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in

(2024) ibclaw.in 139 NCLAT

IN THE NATIONAL COMPANY LAW APPELLATE TRIBUNAL

Chennai Bench

Canara Bank
v.
Mr. S. Rajendran (Liquidator)

Company Appeal (AT) (CH) (Ins) No. 277/2023 and (IA No.851/2023)
Decided on 07-Mar-24

Mr. Justice Venugopal M. (Judicial Member), Mr. Justice Sharad Kumar Sharma (Judicial Member)
and Mr. Jatindranath Swain (Technical Member)

Add. Info:

Impugned Order: Order dated 14.06.2023 passed in IA(IBC)/887(CHE)/2022 in

CP(IB)/785(CHE)/2019.

Corporate Debtor: Cape Engineers Pvt. Ltd.

For Appellant(s): Mr. ML Ganesh, Advocate

For Respondent(s): Ms. Elamathi, Advocate.

Brief about the decision:

Facts of the case

M/s. Sree Ganesh EPC P. Ltd. had availed the credit facilities from the Appellant to an extent
of Rs. 23 crores for which the Corporate Guarantor M/s. Cape Engineers Pvt. Ltd. had offered
its immovable property as collateral security besides executing Corporate Guarantee
Agreement.
The borrower Company went into CIRP pursuant to an order made in an application filed u/s
10 of the Code, 2016. Also, the Corporate Guarantor had preferred an Application under
Section 10 of the Code and by an order dated 06.09.2019, the same was admitted.
Pursuant to the public announcement Form D was filed by Bank/Appellant to the
Respondent/Liquidator and in the liquidation proceedings, the Appellant has desired to stand
outside the liquidation proceedings in terms of Section 52 of the Code.
The Liquidator informed that since the charge was not registered before the Registrar of
Companies, the Appellant will be treated as an Unsecured Financial Creditor and the
mortgaged property will form part of the Liquidation Estate.
The Liquidator on 01.07.2022 had sent a mail to the Appellant / Petitioner wherein it was
informed that the Appellant shall not continue the action under SARFEASI Act, 2002, which
gives a cause of action to approach the Adjudicating Authority/Tribunal for securing
appropriate Orders, besides treating the Appellant/Petitioner, as an Unsecured Financial

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Creditor.

Decision of Appellate Tribunal

A. Rights of Secured Creditors

A Secured Creditor has a right to prefer a winding up petition after securing a decree from the
Debt Recovery Tribunal and a Recovery Certificate based thereon as per decision in Swaraj
Infrastructure Pvt. Ltd. V. Kotak Mahindra Bank Ltd. [2019] ibclaw.in 09 SC. If a Creditor who
had selected a method of having its claim adjudicated upon ought not then to be in a position
to select another method of adjudication as per decision in Craven V. Blackpool Ghreyhound,
Racing Ltd. (1936) 3 ALL ER 513.(p38)
It is to be remembered that prior to the assailing of the Assets of the Corporate Debtor, to the
Liquidator, it is the duty of the Adjudicating Authority to consider the right of a Secured
Creditor to realise the Security Interest and sit out of Liquidation, as per Section 52 of the
Code and any order in violation of the same is liable to be set aside, as per decision in Bank of
Baroda V. Mrs. Deep Venkat Ramani [2019] ibclaw.in 224 NCLAT.(p39)
A First Charge Holder, will have priority in realising its security interest if it elects to realise
its security interest and does not relinquish the same. In the event of the Secured Creditor
opting to relinquish its interest, the distribution of Assets will be governed by Section
53(1)(b)(ii) whereby all the Secured Creditors having relinquished security interest rank
equally.(p41)
Before winding up, each Creditor is free to pursue whatever enforcement measures are open
to him in the absence of an Insolvency Proceeding, the Rule is that the Race goes to the
swiftest and the Creditor initiating the early execution will have the first bite. In fact, the
initiation of Insolvency puts an end to the race and requires that all the Creditors of
the same class participate in the common pool, in proportion to the size of their
admitted claims.(p42)
Clubbing of debts where the charges might be different does not give a right to an assignee, to
seek substitution, in place of the First Charge Holder assignor Bank as per decision in Laxmi
Fibres Ltd. V. Andhra Pradesh Industrial Development Corporation Ltd., reported in AIR 2015
SC 3289.(p43)
The Secured Creditors who have opted out of the Insolvency Process are not in competition for
the liquidation proceeds except to the extent of any balance remaining to them after realising
their security. The competition among Secured Creditors, assuming that all their interests
have been duly perfected will lie outside the Insolvency Law.(p44)
The pari passu Principle has different manifestation, which is beyond the contractual
provisions. In fact, it provides the under pinning for other Insolvency Rules pertaining to proof
of debt. The general Rule is that the claims are to be valued as on the date of
commencement of winding up, is designed to ensure that one is comparing like with
like so that the Assets are distributed pari passu.(p45)

