2023 (12) TMI 1433 - Tri - IBC

Lender's first charge over refinanced assets remains valid without consortium NOC under Section 52

M/s Hinduja Leyland Finance Limited Versus Avil Menezes, Liquidator of Sunil Hitech Engineers & Anr. And American Express Bank Corp. Versus Sunil Hitech Engineers Limited

NCLT Mumbai held that a lender's first charge over refinanced assets remains valid despite the absence of NOC from consortium lenders. The tribunal ... Priority of charges - Seeking directions to the Liquidator of Corporate Debtor to allow to realize corporate debtor’s Assets specifically charged to the Applicant under the provisions of Section 52 of the Code read with the Liquidation Process Regulations 2016 - whether the after satisfaction of charge in a financed assets in favor of lender outside the Consortium lenders get automatically vested as first charge in favor of Consortium lender, or such charge in favor of Consortium Lenders over the same assets, refinanced subsequently by another lender outside the Consortium lenders, remains second charge as a collateral security? HELD THAT:- It is admitted fact that no NOC was taken from the Consortium lenders by the Applicant or Corporate Debtor while refinancing the assets earlier financed by Tata Capital Limited, however, the charge on these assets created in favor of Applicant is registered in the records of the RoC in terms of Section 77 of the Companies Act, 2013. The Applicant had sought NoC from earlier financier of these assets i.e. Tata Capital Limited. It has been consistent understanding with the lenders that the assets financed by lenders outside the Consortium lenders shall be charged in favor of such financier and the Consortium shall have only second charge as collateral security. It is pertinent to note that the charge over such assets was never given as primary security in favor of Consortium lenders by the Corporate Debtor. The existence of charge in favor of Applicant was in public domain, being validly registered with RoC. Accordingly, the applicant remains the first charge holder over these assets, and it can not be said that after satisfaction of earlier charge, the second charge gets converted into first charge and it shall supersede any subsequent first charge. Conclusion - The Applicant holds valid 1st charge over the assets stated in Schedule K of the application and is entitled to enforce security interest thereon in terms of section 52 of the Code. The Respondent is directed accordingly. Appeal allowed. The core legal questions considered by the Tribunal in this matter include:1. Whether the Applicant holds a valid and enforceable first charge over certain movable assets of the Corporate Debtor, which were refinanced by the Applicant after being originally financed by another lender.2. Whether the Consortium lenders, who claim a pari passu second charge over movable assets, automatically acquire a first charge over the assets once the original charge in favor of the prior financier is satisfied.3. Whether the Applicant is entitled to realize its security interest over the specifically charged assets under Section 52 of the Insolvency and Bankruptcy Code, 2016, during the liquidation process of the Corporate Debtor.4. The implications of the absence of a No Objection Certificate (NOC) from the Consortium lenders at the time of refinancing by the Applicant, and whether such absence affects the Applicant's charge.Issue-wise Detailed AnalysisIssue 1: Validity and Priority of the Applicant's Charge over the Movable AssetsRelevant Legal Framework and Precedents: The primary legal provisions invoked include Section 52 of the Insolvency and Bankruptcy Code (IBC), 2016, which governs the realization of security interests by secured creditors during liquidation. Additionally, Section 77 of the Companies Act, 2013, relating to registration of charges with the Registrar of Companies (RoC), is relevant to determine the validity and priority of charges.Court's Interpretation and Reasoning: The Tribunal examined the facts that the movable assets were originally financed by Tata Capital Financial Services and charged in its favor. Upon repayment of the Tata Capital loan, the Corporate Debtor refinanced the same assets with the Applicant, who obtained a No Objection Certificate from Tata Capital. The Applicant duly registered the charge with the RoC in accordance with the Companies Act, 2013.The Tribunal noted that the charge created in favor of the Applicant was specific and exclusive, duly registered, and in public domain. It emphasized that the Applicant remains the first charge holder over these assets, and the charge does not get automatically superseded by any other charge merely because the prior charge was satisfied.Key Evidence and Findings: The Applicant provided documentary evidence including loan agreements, the No Objection Certificate from Tata Capital, registration of charge with RoC, and identification of assets charged. The Tribunal found no evidence from other lenders disputing the Applicant's charge or claiming exclusive charge over the same assets.Application of Law to Facts: The Tribunal applied the principle that a first charge duly registered and created in favor of a financier retains its priority unless expressly subordinated or extinguished. The Applicant's charge, being registered and specific, was held to be valid and first in priority.Treatment of Competing Arguments: The Consortium lenders