Fragmented Framework for Perfection of Security Interest: A Secured Creditor’s Nightmare?

[Sikha Bansal is a Partner and Siddharth Goel a Legal Advisor at Vinod Kothari & Company]

An interesting question of law came up for consideration by way of appeal before National Company Law Appellate Tribunal (NCLAT) in Volkswagen Finance Private Limited v. Shree Balaji Printopack Pvt. Ltd . The brief facts of the case involved a car financing company, which extended a car loan to the corporate debtor. The car financier held a charge by way of hypothecation, entered in the registration certificate under the terms of section 51 of Motor Vehicles Act, 1988 (‘MV Act’). During the time of liquidation of the corporate debtor, the liquidator rejected the claim of the car financier as a secured creditor on the grounds that the claim of the car financier is not duly registered under section 77 of the Companies Act, 2013 and the car financier could not furnish proof in terms of regulation 21 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (‘Liquidation Regulations’). The relevant extract of regulation 21 of the Liquidation Regulations, which are issued pursuant to the Insolvency and Bankruptcy Code, 2013 (the ‘Code’) is as follows: 

“The existence of a security interest may be proved by a secured creditor on the basis of:

 (a) the records available in an information utility, if any;

 (b) certificate of registration of charge issued by the Registrar of Companies;

(c) proof of registration of charge with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India.”

Question of law and problem statement

The NCLAT upheld the order passed by the adjudicating authority, on the grounds that the car financier failed to produce any document as stipulated under regulation 21 of the Liquidation Regulations and that the charge was not registered under section 77 of the Companies Act. The NCLAT based its argument on a plain construction of section 77 of the Companies Act in unequivocal terms. The relevant extract of section 77(3) of Companies Act provide as follows:

(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 under this Act 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 is given by the Registrar under sub-section (2).

The NCLAT, in its concluding remarks, reiterated that the liquidator was right in denying the car financier the status of secured creditor since regulation 21 of Liquidation Regulations was not complied with. Further, the charge was neither registered with Central Registry of Securitisation Asset Reconstruction and Security Interest of India (‘CERSAI’) (under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (the ‘SARFAESI Act’)), nor with the Registrar of Companies (ROC) and information utility (IU). Hence, the claim of car financier that it has its security interest (charge by way of hypothecation) under section 51 of the MV Act is not sufficient. The NCLAT further relied on one of its precedents set out in India Bulls Finance Ltd. v. Samir Kumar Bhattacharata that relied on Oil and Natural Gas Corporation Ltd. v. Official Liquidator of Ambica Mills Co. Ltd.

Though the current matter is pending adjudication before Supreme Court (Civil Appeal No 3858 of 2020), an important point that formed the crux of the decision of the NCLAT needs further deliberations as it points to a larger issue, being the multiple registration requirements for perfection of security interests, as discussed below.

Multiple registrations for perfection of security interest

In the instant case, the NCLAT did not deliberate further on what if, on the facts, the charge was registered with CERSAI or say either with an IU, but not with the ROC. The question which is left open is whether a security interest, which is otherwise registered with say, CERSAI and/or an IU, can still be rejected on the grounds that it ought to have been mandatorily registered with ROC under the Companies Act.

The whole issue arises out of multiple mandates across different laws for perfection of security interest and lack of a unified registry. The table below depicts the extant rules for registration of security interest –

Points of discussion MV Registry [Registration under MV Act] ROC [Registration under Companies Act] CERSAI [Registration under SARFAESI Act] IU [Registration under the Code]
Relevant provisions of the law Section 51 of the MV Act – An entry is made with respect to the existence of the financing agreement Section 77 of the Companies Act Sections 22, 26B read with section 26D of the SARFAESI Act Section 215 of the Code Further, see regulation 21 of liquidation Regulations
Registration authority State motor vehicles registry Registrar of Companies CERSAI Information Utilities (IUs)
Applicable in case of borrower entity being Any entity Companies (optional in case of limited liability partnerships) Any entity Corporate Debtor/Debtor under the Code
Intent of registration Bar on any transfer of motor vehicle without the no-objection certificate of the financier. Does not deal with enforcement of security rights Validity of charge, priority Enforcement and priority of security interest under sections 26C, 26D, and 26E of the SARFAESI Act Proof of debt
Impact of non-registration on enforcement rights of the secured creditor None Charges become void. Loan becomes unsecured SARFAESI rights become unenforceable; loss of priority None. However, it is mandatory under law for the financial creditors.
Charge registration obligation on The entry is made at the time the owner applies for registration Borrower – section 77 of Companies Act Lender can register under section 78 of the Companies Act [if borrower does not within 30 days] Secured Creditor Financial Creditor

In order to ascertain the position under these requirements, it is important to note several aspects. Section 77 of the Companies Act (earlier, section 125 of the Companies Act, 1956) has always mandated compulsory registration of charges in case the borrower is a company. Sub-section (3) of section 77 (before amendments made by the Code) provided that no charge created by a company shall be taken into account by the liquidator or any other creditor unless it is duly registered. Note that a similar provision existed under section 125 of the Companies Act, 1956. It may also be noted that the section refers not only liquidators but also ‘any other creditor’ against whom the charge shall be void.