B. Ambit of Section 52 of the Code

A Liquidator is not to ask the Secured Creditor to relinquish the Secured Interest
over the assets of the Corporate Debtor. The Liquidator is not to prefer an application
praying for directions to the Secured Creditor, to respond to his request for
relinquishment of Security Interest over the Assets of the Corporate Debtor to the

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Liquidation Estate.(p48)
On receipt of such notification the Liquidator is to verify the same and permit those Secured
Creditors, to exercise their right, under 52 of the Code, 2016 if they find that they had
Security Interest over such Assets. To put it precisely, since the Code, 2016 overrides the
SARFAESI Act, 2002, the Liquidator ought not to prefer a petition, based on the
SARFAESI Act, 2002.(p48)

C. Non-registration of the Mortgage as per Section 77 of Companies Act, 2013 does not
impact on status of Secured Creditor under IBC

The 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 reality, the rights of a Mortgagee under the Transfer of Property
Act, 1882 and the SARFAESI Act are not to be diluted, in terms of Regulation 21 of
IBBI (Liquidation process) Regulations, 2016.(p53)
It cannot be lost sight of the fact that CERSAI Registration became mandatory only in
February, 2020, much after the Mortgage was created in the instant case. Further, the fact
remains that the Mortgage was registered in the Office of S.R.O., Thovalai, Kanyakumari
District, Tamil Nadu, which is again a Public Office, providing information on the Mortgages
registered in it.(p54)
The Appellant’s rights in holding a valid mortgage right over the Secured Assets is to
be protected by any means whatsoever.(p54)

D. Decision on present case

Right to recover the money, lent by enforcing a mortgage is a Right to enforce an interest in
the property and that the claim of the First Charge Holder shall prevail over the claim of the
Second Charge Holder and the Appellant / Petitioner can very well enforce the Security
Interest resting on Section 58(f) of the Transfer of Property Act, 1882 and Rule 8 of the
Security Interest (Enforcement) Rules, 2002, comes to a resultant conclusion that mortgage is
the result of the Act of Parties where the Transfer of Ownership Interest in a particular
Immoveable Asset is created, and that the conclusion arrived at by the Adjudicating
Authority/Tribunal in upholding the decision of the Liquidator in classifying the Appellant/Bank
as an Unsecured Financial Creditor is an illegal and an invalid one, in the eye of Law and in
the Liquidation Proceedings, the Appellant /Bank is to be treated as Secured Creditor, as held
by this Tribunal.(p52)

E. Conclusion

The Impugned Order in upholding the decision of the Liquidator in classifying the
Appellant/Petitioner as an Unsecured Financial Creditor is an invalid and illegal one and the
same is set aside to secure the ends of Justice. Accordingly, the Appeal succeeds.(p54)

Judgment/Order:

JUDGMENT

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Justice M. Venugopal, Member (Judicial):

Preamble:

The Appellant has filed the instant Company Appeal (AT) (CH) (Ins) No. 277/2023, being ‘aggrieved’,
in respect of the `Order’ dated 14.06.2023, in IA(IBC)/887(CHE)/2022 in CP(IB)/785(CHE)/2019,
passed by the `Adjudicating Authority’ / `National Company Law Tribunal’, Division Bench II,
Chennai.

2. The `Adjudicating Authority’/`NCLT’, Division Bench II, Chennai, while passing the `Impugned
Order’ in IA(IBC)/887(CHE)/2022 in CP(IB)/785(CHE)/2019 (filed under Section 60(5) of the I & B
Code, 2016, r/w Rule 11 of NCLT Rules, 2016) at paragraph Nos. 17 and 18, had observed the
following: –

“17. In short, the effect of non-registration would not vitiate the recovery of the debt, however
by the language of Section 77(3) of the Companies Act, 2013 as amended post the introduction
of the Code read with Section 52 of the Code and Regulation 21 of the IBBI (Liquidation
Process) Regulations, 2016, the security interest created becomes void against the Liquidator.

18. The decision of case ICICI Bank Ltd. Vs. SIDCO Leathers Limited & Others
[MANU/SC/2337/2006] relied upon by the Applicant does not support its contention as the
issue dealt by the said decision only deals with the right of the first charge holder over the
right of the second charge holder, whereas the issue under consideration before this Tribunal
is restricted to determine the legality of the communications of the Liquidator under the
factual circumstances of the case.”

and dismissed the ‘Application’, without costs.

Appellant’s Submissions:

3. The Learned Counsel for the Appellant submits that M/s. Sree Ganesh EPC P. Ltd. had availed the
credit facilities from the Appellant to an extent of Rs. 23 crores for which the ‘Corporate Guarantor’
M/s. Cape Engineers Pvt. Ltd. had offered its immovable property as collateral security besides
executing ‘Corporate Guarantee Agreement’. The said ‘Corporate Guarantor’, along with Borrower
Company M/s. Sree Ganesh EPC P. Ltd. had duly executed MOD on 07.07.2015, regd. as document
No. 747/2015/SRO Thovalai.

