Friday, June 24, 2011

Why a Charge has to be registered with ROC under Section 125 of the Companies Act ,1956


– No charge has been registeredUnder section 125 in favour of IDBI by the Creditor Thapar Agro Mills – IDBI obtaining decree from DRT.  Whether the decree creates a charge in the assets of the company – Held, No.Sections 125 and 460(6) – Companies Act, 1956 –


IDBI had advanced loan of Rs. 200 lacs to the company in liquidation in August, 1992. As per loan agreement, the company in liquidation ( Thapar Agro Mills Ltd) was to allot Non Convertible Debentures (in short “NCDs”) after complying with the SEB I guidelines and other pre-requisites like appointment of trustees, creation of security etc.

However, despite various reminders, the company in liquidation neither issued NCDs to the appellant nor paid interest or other charges in accordance with the agreement. The company also failed to create security as required. Consequently, the appellant filed an application under Section 19 of the Recovery of  Debts Due to Banks and Financial Institutions Act, 1993 for recovery of Rs.2,96,22,963.00 along with pendente lite and future interest and costs of litigation, which was decreed in favour of IDBI.

However, the Official Liquidator vide order dated 06th May, 2005 rejected the appellant’s claim as secured creditor on the ground that the appellant’s charge was not registered under Section 125 of the Companies Act, 1956. In this case, neither a charge was created by the company in liquidation nor by operation of any law or by the decree of the DRT.

The order of the DRT, Chandigarh amply proves that no NCD was ever issued and hence no charge/security was created by the company. The DRT did not declare petitioner to be a secured creditor. But merely because appellant is in possession of a decree for recovery, does not mean that appellant becomes a secured creditor. In fact, every decree holder is entitled to seek sale of assets of the defendant, in the event the decree is not satisfied.

High Court is of the view that if appellant’s submissions were to be accepted, then every sundry/unsecured creditor after obtaining a decree from the Civil Court would have to be treated as a secured creditor - which is untenable in law. Consequently, as there is no charge in favour of the appellant, the appellant cannot be considered as a secured creditor.

This decision emphasizes the need to register the charge with ROC under section 125 to become a secured creditor in the case of insolvency or winding up of a company. It is not also not understandable why IDBI has not insisted to register the charge with ROC under section 125 of the Companies Act 1956.

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