BANKRUPTCY & INSOLVENCY

LAWS

CHAPTER 2: SECURITY INTEREST

 SECURITY INTEREST
Defined u/s 2(zf) of SARFAESI Act, 2002

• Means right, title or interest over a property

• It is created in favour of a secured creditor
• as collateral for financial assistance granted

• Security interest includes

 Mortgage (Sec 58 of Transfer of Property Act, 1882)
 Charge (Sec 2(16) of Companies Act, 2013 & sec 100 of Transfer of Property Act, 1882)
 Hypothecation (Sec 2(n) of SARFAESI Act, 2002)
 Assignment (Sec 130 of Transfer of property Act, 1882)
 Lien
 PROVISIONS UNDER DIFFERENT ACTS
Mortgage

 Defined u/s 58 of Transfer of Property Act, 1882

 Transfer of interest in specific immovable property
 For securing loan advanced or to be advanced; existing or future debt; performance of engagement
which may give rise to pecuniary liability

Charge
 Defined u/s 2(16) of Companies Act, 2013
 interest or lien created on the property or assets of a company or any of its undertakings or both as
security and includes a mortgage
 Under Transfer of Property Act, 1882

• sec 100
• interest created on immovable property for securing payment
• does not amount to mortgage
Hypothecation
• Defined u/s 2(n) of SARFAESI Act, 2002
• Charge on any movable property, existing or future by the borrower as a security
for financial assistance provide
• without delivery of possession to the creditor
Assignment
• Section 130 of Transfer of property Act, 1882
• Transfer of actionable claim through an instrument in writing duly executed
Lien
• Right to keep the possession of a property
• until the underlying debt is satisfied
 REGISTRATION OF SECURITY INTEREST
• Creation of security interest is the first step towards securing debt
○ However, security creation alone may not suffice
○ Therefore, required steps are to be taken to make the same enforceable by law
● Registration is a manner of giving “public notice”,
○ Sec. 77-81 of the Companies Act
○ Sec. 26C of SARFAESI Act
● Similar provisions in other countries as well
○ Article 9-310 of UCC in the US (perfection by filing of all security interest and
agricultural lien)
○ Section 859A of Companies Act, 2006 in the UK (charges created by a company)
Laws dealing with security interest
1 ● Companies Act, 2013: Chapter VI Registration of Charges

2 ● SARFAESI Act, 2002: Sections 22, 23, 26B read with section 26D SARFAESI Act

● Section 215 of the Code read with reg. 21, 21A of the IBBI (Liquidation Resolution Process) Reg.,
3
2016 and reg. 13 of IBBI (Insolvency Process for Corporate Persons) Reg., 2016

4 ● Common laws including Transfer of Property Act, 1882, Sale of Goods Act, 1930, Motor
Vehicle Act, 1988, etc.
 REGISTRATION OF CHARGES
• Chapter VI of CA, 2013 (sections 77 to 87)- Registration of charges
• ● Section 77:
• ○ sub-section (1): borrower company to register charge
• ○ Third proviso: Any subsequent registration of a charge shall not prejudice any right
acquired in respect of any property before the charge is actually registered.
• ○ (Sub-section 3): 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 Act under this 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
• ○
 IBC
• ◼ ‘Creditor’ defined u/s 3(10)- includes:

• ◼ financial creditor
• ◼ operational creditor
• ◼ secured creditor
• ◼ unsecured creditor
• ◼ decree holder
• In Volkswagen Finance v. Shree Balaji Printopack, the NCLAT held that
registration of security interest (charge by way of hypothecation)with Motor
Vehicle Authority u/s 51 of MV Act was not sufficient; a charge had to be
registered in accordance with sec 77 of CA, 2013 in order for a creditor to be
treated as a secured creditor.

• Charge to be registered within 30 days of its creation-

• with normal fees
• 60 days of its creation- with additional fees
• 120 days of its creation- with advalorem fees
 CREATION OF CHARGE
• Primary responsibility to register the charge on borrower
• ○ If borrower fails to register within 30 days of creation
• ○ Lender may register the same (Sec 78)

• Modification of charges - section 79;

• Where any charge on any property or assets of a company or any of its

undertakings is registered under section 77, any person acquiring such property,
assets, undertakings or part thereof or any share or interest therein shall be
deemed to have notice of the charge from the date of such registration.
• Registration of charge with MCA applicable only when
○ borrower is a company
○ borrower is an LLP (optional)

• Charge is registered in form

○ CHG-1 (for other than debentures) & CHG-9 (for debentures) - In case of companies
○ Form-8 in case of LLP

● If a company contravenes any provision relating to charge creation, penalty is levied on ○

company- Rs. 5,00,000 & officer in default- Rs. 50,000
• Proviso to sec 3(31)- security interest shall not include performance guarantee

• In a recent ruling, tax authorities were held to be secured creditors- State Tax Officer
vs. Rainbow Papers- our article here , as against earlier rulings in Sundaresh Bhatt,
Monnet Ispat, and Leo Edibles
 LIQUIDATION

