Issues Presented and ConsideredThe core legal questions considered by the Tribunal are:
1. Whether the Respondent holds a valid first charge over the movable assets of the Corporate Debtor, or whether the UCO Bank Consortium holds the first pari-passu charge over these assets by virtue of the Original Working Capital Consortium Agreement and its 8th Supplemental Deed.
2. Whether the Respondent was required to obtain a No Objection Certificate (NOC) from the UCO Bank Consortium before creating a charge over the movable assets by refinancing, and the effect of the absence of such NOC on the validity and priority of the Respondent's charge.
3. The applicability of Section 48 of the Transfer of Property Act, 1882 (TP Act) regarding priority of charges, particularly whether the doctrine of priority applies to the charges over movable assets in this case.
4. Whether registration of the charge under Section 77 of the Companies Act, 2013 by the Respondent can override or affect the priority of charges established by hypothecation agreements under the TP Act.
5. Whether the Respondent's claim to realize movable assets under Section 52 of the Insolvency and Bankruptcy Code, 2016 (Code) is valid in light of the competing charges and the absence of proper identification of charged assets.
Issue-wise Detailed Analysis
1. Priority of Charges Over Movable Assets
Legal Framework and Precedents: The Original Working Capital Consortium Agreement dated 05.12.2006 and the 8th Supplemental Deed dated 12.06.2016 created a first pari-passu charge over the Corporate Debtor's movable and immovable assets in favor of the UCO Bank Consortium. Section 48 of the TP Act establishes the doctrine of priority, stating that where multiple rights are created over the same property at different times, the earlier right prevails unless a special contract states otherwise. The Supreme Court in ICICI Bank v. SIDCO Leather affirmed that the first charge holder's claim prevails over subsequent charges.
Court's Interpretation and Reasoning: The Tribunal analyzed the four clauses of the 3rd Schedule of the 8th Supplemental Deed. Clauses 2 and 3 explicitly create a first pari-passu charge by hypothecation on present and future movable assets without exclusions. Clauses 1 and 4 provide first charge on fixed assets but exclude assets financed by term loans outside the consortium.
The Tribunal found that the Respondent refinanced existing movable assets originally financed by TCFSL after TCFSL's loan was repaid and the charge crystallized in favor of the UCO Bank Consortium. Since the assets refinanced were existing movable assets, Clauses 2 and 3 apply, entitling the UCO Bank Consortium to a first pari-passu charge without exclusions.
The Tribunal held that the Adjudicating Authority erred in interpreting the 8th Supplemental Deed to allow the Respondent a first charge, ignoring Clauses 2 and 3 and the doctrine of priority under Section 48 of the TP Act.
Key Evidence and Findings: The closure letter from TCFSL dated 24.03.2017 confirmed repayment and release of charge. The Consortium Agreement and its 8th Supplemental Deed clearly created first pari-passu charge over present and future movable assets. The Respondent refinanced assets after this date without obtaining a NOC from the Consortium.
Application of Law to Facts: The doctrine of priority applies, giving precedence to the UCO Bank Consortium's charge. The refinancing by the Respondent on existing assets does not create a superior charge, especially without a NOC.
Treatment of Competing Arguments: The Respondent argued exclusive charge based on refinancing and registration with RoC, denying any charge by the Consortium over these assets. The Tribunal rejected this, emphasizing the contractual terms and priority doctrine.
Conclusion: The UCO Bank Consortium holds the first pari-passu charge over the movable assets, and the Respondent's charge is subordinate.
2. Requirement and Effect of No Objection Certificate (NOC)
Legal Framework: Under the Code and Liquidation Regulations, a secured creditor claiming to realize security must prove exclusive charge, including furnishing a NOC from prior charge holders if applicable. Section 52(3) of the Code and Regulation 21 of the Liquidation Regulations require proof of security interest.
Court's Reasoning: The Tribunal noted that the Respondent did not obtain a NOC from the UCO Bank Consortium, the existing first charge holder. The Appellant repeatedly requested such NOC and details to identify the charged assets, which the Respondent failed to provide. The absence of a NOC undermines the Respondent's claim to an exclusive or first charge.
Key Evidence: Emails dated 18.12.2019 and 31.12.2019 from the Appellant requesting NOC. The Respondent's email dated 07.10.2020 denying the need for NOC. The Adjudicating Authority's order acknowledged no NOC was provided.
Application of Law: Without a NOC, the Respondent's charge cannot be considered exclusive or first. The Respondent's charge is therefore subservient to the UCO Bank Consortium's charge.
Competing Arguments: The Respondent denied the need for a NOC, asserting exclusive charge based on refinancing and registration. The Tribunal rejected this, emphasizing contractual terms and priority rules.
Conclusion: The Respondent's failure to obtain a NOC from the UCO Bank Consortium invalidates any claim to exclusive charge and the right to realize assets under Section 52 of the Code.
