2025 (2) TMI 636 - AT - IBC

Non-registration of charge under Section 77 doesn't affect secured creditor rights in insolvency proceedings

NCLAT Principal Bench allowed appellant's appeal against NCLT's rejection of secured creditor status. The tribunal held that non-registration of charge ... Categorisation as an unsecured creditor instead of being a secured creditor - appellant did file an application before the Ld. NCLT to claim its status as a secured creditor for the principal amount of loan granted - rejection of claim of the appellant only on the ground the charge was not registered under Section 77 of the Companies Act, 2013 - HELD THAT:- A bare reading of Section 77 (3) of Companies Act, 2013 casts an obligation upon ‘Liquidator’. However, the present case is confined to the duty and role of ‘Resolution Professional’ and admittedly company is not under liquidation. It is a settled law right of a mortgagee under the Transfer of Property Act, 1882 cannot be taken away only because of non-registration of the charge u/s 77 of the Companies Act, 2013. This is in consonance with Section 77 of the Companies Act 2013. Section 78(3) of the Companies Act, 2013 states no charge shall be created by the Company shall be taken in account by the “Liquidator” unless it is registered under subsection 1 and 2. Section 77 (4) of the Companies Act, 2013 clarifies nothing in subsection (c) shall prejudice any contract or obligation for repayment of money secured by charge. The obligation is only on the Liquidator. In fact, Section 3 (4) of IBC defines charge and Section 3 (31) of IBC states secured interest means and includes “Charge”. Thus, combine reading of all the section clarifies only a Liquidator will not consider a claim without registration, however, the RP is bound to consider a “Charge” and a Creditor having charge is a Secured Creditor. Conclusion - i) Non registration of charge per Section 77 of Companies Act, 2013 will not make a difference in the claim of the Applicant being treated as a Secured Creditor. ii) There exists a debt and the Corporate Debtor had secured it by creation of security interest/charge., therefore, the Appellant is a secured financial creditor. Necessary correction be thus made in the record. The appeal is allowed and the impugned order is hereby set aside. ISSUES PRESENTED AND CONSIDEREDThe core legal questions considered in this judgment are:1. Whether the appellant should be classified as a secured creditor under the Insolvency and Bankruptcy Code (IBC) due to the security interest allegedly created over four flats as per the loan agreement with the Corporate Debtor.2. Whether the non-registration of the charge under Section 77 of the Companies Act, 2013 affects the appellant's status as a secured creditor.3. Whether the direction to initiate proceedings against the appellant under Section 66 of the IBC was valid, considering the alleged lack of due process.ISSUE-WISE DETAILED ANALYSIS1. Classification as a Secured CreditorRelevant Legal Framework and Precedents:The appellant argued that it should be recognized as a secured creditor based on the provisions of the IBC, specifically Sections 3(4), 3(30), and 3(31), which define 'charge,' 'secured creditor,' and 'security interest,' respectively. The appellant contended that the loan agreement created a security interest over four flats, thereby qualifying it as a secured creditor.Court's Interpretation and Reasoning:The Tribunal examined the loan agreement clauses, which outlined the creation of a security interest over specific apartments as collateral for the loan repayment. The Tribunal considered the definitions provided in the IBC and concluded that the agreement constituted a security interest, thereby classifying the appellant as a secured creditor.Application of Law to Facts:The Tribunal found that the loan agreement's provisions aligned with the IBC's definition of a secured creditor, as the agreement explicitly secured the loan with specific apartments. The Tribunal emphasized that the security interest was valid despite the lack of registration under Section 77 of the Companies Act, 2013, as the IBC's definitions were broader and did not mandate such registration for CIRP proceedings.Conclusions:The Tribunal concluded that the appellant is a secured financial creditor, and necessary corrections should be made to the records to reflect this status.2. Non-Registration of Charge under Section 77 of the Companies Act, 2013Relevant Legal Framework and Precedents:The impugned order initially rejected the appellant's claim as a secured creditor due to the non-registration of the charge under Section 77. However, the Tribunal examined the distinction between liquidation and CIRP processes under the IBC, noting that the registration requirement primarily applies to liquidation scenarios.Court's Interpretation and Reasoning:The Tribunal reasoned that the non-registration of the charge does not preclude the recognition of a security interest during CIRP. It referenced previous judgments, such as 'Canara Bank vs. Mr. S. Rajendran,' which supported the view that non-registration under Section 77 is not a sufficient ground to deny secured creditor status.Conclusions:The Tribunal held that non-registration of the charge under Section 77 does not affect the appellant's status as a secured creditor during CIRP.3. Direction to Initiate Proceedings under Section 66 of the IBCRelevant Legal Framework and Precedents:The Tribunal considered whether the direction to initiate proceedings against the appellant under Section 66, which deals with fraudulent trading or wrongful trading, was valid. The appellant argued that this direction violated principles of natural justice due to the lack of prior notice or opportunity to respond.Court's Interpretation and Reasoning:The Tribunal acknowledged the appellant's argument regarding the absence of a formal application or notice from the Resolution Professional. It noted that the proceedings under Section 66 were still ongoing and that no final determination had been made regarding the appellant's status as a related party.Conclusions:The Tribunal deemed it premature to make a finding on this issue and set aside the impugned order, allowing the appeal while keeping the issue open for further consideration.SIGNIFICANT HOLDINGSThe Tribunal established the principle that non-registration of a charge under Section 77 of the Companies Act, 2013, does not automatically disqualify a creditor from being recognized as a secured creditor during CIRP proceedings under the IBC. The Tribunal emphasized the broader definitions of 'secured creditor' and 'security interest' within the IBC, which do not necessitate registration for CIRP purposes.In verbatim, the Tribunal stated: 'Legislature never intended that 'registration of charge' under section 77 is sine qua non to qualify as 'secured creditor'... the RP is bound to consider a 'Charge' and a Creditor having charge is a Secured Creditor.'Final determinations on each issue include the recognition of the appellant as a secured financial creditor and the setting aside of the impugned order concerning the initiation of proceedings under Section 66, with the issue remaining open for further adjudication.