The amendment by way of insertion in section 77 (made by the eleventh schedule of the Code) to include references to liquidator appointed under the Code had the effect of applying section 77 to liquidation proceedings under the Code as well. Hence, given the non-obstante nature of section 77(3), a liquidator appointed under the Code cannot disregard that provision. Therefore, even if a secured creditor otherwise furnished other ‘proofs’ of security interest under regulation 21 of the Liquidation Regulations, but not the ROC charge certificate, the liquidator may not be able to admit its claim as a secured claim. Also, as the creditor could not prove ‘security’, it may not be able to able to exercise its right to ‘realise’ the security interest outside liquidation proceedings, even if it is registered with CERSAI. Essentially, once the corporate entity slips into insolvency or liquidation proceedings, the rights of a secured creditor will have to be determined by the interplay between enforcement laws and the insolvency or winding up laws.

Note that CERSAI registrations were not linked to enforcement or priority rights of a secured creditor, until recent amendments made in the year 2016 by way of the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, by which chapter IVA was inserted, which is applicable with effect from 24 January 2020. See, for instance, section 26D, which states that no secured creditor shall be entitled to exercise the rights of enforcement of securities unless the security interest has been registered with central registry. Hence, a creditor will not be able to enforce its SARAFESI rightsif the security interest is not registered with CERSAI. However, non-registration with CERSAI will not hamper the rights of the creditor in liquidation or winding up proceedings (under the Companies Act or the Code) if the creditor has ROC registration. But then, if the secured creditor opts to realise the security interest outside liquidation proceedings, under the SARFAESI Act, it needs to have CERSAI registration.

The interplay between ROC registration and CERSAI registration may be even more complex where the borrower is not yet into insolvency or liquidation proceedings. It can be contended that the applicability of section 77(3) of the Companies Act is not limited to liquidation or winding-up proceedings, but that it also applies when the borrower is a going concern. The words ‘any other creditor’ as used in section 77(3) may buttress this argument. And, it might possibly be contended that, despite CERSAI registration, ROC registration would be needed for a creditor to enforce its rights even outside the realm of the Companies Act. However, such contention is only possible where there are competing creditors in respect of the same security – each having CERSAI registration – but one of them not having ROC registration. This might a practical rarity. The issue, therefore, is contestable.

The observations, as above, can be encapsulated in the following table –

Whether registered with
Yes Yes Yes Enforcement and priority rights fully protected
Yes Yes No Though it is mandatory for a ‘financial creditor’ to submit information to an IU, it does not impact the secured status of the creditor. Security can be proven by ROC or CERSAI registrations
Yes No No Non-registration of charge under CERSAI will disable the creditor from enforcing security interest under SARFAESI Act. However, the creditor can prove ‘security’ and stand in queue under the Companies Act or the Code
No Yes Yes Charge cannot be ‘proved’ under the Companies Act or Code. In winding up proceedings, the secured creditor may not be able to realise security interest In a going concern, CERSAI registration would enable enforcement of rights under the SARAFESI Act. However, counter-arguments possible as discussed above
No No Yes Security rights would be hampered both in winding up proceedings and enforcement proceedings.
No No No Security rights would be hampered both in winding up proceedings and enforcement proceedings. Also, non-filing of information with IU would be in violation of the law

The conclusions as above rest on the reading and interpretation of law as existing today – however impractical that may sound. While the registration with CERSAI might aid a secured creditor from initiating actions as stipulated under SARFAESI Act, such a secured creditor will have no recourse on the security interest over the assets of the corporate debtor under the Code once the corporate debtor slips into insolvency or liquidation, if the charge is not registered with ROC.


With this ruling, the NCLAT has upheld the long standing principle under company law that the charge against the company has to be registered with ROC. However, given the fragmented network for perfection of security interest with different registries under different laws, there is still an ambiguity over the cases where the charge is filed with CERSAI and an IU, but not with the ROC.

While there have been discussions on consolidation of registries, there has yet not been substantial development on that front. Therefore, until the legislature acts or the judiciary sets a precedent otherwise, lenders or financiers, thus, have no other option than to ensure registrations with each of the registries.

For a detailed discussion on this topic and also the impact of this ruling on transactions like leases and hire-purchase, please see our video here.

Sikha Bansal & Siddharth Goel

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