4. According to the Appellant, the borrower Company went into ‘CIRP’ pursuant to an order made in
CP(IB)/786(CHE)/2019 in an application filed u/s 10 of the I&B Code, 2016. Also, the ‘Corporate
Guarantor’, had preferred an ‘Application’ in CP(IB)/785(CHE)/2019 (under Section 10 of the I&B
Code) and by an order dated 06.09.2019, this ‘Tribunal’, was pleased to appoint Mr. J. Manivannan
as ‘Interim Resolution Professional’, and later, he was replaced by another ‘Resolution Professional’,
by name Mr. S.Rajendran.

5. It is represented on behalf of the Appellant that the Respondent had determined 95.76% voting
share to the Appellant herein, based on the loan security documents, executed by the ‘Corporate
Guarantor’, Company. In fact, in IA 1342/IB/2021 an application was filed as per Section 33(2) of the
I&B Code by the Respondent and on 25.04.2022 ‘an order’, was passed by this Tribunal to appoint
the Respondent as ‘Liquidator’, for the ‘Corporate Guarantor’, Company.

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6. It is the version of the Appellant that pursuant to the public announcement form D was filed by it
on 20.05.2022 to the Respondent and in the ‘Liquidation Proceedings’, the Appellant, has desired to
stand outside the ‘Liquidation Proceedings’, in terms of Section 52 of the Code, due to huge
difference in valuation of the ‘Secured Interest’.

7. The Learned Counsel for the Appellant points out that the Respondent had sent an email on
27.05.2022 informing the ‘Appellant’ to provide the documents as per Regulation 21 of the IBBI
(Liquidation process) Regulations, 2016. The Appellant had sent MODTD on 06.06.2022 to the
Respondent and also that subsequently, through an email communication dated 01.07.2022 the
Respondent informed that since the ‘charge’, was not registered before the `Registrar of
Companies’, the `Appellant’, will be treated as an ‘Unsecured Financial Creditor’, and the
‘mortgaged property’, will form part of the ‘Liquidation Estate’, thereby negating the legal document
viz. MODTD which was registered on 07.07.2015, in terms of Section 58(f) of the ‘Transfer of
Property Act’, 1882.

8. The Appellant contends that the Respondent cannot brush aside the aforesaid document, by citing
Section 77(3) of the Companies Act, 2013 and there should not be any conflict between two ‘Central
Act’. Moreover, the ‘Transfer of Property Act’, 1882 confers absolute rights on the ‘Mortgagee’, in
regard to the ‘Mortgage’ and the Respondent, cannot reject the Appellant’s mortgage rights, based
on the reasons that the charge was not registered before the Registrar of Companies. Later, the
Appellant had registered the charged on 05.06.2022 before ‘CERSAI’ although ‘CERSAI
Registration’, was made compulsory from 14.02.2020.

9. The grievance of the Appellant is that it is having 95.76% voting share, ought not to have treated
the Appellant, as an ‘Unsecured Financial Creditor’. The Appellant had informed the Respondent,
through a letter dated 28.06.2022 that they are continuing ‘SARFAESI Act’, action against the
mortgaged asset, in terms of Regulation 37 (7) of the IBBI (Liquidation process) Regulations, 2016.

10. According to the Appellant, Regulation 37(7) of the IBBI (Liquidation process) Regulations, 2016
specifically mention that the ‘SARFAESI Act’, or the ‘Recovery of Debts and Bankruptcy Act’, shall
prevail over the Regulation. While so, the Respondent cannot prevent the ‘Secured Creditor’, from
enforcing its mortgage, under the SARFAESI Act.

11. It is projected on the side of the Appellant that upon the receipt of Respondent’s email on
01.07.2022, the Appellant had filed an IA No. 887 / 2022, before the `Adjudicating Authority / NCLT
Bench – II, Chennai, contesting the stand of the Respondent that MOD cannot be considered as
`Security Interest’, and the same was dismissed on 14.06.2023, on the grounds that, if the `Charge’,
is not registered, as per Section 77 of the Companies Act, 2013, before the `Registrar of Companies’,
the ‘Lender’, cannot be classified as ‘Financial Creditor’ and the `Appellant’, has not furnished any
record available in `Information Utility’.

12. The Learned Counsel for the Appellant takes a plea that the Adjudicating Authority/Tribunal
should have given preference to Section 58(f) of the ‘Transfer of Property Act’, 1882, which is much
before the advent of the I&B Code, 2016. To put it differently, the MOD, was registered before the
advent of the I & B Code, 2016.

13. The Learned Counsel for the Appellant brings to the notice of this Tribunal that the I&B Code,
2016 in its operation is prospective in nature and shall not have any retrospective or retroactive

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effect or derogation to the ingredients of Section 58(f) of the ‘Transfer of Property Act’, 1882.
Moreover, the Appellant had advanced huge credit facilities based on the collateral security offered
by the ‘Corporate Guarantor’ (in Liquidation) and acquired an unfettered and indefeasible right, in
regard to the mortgaged asset, as per Section 58(f) of the ‘Transfer of Property Act’, 1882. Besides
this, MOD cannot be brushed aside because security was not registered u/s 77 of the Companies Act,
2013, being mandatory as per the I&B Code, 2016.

