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2025 (4) TMI 1546 - AT - IBCClassification of appellant as an Unsecured Financial Creditor instead of a Secured Financial Creditor by the Liquidator and the Adjudicating Authority - absence of non-registration of charge in the register of the Registrar of Companies (ROC) - breach of statutory obligation under Section 77 of the Companies Act 2013 besides violating contractual commitments - HELD THAT - An investment was made by BEST-Appellant in the Corporate Debtor by way of an interest free deposit amounting to Rs.30 crores. The compensation for delay on account of non-commissioning of the project was provided for in the IA in terms of the charging of the units and the discounted rate thereof. When the IA did not provide for interest component in clear and precise terms the Liquidator could not on his own have expanded the scope of the IA by way of his own interpretation of the clauses. The Liquidator after examining the IA and not having found any enabling clause which provided for interest on the deposit invested by the Appellant in the Corporate Debtor has rightly treated the security deposit to be interest-free - The Liquidator therefore did not commit any error in concluding that the deposits were interest free and that the Appellant could not have claimed interest on security deposits which was interest free. There are no error on the part of the Liquidator to have admitted only a claim of Rs 30 Cr. in respect of the principal amount and rejecting the claim made in respect of the interest amount of Rs 126.23 Cr. The Adjudicating Authority in the exercise of its summary jurisdiction is not capacitated to determine the terms and conditions of the contractual agreement. The Adjudicating Authority is not expected to go into the commercial intent of the parties in trying to interpret the contractual provisions in the IA beyond a plain reading of the same - When the clauses of the IA did not specifically provide for interest on security deposit the Adjudicating Authority had correctly taken the view that the Liquidator could not have interpreted the IA to the contrary. The Liquidator did not receive any proof with regard to recording of the security having been created either with the information utility or proof of Certificate of Registration of Charge issued by the ROC or registration of charge with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India. Even if the requirement of the registration of charge is side-stepped for the time being in deciding the status of the Appellant as a secured financial creditor the need to possess documents of charge creating the interest cannot be waived as this requirement was clearly envisaged in the IA - In the absence of charge document the Creditor could not have been treated as a Secured Financial Creditor of the Corporate Debtor. It is not for the Liquidator to look into whose fault it was for not creating the security charge. All that the Liquidator was expected to perform was whether the charge has been created. The Appellant on a pointed query made by this Bench also admitted that there was no charge document created in their favour by the Corporate Debtor. In such circumstances when the Appellant has not controverted the fact that no charge was created on the deposit invested by them there are no infirmity in the decision of the Liquidator in not treating the Appellant as a Secured Financial Creditor. Conclusion - The Appellant was rightly classified as an Unsecured Financial Creditor due to absence of registered charge or proof of security interest. There are no good reason to interfere with the impugned order. The Appeal not having any merits stands dismissed.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered in this appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016 ("IBC") were:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Classification of the Appellant as Secured or Unsecured Financial Creditor Legal Framework and Precedents: The definitions of 'charge', 'secured creditor', and 'security interest' under Section 3 of the IBC were pivotal. Section 3(4) defines "charge" as an interest or lien created on property or assets as security, including mortgage. Section 3(30) defines "secured creditor" as a creditor in whose favor security interest is created. Section 3(31) defines "security interest" as a right or claim to property securing payment or performance of an obligation. Regulation 21 of the IBBI (Liquidation Process) Regulations, 2016, prescribes proof of security interest through records in information utility, certificate of registration of charge by ROC, or registration with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India. Section 77(3) of the Companies Act, 2013 mandates that no charge created by a company shall be taken into account by the liquidator or any creditor unless duly registered and certificate of registration is issued by the Registrar. Court's Interpretation and Reasoning: The Appellant contended that the security interest was crystallized due to delay in project commissioning and that the charge was a floating charge which does not require prior registration to be valid. Reliance was placed on a precedent holding that non-registration under Section 77 does not necessarily invalidate a mortgage or security interest. The Appellant argued that the Corporate Debtor's failure to register the charge was a breach of statutory and contractual obligations and should not prejudice their secured status. The Liquidator and Adjudicating Authority found