Financial creditor deemed secured through CERSAI registration alone, Section 77 Companies Act not mandatory

The NCLAT Principal Bench held that a financial creditor can be treated as secured based on charge registration with CERSAI alone, without requiring registration under Section 77 of Companies Act, 2013. Applying the principle of later law prevailing, the tribunal found that IBC provisions and IBBI Liquidation Process Regulations, 2016 override earlier Companies Act requirements. Regulation 21 provides alternative methods for proving security interest, including CERSAI registration. The appellant's charge registered with CERSAI was sufficient to establish secured creditor status. The impugned order was set aside and appeal allowed.

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1. ISSUES PRESENTED and CONSIDERED

The core legal question considered by the Tribunal was whether the Appellant, who had provided credit facilities secured by a charge registered with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI), ought to be classified as a Secured Financial Creditor in the liquidation proceedings of the Corporate Debtor, despite the charge not being registered with the Registrar of Companies (RoC) under Section 77 of the Companies Act, 2013. This raised subsidiary issues including:

• The interplay and hierarchy between Section 77(3) of the Companies Act, 2013, Regulation 21 of the Insolvency and Bankruptcy Board of India (IBBI) (Liquidation Process) Regulations, 2016, Section 52 of the Insolvency and Bankruptcy Code, 2016 (Code), and Section 20(4) of the SARFAESI Act, 2002.
• The effect of non-registration of charge with RoC on the secured status of a financial creditor during liquidation under the Code.
• The applicability and overriding effect of the non-obstante clauses contained in the Code (Section 238), Companies Act (Section 77(3)), and SARFAESI Act (Section 20(4)) in the context of insolvency and liquidation proceedings.
• The evidentiary requirements for proving security interest in liquidation proceedings under Regulation 21 of the IBBI (Liquidation Process) Regulations, 2016.
• The legal consequences of registration of charge only with CERSAI and not with RoC, particularly whether CERSAI registration alone suffices to establish secured creditor status.
• The role of the Committee of Creditors (CoC) and the Adjudicating Authority in classifying creditors as secured or unsecured based on registration of charges.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Whether registration of charge with CERSAI alone suffices to establish secured creditor status in liquidation proceedings under the Code.

Relevant legal framework and precedents: Regulation 21 of the IBBI (Liquidation Process) Regulations, 2016, provides that the existence of a security interest may be proved by a secured creditor on the basis of (a) records available in an information utility; (b) certificate of registration of charge issued by the RoC under Section 77(3) of the Companies Act, 2013; or (c) proof of registration of charge with CERSAI. Section 52 of the Code governs the rights and obligations of secured creditors during liquidation. Section 77(3) of the Companies Act, 2013 mandates registration of charges with the RoC and provides that no charge shall be taken into account by a liquidator unless so registered. Section 20(4) of the SARFAESI Act, 2002 establishes CERSAI as a central registry for security interests but clarifies that its provisions are in addition to and not in derogation of other laws including the Companies Act.

Court's interpretation and reasoning: The Tribunal observed that Regulation 21 explicitly provides three alternative modes for proving security interest, using the word "or" between sub-clauses (b) and (c), thereby permitting proof of security interest either by RoC registration or by registration with CERSAI. The Tribunal noted that Regulation 21 came into force on 15.12.2016, after the amendment to Section 77(3) of the Companies Act on 15.11.2016. This temporal sequence and the express language of Regulation 21 indicate that registration with CERSAI is a valid mode of proving security interest in liquidation proceedings.

Key evidence and findings: The Appellant had registered the charge with CERSAI but had not registered it with the RoC. The Adjudicating Authority had classified the Appellant as an unsecured creditor for this reason. The Appellant also produced a legal opinion recognizing its secured status based on CERSAI registration. The Respondent relied on Section 77(3) of the Companies Act and argued that non-registration with RoC disqualified the Appellant from secured status.

