Western India Regional Council of
The Institute of Chartered Accountants of India

Law Update Details

June 2019 CA. Viral Doshi, CA. Pravin Navandar


In the matter of Finquest Financial Solutions Pvt. Ltd. (Financial Creditor holding approx 20% voting rights in COC approx Rs. 800 crores) vs. Mr. Ravi Shankar Devarakonda (Liquidator) Order delivered on: 10/5/2019.

This MA is filed by Finquest claiming sole first charge over all the fixed assets of the Corporate Debtor. U/s. 60(5) RWS 52 of the IBC against Liquidator of Reid and Taylor India Limited (C D, with total financial exposure of approx Rs. 4,070 crores).

The Finquest, claim admitted by the liquidator is Rs. 1,141 towards debt assigned The entire amount has been classified as secured debt mentioning that the Applicant holds first pari-passu charge on fixed assets and second pari-passu charge on current assets.

Edelweiss (other financial creditor) objected on two points: (issue I) to the Application have stated that Section 52 does not empower a secured creditor to stand outside the liquidation process to enforce it’s security to the exclusion of other secured creditors having same ranking pari-passu charge over the same security interest, more particularly when the issue of priority of charges has not been adjudicated by the Hon’ble Court of Civil judge.

Edelweiss, has further stated (Issue 2) that NCLT, does not have the jurisdiction to determine disputed questions of facts regarding the validity/existence of the registered same ranking pari-passu charges of secured creditors over the same asset. Submitted that since the Applicant is not the sole secured creditor, it is not open for the Applicant to realize it’s security interest to the exclusion of other secured creditors having first charge over the same asset under the misconceived notion of allegedly being a prior exclusive first charge holder of the asset.

EXIM Bank assigned its loans to Edelweiss, has referred to Memorandum of Entry clearly ascertains that EXIM Bank has second paripassu charge over the fixed assets of the CD. Liquidator having verified the documents submits that the Finquest is the sole first charge holder of the fixed Assets.

As regards the Issue No. 1, only the first charge holder with first pari-passu charge can stay outside the liquidation process by the Liquidator and realize his security interest in the manner provided under the above provisions of law. The documents on record, supports the claim of the Finquest that he is the first charge holder to all the fixed assets Of course the other lenders Edelweiss, which is also claiming the first charge, has got the charge subject to the NOC being granted by the IDM who is the prior charge holder but the said NOC was never obtained by the Edelweiss. The documents by the Edelweiss does not substantiate their claim that they are the first charge holders.

Even assuming for a moment but not asserting, whether Edelweiss has any case in their favour to substantiate that they are the first charge holders, the simple answer as per the documents, is that the Edelweiss does not have the first charge and all the lenders including Edelweiss only stand at the second place as the next pari-passu charge holders after the Applicant. In addition to the above, the most important aspect of the realization of security interest by the secured creditor who is having the first charge is to be verified and vetted by the Liquidator who in this particular case had verified the same in terms of Section 52(3) of the IBC and in all categorical terms ascertained that the applicant is the first charge holder of the fixed assets of the CD. In view of the above un-contradictable documentation in favour of the Applicant, Holds that the Applicant is entitled to realize their security interest under Section 52(1)(b).

As regards the issue no. 2, documents speak for themselves. When the entire documents are in favour of then Applicant, excepting a frivolous/untenable claim by the Edelweiss on the issue of first charge does not create a bar on this Tribunal to decide the issue as to who is the first charge holder on the basis of un-contradictable/undisputable documentation. Hold’s that it is the exclusive prerogative of this Tribunal which is exclusively vested with the power to adjudicate the matters relating to and connected with insolvency and bankruptcy law particularly the process of liquidation and the related measures to be adopted in the said process of liquidation. This is just not a substantive law but also a procedural law. Tribunal can decide on the issues of disputed question of fact when the documents unequivocally prove the point that is sought to be decided. The so called dispute raised by the Edelweiss is just frivolous and is hereby rejected. From the above, we hold that the issue no. 1 and 2 are decided in favour of the Applicant and further we hold that the Applicant is entitled to realize their security interest as provided under Section 52(1)(b). This is a very important judgment because of the precedent that it sets by upholding the sanctity of the first charge.

Key Learning:

  1. 1. While registering and recording the charges, one needs to be meticulous as regards documentation. In case of a Pari passu first charge it is not enough to just record the charges in the Register. It is imperative to get NOC from the Original First Charge holder without which it becomes a defective or subservient charge. 

  2. 2. NCLT has been vested with powers to exclusively adjudicate on matters relating to and connected with IBC.

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