14. The Learned Counsel for the Appellant relies on the decision in ICICI Bank V. SIDCO
Leathers Ltd. & Ors. reported in MANU/SC/2337/2006 wherein it is observed that while
enacting a statute, the parliament cannot be presumed to have taken away a right on property. Right
to Property, is a constitutional right. Right to recover money lent by enforcing a mortgage would be
a right to enforce an interest in the ‘Property’. Also that as per Section 48 of the ‘Transfer of
Property Act’, 1882 claim of the ‘First Charge Holder’ shall prevail over the claim of the ‘Second
Charge Holder’ and that in a given case where the debts due to both the ‘First Charge Holder’ and
the ‘Second Charge Holder’ are to be realised from the property belonging to the mortgagor, the
‘First Charge Holder’ will have to be repaid first.

15. Such a valuable right having regard to the legal position as obtaining in common law and as also
under the provisions of the ‘Transfer of Property Act’, 1882 must be deemed to have been known to
the Parliament. Thus, “while enacting the Companies Act, the Parliament cannot be held to have
intended to deprive the first charge holder of the said right. Such a valuation right, therefore, must
be held to have been kept preserved”.

16. According to the Appellant, since Regulation 21 of IBBI (Liquidation process) Regulations, 2016
came into force only in the year 2016, the Respondent ought to have given credence to the ‘MOD’,
executed in favour of the Appellant the pre-existing rights conferred in favour of mortgagee by
virtue of the ‘Transfer of Property Act’, and ‘SARFAESI Act’, will not get diluted by virtue of
Regulation 21 of IBBI (Liquidation process) Regulations, 2016 which admittedly came into force only
in the year 2016. In fact, the ‘Registration of CERSAI’, has become mandatory in February, 2020
only and the same cannot be applied retrospectively. In any case, the Appellant had registered the
`Security Interest’, in `CERSAI’, on 05.06.2022, before the Respondent / Liquidator, gave his
decision vide communication dated 01.07.2022.

17. According to the Appellant, had not the I&B Code, 2016 not to come into force the Appellant can
very well enforce the security interest based on Section 58(f) of the ‘Transfer of Property Act’, 1882
and Rule 8 of ‘Security Interest’ (enforcement) Rules, 2002.

18. According to the Appellant, the Section 35 of the ‘SARFAESI Act’, 2002 for adjudication of the
above case, which is perimetria with section 238 of the I&B Code and the same is as follows: –

“The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith
contained in any other law for the time being in force or any instrument having effect by virtue
of any such law.”

19. According to the Appellant, the Respondent has relied upon the decision in M/s. Volkswagen
Finance Ltd. Vs. Shree Balaji Printpack Pvt. Ltd. rendered by this Tribunal which deals with ‘Non-
Registration of Charge’, with regard to moveable property (hypothecation of car). It is relevant to
distinguish between the term ‘Charge and Mortgage’.

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‘MORTGAGE is a transfer of an interest in immovable property as a security for the loan. In

other words, transfer of ownership interest in a particular immovable asset. Mortgage is the
result of the act of parties. It must be registered under TP Act, 1882’.

‘CHARGE is not a transfer though it is nonetheless a security for the payment of an amount.
Charge refers to the security for securing the debt, by way of pledge, hypothecation and
mortgage. Charge is created either by the operation of law or by the act of the parties
concerned’.

20. The Learned Counsel for the Appellant/Bank refers to the decision in SICOM Limited V.
Sundaresh Bhat, the Liquidator of ABG Shipyard Ltd. (vide Comp. App. (AT) (Ins.) 470 /
2021 dated 06.01.2022, reported in MANU/NL/0017/2022, whereby and whereunder at
paragraph 31 and 32, it is observed as under:-

‘’31. Hon’ble Supreme Court in Sesh Nath Singh v. Baidyabati Sheoraphull Co-operative Bank
Ltd. had occasion to consider the nature of proceeding under the SARFAESI Act, 2002. The
Hon’ble Supreme Court in the said case held that proceedings under SARFAESI Act, 2002 are
civil proceedings in a Court.

32. The judgement of the Hon’ble Supreme Court in Indian Bank (supra), thus, fully support
the submissions of the learned Counsel for the Appellant. There being adjudicatory order of
the Debt Recovery Tribunal in favour of the Appellant, the mortgage and hypothecation was
created in favour of the Appellant by the Corporate Debtor, hence, non-registration of
Mortgage and hypothecation under Section 77 of the Companies Act, cannot be a ground to
hold that the Appellant was not a ‘secured creditor’. Under the order of the Debt Recovery
Tribunal, the Corporate Debtor having not deposited the amount within 30 days time period’,
the Appellant was at liberty to realise the amount from mortgaged and hypothecated assets.
The security interest was created by virtue of the judgement of Debt Recovery Tribunal dated
26th April, 2017.”

