While adjudicating an interim application filed in VMS Equipment v. Primrose Infratech Private Limited^[1], the National Company Law Tribunal (“NCLT”), New Delhi Bench has held that if security interest is created by virtue of the operation of law prior to the commencement of corporate insolvency resolution process (“CIRP”)/ moratorium, there is no inconsistency between the provision of Sections 13 and 13A of the Uttar Pradesh Industrial Area Development Act, 1976 (“UPIAD Act”) and Insolvency and Bankruptcy Code, 2016 (“IBC”), hence, Section 238 of the IBC will not get attracted.

This said interim application was filed by Greater Noida Industrial Development Authority (“GNIDA”) under Section 60(5) of the IBC seeking inter alia, rejection of the resolution plan put up for its approval in IA. No. 1489/2020 (“Resolution Plan”). The underlying main Petition^[2] was filed by M/s VMS Equipment Private Limited against M/s Promise Infratech Private Limited (“Corporate Debtor”) under Section 7 of the IBC, which was admitted by the NCLT vide Order dated December 21, 2018 and the CIRP in respect of the Corporate Debtor was initiated. The Corporate Debtor is represented through its resolution professional, Sh. Anil Mata (“RP”).

GNIDA is established under the UPIAD Act for performing functions as a statutory authority. For the development and marketing of group housing pockets/ flats/ plots, GNIDA executed a registered lease deed dated November 29, 2011 in respect of the said plot in favour of the Corporate Debtor. Certain amounts were payable by the Corporate Debtor to GNIDA on account of allotment/ premium, additional compensation and time extension penalties for complete construction, etc. against the said plot of land, and therefore, GNIDA demanded the said amount from the Corporate Debtor through demand notice and show cause notices, which were unpaid. GNIDA had submitted its claims of Rs. 55 Crores (approx.) as of January 4, 2019 with the RP.

The Resolution Plan was approved by 80.84% votes of the committee of creditors (“CoC”). Claim of GNIDA, filed in the form prescribed for a financial creditor, was provisionally admitted in the 4^th CoC meeting. A series of challenges and applications to such categorization of debt was finally adjudicated in categorization of debt of GNIDA as ‘operational debt’.

ISSUES INVOLVED AND RULING.

1. Whether GNIDA is a Secured Creditor in terms of Section 3(30) of the IBC?

Amount payable to GNIDA under UPIAD Act would constitute ‘Charge’:

GNIDA contended that by virtue of Section 13 read with Section 13A of the UPIAD, security interest was created in favour of GNIDA, which makes it a “secured creditor” in terms of Section 3(30) of IBC. Sections 13 and 13A of the UPIAD Act deal with the “imposition of penalty and mode of recovery of arrears“. From the bare perusal of Section 13, it transpires that in order to trigger the said provision, there has to be a default committed by the transferee in respect of any of the following:

(a)         payment of any consideration money or installment thereof, or

(b)        any other amount due on account of the transfer of any site or building by the authority, or

(c)         any rent due to the authority in respect of any lease.

In the instant case, it was not disputed that the Corporate Debtor had committed a default in payment of lease rentals prior to the commencement of CIRP. Hence, the same qualifies to be a default in terms of Section 13 of the UPIAD Act. Further, it was observed that in terms of Section 13A of the UPIAD Act, any amount payable to the authority under Section 13 will constitute a “charge” over the property.

‘Security Interest’ under the IBC includes ‘Charge’:

The NCLT also perused the definition of “secured creditor” under Section 3(30) of IBC, which means a creditor in favour of whom security interest is created. Further, “security interest” under Section 3(31) of IBC is defined to mean right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person. Thus, the term “security interest” includes “charge”, and consequently, the creditor in whose favour the “charge” is created is considered “secured creditor”.

Judicial Precedents:

The NCLT referred to the judgment passed by the Supreme Court in the matter of State Tax Officer v. Rainbow Papers Limited ^[3], wherein it was held:

“30. The learned Solicitor General rightly argued that in view of the statutory charge in terms of Section 48 of the GVAT Act, the claim of the Tax Department of the State, squarely falls within the definition of “Security Interest” under Section 3(31) of the IBC and the State becomes a secured creditor under Section 3(30) of the IBC.

