The National Company Law Tribunal, Ahmedabad ("NCLT") in Intec Capital Ltd. v. Arvind Gaudana IRP of Vrundavan Ceramic Pvt. Ltd1 has reiterated that in absence of a charge being registered in terms of Section 77 of the Companies Act, 2013 ("Act"), a lender cannot be treated as a secured financial creditor in terms of the Insolvency and Bankruptcy Code, 2016 ("Code").
- An application under Section 7 of the Code made by State Bank of India was admitted against Vrundavan Ceramic Private Limited ("Corporate Debtor") and Corporate Insolvency Resolution Process ("CIRP") was initiated against the Corporate Debtor along with appointment of Resolution Professional ("RP").
- Intec Capital Limited ("Applicant"), a non-banking financial company, claimed that the Corporate Debtor had provided a corporate guarantee in favour of the Applicant in relation to the facilities availed by Gokul Ceramics Private Limited and Umiya Ceramics Private Limited ("Borrowers").
- Although the claim of the Applicant as creditor was originally not considered, ultimately, the Applicant became a part of the Committee of Creditors ("CoC") as an "unsecured financial creditor" with State Bank of India being a "secured financial creditor".
- The Applicant filed this Intervention Application to also be considered as a "secured financial creditor" in view of the undertaking given by the Corporate Debtor confirming the creation of a hypothecation over an inkjet printer as additional collateral.
The contentions made on behalf of the Applicant were as follows:
- The Applicant relied on the aforementioned undertaking wherein the Corporate Debtor has confirmed creation of a hypothecation/charge on an inkjet printer as additional collateral.
- The Applicant also submitted that the State Bank of India issued a no objection certificate in favour of the Applicant with respect to the aforesaid charge.
The contentions made on behalf of the RP were as follows:
- Upon verification of website of Ministry of Corporate Affairs and the documentary evidence available, it was clear that no charge has been created or has been registered as required by section 77(1) of the Companies Act, 2013 ("Act") or the provisions of the Companies Act, 1956.
- The Corporate Debtor also provided no information relating to any security interest created to secure the guarantee provided by it to the Applicant.
- There was no disclosure regarding contingent liability in the books of the Corporate Debtor as required by Accounting Standards.
- It was also submitted that as per Regulation 21 of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 ("IB Regulations"), the existence of security interest may be proved on the basis of the records available in an Information Utility, the certificate or registration of charge issued by Registrar of Companies ("ROC") or Central Registry of Securitization Asset Reconstruction and Security Interest of India.
The Division Bench of NCLT observed that in accordance with Section 77(1) of the Act, it was the duty of every company to register the particulars of the charge with the ROC within 30 (thirty) days of its creation. No such charge is shown to be registered with the RoC.
In the case of Indiabulls Housing Finance Ltd. vs. Mr. Samir Kumar Bhattacharya2, NCLAT held that "It is thus clear that the CoC had made it clear that in absence of Charge being registered, the Appellant could not be treated as Secured Financial Creditor.... The transaction did not even reflect in the books of account of the Corporate Debtor. Appellant should be happy that it has been at least treated as Financial Creditor....".
The Applicant was also unable to prove the existence of the security interest in terms of Regulation 21 of the IB Regulations referred to above.
Thus, the NCLT rejected the prayer of the Applicant to consider its claims as the secured financial creditor and upheld the decision of RP in considering the claim of the Applicant as unsecured financial creditor. Thus, NCLT once again has reiterated that for a lender to be considered as a secured financial creditor, the charge has to be registered in terms of Section 77(1) of the Act and existence of such security interest has to be proved in accordance with Regulation 21 of the IB Regulations.
Typically, lenders insist that the creation of a charge is a condition precedent to disbursement and ensure that requirements of the Registration Act, 1908 wherever applicable, are complied with as a condition precedent. However, filing of forms with the ROC is often only a post-disbursement condition and, in some instances, borrowers do not comply.
As seen in the Indiabulls judgment referred to above and in the present judgment discussed in this article, even if a charge is otherwise created in accordance with applicable law but is not registered with the ROC or filed with the information utility, the charge holder will not be considered to be a 'secured creditor' under the Code.
Section 78 of the Act allows the charge holder to make an application to the ROC for registration of the charge, in cases where the company fails to register the charge within 30 days of its creation. It is therefore advisable for lenders to strictly monitor compliance with Section 77 and on failure to comply, immediately file an application under Section 78 and get the charge registered themselves.
1. Order dated 13th March 2023 in IA No. 340 of 2020 in CP (IB) No. 561/7/NCLT/AHM/2018
2. Company Appeal (AT) (Insolvency) No. 830 of 2019
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