21. The Learned Counsel for the Appellant/Bank submits that the Adjudicating Authority/Tribunal
should have recognised the Appellant’s rights, which is holding valid mortgaged rights over the
‘Secured Assets’ and, therefore, prays for setting aside the impugned order dated 14.06.2023 passed
in IA(IBC)/887(CHE)/2022 in CP(IB)/785(CHE)/2019 by the Adjudicating Authority/NCLT, Division
Bench II, Chennai.

Respondent’s Contentions:

22. According the Respondent / Liquidator the Appellant had submitted their claim against the
Corporate Debtor, for the ‘Corporate Guarantee’, and collaterals given by the ‘Corporate Debtor’, for
the ‘Loan Sum’, availed by M/s. Sree Ganesh EPC P. Ltd. from the Bank for an amount of Rs. 23
crores. In fact, the property belonging to the ‘Corporate Debtor’, bearing door No. 7/IB2 located at
534/1B of Kumarapuram village, Thovalai Taluk, Kanyakumari, was provided as collateral to the
Appellant bank for the loan sanctioned in favour of M/s. Sree Ganesh EPC P. Ltd.

23. It is represented on behalf of the Respondent that on 27.05.2022 Liquidator sought for
documents to establish the existence of security interest as per Regulation 21 of the IBBI
(Liquidation process) Regulations, 2016, to classify the Appellant as ‘Secured Financial Creditor’,

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but the Appellant / Bank had not submitted the documents. Further, the Appellant had not registered
charge for any of the alleged collaterals with the Registrar of Companies (ROC) as required under
the Companies Act, 2013 and Regulation 21 of the IBBI (Liquidation process), Regulations, 2016.

24. It is the stand of the Respondent that Section 77 (3) of the Companies Act, 2013 reads as under:
–

‘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 appointed under this Act or
the Insolvency and Bankruptcy Code, 2016, as the case may be, 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).’

25. The Learned Counsel for the ‘Liquidator’ points out that a detailed claim determination note was
emailed dated 03.06.2022 to the Appellant by the ‘Liquidator’, mentioning that their whole claim of
Rs. 34,78,78,231/- was admitted as an ‘Unsecured Financial Creditor’, after having gone through the
records and information made available to the ‘Liquidator’. In fact, the Appellant’s claim is not
satisfying any of the requirements under Regulation 21 of IBBI (Liquidation process) Regulation,
2016 for establishing the existence of security interest as the Appellant had failed to furnish the
documents, requested by the ‘Liquidator’, as per Regulation.

26. It is represented on behalf of the Respondent that since no documents were furnished to prove
the existence of security interest, under Regulation 21 of IBBI (Liquidation process) Regulations,
2016 the Assets of the Corporate Debtor will form part of the ‘Liquidation Estate’. Also, that there is
a ‘Fixed Deposit’ (A/c No. 140025439149) in the name of M/s. Sree Ganesh EPC P. Ltd. of Rs.
16,94,453/- lying with the Appellant/Bank. The said amount is a mutual credit between the Appellant
and the ‘Corporate Debtor’, and this was not adjusted in the claim sum.

27. It is the stand of the Respondent that the Appellant in paragraph 8 of the Appeal had admitted
that they had subsequently registered the charge with ‘CERSAI’, on 05.06.2022 although ‘CERSAI
Registration’, was made compulsory since 2020 itself and this is quite evident that it was an after
thought to register the charge before ‘CERSAI’.

28. The Learned Counsel for the Respondent refers to the order dated 19.10.2020 of this Tribunal,
in M/s. Volkswagen Finance Ltd. Vs. Shree Balaji Printpack Pvt. Ltd. vide Comp. App. (AT)
(Ins.) 02/2020, wherein at paragraph 29, it is observed as under: –

“29. From the documentary evidence on record it is clear that no ‘Charge’ has been registered
under the provisions of Section 77(1) of the Companies Act 2013, in relation to the Subject
Property. The Liquidator has rightly referred to Regulation 21 of IBBI (Liquidation Process)
Regulation, 2016 and observed that the Appellants ‘Claim’ was not supported by any evidence
as prescribed under the said Regulation. It is also an admitted fact that the ‘Charge’ was not
registered under Central Registry of Securitization Asset Reconstruction and Security Interest
of India. We are keeping the ratio of the aforenoted Judgements of the Hon’ble Supreme Court
and Section 52(3) of the Code read with Regulation 21(c) of the (Liquidation Process),
Regulations, 2016, in view. We are of the considered opinion that the contentions of the
Learned Counsel appearing for the Appellant that Registration with Motor Vehicle Authority
under Section 51 of the Motor Vehicles Act, 1988 would suffice, cannot be sustained. Section

