Inter-Se Priority Among Secured Creditors in Liquidation - A Judicial Dichotomy  

The Insolvency and Bankruptcy Code, 2016 (“IBC”/”Code”) came into force on 28th May, 2016 with the primary objective of consolidating and amending the laws of reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner to maximise the value of their assets. The Code has been evolving over the last six years, with changing scenarios and adapting to practical circumstances along the way. As a result, the Code has undergone amendments from time to time. The provisions in the Code have also been interpreted and clarified by judicial pronouncements of the Hon’ble NCLTs, the Hon’ble NCLAT and the Hon’ble Supreme Court of India. The law relating to the Code is still emerging and there are a number of issues which are still required to be addressed with unambiguous certainty. One such issue is the distribution of proceeds in liquidation from the sale of assets under Section 53 of the Code to the secured creditors vis-à-vis the validity of inter se priority among secured creditors in respect of their security interests (charges) during liquidation.

What is the meaning of “Charge” and “Inter se Priority”?

Section 3(4) of the Code defines the term “charge” as an interest or lien created on the property or assets of any person or any of its undertakings or both, as the case may be, as security and includes a mortgage.

Several charges can be created in respect of a particular asset. This can be done by way of creating a pari passu charge over the asset where all the charge holders are placed on an equal footing or by way of the creation of a first charge and a subservient charge wherein the first charge holder can satisfy its debts in entirety prior to the subservient charge holders. This principle is embodied in Section 48 of the Transfer of Property Act, 1882. However, under Section 52 of the Code, a secured creditor has two options to realise its debts from secured assets held by it relating to a corporate debtor in liquidation:

Although the Code does not specifically indicate the validity of inter-se-priority of charges at the time of distribution in accordance with the waterfall mechanism provided under Section 53, the issue has been deliberated and decided upon by the Hon’ble NCLTs, Hon’ble NCLAT and Hon’ble Supreme Court of India in recent times, through judicial interpretation.

Pre-IBC Regime: Legal Position under the Companies Act, 1956

Under the earlier Companies Act, 1956, Sections 529 and 529A governed the ranking of creditors’ claims and the distribution of sale proceeds by the Official Liquidator in respect of a corporate debtor in liquidation.

The legal position vis-à-vis inter-se-priority of charges in the pre-IBC regime was discussed at length by the Hon’ble Supreme Court of India in the case of ICICI Bank vs Sidco Leathers Ltd. [Appeal (Civil) 2332 of 2006, decided on April 28, 2006]. In the said case, the Hon’ble Apex Court, while interpreting Sections 529 and 529A of the Companies Act, 1956, observed that even though workmen’s dues and secured creditors’ debts are treated pari passu, this does not negate inter se priorities between secured creditors. The Hon’ble Court stated that since the Companies Act of 1956 is a special statute which contains no provisions regarding inter se priority among secured creditors, the specific provisions set forth in the Transfer of Property Act, 1882 shall prevail. The Hon’ble Court further held that if Parliament, while amending the provisions of the Companies Act, 1956, intended to take away secured creditors’ entitlement to property, it would have stated so expressly. The Hon’ble Court, while deciding the issue, observed the following:

“Section 529A of the Companies Act does not ex facie contain a provision (on the aspect of priority) amongst the secured creditors and, hence, it would not be proper to read therein to things, which the Parliament did not comprehend. The subject of mortgage, apart from having been dealt with under the common law, is governed by the provisions of the Transfer of Property Act. It is also governed by the terms of the contract.”

“Merely because section 529 does not specifically provide for the rights of priorities over the mortgaged assets, that, in our opinion, would not mean that the provisions of section 48 of the Transfer of Property Act in relation to a company, which has undergone liquidation, shall stand obliterated.”

From the aforesaid, it is evident that the Hon’ble Apex Court upheld the validity of the Transfer of Property Act, 1882, which is a general law, over the provisions of the Companies Act, 1956, which is a special law and which did not recognise the concept of inter-se priority of charges.

