Restructuring & Insolvency Monthly Update | April 2024

RECENT JUDGMENTS

Ramesh Singh Rawat v. SPG Global Distribution Pvt Ltd

NCLAT, New Delhi | Judgment dated February 27, 2024 | Comp App (AT) (INS) No. 872 of 2023

Background facts

• This Appeal was preferred by the Appellant against an Order dated June 02, 2023 passed by the National Company Law Tribunal, Chandigarh Bench (NCLT) in I.A. No. 937 of 2020 in C.P. (IB) No. 254/CHD/HRY/2019 directing the Appellant to hand over the possession of the subject property, (claimed by the Resolution Professional as the property of the Corporate Debtor) to the Liquidator within a period of 15 days.
• It was the case of the Appellant that by virtue of an Agreement to Sell dated March 31, 2018 (Agreement to Sell) read with certain extension agreements, the subject property was transferred to the Appellant for a total consideration of INR 75 lakh. However, the Resolution Professional contested that the Agreement to Sell never culminated into execution of a sale deed and the transaction between the parties was never concluded.
• Factually, the parties submitted that the Corporate Debtor acquired the subject property by virtue of a sale deed dated September 03, 2014. Thereafter, on March 31, 2018, the Corporate Debtor entered into an Agreement to Sell the subject property to the Appellant for total consideration of INR 75 lakh out of which, a sum of INR 30.40 lakh was paid to the Corporate Debtor by the Appellant in part performance of the said Agreement to Sell.
• Subsequently, on May 31, 2018, the date of execution of sale deed between the Corporate Debtor and the Appellant was extended and the Appellant was put in possession of the subject property. The Appellant submitted that the date for execution of sale deed was extended multiple times, and it was agreed that if the Corporate Debtor fails to execute the sale deed by June 03, 2019, the Appellant shall have the right to take action against the Corporate Debtor in terms of the Agreement to Sell.
• Thereafter, on December 06, 2019, CIRP came to be initiated in respect of the Corporate Debtor and the sale deed could not be executed. The Appellant filed its claim before the Resolution Professional which was not admitted. Later, the Corporate Debtor went into Liquidation and the claim of the Appellant was admitted partly to the tune of INR 18 lakh as other stakeholder.
• The Appellant, relying on the judgements passed by the Supreme court in Tata Consultancy Service Limited v. Vishal Ghisulal Jain, RP, SK Wheels Pvt. Ltd., 2021 SCC Online SC 1113, Gujarat Urja Vikas Nigam Limited v. Amit Gupta & Ors., 2021 SCC Online SC 194, Embassy Property Developments Pvt. Ltd. v. State of Karnataka & Ors, 2019 SCC Online SC 1542 and judgement passed by the National Company Law Appellate Tribunal, New Delhi (NCLAT) in Comp App (AT)(INS) No. 849 of 2021 titled Sicom Ltd. & Anr. v. Kitply Industries Ltd. & Ors., argued that the Adjudicating Authority does not have jurisdiction to adjudicate upon the title of the subject property in terms of its limited jurisdiction under the IBC.
• The Appellant argued that by means of the Agreement to Sell, the Appellant is entitled to either refund of double of the earnest money or to seek specific performance of the contract through a suit before the Civil Court, which right has been closed by way of the Impugned Order.
• The Appellant also argued that the possessory title of the Appellant is protected under Section 53A of the Transfer of Property Act, 1882.
• On the other hand, the Respondent submitted that the Appellant is in illegal possession of the subject property, for the following reasons:
  • The payment of INR 30.40 lakh, alleged to be made by the Appellant was made in parts including payments to related parties of the Corporate Debtor, part payment in cash without any record of the same.
  • Subject property was already mortgaged to a financial creditor and hence no Agreement to Sell could have been executed by the Corporate Debtor.
  • Even if Agreement to Sell was executed, the sale deed was not executed by the Corporate Debtor till November 30, 2018 in terms of the Extension Agreement dated September 14, 2018 and therefore, the Agreement to Sell stood terminated even before the initiation of CIRP in respect of the Corporate Debtor.

Issues at hand?

• Whether the Adjudicating Authority has the jurisdiction to adjudicate upon the title of a property, disputed by the Resolution Profession to be the Corporate Debtor's?

Decision of the Tribunal

• The NCLAT dismissed the Appeal filed by the Appellant and upheld the Impugned Order passed by the NCLT holding that the subject property belongs to the Corporate Debtor.
• The NCLAT observed that Section 60(5)(c) of the IBC empowers the Adjudicating Authority to entertain or dispose any claim made by or against the Corporate Debtor, including claims by or against any of its subsidiaries situated in India; and also any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the Corporate Debtor.
• The NCLAT further observed that Section 238 of the IBC creates an overriding effect over anything inconsistent contained in any other law for the time being in force or any instrument having effect by virtue of any such law.
• In furtherance of the above observations, the NCLAT held that the question of fact as to whether the subject property belongs to the Corporate Debtor or the Appellant on account of the Agreement to Sell is a question relating to the insolvency resolution of the Corporate Debtor and is therefore, covered under Section 60(5)(c) of the IBC and the Adjudicating Authority has the jurisdiction to adjudicate on the title of the subject property.
• The NCLAT also observed that protection under Section 53A of the Transfer of Property Act, 1882 will not apply to the present case as the Appellant had itself not performed its part of the Agreement to Sell. The Appellant had only deposited a sum of INR 30.40 lakh out of the total consideration of INR 75 lakh despite several extensions and is therefore, not protected under Section 53A of the Transfer of Property Act, 1882.

