Prefatory Note
The ruling by the National Company Law Appellate Tribunal, New Delhi Bench (‘NCLAT’) in Home Kraft Avenues v. Jayesh Sanghrajka[i]* *addresses a foundational issue under the Insolvency and Bankruptcy Code, 2016 (‘IBC’), namely, whether non-registration of a charge under s. 77 of the Companies Act, 2013 (‘CA2013’) precludes a creditor from being treated as a secured financial creditor (‘SFC’) during the Corporate Insolvency Resolution Process (‘CIRP’).
The case arises in the context of a real estate financing transaction, where the creditor’s rights were secured by a mortgage arrangement over specific flats, albeit without registering the charge with the Registrar of Companies (RoC). The NCLAT’s decision reverses the National Company Law Tribunal’s (NCLT) narrow interpretation, laying down a significant precedent that affirms commercial arrangements securing debt do not lose their character merely due to the lack of statutory registration, at least in the context of the CIRP.
Facts of the Case
Home Kraft Avenues (‘appellant’) had advanced a loan of Rs. 11 crores to the corporate debtor (‘CD’) under a loan agreement dated 29.10.2015. The loan was repayable within 29 months, and the agreement also included two crucial clauses:
(i) the borrower could discharge the interest liability either by paying 18% per annum or by transferring four specified flats; and
(ii) in the event of default in repayment of the principal, the borrower agreed to transfer four additional flats to the lender as security.
These arrangements were supported by pre-executed agreements for sale and a power of attorney (POA) placed in escrow.
Upon the CD’s admission to CIRP on 29.06.2020, the appellant submitted two claims, one as an SFC (Form C) for Rs. 11 crores, and another as a homebuyer (Form CA) for the four flats to be received in lieu of interest. The Resolution Professional (‘RP‘) admitted the claim under Form CA as a homebuyer but classified the principal loan claim as unsecured, citing the absence of registration of a charge under s.77 of the CA2013.
Aggrieved by this classification, the appellant approached the NCLT seeking a direction to be treated as an SFC in respect of the principal loan. However, the NCLT, by order dated 02.05.2023, dismissed the application solely on the ground that the security interest was unregistered under s. 77 and hence unenforceable during CIRP. The present appeal challenged this classification.
Decision of the NCLAT
The NCLAT allowed the appeal and set aside the impugned NCLT order, holding that non-registration of a charge under s. 77 of the CA2013 does not negate the status of a creditor as an SFC under the IBC. The NCLAT’s key findings are summarised as follows:
Inapplicability of s. 77 of the Companies Act to CIRP
The NCLAT held that s. 77(3) of the CA2013 places an obligation on the liquidator, not on the RP. The requirement of registering a charge under s. 77 is relevant in the context of liquidation, where an SFC seeks to enforce its security outside the liquidation estate. During CIRP, the RP is mandated to take custody of all assets of the CD under s. 18 and s. 25 of the IBC, regardless of encumbrance or registration.
Legislative Scheme under IBC Prevails
The IBC’s framework defines an SFC under s.3(30) as one in whose favour a security interest is created, and s. 3(31) further elaborates on ‘security interest’ to include any mortgage, charge, hypothecation, assignment, encumbrance or any other agreement or arrangement securing payment of a debt. The NCLAT noted that there is no statutory requirement under the IBC for such a security interest to be registered with the RoC in order to confer the status of a secured creditor.
Binding Arrangement and Possession of Security
The NCLAT found that the loan agreement and its annexures clearly evidenced an intention to secure the repayment of the Rs. 11 crore loan via four identified flats. These were to be formally transferred upon default, with enforceable rights conferred through agreements and escrow arrangements. This was sufficient to create a security interest in terms of s. 3(31) of the IBC, notwithstanding the lack of registration.
Reliance on Precedents
The NCLAT cited with approval its earlier decision in Canara Bank v. S. Rajendran, Liquidator of M/s Cape Engineers Pvt. Ltd*.*[ii], wherein it was held that non-registration under s.77 is not, by itself, sufficient to deny the status of a secured creditor. It also noted that in Pashchimanchal Vidyut Vitaran Nigam Ltd. v. Raman Ispat[iii], the Supreme Court had interpreted s.3(31) of the IBC to be broader than the definition under the Companies Act.
Directions to Amend Classification
Accordingly, the NCLAT directed that the necessary correction be made in the CIRP records, treating the appellant as a secured financial creditor in respect of the loan advanced.
Violation of Natural Justice on s.66 Proceedings
The NCLAT also addressed a separate but related grievance regarding a direction in the NCLT order for the initiation of proceedings under s. 66 of the IBC against the appellant (for fraudulent transactions) without any prior notice or opportunity to be heard. The NCLAT held that such a direction was in violation of principles of natural justice, especially when passed in an application filed solely by the appellant for the purpose of classification. That portion of the NCLT order was accordingly quashed.
Our Analysis
This judgment is a landmark affirmation of commercial substance over statutory formality in insolvency proceedings. By recognising that a contractually created security interest, even if unregistered, qualifies a creditor for ‘secured’ status under the IBC, the NCLAT ensures that the realities of complex financial transactions are not negated by bureaucratic lapses or omissions.
The ruling is also an important reminder that the IBC constitutes a self-contained code, and its definitions under s.3(30) and s.3(31) govern the recognition of secured creditors in the CIRP context. The NCLAT correctly distinguished between the rights of creditors during liquidation, where s.77 registration may be a prerequisite to enforce security outside the waterfall mechanism, and rights during CIRP, where such registration has no bearing on the RP’s classification duties.
Moreover, the judgment reaffirms the sanctity of escrow mechanisms and registered contractual arrangements, which effectively provide security to lenders, thereby reinforcing contractual certainty. It protects lenders in the real estate and structured finance sectors who often rely on complex arrangements involving escrowed documents, staged transfers, and conditional ownership.
The NCLAT’s censure of the NCLT for issuing s. 66 directions without notice are also welcome. It reiterates to adjudicating authorities that even within the summary nature of IBC proceedings, due process remains inviolable, and applications seeking mere classification cannot be stretched into punitive findings.
In summary, this decision ensures that substantive rights under the IBC are upheld, even where there may be procedural irregularities under the Companies Act, provided that the commercial arrangement evidences an intention to create security. It brings much-needed clarity to practitioners navigating the interplay between corporate law compliance and insolvency classification, and fortifies the rights of creditors in pre-default secured lending scenarios.
End Notes
[i] [2025] 172 taxmann.com 70.
[ii] Company Appeal (AT) (Ins) No. 277 of 2023.
[iii] Civil Appeal No.7976 of 2019.
Authored by the Metalegal Advocates Editorial Board, the views expressed are personal and do not constitute legal advice or opinion.
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