 

Post-IBC Regime: Legal Position under the Code and the Report of the Insolvency Law Committee 2018

 

Report of the Insolvency Law Committee dated March 26, 2018

In the Report of the Insolvency Law Committee (ILC) dated March 26, 2018, it was noted that inter-creditor agreements should be respected. The ILC relied on the judgement of the Hon’ble Supreme Court in the case of ICICI Bank vs. Sidco Leathers Ltd. and came to the conclusion that the principles that emerged from the said case are also applicable to the issue under section 53 of the Code. The ILC in its report stated that Section 53(1)(b) of the Code only kept the workmen and secured creditors, on an equal pedestal and no observations were made on the inter-se priority agreements between the secured creditors and the same would therefore remain valid. The Report further clarified that the provision of Section 53(2) would come into effect only in cases where any contractual arrangement interferes with the pari passu arrangement between the workmen and secured creditors which means that contracts entered into between secured creditors would continue to remain valid.

 

Judicial Interpretation in recent times

Section 53 of the Code lays down the waterfall mechanism with respect to payment of debts to the creditors of the corporate debtor. The workmen’s dues and the debts of secured creditors rank pari passu under Section 53. However, the Code does not expressly provide for the preservation of inter-se-priorities between secured creditors at the time of distribution of sale proceeds realised by the liquidator by the sale of assets. The issue is to be understood and interpreted in the light of recent judicial decisions. Some of the recent judgments which have dealt with the issue are:

 

Technology Development Board vs Mr. Anil Goel & Ors. [I.A No. 514 of 2019 in CP(IB) No. 04 of 2017 decided on 27th February, 2020 by the Hon’ble NCLT, Ahmedabad]

In the instant case, the liquidator had distributed proceeds from the sale of assets to the first charge holders, in priority to the applicant who was a second charge holder without considering the claim of the applicant as a secured creditor that such distribution ought to have been made prorate among all secured creditors. It is pertinent to mention here that all the secured creditors had relinquished their security interests in the common pool of the liquidation estate. The Applicant was one of the secured financial creditors of the Corporate Debtor having a 14.54% voting share in the CoC of the Corporate Debtor.

Aggrieved by such distribution which recognised inter-se-priority among secured creditors, the Applicant moved the Hon’ble NCLT, Ahmedabad Bench.

The issue to be determined:

The primary issue that was to be decided by the Hon’ble NCLT was that once a secured creditor has not realised his security under Section 52 of the Code, and has relinquished the security to the liquidation estate, whether there remains no classification inter se i.e., by joining liquidation, all the secured creditors are ranked equal (pari passu), irrespective of the fact that they have inter-se-priority in security charge.

Observations of the Hon’ble NCLT

The Hon’ble NCLT while deciding the aforesaid issue held:

  • It is a settled position that when a charge is created on a property in respect of which there is already a charge, it cannot be said that the creation of the second charge on the property should have been objected to by the first charge holder as an existing and registered charge is deemed to be a public notice.
  • Emphasis was placed on Section 53(2) of the Code, which provides that any contractual arrangements between recipients under sub-section(1) with equal ranking, shall be disregarded by the liquidator if it disrupts the order of priority under that sub-section. In other words, if there are security interests of equal ranking, and the parties have entered into a contract in which one is supposed to be paid in priority to the other, such a contract will not be honoured in liquidation.
  • The whole stance in liquidation proceedings is to ensure parity and proportionality. However, the idea of proportionality is only as far as claims of similar ranking are concerned.

Decision:

The Hon’ble NCLT, relying on the judgement of the Hon’ble Supreme Court of India passed in ICICI Bank vs. Sidco Leathers Ltd., held that inter se priorities among creditors remain valid and prevail in the distribution of assets in liquidation.