• Secured creditor to inform liquidator, and liquidator to “verify” such

security interest and “permit” the secured creditor to realise only
“such” security interest

• Presumption of asset being part of liquidation estate

• where a secured creditor does not intimate its decision within 30 days
from the liquidation commencement date, the assets covered under the
security interest shall be presumed to be part of the liquidation estate.
 MORATORIUM

• Bar on enforcement of security interest during moratorium

• Sec. 14(1)(c) - prohibits any action to foreclose recover or enforce any
security interest created by the corporate debtor in respect of its property
including any action under SARFAESI Act, 2002
• part payment of the sale consideration was made by the purchaser and no
sale certificate was executed as on the date of admission of the CIRP
application - sale is not completed under SARFAESI - FC cannot continue
to enforce - Indian Overseas Bank v. RCM Infrastructure
 DISSENTING CREDITORS

• Treatment of secured creditors in the resolution plan

• Priority and value to be considered by CoC- see sec 30(4)
• The entitlement of such a dissenting financial creditor to receive the “amount
payable” could also be satisfied by allowing him to enforce the security interest, to
the extent of the value receivable by him and in the order of priority available to
him. SC in Jaypee Kensington
• However, his dealing with the security interest, if occasion so arise,
would be conditioned by the extent of value receivable by him.
• The creditor cannot bring about an inequitable scenario, by receiving
excess amount, beyond the receivable liquidation value proposed for
the same class of creditors.
• Right to make an application to NCLT if any resistance is faced in the
course of realising secured asset from the CD or any person connected
therewith
• Where the proceeds of the realisation of the secured assets are not
adequate, the unpaid debts of such secured creditor shall be paid by
the liquidator in accordance with 53(1)(e)
• In majority of cases, liquidation fund is gets exhausted after paying the
second layer u/s 53(1)
Therefore, this recovery is almost impossible
 OPTIONS AVAILABLE TO SECURED CREDITORS

Secured creditors during liquidation has option to

• Realize the security interest outside liquidation

• Relinquish security interest and receive proceeds u/s 53

■ priority under sec. 53(1)(b), pari passu with workmen

■ asset becomes part of liquidation estate - sec. 36
Secured creditors under IBC: Rights during liquidation (1/2)

Realization by secured
creditor

Outside Under
Liquidation Liquidation
process –Sec 52 process- Sec 52

Realization Security Interest

outside relinquished
Liquidation
 LIQUIDATION PROCESS
• ● Reg.37 of Liquidation process:
• The secured creditor must intimate the liquidator the realizable price at which he
proposes to realise the asset.

• ● Within 21 days of such intimation, liquidator shall:

• Of a person willing to buy the asset before the expiry of 30 days of intimation;
and
• At a higher price than intimated by the secured creditor
• Secured creditor shall sell the asset to such person; and bear the cost incurred by
the liquidator for identification of such person
• Reg. 37 applies only in cases outside SARFAESI Act
Realization of security interest outside liquidation process

TIMELINE
Step • Communication of decision within 30
1 days of LCD
• In form of operational (creditors ) or
Form D(Financial creditors)
Step
2 • Proportional contribution towards Liq.
Costs & women dues
• Within 90 days of LCD
Step
3 • Excess of Realised amount over due
submitted claim to be submitted to
liquidation estate
Step • Within 18 days of LCD
4 • Such assets cannot be sold to any
person who is disqualified u/s 29 A
of the code
 INFORMATION UTILITY

• Information utility is regulated information agency which

• accepts, electronically record, get authentication, maintain and provide access
to financial information

○ Financial information means one or more of the following

• records of the debt of the person;
• records of liabilities when the person is solvent;
• records of assets of person over which security interest has been created;
• records, if any, of instances of default by the person against any debt;
 SERVICES

• IU are responsible to provide core services & other

• services under the IU regulations

○ Core services means services rendered for-

• accepting electronic submission of financial information
• safe and accurate recording of financial information
• authenticating and verifying the financial information submitted
• providing access to information stored with the IU
• Information utility is registered under sec 210 of the Code read with
Regulation 4 of IU regulations

• Currently, there is only one IU in India named National E- Governance

Services Ltd (NeSL)
 ROLE OF INSOLVENCY PROFESSIONALS

• Verification of claim
• whether security interest exists and the proof is in accordance with regulations
• check proofs submitted from IU, CERSAI, ROC
• details to be checked from Forms submitted and annexed documents

• in case of liquidation, the liquidator shall also verify the claims collated during the
corporate insolvency resolution process but not submitted during the liquidation process,
within thirty days from the last date for receipt of claims during liquidation process (see,
reg. 30 of Liquidation regs.)
• List of creditors and information memorandum
• should contain details of security interest, if any - see reg. 13 and 36(2) of CIRP Regs.
• Resolution plan:
shall take into consideration priority and value of security interest

• During liquidation process

assess details of secured creditors going for relinquishment and realisation
from secured creditors opting for realisation, recover costs/workmen share
(within 90 days) and excess (within 180 days)

• ensure distribution in terms of sec. 53

• assess inter-se priorities and values