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51(1) of the MV Act, 1988 only provides for “entry” in the Certificate of Registration regarding
the agreement. The Section provides how to deal with the entry. To reiterate, in the instant
case, as the ‘Security Interest’ was neither registered with the ‘Information Utility’; nor under
Section 125 of the Companies Act, 1956/Section 77 of the Companies Act, 2013; no Application
was preferred under Section 87 of the Companies Act, 2013; ‘Charge’ was not registered in
the Securitisation Asset Reconstruction and Security Interest of India, we are of the opinion
that Section 52(3)(b) of the Code and Regulation 21(b) of the (Liquidation Process),
Regulation, 2016 are not complied with and the ratio laid down by the Hon’ble Apex Court in
Kerala State Financial Enterprises Ltd. (Supra) and this Tribunal in India Bulls Finance Ltd.
(Supra) is squarely applicable to the facts of this case. Hence, we hold that when in present
matter ‘Charge’ was not registered as per the provisions of Section 77 (1) of the Companies
Act 2013 and as envisaged under the Code, the Creditor cannot be treated as a ‘Secured
Creditor’.

29. The Learned Counsel for the Respondent refers to the order dated 29.03.2022 in UCO Bank Vs.
G. Ramachandran, Liquidator of M/s. Sai Regency Power Corporation Pvt. Ltd.
(IA/778(CHE)/2021) and IA/777(CHE)/2021 in IBA/92/2019), wherein the security interest
created by a ‘Creditor’, was upheld after submission of claim form with ‘Liquidator’, will be
considered as ‘Unsecured Financial Creditor’. Further, the ‘Liquidator’, already had intimated the
Appellant about the UCO Bank’s order passed by the Adjudicating Authority/Tribunal, Chennai in the
‘Claim Determination Note’, share to the Appellant on 04.06.2022.

30. The Learned Counsel for the Respondent refers to Section 52(3) of the I&B Code, 2016 that
before any security interest is realised by the ‘Secured Creditor’, the ‘Liquidator’, shall verify such
‘Security Interest’, and permit the ‘Secured Creditor’, to realise only such ‘Security Interest’, the
existence of which may be proved either-

a. by the record of such ‘Security Interest’ maintained by an information utility; or

b. by such other means as may be specified by the Board.

31. According to the Respondent, Regulation 21 of IBBI (Liquidation process) Regulations, 2016
specifies the other means to establish the existence of security interests:

(i) The records available in an information utility, if any;

(ii) Certificate of registration of charge issued by the Registrar of Companies or;

(iii) Proof of registration of charge with a Central Registry of Securitisation Asset

Reconstruction and Security Interest of India.

32. Further, according to the Respondent the Appellant has failed to fulfil the requirements as per
Section 52 of the Code r/w Regulation 21 of the ‘Liquidation Process Regulations’. Also, that the
Appellant is an ‘Unsecured Financial Creditor’, of the ‘Corporate Debtor’, and the aspect of the
applicability of the ‘Transfer of Property Act’, 1882 does not arise.

33. The Learned Counsel for the Respondent points out that in regard to the letter sent by the
Appellant on 28.06.2022 initiating action on the ‘Corporate Debtor’s Asset’ under the ‘SARFAESI
Act’ , it is to be noted that Section 33(5) of the Code prohibits initiation of suit or other legal

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proceedings, when a ‘Liquidation Order’, is passed against the ‘Corporate Debtor’. Considering the
fact, that the Appellant has failed to establish the security interest, as per I&B Code, 2016 and
Regulations therein, the Appellant does not have the right to initiate the action under ‘SARFAESI
Act’, on an Asset which forms part of the ‘Liquidation Estate’.

34. In regard to the Appellant/Bank issuing a notice on 28.06.2022 to the ‘Corporate Debtor’, under
the ‘SARFAESI Act’, to proceed against the mortgaged Assets, the ‘Liquidator’, had sent an email on
01.07.2022 wherein it was reiterated that since the charge created on the property of the ‘Corporate
Debtor’, was not registered, the Appellant is an ‘Unsecured Financial Creditor’, and in the same
email, the ‘Liquidator’, had informed that the Appellant ‘shall not continue the proceedings’ under
the ‘SARFAESI Act’, while the Company is undergoing the ‘Liquidation Process’, under I & B Code,
2016.

35. The Learned Counsel for the Respondent refers to the decision of the Hon’ble Supreme Court
in ICICI Bank Ltd. Vs. SIDCO Leathers Ltd. & Ors. (vide MANU/SC/2337/2006) and points out
that this decision does not support the Appellant’s contentions as the issue dealt with by the said
decision only with regard to ‘First Charge Holder’ over the right of the ‘Second Charge Holder’.
However, the issue before this Tribunal is restricted to decide the legality of the communication of
the ‘Liquidator’ under the factual circumstances of the case, to classify the Appellant’s claim as an
‘Unsecured Financial Creditor’.