 

Technology Development Board vs Mr. Anil Goel & Ors. [Company Appeal (AT) (Insolvency) No.731 of 2020 decided on 5th April, 2021 by the Hon’ble NCLAT, Principal Bench, New Delhi]

The issue to be determined:

Aggrieved by the aforesaid order dated 27th February 2020 passed by the Hon’ble NCLT, Ahmedabad, an appeal was preferred by the Applicant before the Hon’ble NCLAT wherein the issue raised for consideration was whether there could be no sub-classification among the secured creditors in the distribution mechanism adopted in a Resolution Plan of the Corporate Debtor as according to priority to the first charge holder would leave nothing to satisfy the claim of the Appellant who too is a secured creditor.

Observations of the Hon’ble NCLAT

The Hon’ble NCLT while deciding the issue took note of Sections 52 and 53 of the Code and held:

  • Section 52(2) of the Code stipulates that a secured creditor, in the event it chooses to realise its security interest, shall inform the liquidator of such security interest and identify the asset subject to such security interest to be realised. The liquidator’s duty is to verify such security interest and permit the secured creditor to realise only such security interest, the existence of which is proved in the prescribed manner. It is abundantly clear that there is a direct link between the realisation of a security interest and the asset subject to such security interest to be realised.
  • Section 53 deals with distribution of assets by providing that the proceeds from the sale of the liquidation assets shall be distributed in the order of priority laid down in the section. The provision engrafted in Section 53 has an overriding effect over all other laws in force.
  • The essential difference between the two provisions i.e Sections 52 and 53, lies with regard to the realisation of interest. While Section 52 provides an option to the secured creditor to either relinquish its security interest or realise the same, Section 53 is confined to the mode of distribution of proceeds from the sale of the liquidation assets.
  • Whether the secured creditor holds the first charge or the second charge is material only if the secured creditor elects to realise its security interest.
  • A secured creditor who once relinquishes its security interest ranks higher in the waterfall mechanism provided under Section 53 as compared to a secured creditor who enforces its security interest but fails to realise its claim in full and ranks lower in Section 53 for the unpaid part of the claim.
  • Section 52 incorporating the doctrine of election, read in juxtaposition with Section 53 providing for distribution of assets, treats a secured creditor relinquishing its security interest to the liquidation estate differently from a secured creditor who opts to realise its security interest, so far as any amount remains unpaid following enforcement of security interest to a secured creditor is concerned by relegating it to a position low in priority.
  • The non-obstante clause contained in Section 53 makes it clear that the distribution mechanism provided thereunder applies in disregard of any provision to the contrary contained in any Central or State law in force.
  • A first charge holder will have priority in realising its security interest provided it elects to realise and not relinquish the same. However, once a secured creditor opts to relinquish its security interest, the distribution would be in accordance with the Section 53(1)(b)(ii) wherein all secured creditors have relinquished their security interest.

Decision

It was held by the Hon’ble NCLAT that the view taken by the Adjudicating Authority on the basis of the judgement passed by the Hon’ble Apex Court in ICICI Bank vs. Sidco Leathers Ltd. and ignoring the mandate of Section 53, which has an overriding effect and was enacted subsequent to the aforesaid judgment, is erroneous and cannot be supported. The Hon’ble NCLAT therefore held that the order of the Adjudicating Authority holding that the inter-se priorities amongst the secured creditors will remain valid and prevail in the distribution of assets in liquidation cannot be sustained and the liquidator was directed to treat the secured creditors relinquishing the security interest as one class ranking equally for distribution of assets under Section 53(1)(b)(ii) of the Code and distribute the proceeds in accordance therewith.

 

Kotak Mahindra Bank Limited vs Technology Development Board & Ors. [Civil Appeal Diary No(s). 11060/2021]

The aforesaid order passed by the Hon’ble NCLAT has been further challenged before the Hon’ble Supreme Court of India. The appeal is currently pending adjudication, but the Apex Court has stayed the operation of the impugned order dated 5th April passed by the Hon’ble NCLAT, by order dated 29th June, 2021 . The appeal has been last heard on April 29, 2022, wherein an order has been passed to list the matter after eight weeks. It would be interesting to see whether the Apex Court upholds the order of the Hon’ble NCLAT and disregards the inter se priority among creditors at the time of distribution of sale proceeds under Section 53 of the Code or upholds the validity of the same.