Canara Bank v. Mr. S. Rajendran

NCLAT, Chennai | Judgment dated March 07, 2024 | Comp. App. (AT)(CH)(INS) No. 277 of 2023

Background facts

• This Appeal was preferred by Canara Bank, a Financial Creditor in the CIRP of Cape Engineers Pvt Ltd (Corporate Debtor) against the Order dated June 14, 2023 passed in IA(IBC)/887(CHE)/2022 in CP(IB)/785(CHE)/2019 by the NCLT, Chennai Bench (NCLT) holding that in view of noncompliance of Section 77(3) of the Companies Act, 2013 (Companies Act), the security interest created in favor of the Appellant becomes void against the Liquidator.
• Pertinently, one Sree Ganesh EPC P. Ltd availed certain credit facilities from the Appellant for which, the Corporate Debtor offered Corporate Guarantee along with its immovable property as collateral security. Thereafter, the Corporate Debtor was admitted into CIRP under the IBC and the Appellant filed its claim before the Resolution Professional of the Corporate Debtor.
• The Appellant was inducted as a member of CoC of the Corporate Debtor having a voting share of 95.76%.
• Later, the Corporate Debtor went into liquidation. In terms of Section 52(1)(b) of the IBC, the Appellant desired to stand outside the Liquidation Proceedings and accordingly notified the Liquidator of the Corporate Debtor for realization of its security interest. Consequently, the Liquidator sought for certain documents from the Appellant in terms of Regulation 21 of the Liquidation Regulations to prove existence of security interest in its favor and on receipt thereof, rejected the request made by the Appellant, treating him as an unsecured Financial Creditor of the Corporate Debtor.
• It is the case of the Appellant that it has a valid mortgage in terms of Transfer of Property Act, 1882 (TPA), by virtue of a registered mortgage deed and the same cannot be neglected merely because the charge was not registered in terms of Section 77(3) of the Companies Act.
• Interestingly, the mortgage deed executed between the Corporate Debtor and the Appellant was registered before the advent of IBC. It was therefore argued that the IBC in its operation is prospective in nature and shall not have any retrospective or retroactive effect or derogation to the ingredients of Section 58(f) of the TPA. It was also argued that the Registration before CERSAI has become mandatory only in February, 2020 and the same cannot be applied retrospectively. In any case, the Appellant registered the charge on June 05, 2022 before the rejection from the Liquidator and therefore, the same ought to be factored into.
• On the other hand, the Respondent Liquidator submitted that since the charge of the Appellant is not registered before the Registrar of Companies in accordance with Section 77 of the Companies Act, the Appellant will be treated as an unsecured financial creditor and the mortgaged property will form a part of the Liquidation Estate of the Corporate Debtor. It is the submission of the Respondent that in terms of Section 77(3) of the Companies Act, read with Section 52 of the IBC and Regulation 21 of the Liquidation Regulations, the Appellant do not have valid documents to prove its security interest and is therefore, classified as an unsecured creditor of the Corporate Debtor.

Issue at hand?

• Whether registration of security interest in accordance with Section 77 of the Companies Act is a pre-requisite for realization of security interest under the IBC?
• Whether non-compliance of Section 77 of the Companies Act will render a valid mortgage in terms of TPA as invalid?

Decision of the Court

• The NCLAT allowed the Appeal filed by Canara Bank and upheld its status as a Secured Creditor of the Corporate Debtor. While coming to this conclusion, the NCLAT observed it is the right of the Secured Creditor to realize its debt outside the process of liquidation. In fact, it is the duty of the Adjudicating Authority to consider such right of a Secured Creditor to realize its Security Interest as per Section 52 of the IBC.
• The NCLAT took note of Sections 52 and 53 showcasing the Legislative intent to provide two options to the Secured Creditor armed with a security interest i.e. (i) either enforce security interest against the Asset out of Liquidation Estate being the subject of security interest; or (ii) relinquish the same and claim as Secured Creditor in the manner mentioned in Section 53(1)(b) and further ranking equal to other Secured Creditors.
• The NCLAT observed that when a secured creditor chooses to realize its security interest and notifies the same to the Liquidator, the Liquidator is required to verify the same and permit the Secured Creditors having a valid security interest in their favor, to exercise their right under Section 52 of the IBC.
• The NCLAT held that the Appellant can very well enforce its Security Interest resting on Section 58(f) of the TPA and Rule 8 of the Security Interest (Enforcement) Rules, 2002 and concluded that non-registration of the Mortgage, as per Section 77 of the Companies Act, 2013, cannot be a ground to opine that the Appellant is not a Secured Creditor of the Corporate Debtor. The NCLAT further held that the rights of a Mortgagee under the TPA and the SARFAESI Act are not to be diluted, in terms of Regulation 21 of Liquidation Regulations.
• For the facts of the case in hand, the NCLAT also observed that it cannot lose sight of the fact that CERSAI Registration became mandatory only in February, 2020, much after the Mortgage was created and registered in the Office of S.R.O., Thovalai, Kanyakumari District, Tamil Nadu, which is a Public Office, providing `information', on the `Mortgages', registered in it.
• In terms of the above, the NCLAT concluded that the Appellant is a secured creditor of the Corporate Debtor and is entitled to realize its security interest under Section 52 of the IBC.

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