Brief Overview:
Registration of charge created on the assets under Section 77 of the Companies Act, 2013 does not establish priority and cannot dilute the status of another secured creditor under the Insolvency and Bankruptcy Code, 2016.
[Avil Menezes v. Hinduja Leyland Finance Limited (Company Appeal (AT) (Ins.) No. 555 of 2024; decided on 21st January 2025)]
Technical Details:
1) The Corporate Debtor (“CD”) availed credit facilities from Tata Capital Financial Service Limited (“TCFSL”) against its movable assets which were exclusively charged in favour of the TCFSL. Subsequent to repayment of the credit facilities to TCFSL, the CD created a new charge on its movable assets in favour of the UCO Bank consortium (“Consortium”). The CD had subsequently availed refinancing facilities from Hinduja Leyland Finance Limited (“Hinduja”) and a charge was created on the movable assets of the CD, for which a charge already existed in favour of the Consortium.
2) In the liquidation process under the Insolvency and Bankruptcy Code, 2016 (“Code”), Hinduja opted to realise its security interest, which was rejected by the Liquidator as the Consortium had first pari-passu charge. However, the Adjudicating Authority accepted the claim made by Hinduja.
3) In appeal, the contention raised by Hinduja that it had first charge on the assets because it was registered under Section 77 of the Companies Act, 2013 (“Companies Act”) was rejected by the Appellate Tribunal. It further carefully assessed the relevant clauses of the Consortium Agreement (“Agreement”) and opined that the Agreement:
(a) does not contain any exclusion clause in respect of assets financed by loans from other banks outside the Consortium;
(b) creates a first pari-passu charge on all ‘present and future’ assets of the CD and a first right over the proceeds from the sale of movable assets in favour of the Consortium;
(c) does not permit that assets which already have a first charge to be charged to other banks upon refinancing. Hence, no other charge could have been created without the consent or NOC of the Consortium.
4) The Appellate Tribunal further extended the applicability of Section 48 of the Transfer of Property Act, 1882 (which applies to immovable assets) to movable assets because the security on both was created under a common agreement.
JC takeaway:
Status accorded to a secured creditor in case of liquidation under the Code may require assessment beyond effecting registration of a charge and careful drafting of the documents creating the security to ensure priority inter alios secured creditors with charge on the same assets.
For further details, please see:
https://ibbi.gov.in//uploads/order/bdec4441048929d4e61c68c69519e8a5.pdf
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