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Unpaid sellers’ lien under the Sale of Goods Act Do not Create Security Interest Under Insolvency Code

IN THE MATTER OF Bharat Heavy Electricals Ltd. (Appellant/ Operational Creditor/Applicant) vs  Mr. Anil Goel,  in the appeal against the order of NCLT, 

The NCLAT observed that the Appellant in Form ‘B’ and Form ‘C’ claimed that it has unpaid sellers’ lien under the Sale of Goods Act on the material supplied which is lying/stored at Corporate Debtor’s project site and a statutory charge under the Transfer of Property Act on the goods supplied that have since been erected. The Liquidator rejected this claim and held that the Appellant was not a Secured Creditor. The Adjudicating Authority also looked into this aspect and in Paragraphs – 21 to 30 referred to the provisions of IBC. It has also looked into the agreement between the parties and the contractual provisions at Paragraphs – 31 to 34 of the Impugned Order and held that the Appellant is not having security interest and consequently, cannot be considered as a Secured Creditor. 

The NCLAT said -  "although we do not hold that that provisions of Sale of Goods Act and Transfer of Property Act are inconsistent or contrary as such to IBC, we hold that considering the provisions (as discussed in detail by the Adjudicating Authority) as found in Section 3(30) which defines “Secured Creditor” and Sections 3(31), 3(33) read with Section 238 of IBC, if benefit is to be taken under the provisions of IBC, it can be done if there was a contractual arrangement/transaction creating security interest in favour of the Creditor. It has to be a security interest which is “created” as such. IBC is complete Code in itself. 

The Appellant is claiming to be Secured Creditor on statutory basis. Admittedly, the Appellant is not relying on any contractual provision, or transaction creating security interest to claim benefits of lien/charge. Counsel for Appellant relied on “ICICI Bank Vs. Sidco Leathers” – (2006) 10 SCC 452 where inter alia it was considered that Section 529-A and Section 529 under the Companies Act, 1956 were silent on the question of inter se priority between Secured Creditors and Section 48 of Transfer of Property Act, 1882 applied. Reliance was also placed on “Central Bank of India vs. State of Kerala” – (2009) 4 SCC 94 in which inter alia issue was State Legislators creating first charge on the property of dealer/person liable to pay sales tax and Section 34(1) of DRT Act and Section 35 of Securitisation Act, for enforcing security interest were examined and observation was that non- obstante clauses in said Central Acts could not render first charge created by said State enactments inoperative. 

In our humble opinion, the said Judgements do not help Appellant in interpretation and application of IBC in the manner in which Appellant wants. We agree with the Adjudicating Authority in this regard that the Appellant cannot be treated as Secured Creditor."

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