NCLAT Upholds Secured Creditor Status Of Second Charge Holder Despite Non-Registration In Mirage Ceramics CIRP

The National Company Law Appellate Tribunal (NCALT) at New Delhi has upheld the classification of Kamlesh Mehta, a second charge holder, as a secured financial creditor of the corporate debtor, Mirage Ceramics Pvt. Ltd. It held that the absence of consent from the first charge holder and non-registration of charge under Section 77 of the Companies Act, 2013 did not vitiate the second charge in the facts of the case.

A bench of Judicial Member Justice Ashok Bhushan and Technical Member Barun Mitra held the following:

“Moreover, when the charge created for Respondent No. 2 was undisputedly subservient and secondary to the charge of ASREC (India) Limited, ASREC (India) Limited cannot claim to have suffered any injury or prejudice on this count. We therefore do not find substance in the contention raised by ASREC (India) Limited that since the Deed of Charge had been executed without the consent of the first charge-holder, the Liquidator could not have classified Kamlesh Mehta as a secured financial creditor.”

The corporate debtor, Mirage Ceramics Pvt. Ltd., was admitted into the corporate insolvency resolution process on February 14, 2020. It was subsequently ordered into liquidation on June 15, 2023.

The dispute arose during liquidation. Liquidator Bhaskar Gopal Shetty classified Kamlesh Mehta as a secured financial creditor of Mirage Ceramics Pvt. Ltd. This classification was based on an order dated October 4, 2018 passed by the Bombay High Court.

The order recorded an undertaking to create a second charge. The classification also relied on a Deed of Charge-cum-Hypothecation dated February 20, 2019. This deed created a second charge over the assets of Mirage Ceramics Pvt. Ltd.

ASREC (India) Limited, which held the first charge, challenged this classification before the National Company Law Tribunal. It thereafter approached the appellate tribunal.

ASREC (India) Limited contended that the Bombay High Court had merely recorded an undertaking. It had not issued a judicial direction creating an enforceable security interest. It argued that the second charge in favour of Kamlesh Mehta was invalid in the absence of prior consent of ASREC (India) Limited.

It said such consent was required under the hypothecation agreement. It also submitted that registration of charge under Section 77 of the Companies Act was mandatory for recognition as a secured creditor.

Per contra, Kamlesh Mehta submitted that the High Court's order, treated as a consent decree, clearly envisaged the creation of a second charge. He argued that the Deed of Charge was validly executed and registered with the Sub-Registrar. He further submitted that non-registration under Section 77 was procedural in nature. He said it did not extinguish a valid security interest.

The tribunal noted that the Bombay High Court order acknowledged the existence of the first charge held by ASREC (India) Limited. It also permitted the creation of a second charge in favour of Kamlesh Mehta. It ensured that the priority of the first charge holder was protected.

“When we look at the above order of the Bombay High Court at para 1(ii), it is clear that Respondent No. 2 was to have second charge over the property of the Corporate Debtor. It follows therefrom that the Respondent No. 2 would only enjoy the benefit of second charge over the property of the Corporate Debtor after the first charge has been discharged.”

The tribunal held that the dues of ASREC (India) Limited were to be satisfied first. It said the second charge in favour of Kamlesh Mehta would operate only on the residual value. It therefore concluded that ASREC (India) Limited had suffered no legal injury or prejudice.

Interpreting Regulation 21 of the IBBI (Liquidation Process) Regulations, 2016, the tribunal emphasised that the provision uses the word “may” and not “shall”.

“The use of the word 'may' instead of 'shall' leaves sufficient room for other alternative modes to substantiate the existence of security interest.”

The tribunal also noted that the Deed of Charge had been duly registered with the Sub-Registrar, Pune Gramin. It observed that this was a competent public authority.

“In the present case, the Deed of Charge had been duly registered before the Sub-Registrar, Pune Gramin which was a public office competent to register the said instrument and the legality of this instrument of registration has remained contested.”

Accordingly, finding no merit in the appeal filed by ASREC (India) Limited, the tribunal upheld the classification of Kamlesh Mehta as a secured financial creditor of Mirage Ceramics Pvt. Ltd. It affirmed the order of the adjudicating authority.