Application of law to facts: The Tribunal applied Regulation 21's inclusive language and held that registration with CERSAI suffices for proving security interest. The Tribunal distinguished the purpose of RoC registration (statutory compliance under Companies Act) from CERSAI registration (fraud prevention and transparency for lenders) and held that both are valid modes of proof under the Code's liquidation regulations.

Treatment of competing arguments: The Respondent's argument that Section 77(3) of the Companies Act, 2013, with its non-obstante clause, overrides Regulation 21 was rejected. The Tribunal observed that the Code's Section 238 contains a non-obstante clause overriding other laws in case of inconsistency and that Regulation 21 was framed under the Code's authority. The Tribunal also noted that the SARFAESI Act's provisions are in addition to and not derogation of other laws, thus CERSAI registration does not negate the need for RoC registration but is an alternative mode of proof under the Code's liquidation framework.

Conclusions: The Tribunal concluded that the Appellant's registration of charge with CERSAI was sufficient to establish its status as a Secured Financial Creditor in liquidation proceedings under the Code.

Issue 2: The effect of non-registration of charge with RoC under Section 77 of the Companies Act on secured status during liquidation.

Relevant legal framework and precedents: Section 77(3) of the Companies Act, 2013 provides that no charge created by a company shall be taken into account by a liquidator or any other creditor unless it is duly registered with the RoC and a certificate of registration is issued. This section contains a non-obstante clause indicating its overriding effect over other laws. Section 52 of the Code governs secured creditor rights in liquidation. Section 238 of the Code contains a non-obstante clause overriding inconsistent laws. The principle of lex posterior derogat priori (later law prevails) and judicial precedents on non-obstante clauses were considered.

Court's interpretation and reasoning: The Tribunal acknowledged the mandatory nature of RoC registration under Section 77(3) but observed that Regulation 21 of the IBBI (Liquidation Process) Regulations, 2016, which came into force after the amendment to Section 77(3), provides an alternative mode of proof via CERSAI registration. The Tribunal held that the Code, being a special and later enactment with an overriding non-obstante clause, prevails over the Companies Act to the extent of inconsistency. It further reasoned that Section 77(3) of the Companies Act and Regulation 21 of the Liquidation Regulations can be harmoniously construed to allow proof of security interest either by RoC registration or CERSAI registration.

Key evidence and findings: The Appellant's charge was not registered with RoC but was registered with CERSAI. The Adjudicating Authority had relied on Section 77(3) to deny secured status. The Tribunal found that the Adjudicating Authority failed to appreciate the effect of Regulation 21 and the Code's overriding provisions.

Application of law to facts: The Tribunal applied the principle of harmonious construction and the Code's overriding provisions to hold that non-registration with RoC does not automatically negate secured status if the charge is registered with CERSAI as per Regulation 21.

Treatment of competing arguments: The Respondent's reliance on the mandatory language of Section 77(3) and its non-obstante clause was countered by the Tribunal's analysis of the Code's later enactment and overriding provisions. The Tribunal also distinguished the different purposes of RoC and CERSAI registrations.

Conclusions: Non-registration of charge with RoC under Section 77(3) does not preclude recognition of secured creditor status in liquidation proceedings if the charge is registered with CERSAI in accordance with Regulation 21 of the Liquidation Regulations.

Issue 3: The interplay of non-obstante clauses in the Code, Companies Act, and SARFAESI Act.

Relevant legal framework and precedents: Section 238 of the Code provides that the Code's provisions override any inconsistent law. Section 77(3) of the Companies Act contains a non-obstante clause giving it overriding effect. Section 20(4) of the SARFAESI Act states that its provisions are in addition to and not in derogation of other laws. Judicial precedents affirm that a non-obstante clause in a later enactment prevails over an earlier one.

Court's interpretation and reasoning: The Tribunal held that the Code, being a later and special enactment with an overriding non-obstante clause, prevails over the Companies Act to the extent of inconsistency in insolvency and liquidation matters. The SARFAESI Act's provisions, including CERSAI registration, are supplementary and do not derogate from the Companies Act or the Code. The Tribunal emphasized the need for harmonious construction of these statutes to avoid conflict and uphold the insolvency framework's efficacy.

