Is Charge Registration Under Section 77 of the Companies Act Mandatory for Secured Creditor Status Under IBC?

The National Company Law Appellate Tribunal (NCLAT) in Home Kraft Avenues Vs Jayesh Sanghrajka and Anr.¹ held that registration of charge under section 77 of the Companies Act is not a sine qua non for a creditor to be considered as secured creditor under section 3(30) of the Insolvency and Bankruptcy Code, 2016 (Code).

The Appellant had advanced a loan of ₹11 crore to the Corporate Debtor, with two options regarding the interest payable on the principal amount: either an interest rate of 10% could be taken, or four flats could be transferred in favor of the Appellant. The Corporate Debtor failed to repay even the principal amount, leading to its admission into CIRP. Consequently, the Appellant filed its claims for ₹11 crore as a financial secured creditor and for the four flats that had been transferred in lieu of interest.

The Resolution Professional admitted the Appellant’s claims as a homebuyer with respect to the four flats. However, the Adjudicating Authority refused to recognize the Appellant as a secured creditor for the principal loan amount on the ground that the charge was not registered under Section 77 of the Companies Act.

Registration Of Charge Under Section 77 of Companies Act Mandatory For Secured Creditor Status Under IBC

The primary question before the NCLAT was whether the Appellant could be categorized as a secured financial creditor even if the charge was not registered in terms of Section 77 of the Companies Act.

The Tribunal referred to Section 77(3) of the Act, which states that, notwithstanding anything contained in any other law for the time being in force, no charge created by a company shall be taken into consideration by the liquidator or any other creditor unless such charge is registered under Sub-section (1) and a registration certificate for such charge is issued by the Registrar under Sub-section (2).

Based on the above, the Tribunal noted that, on a bare perusal of the provision, it is clear that it obligates the liquidator not to consider the charge unless it is properly registered. However, the Tribunal further observed that, in the present case, the company is not under liquidation; therefore, analysis will be confined to the examination of the role and responsibilities of the Resolution Professional.

The intention of the legislature was not to apply Section 77 of the Companies Act to the Corporate Insolvency Resolution Process, given that the treatment of secured creditors and security interests under the liquidation process is entirely different from that under the Corporate Insolvency Resolution Process.

Under liquidation, a secured creditor is entitled to realize its security interest by excluding its assets from the liquidation estate, as per Section 52 of the Code. A secured creditor under the liquidation process who seeks to realize its security interest outside the waterfall mechanism must prove that it holds a charge over the property. In such cases, the liquidator is required to recognize only those charges that are registered under Section 77 of the Companies Act.

Furthermore, secured assets are included in the definition of the liquidation estate under Section 36(3)(g) only when the secured creditor has relinquished its interest. On the other hand, Sections 18(1)(f) and 25(2)(a) of the Code mandate the Resolution Professional to take control of all assets of the Corporate Debtor, irrespective of any encumbrance. Additionally, the secured creditor is not empowered to realize its security interest during the CIRP.

This reasoning is further reinforced by the fact that Regulation 21 of the Liquidation Regulations provides for the evidence required to prove security interest, whereas no such requirement exists under the CIRP Regulations. The question of charge arises only in the liquidation process and has no relevance to the CIRP.

Based on the above, the Tribunal observed that it was never the intention of the legislature that registration of charge is sina qua non to qualify as secured creditor. The Resolution Professional has to follow the provisions of the code. Section 3(4) of the code defines charge as interest or lien over a property as security and includes mortgage. Section 3(30) defines a secured creditor as one in favor of whom a security interest is created. 

Further, section 3(31) states security interest means right, title or interest or a claim to a property in favor of or provided for a secured creditor by a transaction which secures payment or performance of obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or ‘arrangement’ securing payment or performance of any obligation of any person.Section 3(33) states that “transaction” includes an ‘agreement’ or ‘arrangement in writing’ for transfer of assets, or funds, goods or service from or to the Corporate Debtor and section 3(34) of IBC states that transfer includes mortgage, pledge, gift, loan or any other form of transfer of right, title or lien.

After referring to the relevant definitions, the Tribunal observed that the registration of a charge under Section 77 of the Companies Act is not a requirement under the definition of a secured creditor. In fact, a creditor is considered secured by virtue of any arrangement, such as a loan agreement that designates certain assets—such as the four flats in this case—as secured property against the repayment of the loan extended to the Appellant.

The NCLAT in Canara Bank vs. Mr. S. Rajendran, Liquidator of M/s Cape Engineers Pvt. Ltd² held that non registration of mortgage in terms of section 77 of the Companies Act is not sufficient to come to the conclusion that the Appellant is not a secured creditor. 

Based on the above, the Tribunal reiterated the settled position of law that rights of the mortgagee under the Transfer of Property Act cannot be taken away because of non-registration of charge under section 77 of the companies act.

This interpretation is in consonance with Section 77 of the Companies Act, 2013.Section 77(3) of the Companies Act, 2013, states that no charge created by a company shall be taken into account by the Liquidator unless it is registered under Sub-sections (1) and (2). Additionally, Section 77(4) clarifies that nothing in Sub-section (3) shall prejudice any contract or obligation for the repayment of money secured by a charge. This obligation applies only to the Liquidator.

Furthermore, Section 3(4) of the IBC defines a charge, while Section 3(31) states that secured interest includes a charge. Thus, a combined reading of these provisions makes it clear that while a Liquidator cannot consider an unregistered charge, the Resolution Professional (RP) is bound to recognize a charge, and a creditor holding such a charge qualifies as a secured creditor.

Accordingly, the Appellant was declared as a secured creditor even if the charge created in favor of the Appellant was not registered in terms of section 77 of the Companies Act.

Conclusion

It can be concluded that Section 77 of the Companies Act obligates the Liquidator to determine whether the charge is registered under this section when a secured creditor in the liquidation process seeks to realize its security interest under Section 52 of the Code. However, in the Corporate Insolvency Resolution Process (CIRP), no such requirement exists. This means that before a creditor can be categorized as a secured creditor, it is not mandatory for the charge to be registered under Section 77 of the Companies Act.

The Tribunal has clarified several important issues in this judgment, which will contribute to the effective implementation of the Code.

¹COMPANY APPEAL (AT)(INS) NO.756/2023

²Company Appeal (AT) (Ins) No. 277 of 2023