36. The Learned Counsel for the Respondent while summing up prays for dismissal of the instant
Appeal along with connected applications.

Secured Creditor’s Rights:

37. A Secured Creditor is not obligated to resort to its security. In fact, he may also rely upon his
security and proceed to realise his ‘debt’, in ordinary law and may stand entirely outside the winding
up the proceedings as per decision in Gujarat State Financial Corporation V. Official Liquidator
(1996), 87 Company cases pg. 658 (Guj-DB).

38. A Secured Creditor has a right to prefer a winding up petition after securing a ‘Decree’ from the
Debt Recovery Tribunal and a Recovery Certificate based thereon as per decision in Swaraj
Infrastructure Pvt. Ltd. V. Kotak Mahindra Bank Ltd., 2019 3 SCC at pg. 620. If a Creditor who had
selected a method of having its ‘Claim’ adjudicated upon ought not then to be in a position to select
another method of adjudication as per decision in Craven V. Blackpool Ghreyhound, Racing Ltd.
(1936) 3 ALL ER 513.

39. It is to be remembered that prior to the assailing of the Assets of the `Corporate Debtor’, to the
`Liquidator’, it is the duty of the `Adjudicating Authority’, to consider the right of a `Secured
Creditor’, to realise the `Security Interest’, and sit out of Liquidation, as per Section 52 of the Code
and any order in violation of the same is liable to be set aside, as per decision in Bank of Baroda V.
Mrs. Deep Venkat Ramani (2020) 158 SCL 320 (NCLAT), New Delhi.

40. A cumulative reading of Section 52 and 53 of the I&B Code, 2016 shows that the Legislature in
their wisdom thought it fit to give an option to the Secured Creditor armed with a security interest
to choose out of the two options (i) either enforce security interest against the Asset out of
Liquidation Estate being the subject of security interest or relinquish the same and claim as Secured

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Creditor in the manner mentioned in Section 53(1)(b) and further ranking equal to other Secured
Creditors.

41. A ‘First Charge Holder’, will have priority in realising its security interest if it elects to realise its
security interest and does not relinquish the same. In the event of the Secured Creditor opting to
relinquish its interest, the distribution of Assets will be governed by Section 53(1)(b)(ii) whereby all
the Secured Creditors having relinquished security interest rank equally.

42. Before winding up, each Creditor is free to pursue whatever enforcement measures are open to
him in the absence of an Insolvency Proceeding, the Rule is that the ‘Race’ goes to the swiftest and
the ‘Creditor’ initiating the early execution will have the first bite. In fact, the ‘Initiation of
Insolvency’ puts an end to the race and requires that all the Creditors of the same class participate
in the common pool, in proportion to the size of their admitted claims.

43. The pari passu Principle of ratable distribution envisages that the distribution of proceeds in
respect of a class of recipients that rank equally will have to be paid in equal proportion where the
debts cannot be paid in full. As a matter of fact, clubbing of debts where the charges might be
different does not give a right to an assignee, to seek substitution, in place of the ‘First Charge
Holder’ assignor Bank as per decision in Laxmi Fibres Ltd. V. Andhra Pradesh Industrial
Development Corporation Ltd., reported in AIR 2015 SC 3289.

44. The Secured Creditors who have opted out of the Insolvency Process are not in competition for
the liquidation proceeds except to the extent of any balance remaining to them after realising their
security. The competition among Secured Creditors, assuming that all their interests have been duly
perfected will lie outside the Insolvency Law.

45. The pari passu Principle has different manifestation, which is beyond the contractual provisions.
In fact, it provides the under pinning for other Insolvency Rules pertaining to proof of ‘Debt’. The
general Rule is that the ‘claims’ are to be valued as on the date of commencement of winding up, is
designed to ensure that one is comparing like with like so that the Assets are distributed pari passu.

Ambit of Section 52 of the Code:

46. Section 52 of the I&B Code, 2016 provides that in a liquidation proceeding, the Secured Creditor
may choose to relinquish its security interest and take part in the distribution of Assets or realise its
security interest outside the ‘Liquidation Proceeding’. If a Secured Creditor determines to realise its
security, the sum of IRP costs payable by the Secured Creditor shall be deducted from the realised
proceeds. If there is a surplus realised from the enforcement of a Security Interest, the Secured
Creditor has to account for the same to the Liquidator.

47. In respect of the proceeds of the realisation of the Secured Assets, are not enough to repay the
debts owed to the Secured Creditor, he may file a claim in accordance with priority of payments as
per Section 53 of the I&B Code, 2016 for such an unpaid portion.