3. Applicability of Section 48 of the Transfer of Property Act, 1882
Legal Framework: Section 48 of the TP Act provides that when multiple rights are created over the same immovable property at different times, the earlier right prevails unless a special contract states otherwise. The doctrine of priority (qui prior est tempore potior est jure) ensures that the first created charge has precedence.
Court's Interpretation: Although Section 48 strictly applies to immovable property, the Tribunal found it relevant to charges over movable assets given the contractual hypothecation of both movable and immovable assets in the Consortium Agreement. The principle of priority applies to ensure legal certainty and protection of first charge holders.
Key Findings: The Tribunal relied on Supreme Court precedent affirming Section 48's principle. It concluded that the Respondent's later charge cannot override the Consortium's earlier charge.
Application to Facts: The Respondent's charge created after the Consortium's charge is subordinate. The absence of a special contract allowing the Respondent to supersede the Consortium charge reinforces this.
Competing Arguments: The Respondent argued registration of charge overrides priority. The Tribunal rejected this, holding registration is procedural and does not affect substantive priority rights under TP Act.
Conclusion: Section 48's doctrine of priority protects the UCO Bank Consortium's first charge over movable assets.
4. Effect of Registration of Charge under Companies Act, 2013
Legal Framework: Section 77 of the Companies Act, 2013 requires registration of charges but non-registration does not extinguish the charge. Registration is evidence of the charge but does not affect substantive rights or priority.
Court's Reasoning: The Tribunal noted that the Respondent's charge was registered with the Registrar of Companies, but the Consortium's charge was not. However, prior decisions of this Tribunal hold that non-registration cannot be a ground to deny secured creditor status or priority if the charge was validly created under the TP Act or SARFAESI Act.
Key Precedents: The Tribunal relied on its earlier decisions holding that registration is a formality and does not affect the rights of mortgagees or hypothecators under the TP Act.
Application: The Respondent's registration does not elevate its charge above the Consortium's first charge created by hypothecation agreements.
Competing Arguments: The Respondent argued registration confers priority. The Tribunal rejected this.
Conclusion: Registration of charge under the Companies Act cannot override the Consortium's first charge created by hypothecation.
5. Identification and Realization of Charged Assets under Section 52 of the Code
Legal Framework: Section 52 of the Code allows secured creditors with exclusive charge to realize security interest. The secured creditor must identify the charged assets clearly to exercise this right.
Court's Findings: The Respondent failed to adequately identify the charged movable assets, providing details for only 14 out of 291 assets. The loan documents lacked serial numbers, chassis numbers, or machine numbers required to map assets to loans. The Appellant could not verify the assets purportedly charged to the Respondent.
Application: Without clear identification, the Respondent cannot enforce rights under Section 52. The Tribunal found the Adjudicating Authority erred in directing the Appellant to hand over assets to the Respondent without proper identification.
Competing Arguments: The Respondent sought to realize assets despite incomplete identification. The Tribunal prioritized proper asset mapping and verification.
Conclusion: The Respondent is not entitled to realize movable assets under Section 52 due to failure to identify charged assets and lack of exclusive charge.
Significant Holdings
"Section 48 of the Transfer of Property Act stipulates the Doctrine of Priority which is based on the Principles of Natural Justice, asserting that when rights are granted to two individuals at different times, the one who possesses the earlier right will also have the legal advantage."
"Clauses 2 and 3 of the 8th Supplemental Deed of Working Capital Consortium Agreement create the first pari-passu charge by hypothecation on the entire current and future movable assets of the Corporate Debtor without any exclusion, thereby entitling the UCO Bank Consortium to a first charge over such assets."
"In no circumstances could any charge have been created in favour of third parties, such as the Respondent herein, without the consent or No Objection Certificate of the UCO Bank Consortium."
"Registration of the charge under Section 77 of the Companies Act, 2013 is only a formality and does not affect the substantive rights or priority of charges created under the Transfer of Property Act."
"After enforcement of right under Section 52 of the Code by one secured creditor, no other secured creditor can enforce his right subsequently. Only if the asset is charged exclusively to a particular creditor then Section 52 can be given effect."
"The Respondent failed to identify the charged movable assets adequately and did not produce a No Objection Certificate from the UCO Bank Consortium, hence the Respondent is not entitled to realize the movable assets under Section 52 of the Code."
Final Determinations:
- The UCO Bank Consortium holds the first pari-passu charge over the movable assets of the Corporate Debtor as per the Consortium Agreement and its 8th Supplemental Deed.
- The Respondent's charge is subordinate and cannot claim exclusive charge without a NOC from the UCO Bank Consortium.
- The Respondent's registration of charge does not override the Consortium's first charge.
- The Respondent failed to identify the charged assets sufficiently to enforce realization under Section 52 of the Code.
- The Adjudicating Authority's Impugned Order allowing the Respondent to realize assets is set aside, and the appeal is allowed in favor of the Appellant.