in ICICI Bank Ltd. Vs. SIDCO Leathers Ltd., which supports the precedence of the first charge holder's rights over the second charge holder.

Tribunal's Findings:
The Tribunal concluded that the non-registration of the mortgage under Section 77 of the Companies Act, 2013, does not invalidate the Appellant's status as a "Secured Creditor." The Tribunal emphasized that the rights of a Mortgagee under the Transfer of Property Act, 1882, and SARFAESI Act should not be diluted by the requirements of Regulation 21 of the IBBI (Liquidation Process) Regulations, 2016. The Tribunal also noted that CERSAI registration became mandatory only in February 2020, after the mortgage was created.

Disposition:
The Tribunal set aside the Impugned Order dated 14.06.2023, passed by the Adjudicating Authority/NCLT, Division Bench-II, Chennai, which had upheld the Liquidator's decision to classify the Appellant as an "Unsecured Financial Creditor." The Tribunal allowed the Appellant's appeal, recognizing their status as a "Secured Creditor" and protecting their mortgage rights over the secured assets. The connected pending IAs, if any, were closed.

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