48. A Liquidator is not to ask the Secured Creditor to relinquish the Secured Interest over the assets
of the Corporate Debtor. The Liquidator is not to prefer an ‘Application’, praying for directions to the
Secured Creditor, to respond to his request for relinquishment of Security Interest over the Assets of
the Corporate Debtor to the Liquidation Estate. On receipt of such notification the Liquidator is to

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verify the same and permit those `Secured Creditors’, to exercise their right, under 52 of the I & B
Code, 2016 if they find that they had `Security Interest’, over such `Assets’. To put it precisely, since
the I&B Code, 2016 overrides the ‘SARFAESI Act’, 2002, the Liquidator ought not to prefer a
petition, based on the ‘SARFAESI Act’, 2002.

49. As far as the present case is concerned, the Appellant/Bank before the Adjudicating
Authority/NCLT Bench II, Chennai in IA 887/2022 in CP(IB)/785(CHE)/2019 (filed u/s 60(5)(c) I&B
Code, 2016 r/w Rule 11 of NCLT Rule, 2016) has sought the relief of quashing the communication
dated 01.07.2022 and 04.06.2022 caused by the Liquidator as non est in Law.

50. In fact, the Liquidator on 01.07.2022 had sent a mail to the Appellant / Petitioner wherein it was
informed that the Appellant shall not continue the action under SARFEASI Act, 2002, which gives a
`cause of action’, to approach the `Adjudicating Authority/Tribunal’, for securing appropriate
Orders, besides treating the Appellant/Petitioner, as an ‘Unsecured Financial Creditor’.

51. On behalf of Respondent, a plea is taken that Appellant is to be treated as an Unsecured

Financial Creditor and that he will be paid from the `Liquidation Proceeds’, as per Section 53(1) of
the I & B Code, 2016.

52. Be that as it may, on a careful consideration of respective contentions, this Tribunal, keeping in
mind of the prime fact that ‘Right to recover’ the money, lent by enforcing a mortgage is a ‘Right to
enforce’, an interest in the property and that the claim of the ‘First Charge Holder’, shall prevail
over the claim of the ‘Second Charge Holder’, and the `Appellant / Petitioner’, can very well enforce
the ‘Security Interest’, resting on Section 58(f) of the ‘Transfer of Property Act’, 1882 and `Rule 8 of
the Security Interest (Enforcement) Rules, 2002’, comes to a resultant conclusion that ‘mortgage’, is
the result of the `Act of Parties’, where the `Transfer of Ownership Interest’, in a particular
`Immoveable Asset’ is created, and that the conclusion arrived at by the `Adjudicating Authority /
Tribunal’, in upholding the decision of the `Liquidator’, in classifying the `Appellant / Petitioner /
Bank’, as an `Unsecured Financial Creditor’, is an illegal and an invalid one, in the eye of `Law’ and
in the `Liquidation Proceedings’, the Appellant /Bank, is to be treated as `Secured Creditor’, as held
by this `Tribunal’.

53. In addition, the `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 reality, the ‘rights’ of a `Mortgagee’, under the `Transfer of Property Act’,
1882 and the ‘SARFAESI Act’, are not to be diluted, in terms of Regulation 21 of IBBI (Liquidation
process) Regulations, 2016.

54. It cannot be lost sight of the fact that ‘CERSAI Registration’, became `mandatory’, only in
February, 2020, much after the `Mortgage’, was created in the instant case. Further, the fact
remains that the `Mortgage’, was registered in the Office of S.R.O., Thovalai, Kanyakumari District,
Tamil Nadu, which is again a Public Office, providing `information’, on the `Mortgages’, registered
in it. Suffice it for this `Tribunal’, to unhesitatingly, to hold, that the Appellant’s rights, in holding a
`Valid Mortgage Right’, over the `Secured Assets’, is to be protected, by any means whatsoever.
Looking at from any angle, this `Tribunal’, holds that the `Impugned Order’, dated 14.06.2023, in
IA(IBC)/887(CHE)/2022 in CP(IB)/785(CHE)/2019, passed by the `Adjudicating Authority / NCLT’,
Division Bench-II, Chennai, in upholding the decision of the `Liquidator’, in classifying the
`Appellant/Petitioner’, as an `Unsecured Financial Creditor’, is an `invalid’ and `illegal’ one and the

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same is set aside, by this `Tribunal’, to secure the ends of Justice. Accordingly, the `Appeal’
succeeds.

Disposition:

In fine, the instant Comp. App (AT) (CH) (Ins) No. 277 / 2023 is `allowed’. No costs. The `Impugned
Order’, dated 14.06.2023, in IA(IBC)/887(CHE)/2022 in CP(IB)/785(CHE)/2019, passed by the
`Adjudicating Authority / NCLT’, Division Bench-II, Chennai, is set aside by this `Tribunal’, for the
reasons ascribed in this `Appeal’. The IA(IBC)/887(CHE)/2022 in CP(IB)/785(CHE)/2019, filed by the
`Appellant/Petitioner/Bank’ is allowed. The connected pending IAs, if any, are closed.

[Justice M. Venugopal]
Member (Judicial)

[Justice Sharad Kumar Sharma]

Member (Judicial)

[Jatindranath Swain]
Member (Technical)

07.03.2024

Original judgment copy is available here.

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