Treatment as secured creditor- without charge registration? - Knowledge Series by Sumedha Management Solutions Pvt. Ltd

Judgement on IBC
Treatment as secured creditor- without charge registration? - Knowledge Series by Sumedha Management Solutions Pvt. Ltd

Introduction:

In SICOM Limited vs. Mr. Sundaresh Bhat, Liquidator of ABG Shipyard Limited, the Hon’ble NCLAT held that Section 77(3) of Companies Act, 2013 (provision of mandatory registration of a charge) is applicable only to charge created by a ‘company’ and not on encumbrance created over an asset of a company pursuant to the judgment of Debt Recovery Tribunal. Below we discuss the ruling:

Facts of the case:

  • ABG Shipyard Limited (“Corporate Debtor”) had obtained financial assistance from the Appellant in 2013, and the security was provided by mortgage and hypothecation.

  • The account of Corporate Debtor was classified as non-performing asset, and the Appellant issued notices and reminders to pay outstanding money, and ultimately, filed an O.A. before Debt Recovery Tribunal, seeking recovery of money.

  • DRT, vide its judgment dated 26.04.2017, allowed the O.A. and directed the Appellants to jointly and severally deposit Rs.144,46,95,879/- within 30 days, failing which due was to recover from their mortgaged and hypothecated properties.

  • Later, on initiation of liquidation of the Corporate Debtor, the Appellant filed its claim with the liquidator, wherein its claim was categorised as “unsecured” since the Appellant failed to furnish any document pertaining to ROC charge in support of its security interest as required under Section 77 of Companies Act, 2013.

Precedents relied upon:

Section 109 of the Companies Act, 1913 came for consideration before Oudh High Court in Hukmichand vs. Pioneer Mills Ltd.1, wherein the High Court held that Section 109 was not applicable when charge is created by operation of law and not by a contract.

The Hon’ble Calcutta High Court, in Praga Tools Ltd. vs. Official Liquidator of Bengal Engineering Co. (P) Ltd.2, held that when security was furnished in pursuant of order of High Court, which cannot be said to be a charge created by the company, Section 125 of Companies Act was not applicable.

In Indian Bank vs. Official Liquidator, Chemmeens Exports (P) Ltd. & Ors.3, the provision of Section 125 of Companies Act, 1956 came for consideration. Indian Bank had advanced certain amount to M/s Chemmeens Exports Pvt. Ltd., which was secured by equitable mortgage by deposit of title deeds of debtor. Winding up proceedings were initiated by the bank. The bank sought leave of the Company Court to file a suit for recovery, which was granted. In the suit, Official Liquidator filed written statement taking the plea that the properties of the Company not having been registered under Section 125, therefore, the charge was void. A preliminary decree was passed against the Official Liquidator.

The Hon’ble Supreme Court also approved the judgment of Bombay High Court in Suryakant Natvarlal Surati vs. Kamani Bros. Ltd.4

The Hon’ble Supreme Court, in Kerala State Financial Enterprises Ltd. vs. Official Liquidator5, referring to the judgment of Indian Bank (supra), also held that Section 125 of Companies Act may not be applicable in a case where decree has already been passed.

Judgment:

There being an adjudicatory order in favour of the Appellant, mortgage and hypothecation was created in favour of Appellant, hence, non-registration of mortgage and hypothecation under Section 77 of Companies Act cannot be a ground to hold that Appellant was a ‘unsecured creditor’. Accordingly, the NCLAT held that security interest was created by virtue of judgment of DRT.

1 AIR 1927 Oudh 55

2 1982 SCC OnLine Cal 290

3 (1998) 5 SCC 401

4 (1985) 58 Comp Cas 121

5 (2006) 10 SCC 709

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