Is Financier With Hypothecation Charge Over Vehicle A 'Financial Creditor' Under IBC? Supreme Court To Examine

The Supreme Court on Thursday issued notice on an appeal filed against an NCLAT verdict which held that a financier cannot claim the status of 'financial creditor' under the Insolvency and Bankruptcy Code (IBC) if the hypothecation charge in respect of a vehicle is not registered as per the Companies Act, 2013.

A bench comprising Justices DY Chandrachud, Indira Banerjee and Sanjiv Khanna issued notice on the appeal Volkswagen Finance Private Ltd v Sree Balaji Printopack Pvt Ltd and another.

The appeal challenged the verdict passed by the National Company Law Appellate Tribunal on October 19 last year holding that registration of hypothecation charge over a vehicle with Motor Vehicle Authority under Section 51 of the Motor Vehicles Act, 1988 does not qualify as registered 'charge' for a valid claim before a liquidator,unless the same is registered in terms of the Companies Act. The appellant had approached the NCLAT rejecting the claim of Volkswagen Finance Pvt Ltd.

Challenging the NCLAT verdict, Advocate Sanjeev Sagar, appearing for the appellant, raised the following arguments before the Supreme Court :

1. The appellant has a security interest, created in terms of the hypothecation agreement for a vehicle against a loan of Rs 36 lakhs advanced to thecorporate debtor;
2. The charge is registered under the Motor Vehicles Act 1988 and was endorsed on the certificate of registration;
3. The charge is recognized by the provisions of sub-section (3) and (4) of Section 77 of the Companies Act 2013; and
4. The National Company Law Appellate Tribunal has erroneously interpreted the provisions of Section 52(3) of the IBC and Regulation 21 of the Insolvency and Bankruptcy Board of India (Liquidation Process)Regulations 2016

The submissions were based on the provisions contained in Sections 3(30)and 3(31) of the Insolvency and Bankruptcy Code 2016.

The top court has issued notice returnable by February 8, 2021.

The facts of the case were that the Company (under Liquidation) i.e. Shree Balaji Printopack Pvt. Ltd. had executed a Loan and Hypothecation Agreement on 25.11.2013 for an amount of Rs. 36,00,000/- payable in 84 monthly instalments of Rs. 61,964/- each from 15.12.2013 to 15.11.2020, for the purchase of an AUDI Q3 TDI 2.0 vehicle. Volkswagen Finance claimed that it had security of the vehicle in terms of Sections 52 and 53 of the Insolvency and Bankruptcy Code, 2016, and a demand of Rs. 21,83,819.18/- was made which was not paid by Shree Balaji Printopack and hence there was a 'default', giving rise to a legitimate claim.

A liquidator was appointed against Shree Balaji on Apr 3, 2019, and Volkswagen filed its claim on Jul 27, 2019 with copies of the Loan Agreement, the Hypothecation Deed, the Demand Letter and the Registration Certificate of the vehicle, and submitted that the 'charge' was duly registered through the hypothecation registration with the Regional Transport Office (RTO) in terms of Section 51 of the Motor Vehicles Act, 1988 (M.V. Act), and that there was no requirement of registration of 'Charge' with the Registrar of Companies (ROC).

Click here to read/download the order