57. As observed above, the State is a secured creditor under the GVAT Act. Section 3(30) of the IBC defines secured creditor to mean a creditor in favour of whom security interest is credited. Such security interest could be created by operation of law. The definition of secured creditor in the IBC does not exclude any Government or Governmental Authority.”

In view of the above, the NCLT held that a security interest can be created by operation of law, and undisputedly, the GNIDA is a Government Authority and the aforesaid observation would be squarely applicable to the facts of the case. Accordingly, GNIDA is “a secured creditor” in terms of Section 3(30) of the IBC. We have also analyzed this particular judgement in our previous article, which may be referred to on our website.

1. Whether provisions of Section 13 and Section 13A of UPIAD Act are inconsistent with the provisions of the IBC by virtue of Section 238 of the IBC?

Security Interest created prior to CIRP/ Moratorium:

It flows from Section 14(1) of the IBC that all the recovery proceedings initiated post December 21, 2018, i.e. date of initiation of CIRP and moratorium, including security interest, if any, created by virtue of those proceedings are void. However, it was noted that the Corporate Debtor had committed a default of Rs. 43 Crores (approx.) even prior to the initiation of the moratorium. This would imply that the provisions of Sections 13 and 13A of the UPIAD Act had been triggered prior to the initiation of the moratorium. Hence, the NCLT opined that since, in the instant case, the security interest of GNIDA was created by virtue of the operation of law prior to the commencement of CIRP/ moratorium, there is no inconsistency between the provision of Sections 13 and 13A of the UPIAD Act and IBC, hence the same will not attract Section 238 of IBC. Section 238 of IBC is an overriding provision that reads thus:

“238. The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law“.

Charge created by virtue of law, even if not registered, cannot be questioned:

The RP contended that the charge had not been registered in terms of Sections 77 and 78 of the Companies Act, 2013 and relied on a judgment ^[4] passed by the National Company Law Appellate Tribunal to state that in absence of charge being registered, the applicant could not be treated as secured financial creditor. The NCLT held in this regard that from the judgment relied on by the RP, it transpired that the security interest was not created by virtue of law, and therefore, the findings of the said judgment would not be applicable to the facts of the present case. The NCLT further held that the registration of a charge is for the purpose of proving the existence of such a charge, but where the charge is found to have been created by virtue of law, its existence cannot be denied or questioned merely because the charge is not registered.

DECISION.

In view of the aforesaid discussion and findings, the NCLT concluded that:

• The GNIDA is “a secured creditor” in terms of Section 3(30) of the IBC;
• The “charge” of GNIDA in the instant case has been created by virtue of law i.e., in terms of Sections 13 and 13A of the UPIAD Act well before the moratorium period and Section 14(1) of IBC will not create an escape route for the Corporate Debtor to get an exemption from the charge created by virtue of law under Section 13A of the UPIAD Act;
• There is no inconsistency between the provision of Sections 13 and 13A of the UPIAD Act and the IBC, hence the provisions of Section 238 of IBC do not get attracted.

ANALYSIS.

While the decision passed by the NCLT in this case acknowledges the statutory charges over land created under other applicable laws in favour of statutory/ government authorities, it has left the very significant question on priority in payments unanswered. The NCLT has stated in this regard that “…we do not espouse at what priority and in what position the Applicant would be placed under the Waterfall Mechanism“, and left the same unsettled.  This ambiguity will open new avenues of challenges and disputes, particularly by the statutory/ government land authorities, which are already contesting several matters seeking appropriate recognition/ payment priorities of their land dues from allottee/ lessee companies undergoing insolvencies. Since this order was passed in adjudication of an interim application, the main petition^[5], remains pending before the NCLT as on date, and we are tracking the matter for the possibility of the RP preferring an appeal to challenge this order, and, or for a finality on the facet of positioning of statutory/ government land authorities under the waterfall mechanism and fate of the supposed “secured operational creditors”. Watch this space for more.

Footnotes:

[1] IA. NO. 4869/ND/2022 in Company Petition No. (IB)-995(ND)/2018.

[2] CP (IB)- 995/ND/2018.

[3] Civil Appeal No. 1661 of 2020.

[4] Indiabulls Housing Finance Ltd. v. Mr. Samir Kumar Bhattacharya & Ors., Company Appeal (AT) (Ins.) No. 830/2019.

[5] Company Petition No. (IB)-995(ND)/2018.