20 January 2015

Status of secured creditor not alters unless charge explicitly extinguished

The Supreme Court of India has, on 9-1-2015, held that a charge created under Section 125 of Companies Act, 1956 shall not be extinguished unless the arbitration award does not explicitly say so. It was held that the consent award in an arbitral proceeding would not bar a suit for enforcement of the charge and it would not be hit by Order II, Rule 2 Code of Civil Procedure, and that in the absence of proceedings for satisfaction or release of charge under Section 138 and 139 of Companies Act, 1956, the status of the company as a secured creditor continues. The respondent company (B.P.L. Limited) here had availed a short term loan facility from the petitioner (Infrastructure Leasing & Financial Services Limited). The respondent company offered security in the form of first and exclusive charge on receivables of Hewlett Packard (India) Ltd. A Deed of Hypothecation was accordingly executed by the parties and relevant documents for creation of charge under Section 125 of Companies Act, 1956 were filed with the Registrar of Companies. When the respondent company failed to repay the loan, the parties referred the matter to arbitration.

The arbitration award decreed that the award was passed on consent and provided for settlement of money claim by issue of post dated cheques. The respondent company further filed for scheme under Section 391-394 of Companies Act, 1956. The petitioner filed various objections to the scheme. The respondent company had contended that based on the arbitration award, the petitioner was only an unsecured creditor since the deed of hypothecation was extinguished based on the arbitration award and hence, the consent of the petitioner was not required for the scheme.


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