 

Oriental Bank of Commerce (now Punjab National Bank) vs Anil Anchalia & Anr. [Comp. App. (AT)(Ins) No. 547 of 2022 decided on 26th May, 2022 by the Hon’ble NCLAT]

  • In the instant case, the appellant, who was the first and exclusive charge holder with respect to the assets of the corporate debtor, had relinquished its security interest in the liquidation estate. The liquidator, however, distributed the sale proceeds on a pro rata basis under Section 53 of the Code. Being aggrieved by the said distribution, the Appellant filed an application [IA (IBC)/101(KB)2022] before the Hon’ble NCLT, Kolkata, which was rejected by an order dated March 4, 2022. Aggrieved by the same, the appellant preferred an appeal before the Hon’ble NCLAT.
  • One of the contentions raised by the Appellant in the instant case was that the order of the Hon’ble NCLAT in the case of Technology Development Board vs. Mr. Anil Goel & Ors. that secured creditors after having relinquished their security interest could not claim any amount realised from secured assets once they elected for relinquishment of security interest, and that they would be governed by the waterfall mechanism under Section 53 has been stayed by the Hon’ble Supreme Court of India and therefore the Appellant is entitled to receive the entire amount realised from its secured assets.
  • The Hon’ble NCLAT rejected the aforesaid contention and observed that in the light of the judgement passed by the Hon’ble Supreme Court in “India Resurgence ARC Private Limited vs. Amit Metaliks Limited and Anr. [2021 SC OnLine SC 409] and “Indian Bank vs. Charu Desai, Erstwhile Resolution Professional & Chairman of Monitoring Committee of GB Global Ltd. & Anr.[CA(AT)No. 644 of 2021] the issue is no more res integra. In the aforesaid two cases, a similar contention was raised by the Appellants that the dissenting financial creditors are entitled to receive payment as per their secured interest, wherein it was decided that “when the extent of value received by the creditors under Section 53 is given which is in the same proportion and percentage as provided to the other Financial Creditors, the challenge is to be repelled”.
  • Since the issue is no more res integra and has been decided in the case of India Resurgence ARC Private Limited vs. Amit Metaliks Limited and Anr. by the Hon’ble Apex Court by its judgment dated 13.05.2021, the instant appeal was also dismissed.

 

Conclusion

 

Section 52 of the Code gives each secured creditor the option of relinquishing their right to the liquidation estate or realising their security interest on its own, subject to the Code’s requirements.

It can be possibly interpreted that once the secured creditor has relinquished its security interest in the liquidation estate, such a secured creditor exercises its option in favour of losing its priority rights over assets charged to it and joins the liquidation pool wherein the secured creditor is paid from the proceeds of the liquidation estate in accordance with Section 53 of the Code. The Code has provided the option to a secured creditor to enforce its first and exclusive charge by taking recourse to Section 52, whereby in the event it is unable to realise its entire dues, it would be ranked lower under Section 53 for realisation of the balance amount. A secured creditor cannot enjoy the fruits of both the provisions under Sections 52 and 53 of the Code at the same time. Once the secured creditor relinquishes its security interest to the common pool of the liquidation estate, it will be treated at par with all other creditors.

