Introduction
In the case of Home Kraft Avenues v. Jayesh Sanghrajka, Resolution Professional (“RP”) of Ornate Spaces Private Limited (“Corporate Debtor”) and Ors1, the National Company Law Appellate Tribunal (“NCLAT”) examined the interplay between Section 77 of Companies Act, 2013 (“Act”) and Section 3(30) of the Insolvency and Bankruptcy Code, 2016 (“IBC”). The issue arose pursuant to an appeal against the order passed by National Company Law Tribunal, Mumbai Bench (“NCLT Mumbai”) which had held that, “no charge created by a company shall be taken into account by the liquidator appointed under this act or I&B code or any other creditor unless it is duly registered u/s 77(1) and a certificate of registration is given by the Registrar”.
The NCLAT relied upon various statutory provisions and judgements to conclude that it is mandatory to register the charge under Section 77 of the Act in the event of liquidation under IBC but there is no such mandatory requirement in the event of corporate insolvency resolution process (“CIRP”) under IBC.
Factual Background
Home Kraft Avenues, the appellant in the present case (“Appellant”) entered into a loan agreement with the Corporate Debtor which provided that in the event the Corporate Debtor fails to pay the principal amount of INR 11 Crores, four apartments together with the car parking spaces would be transferred in favour of the Appellant. Subsequently, the Corporate Debtor defaulted in the repayment of the principal amount of the loan and the RP identified the Appellant as an unsecured creditor of the Corporate Debtor. On these grounds, the Appellant applied to NCLT Mumbai seeking directions for admission of its claim as a ‘secured financial creditor' of the Corporate Debtor. However, the NCLT Mumbai rejected the claim of the Appellant and classified it as an ‘unsecured financial creditor' of the Corporate Debtor on the ground that the ‘security interest' created over the identified flats of the Corporate Debtor was not registered with the Registrar of Companies as required under section 77 of the Act.
Aggrieved by the order of NCLT Mumbai, the appellant appealed before the NCLAT. The Appellant argued that it should be considered as a ‘secured creditor' since the ‘security interest' was created over the identified flats of the Corporate Debtor, in terms of IBC.
NCLAT's ruling
The NCLAT analyzed Section 77(3) of the Act, reproduced hereinbelow, for reference:
“Section 77 – (3)Notwithstanding anything contained in any other law for the time being in force, no charge created by a company shall be taken into account by the ‘liquidator' or any other creditor unless it is duly registered under sub-section (1) and a certificate of registration of such charge is given by the Registrar under sub-section (2).”
On a bare reading of Section 77(3) of the Act, the NCLAT concluded that the section places an obligation on a liquidator to ensure whether a security interest has been duly registered under Section 77(3) of the Act, and no such obligation has been cast upon a ‘resolution professional' under IBC. The NCLAT noted that there is a stark difference between ‘security interest' under an insolvency process and ‘security interest' under a liquidation process. In a liquidation process, any secured creditor has an option to either (i) exclude its security from the liquidation estate and realise the security on its own; or (ii) relinquish its interest so that the security becomes a part of the ‘liquidation estate'. However, in the CIRP process, the resolution professional is mandated to take control of the ‘entire assets' and not just a part of the assets of the corporate debtor and therefore, an examination of registration or non-registration of charge over the assets is less relevant.
For the same reasons, the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 states that the existence of security interest can be proved by a secured creditor on the basis of, inter-alia, a certificate of registration of the charge issued by Registrar of Companies but no such provision has been included in Insolvency and Bankruptcy Board of India (Corporate Insolvency Resolution Process) Regulations, 2016. This clarifies the legislative intent to require registration of a charge only for liquidation and not for CIRP. This is further substantiated by the fact that ‘registration of charge under section 77 of the Act' is not a part of the definition of ‘security interest' under IBC.
The NCLAT further relied upon its observations in M/s Cape Engineers Private Limited2 to the effect that “non-registration of the Mortgage, as per Section 77 of the Companies Act, 2013, is not a sufficient/ enough ground, to come to an opinion, that the Appellant, is not a ‘Secured Creditor'”, in order to support the conclusion that registration of charge under section 77 of the Act is not a sine-qua-non for a creditor to be classified as a ‘secured creditor'.
Conclusion
The NCLAT concluded that the provisions of Section 77(1) of the Act that mandates registration of charge by a company with the Registrar of Companies is a mandatory requirement for consideration of a creditor as a ‘secured creditor' by a liquidator in liquidation proceedings. However, the same is not a mandatory requirement for the Appellant to be treated as a ‘secured creditor' in CIRP considering that a Corporate Debtor is in CIRP and not liquidation, and in ‘CIRP' mere existence of ‘security interest' is sufficient to classify a creditor as a ‘secured creditor'.
However, on a plain reading of Section 77(3) of the Act, it is to be noted that this section not just applies to the liquidator but also applies to ‘any other creditor'. Considering that the NCLAT has relied upon its reading of the text of section 77(3) of the Act to reach the conclusion that a creditor could be a secured creditor during CIRP, but it may cease to be such during liquidation, there lies a possibility that a higher court or another tribunal takes an alternate view and holds that registration of a charge under section 77 of the Act is a mandatory requirement to be classified as ‘secured creditor' even during the process of CIRP and not just in the process of liquidation. Therefore, as a matter of caution, it is suggested that the charge created in favour of the lenders or on behalf of the lenders should always be duly registered under section 77 of the Act to avoid any interpretational issues that may present itself in future.
Footnotes
1. 2025 SCC OnLine NCLAT309.
2. MANU / NL/ 0154/2024
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