argued that under the consortium agreement, they held a pari passu second charge over movable assets and that upon satisfaction of the original charge, their charge would crystallize into a first charge. The Tribunal rejected this contention, holding that the Consortium's charge was collateral security and did not automatically convert into a first charge upon satisfaction of the prior charge.Conclusion: The Applicant holds a valid and enforceable first charge over the specified movable assets and is entitled to realize the security interest accordingly.Issue 2: Effect of Absence of NOC from Consortium Lenders on the Applicant's ChargeRelevant Legal Framework and Precedents: The contractual terms of the Consortium agreement and the principles of charge registration under the Companies Act were considered. The question was whether the absence of an NOC from the Consortium lenders at the time of refinancing affects the validity or priority of the Applicant's charge.Court's Interpretation and Reasoning: The Tribunal found that the Applicant had obtained a No Objection Certificate from Tata Capital, the original financier, but not from the Consortium lenders. However, the Tribunal emphasized that the Consortium's charge was collateral security and did not constitute a primary charge on the assets refinanced by the Applicant.The Tribunal reasoned that the Applicant's charge was duly registered and in public domain, and the Consortium's claim of automatic crystallization of charge was not supported by the terms of the agreements or by law. Therefore, the absence of an NOC from the Consortium lenders did not invalidate or subordinate the Applicant's charge.Key Evidence and Findings: The Applicant submitted the NOC from Tata Capital and charge registration documents. The Consortium's reliance on clause 4 of the Third Schedule of the Consortium agreement was examined and found to provide only for a second charge as collateral security.Application of Law to Facts: The Tribunal applied the principle that charges must be registered and that the priority of charges depends on their creation and registration, not on unilateral claims of automatic crystallization or implied subordination without express agreement.Treatment of Competing Arguments: The Consortium's argument that their charge automatically became first charge was rejected as inconsistent with the contractual terms and the public registration of the Applicant's charge.Conclusion: The absence of an NOC from the Consortium lenders does not affect the validity or priority of the Applicant's first charge over the assets.Issue 3: Entitlement of the Applicant to Realize Security Interest under Section 52 of the IBCRelevant Legal Framework and Precedents: Section 52 of the Insolvency and Bankruptcy Code, 2016, provides that secured creditors may enforce their security interests during liquidation, subject to certain procedural requirements.Court's Interpretation and Reasoning: The Applicant submitted a claim and sought directions to realize its security interest in the charged assets. The Liquidator initially raised concerns regarding mapping of assets to loan agreements and the charge registration. However, the Tribunal found that the Applicant had complied with procedural requirements, submitted proof of claim, and identified the assets with sufficient particularity.The Tribunal held that since the Applicant holds a valid first charge, it is entitled to enforce its security interest in accordance with Section 52 of the Code. The Liquidator was directed to allow the Applicant to realize the assets charged in its favor.Key Evidence and Findings: The Applicant submitted proof of claim, identification of assets, and correspondence with the Liquidator. The Tribunal found no valid reason to deny the Applicant's entitlement to enforce its security interest.Application of Law to Facts: The Tribunal applied Section 52 to permit realization of security interest by the Applicant as a secured creditor during liquidation.Treatment of Competing Arguments: The Liquidator's objections regarding asset identification and charge mapping were addressed by the Tribunal, which found the Applicant's submissions sufficient and the objections unsubstantiated.Conclusion: The Applicant is entitled to realize its security interest over the assets specifically charged to it under Section 52 of the Code.Significant Holdings'Accordingly, we are of considered view that the Applicant holds valid 1st charge over the assets stated in Schedule K of the application and is entitled to enforce security interest thereon in terms of section 52 of the Code. The Respondent is directed accordingly.'The Tribunal established the core principle that a first charge duly created and registered in favor of a financier remains valid and enforceable, notwithstanding the existence of a consortium charge as collateral security. It rejected the proposition that a second charge automatically converts into a first charge upon satisfaction of an earlier charge.The Tribunal also clarified that the absence of a No Objection Certificate from consortium lenders does not invalidate or subordinate a subsequently created and registered first charge by another financier.Finally, the Tribunal held that secured creditors holding valid charges are entitled to realize their security interests under Section 52 of the Insolvency and Bankruptcy Code during liquidation, provided procedural requirements are met.