It can also be argued that the NCLAT has ignored the legislative intent clarified in the Insolvency Law Committee Report which after considering the decision of the Hon’ble Supreme Court in ICICI Bank vs Sidco Leathers Ltd. applied its principles to the issue under Section 53 of the Code and recommended that inter-se-priority among creditors was not disturbed by Section 53. Section 53 does not deal with inter-se-rights amongst creditors. It merely deals with the distribution of proceeds arising from the sale of assets to various stakeholders. The non-obstante clause in Section 53 would apply to scenarios where the provisions of the section are contrary to any law. Section 53(1)(b) merely mandates that workmen’s dues and debts owed to a secured creditor, in the event such secured creditor has relinquished security in the manner set out in Section 52, shall rank equally and nothing more. The said section does not deal with mortgages or inter-se-priorities amongst creditors/mortgagees. Mortgages are governed by the provisions of the Transfer of Property Act, 1882 and as such inter-se-priorities between mortgagees have been dealt with in that Act. Therefore, there may not be any justification for excluding the applicability of the provisions of the Transfer of Property Act, 1882 relating to mortgages for payment of dues to creditors under Section 53. The absurd result of not providing inter-se-priority to creditors at the time of distribution of sale proceeds under Section 53 would be that every secured creditor holding the first charge on assets would encourage liquidation and realise its dues by selling assets itself by opting to not relinquish the assets to the liquidation pool under Section 52. The chance of selling the corporate debtor as a going concern would then absolutely be eradicated, which would be contrary to the object and spirit of the Code.

It is expected that the Supreme Court will finally rest the issue while deciding the appeal in the case of Kotak Mahindra Bank Limited vs Technology Development Board & Ors. [Civil Appeal Diary No(s). 11060/2021 which is scheduled to appear for a hearing later this month.

Image Credits: Photo by Dennis Maliepaard on Unsplash

Section 53 does not deal with inter – se – rights amongst creditors. It merely deals with the distribution of proceeds arising out of sale of assets to various stakeholders. The non – obstante clause in Section 53 would apply to scenarios where the provisions of the section are contrary to any law. Section 53(1)(b) merely mandates that workmen’s dues and debts owed to a secured creditor, in the event such secured creditor has relinquished security in the manner set out in Section 52, shall rank equally and nothing more. The said section does not deal with mortgages or inter – se – priorities amongst creditors / mortgagees. Mortgages are governed by the provisions of the Transfer of Property Act, 1882 and as such inter – se – priorities between mortgagees has been dealt with in that Act.

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Recent Relaxations On Debenture Issuance Related Compliances Under The Companies Act, 2013

The provisions of the Companies Act, 2013 (the “Act”) relating to the issuance of debentures, stipulate various requirements which the issuing company has to comply with, which includes maintaining a Debenture Redemption Reserve (DRR) account and in case of a secured debenture, filing of charge-related documents.

The outbreak of COVID-19 and the related regulatory lockdowns have affected business inflows and administrative functioning of many organizations. On one hand, some of the companies are facing financial difficulties in meeting their repayment obligations under the debentures issued, while on the other hand, these companies are unable to meet the statutory requirements stipulated under the Act. Considering the request of various stakeholders, the Ministry of Corporate Affairs, India (“the MCA”) has brought out several relaxations relating to the compliance requirements for debenture issuance under the Act.

 

Debenture Redemption Reserve:

In order to protect the interest of the debenture holders, as per section 71 (4) of the Act, the companies, which have issued debentures, are mandatorily required to create a DRR account and transfer the stipulated sum of money to such account, every year, out of the profits of the company. The amount credited to such account shall be out of the profits of the company available for payment of dividend and the amount credited to such account shall not be utilized by the company except for the redemption of debentures.

Pursuant to the Companies (Share Capital and Debentures) Amendment Rules[1], 2019 dated 16th August 2019 (“the Amendment Rules”), the requirements of maintaining DRR account was further relaxed and only certain class of companies are required to comply with the provision to create a DRR account and to transfer money to the said account. In furtherance to the said Amendment Rules, the requirement of the DRR was modified as follows:

  • The requirement of DRR was removed for both privately placed debentures and public issue of debentures both by Non-Banking Finance Companies (NBFCs) (registered with Reserve Bank of India under section 45- IA of the RBI Act, 1934) and Housing Finance Companies (HFCs) (registered with National Housing Bank);
  • The requirement for other listed companies (other than NBFCs and HFCs) to create DRR, both in case of private issuance and public issuance of debentures, has been done away with; and
  • The requirement for DRR was reduced from 25% to 10% of the value of the outstanding Debentures in case of unlisted companies (other than NBFC and HFCs).

