Conundrum on concept of subordinate charge in CIRP under IBC


Status as on- 24/05/2021


One of the critical methods of raising funds under Project Financing is through making a Subordinate Charge to the current charge holder. The subsequent charge consequently made, exists as subordinate to initially charge and must be acknowledged once the obligation of first charge holder has been fulfilled according to the set up laws. Such act of making charge is found overall as Inter-Creditor Agreements, that happens between first charge holder and second charge holder.

The idea of Subordinate Charge has been perceived under the plan of existing laws to be specific, Section 48 of Transfer of Property Act, 1882 and Section 529A of Companies Act perceived the idea of subordinate charges and in different decisions, Hon’ble Apex Court has additionally maintained, that first charge holder should be given need over second charge holder. Further, it very well might be judicious to incorporate the idea of subordinate charge, as these are business choices taken by Financial Institutions at the hour of loaning of cash through Intercreditor Agreements.

Introduction of Insolvency and Bankruptcy Code, 2016 has decreased the idea of Subordinate Charge as Form H and Section 53 of Insolvency and Bankruptcy Code (“IBC”) recognizes only secured creditors. It is appropriate to note here that even the second charge holder has been recognized as a got leaser under the aegis of IBC, accordingly, lessening the line between first charge holder and second charge holder. In line of such non-clearness over subordinate charges under IBC the sum, under Resolution Plan, is being conveyed without thinking about subordinate charges.

In this short article, we would be going through the presentation of idea of charge, statute developed regarding Subordinate Charge, and why such idea ought to be explained by Insolvency and Bankruptcy Board of India (“IBBI”).


Under Companies Act, charge has been characterized as an interest or lien made on the property or resources of an organization, or any of its endeavours, or both, as security and incorporates a home loan. As per Transfer of Property Act, 1882, Charge is made where any unflinching property of one individual, by demonstration of gatherings or activity of law, is made security for the instalment of cash to another, such exchange doesn’t add up to contract and by excellence of the equivalent, a charge is made towards reimbursement of advance as security.

Section 48 of Transfer of Property Act decides need of rights made by move and has presented idea of Subordinate Charge. According to the said segment, where an individual make a few rights in resolute property and such rights can’t all exist or be practiced together, at that point every last right made without any unique agreement will be exposed to rights beforehand created. This part explains that the principal directly preposterous property is of first made charge, and without any exceptional agreement, would hold inclination over the last charge made over a similar relentless property.


On account of ICICI Bank Limited vs Sidco Leathers Limited and Others, Hon’ble Apex Court, while deciphering Section 48 of Transfer of Property Act, 1882, has held that case of first charge holder will beat second charge holder and in the event that where obligations are because of both, first charge holder will be given need for reimbursement. Further, on the issue of entomb se need between two arrangements of Secured Creditors, it likewise held that while authorizing a resolution, Parliament can’t be dared to have removed a privilege in property as it is a Constitutional right and option to recuperate cash by implementing a home loan is additionally an option to uphold a premium in the property.

On account of State of Andhra Pradesh vs Rajah Ram Janardhana Krishna,it was held that Specific Charge, which is made first on schedule, will outweigh the charge made along these lines. A lot later, on account of Jitendra Nath Singh vs Official Liquidator and Ors, Hon’ble Supreme Court while deciphering Section 529A of the Companies Act, 1956 held that privileges of got and unstable lenders of the organization in wrapping up procedures will be like that of bequest of people declared as wiped out.

Notwithstanding, some opposite decisions have additionally been passed under IBC with respect to subordinate charges. In Stressed Assets Stablization store vs BijayMurmuria, question was raised in regards to endorsement of goal plan wherein the order, as recommended under Section 48 of Transfer of Property Act, was disregarded and inclination of First Charge over Second Charge was not thought about. Hon’ble NCLAT in the said case didn’t adjust to the perspectives on Appellant and held that the said issue doesn’t emerge in realities and law and that Appellant couldn’t demonstrate its first charge over resources of Company. However, in the Said case Appellant couldn’t demonstrate its first charge, along these lines neglected to make any ground under IBC, the inquiry to offer advantage to him, as first charge holder, doesn’t arise. Further, on account of IREDA vs Bhuvnesh Maheshwari, issue of need of charges between first charge holder, as respects to dispersion of continues of Resolution plan, was raised by IREDA. Anyway Learned Appellate Tribunal, without going into subtleties of immaterialness’ of standards of Subordinate Charge, held that the judgment of Hon’ble Supreme Court in Essar Steelhas maintained the business insight of Committee of Creditors and by uprightness of Section 238 of IBC, IBC has superseding impact over some other laws.


Right to property is an established right and Parliament can’t be ventured to remove such right, except if unequivocally referenced in the Statute. Further, option to recuperate cash by authorizing a home loan is additionally covered under the ambit of Right to Property. There is no notice of idea of Subordinate Charge in IBC, in this way, the said Code can’t remove the privileges of Financial Creditors of getting need over second charge holders.

According to Section 30(2)(e) of IBC, a Resolution Professional needs to inspect the Resolution Plan and needs to affirm that such arrangement doesn’t repudiate any arrangements of law for the time being in power and the considerable law which manages the got resources is Transfer of Property Act, 1882. As in the previously mentioned matter of ICICI Bank vs Sidco Leathers Limited, Hon’ble Apex Court has effectively analysed Section 48 of Transfer of Property Act and has held that case of first charge holder will beat second charge holder. Subsequently, it very well may be deciphered that not giving first charge holder need over second charge holder, for the returns under Resolution Plan and Section 53 of IBC, repudiates the arrangements of law. Accordingly, Resolution Plans ought to be appropriately inspected by Resolution Professionals and ought not be affirmed by Hon’ble NCLTs.


Banks/Financial Institutions (FIs) give monetary help based on evaluation of advance recuperation and strength of safety accessible with them. The act of giving Working Capital credits or any extra advances to be obtained by the Corporates, is normally done through Subordinate Charges. Further, ventures are finished by Corporates based on Financial Assistance given by Bank/FIs as these credits are important to maintain the business.

Definitively, it is right to make reference to that, Banks/FIs would be hesitant to permit the Corporates to accept further advances as important to show the business to surrendering second charge, as they would be careful about their worth of first accuse being at standard of second charge loan specialist under IBC.

IBC is an instrument conceived to restore a stressed corporate. Consequently, aim of legislators will be fixed if First charge holder would be hesitant to restore by going under IBC and would investigate other recuperation discussions. Along these lines, it is the need of great importance that an explanation in regards to the idea of Subordinate Charge be made by the Insolvency and Bankruptcy Board of India, so that Banks/FIs can come at educated choice while loaning Financial Assistance to the Corporates, which thus would help them in authorizing the protections for Recovery.

Disclaimer – The above article is based on the personal interpretation of the related orders and laws. The readers are expected to take expert opinion before relying upon the article. For more information, please contact us at

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