that the IA explicitly required creation of a second charge in favor of the Appellant after the project lenders created the first charge, but no evidence of registration or creation of such charge was produced. The Adjudicating Authority relied on Section 77(3) of the Companies Act, 2013 and Regulation 21 of the Liquidation Process Regulations to hold that in absence of registration and documentary proof, the Appellant could not be treated as a Secured Financial Creditor. The Tribunal noted that the floating charge concept was not mentioned in the IA/EPA and was an afterthought by the Appellant. The absence of any charge document or registration was fatal to the claim of secured status. The Tribunal emphasized that the Liquidator's role was to verify existence of security interest, not to determine fault or breach of the Corporate Debtor. The Appellant admitted no charge document was created. Key Evidence and Findings: The IA clause 3.3(a)(iv) required a second charge to be created in favor of the Appellant. No certificate of registration of charge or proof of charge creation was produced. The Appellant conceded no charge document existed. The Liquidator's records and information utility did not contain evidence of security interest. Application of Law to Facts: The statutory mandate under Section 77(3) of the Companies Act and Regulation 21 of the Liquidation Process Regulations requires registration of charge for recognition by the Liquidator. The failure to register or produce proof meant the Appellant's claim as secured creditor could not be accepted. Treatment of Competing Arguments: The Tribunal rejected the Appellant's equitable argument that the Corporate Debtor's failure to register the charge should not prejudice them. It held that the Liquidator's function is limited to verifying existence of security interest on record, not to remedy breaches of statutory obligations by the Corporate Debtor. The Tribunal also rejected the floating charge argument due to absence of any contractual basis. Conclusion: The Appellant was rightly classified as an Unsecured Financial Creditor due to absence of registered charge or proof of security interest. Issue 2: Entitlement to Interest on the Interest-Free Deposit Legal Framework and Precedents: The contractual terms of the IA and EPA governed the rights to interest or compensation. The Liquidator's role is to admit claims based on records and agreements. The Adjudicating Authority has limited jurisdiction to interpret commercial contracts beyond their plain terms in insolvency proceedings. The Maharashtra Electricity Regulatory Commission (MERC) had previously adjudicated disputes under the EPA and held the security deposit to be interest-free. Court's Interpretation and Reasoning: The Appellant argued that the IA/EPA implicitly acknowledged entitlement to interest or compensation for delay in project commissioning by way of additional discounted rates on power units, calculated on a term loan borrowing rate of 12% per annum. They contended that the Liquidator's rejection of the interest claim was a misinterpretation of the contractual intent and resulted in unjust denial of legitimate dues. The Respondent argued that the deposit was expressly interest-free and that the discounted power supply was not interest but a commercial arrangement unrelated to the time value of money. The MERC's prior ruling that the deposit was interest-free was cited as authoritative. The Tribunal examined the IA's relevant clauses which clearly described the deposit as interest-free and provided for compensation for delay through additional discounts on power units rather than interest payments. The Tribunal held that the Liquidator was correct in adhering to the plain wording of the agreements and not expanding the scope to include interest where none was expressly provided. It emphasized that the Adjudicating Authority is not a forum for detailed commercial contract interpretation beyond a summary review. Key Evidence and Findings: The IA explicitly described the deposit as interest-free. The compensation for delay was via additional discounted rates on power units. The MERC had ruled the deposit to be interest-free. No other documentary evidence was produced by the Appellant to substantiate a claim for interest. Application of Law to Facts: The Liquidator's admission of claim only for the principal amount and rejection of interest was consistent with the contractual terms and regulatory rulings. The Adjudicating Authority's affirmation of this approach was legally sound. Treatment of Competing Arguments: The Tribunal rejected the Appellant's argument that the Liquidator should have ascertained the parties' commercial intent beyond the contract's express terms. It held that the Liquidator must act on the basis of clear contractual provisions and records before it. Conclusion: The claim for interest on the interest-free deposit was rightly rejected. The Appellant's entitlement was limited to the principal amount of Rs 30 crores. 3. SIGNIFICANT HOLDINGS The Tribunal crystallized the following principles and determinations:
Final determinations included dismissal of the appeal, upholding the classification of the Appellant as an Unsecured Financial Creditor, and affirming the rejection of the interest claim on the security deposit. The Tribunal found no infirmity in the impugned order and held that the Liquidator and Adjudicating Authority acted within their jurisdiction and in accordance with the law and contractual terms.
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