Pursuant to the above changes, only unlisted Companies (other than unlisted NBFCs and HFCs) are required to comply with the DRR requirement.

It may be noted that, in addition to the requirement of maintaining the DRR account, every listed company (including NBFCs and HFCs) issuing debentures under public issue and private placement basis and other unlisted companies (excluding NBFCs and HFCs) issuing debentures under private placement basis was required to invest in specified Government securities or deposit with a scheduled bank (as the case may be) a sum of not less than 15%, of the amount of its debentures maturing during the year, ending on the 31st day of March of the next year. Further, the amount so invested shall remain invested or deposited and shall not fall below fifteen percent of the amount of the debentures maturing during the year ending on the 31st day of March of that year. Though there were relaxations provided with respect to maintaining the DRR being brought into effect through the said Amendment Rules, however, the requirement of making such investment was retained to protect the investor sentiment. 

However, in consonance with the above relaxations, the MCA vide its notification dated 5th June 2020 (“Notification of 2020”) has now amended the clause (v) of the sub-rule (7) of Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014. As per the Notification of 2020, the requirement of maintaining a deposit or investment to a tune of 15% of the total amount of debentures (maturing as of 31st March of the next year) has been relaxed for listed NBFCs, HFCs and other listed companies undertaking debenture issuance on private placement basis.

 

Compliances towards charge filings:

As per the existing provision of the Act, the company creating a charge over its assets or properties is required to file Form CHG-1[2] and CHG-9[3] with the MCA within 30 days from the date of creation or modification of charges (as the case may be). With the recent changes[4] in the provisions relating to charge filing, a company which fails to file the e-form within the said timeline has the ability to make an application to the Registrar for filing by making payment of additional fees[5] and the additional time period is as follows:

  • in case of charges created before the commencement of the Companies (Amendment) Ordinance, 2019 (“Ordinance”) viz. 2nd November 2018, within a period of 300 days of such creation; or six months from 2nd November 2018 by making payment of additional fees, which is an exposure of a maximum of 12 times of the normal fees; and
  • in case of charges created on or after the commencement of the Ordinance, within a period of a maximum 120 days of such creation (application has to be preferred after the initial 60 days), on payment of ad-valorem fees as may be prescribed subject to the maximum of Rs. 5,00,000/- (Rupees Five Lakhs)[6].

However, considering the request from the various stakeholders towards relaxation in the filing of these charges forms within the stipulated time frame as given under section 71, 77, 78 and Rule 3(1) of the Companies (Registration of Charges) Rules, 2014, the Government vide circular no. 23/2020 dated 17th June, 2020 (“Scheme for relaxation of time for filing forms related to creation or modification of charges under the Companies Act, 2013”, referred to as “the Charge Scheme” hereinafter), has further relaxed timeline for filing of forms related to the creation and modification of charges under the Act.

 

Provisions of the Scheme:

With the introduction of the Charge Scheme, the MCA has given relaxation in the filing of the Forms towards charge creation and modification and for this, the applicability of the scheme is considered on two-levels, as provided below:

  1. Where the date of creation and modification of charge is of a date prior to 1st March 2020, but the timeline for filing such form had not expired under section 77 of the Act as on 1st March 2020:

In such cases, it has been clarified that the period beginning from 1stMarch 2020 and ending on 30th September 2020 (“exempted period”) shall not be reckoned for the purpose of counting the number of days under section 77 and 78 of the Act. In case, the form is not filed within such period, the first day after 29thFebruary 2020 shall be reckoned as 1st October 2020 for the purpose of counting the number of days within which the form is required to be filed under the relevant provisions of the Act.