Key evidence and findings: The Tribunal referred to the sequence of enactments, the language of the non-obstante clauses, and judicial pronouncements on statutory interpretation.

Application of law to facts: The Tribunal applied these principles to reject the Respondent's argument that Section 77(3) of the Companies Act overrides Regulation 21 of the Liquidation Regulations and the Code's provisions.

Treatment of competing arguments: The Respondent's argument based on the Companies Act's non-obstante clause was countered by the Tribunal's analysis of the Code's later enactment and overriding effect. The Tribunal also noted that the SARFAESI Act's non-obstante clause does not conflict with the Code or Companies Act in this context.

Conclusions: The Code's provisions, including Regulation 21, prevail over inconsistent provisions of the Companies Act and SARFAESI Act in insolvency and liquidation proceedings, ensuring that registration with CERSAI suffices to prove security interest.

Issue 4: The role of the Committee of Creditors and Adjudicating Authority in classification of creditors.

Relevant legal framework and precedents: The Code and Liquidation Regulations empower the CoC and Adjudicating Authority to classify creditors based on claims and evidence of security interest. The classification affects the priority of repayment and participation in the resolution process.

Court's interpretation and reasoning: The Tribunal noted that the CoC had taken a commercial decision to classify the Appellant as unsecured, but such classification must be consistent with law and evidence. The Adjudicating Authority's rejection of the Appellant's secured status was found to be legally incorrect as it ignored the valid registration of charge with CERSAI under Regulation 21.

Key evidence and findings: The Appellant's claim was admitted by the Resolution Professional without indicating secured or unsecured status. The final resolution plan classified the Appellant as unsecured. The Appellant challenged this classification.

Application of law to facts: The Tribunal held that the Adjudicating Authority must classify creditors in accordance with the law and valid proof of security interest, including registration with CERSAI. The commercial wisdom of the CoC cannot override statutory provisions.

Treatment of competing arguments: The Respondent's reliance on CoC's commercial wisdom was rejected as subordinate to statutory requirements and the Code's provisions.

Conclusions: The Appellant was entitled to be classified as a Secured Financial Creditor based on valid registration of charge with CERSAI, and the Adjudicating Authority erred in rejecting this status.

3. SIGNIFICANT HOLDINGS

"Regulation 21 of the IBBI (Liquidation Process) Regulations, 2016 provides three alternatives for proving security interest, including proof of registration of charge with CERSAI, and the use of the word 'or' makes it clear that security interest may be proved either by registered charge maintained by RoC or registration of charge entered with CERSAI."

"Section 77(3) of the Companies Act, 2013, which mandates registration of charge with RoC, does not exclusively determine the secured status of a creditor in liquidation proceedings under the Code, especially in light of the overriding non-obstante clause in Section 238 of the Code and the subsequent enactment of Regulation 21."

"The Code being a special and later enactment, and having a non-obstante clause, prevails over inconsistent provisions of the Companies Act, 2013 and SARFAESI Act, 2002, to the extent of inconsistency in insolvency and liquidation matters."

"Registration of charge with CERSAI under Section 20 of the SARFAESI Act, 2002, is a valid mode of proving security interest in liquidation proceedings under the Code, and non-registration with RoC under Section 77 of the Companies Act, 2013, does not automatically disqualify a financial creditor from being treated as secured."

"The Adjudicating Authority erred in classifying the Appellant as an unsecured creditor despite valid registration of charge with CERSAI, and the Appellant ought to have been treated as a Secured Financial Creditor."

"The provisions of the Code, including Regulation 21 of the IBBI (Liquidation Process) Regulations, 2016, must be harmoniously construed with other statutes to uphold the insolvency resolution framework and ensure creditors' rights are protected."

Final determination: The appeal was allowed, the Impugned Order was set aside, and the Appellant was held entitled to be treated as a Secured Financial Creditor based on registration of charge with CERSAI.

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