Loan Restructuring Need Not Be Treated As Modification Of Charge; Original Security Remains Valid: NCLAT

The National Company Law Appellate Tribunal (NCLAT) in Delhi has held that restructuring of loan facilities does not necessarily amount to modification of charge requiring fresh registration where the underlying security remains unchanged.

“We are in agreement with the approach adopted by the Ld. Adjudicating Authority in construing the term modification liberally as the same will not prejudice the security interest of existing lenders and the restructuring of the facilities done by the lender Banks may not amount to modification of charge in strict sense.”, the tribunal observed.

The ruling came in appeals filed by Kotak Mahindra Bank Ltd. in the liquidation of Gupta Synthetics Ltd., where it challenged the classification of State Bank of India and IDBI Bank Ltd. as secured creditors despite no fresh registration of charge after restructuring.

A Bench of Judicial Member Justice Mohd. Faiz Alam Khan and Technical Member Indevar Pandey upheld the earlier decision, observing that restructuring of loans, including conversion of unpaid interest into separate components, may not by itself amount to creation of a new charge when the underlying security remains unchanged.

The tribunal noted that the original charges created and registered between 2006 and 2008 continued to secure the outstanding debt, including restructured portions, and were not extinguished merely because modifications were not registered.

It further held that in liquidation proceedings, security interest can be proved through multiple independent modes under Regulation 21 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, including registration of charge or proof of registration with the Central Registry of Securitisation Asset Reconstruction and Security Interest.

“Regulation 21 of the Liquidation Process Regulations, 2016 provides three modes of proving the security interest and the same may be proved by either of the said mode or manner and keeping in view the Section 238 of the Code, Regulation 21 would override the provision of Section 77 (3) of the Companies Act, 2013 and thus hold that apart from the certificate of registration of charge issued by the ROC the security interest may also be proved by registration of charge with the CERSAI.”

Rejecting the reliance placed by Kotak Mahindra Bank Ltd. on a consent decree passed by the Debts Recovery Tribunal, the bench held that such a decree only enables recovery of dues and does not create any fresh security interest. Even if such a right is assumed, it would remain subordinate to existing registered charges.

The tribunal emphasised that the restructuring carried out by consortium lenders, including State Bank of India and IDBI Bank Ltd., was a reorganisation of existing liabilities and not fresh lending altering the nature or extent of the original security.

Since the securities remained unchanged and lenders were aware of each other's charges, the restructuring need not be treated as the creation of a fresh charge in the facts of the case.

Accordingly, the Appellate Tribunal dismissed all appeals and upheld the orders passed by the National Company Law Tribunal, which had classified the State Bank of India and IDBI Bank Ltd. as secured creditors.