 

Put in other words, the exempted period will not be considered for computing the maximum period of 120 days for filing of CHG-9 for creation and modification of charges. Hence, the forms for which the timeline for filing has not expired as on 1st March 2020, can be filed without paying any additional fees towards the exempted period. As such, the companies can benefit from the Scheme by paying only the fees as applicable on 29.02.2020, only if the company manages to file their pending forms within the relaxation period i.e. from 01.03.2020 to 30.09.2020. Otherwise, the benefit to the company is that it will be entitled to make the filing of the form, however, by paying the additional fees for the days beginning from 01.10.2020 till the date of filing of such form. It is to be noted that the filing has to be done still within the maximum permissible time limit of 120 days by paying additional fees or ad valorem fees as the case may be.

 

 

  1. Where the date of creation or modification of charge falls on any date between 1st March 2020 to 30th September 2020 (both days inclusive):

In case the due date of filing the form for creation or modification of charges falls between the relaxation period and the Company fails to file the form within 30.09.2020, the first day after the date of creation or modification of charge shall be reckoned as 01.10.2020 for the purpose of counting the number of days within which the form is required to be filed under section 77 or section 78 of the Act.

 

It is pertinent to note that, if the form is filed before 30.09.2020, normal fees shall be chargeable under the Fees Rules. However, if the form is filed thereafter, the first day after the date of creation or modification of charges shall be reckoned as 01.10.2020 and the company will have to complete the filing within the maximum number of additional days permitted by paying the additional fees or ad valorem fees as the case may be.

 

Conclusion:

The exemptions provided last year towards the requirement of maintaining DRR was a big step to ease the compliance requirements for companies especially for those companies which are facing a financial crisis, however, it had affected the sentiments of investors in the debt market as the protection provided to the investor was being diluted. Now, with further relaxation in the requirement of maintaining the 15% deposit for listed companies undertaking debenture issuance on a private placement basis, the regulator needs to consider providing an adequate safety net to encourage investor protection.

The introduction of the Charge Scheme is yet another move by the authority to help ease India Inc. which could be welcomed by the investors as well. But again, the Charge Scheme also aims favours India Inc. whereby companies are provided extension of the time period to complete the filing of charge creation or modification.

Keeping aside the monetary exposure, wherein the maximum exposure towards the additional fees is the ad-valorem value (that too to an extent of Rs.5,00,000/-), the only benefit in terms of an investor especially in case of debenture issuances, is that the Charge Scheme enables the company to complete the pending filings. Moreover, the Act provides that a liquidator appointed under the Insolvency and Bankruptcy Code, 2016 has to take into account the charge created by a company and such charge has to be registered. This allows the investor to ensure that companies can rectify the filings and adequately reflect the charge with the Registrar.

However, it must be noted that the benefit will not be applicable if the timeline for filing of the form has expired, even after excluding the exempted period. Further, the contractual right of the investor to enforce the repayment of the obligation (which is secured by the charge) would still remain. While these recent changes are a small breather to India Inc., regulators should not forget to protect the interest of investors, especially in these testing times.

 

 

References

[1]  Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014

[2] Refer section 71, 77, 78 and 79 of the Companies Act, 2013 along with Rule 3(1) of the Companies (Registration of Charges) Rules, 2014.

[3] Refer section 77, 78 and 79 of the Companies Act, 2013 along with Rule 3 of the Companies (Registration of Charges) Rules, 2014.

[4] Companies (Amendment) Ordinance,2019

[5] Refer the Companies (Registration of Offices and Fees) Rules, 2014 (“Fees Rules”)

[6] For ease of reference, we have considered fees structure applicable for non-small companies.

 

 

Image Credits: Photo by Austin Distel on Unsplash

The exemptions provided last year towards the requirement of maintaining DRR was a big step to ease the compliance requirements for companies especially for those companies which are facing a financial crisis, however, it had affected the sentiments of investors in the debt market as the protection provided to the investor was being diluted. Now, with further relaxation in the requirement of maintaining the 15% deposit for listed companies undertaking debenture issuance on a private placement basis, the regulator needs to consider providing an adequate safety net to encourage investor protection.

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