Secured Creditors

What Is a Secured Creditor?

A secured creditor is any creditor or lender associated with an issuance of a credit product that is
backed by collateral. Secured credit products are backed by collateral. In the case of a secured
loan, collateral refers to assets that are pledged as security for the repayment of that loan. In the
event that a borrower defaults on the repayment of a secured loan, assets are forfeited to the
secured creditor.

Key Takeaways
 A secured creditor is any creditor or lender associated with an issuance of a secured credit
product. A secured credit product is any credit product backed by collateral.
 In the case of a secured loan, collateral refers to assets that are pledged as security for the
repayment of that loan.
 Secured creditors can be various entities, although they are typically financial
institutions.
 Secured creditors may offer several different types of credit products with the option of
securing these offerings through collateral. These products include personal loans,;
institutional loans for businesses; and corporate bonds.

Statutory Definition:
1. Insolvency and Bankruptcy Code, 2016 (IBC):
Section 3(30): “Secured Creditor means a creditor in favor of whom a security interest is
created.”
Section 3(31): Defines Security interest as “A right, title or a claim to property, created in favor
of or provided for a secured creditor.”
2. SARFAESI Act, 2002:
Section 2(zd): “Secured Creditor” includes:
 Bank or financial institution,
 Consortium of banks,
 Debenture trustee,
 Asset Reconstruction Company (ARC),
 Any trustee holding securities on behalf of these entities.
Section 2(zf): “Security interest” means a right, title or interest of any kind upon tangible or
intangible assets, created in favor of any secured creditor, and includes:
 Mortgage, charge, hypothecation, or assignment.
 Retention of title by the seller under a hire purchase or conditional sale.
3. Transfer of Property Act, 1882 (TPA):
Although the TPA doesn’t use the term “secured creditor”, it defines mortgage, which is a
method of securing debt.
Section 58: Defines Mortgage as the transfer of an interest in immovable property to secure
payment of a loan.
 The mortgagee is effectively a secured creditor.
 Types of mortgages: Simple, Usufructuary, English, Mortgage by conditional sale,
Anomalous, Equitable mortgage.
4. Indian Contract Act, 1872:
The Act indirectly addresses secured creditors through provisions relating to:
🔹 Pledge (Section 172–179):

 A pledgee (the creditor) is a secured creditor who has the right to retain goods pledged
as security.
🔹 Guarantee (Sections 126–147):

 A surety, while not a secured creditor by default, can become one if security is provided
for the guarantee.
5. Recovery of Debts and Bankruptcy Act, 1993 (RDB Act):
While not defining "secured creditor", the Act governs recovery of debts owed to banks and
financial institutions.
 DRTs (Debt Recovery Tribunals) deal primarily with secured debt enforcement under
this law.
 Secured creditors (banks/FIs) file Original Applications before DRTs.
6. Limitation Act, 1963:
Though it does not define "secured creditor", it prescribes different limitation periods:
 For a mortgage suit by a secured creditor (e.g., mortgages): 12 years from the date of
default or right to foreclose arises.
Rights of Secured Creditors:
 Priority in Repayment:
Secured creditors have priority over unsecured creditors and government dues in the distribution
of assets during liquidation, as per Section 53(1)(b)(ii) of IBC, where they rank pari passu with
workmen’s dues for the preceding 24 months.
 Enforcement of Security Interest:
Secured creditors can enforce their security interest outside the liquidation process under Section
52(1)(b) of IBC, subject to verification by the liquidator (Section 52(3)). Alternatively, they may
relinquish their security interest to the liquidation estate and claim priority under Section 53(1)
(b).
 Participation in Corporate Insolvency Resolution Process (CIRP):
Secured creditors, as financial creditors, can initiate CIRP under Section 7 of IBC and participate
in the Committee of Creditors (CoC) under Section 21, influencing resolution plans (Section 30).
 Right to Register Security Interest:
Secured creditors must register their charges to claim priority, ensuring legal recognition of their
security interest.
 Right to Surplus in Liquidation:
If a secured creditor realizes their security interest under Section 52(1)(b) of IBC and recovers
more than their entitled amount, the surplus must be remitted to the liquidator for distribution
under Section 52(7).
 Right to Challenge Invalid Resolution Plans:
Secured creditors can challenge resolution plans that do not meet the minimum payment
requirements under Section 30(2) of IBC or violate their priority rights.

Limitations /Obligations of Secured Creditors:

 Compliance with Procedural Requirements for Enforcement:
Obligation: Secured creditors must strictly adhere to procedural requirements when enforcing
their security interest to avoid legal challenges or loss of priority
Limitation: Non-compliance with notice periods, approvals, or verification processes can lead to
legal disputes, delays, or invalidation of enforcement actions, reducing recovery prospects.
  Moratorium Restrictions During CIRP:
Obligation: Secured creditors are prohibited from enforcing their security interests during the
Corporate Insolvency Resolution Process (CIRP) due to the moratorium imposed under Section
14(1)(c) of IBC.
Limitation: This restriction delays recovery, compelling secured creditors to rely on the CoC’s
decisions or wait for liquidation to enforce their security interest under Section 52(1)(b).
 Registration of Security Interest:
Obligation: Secured creditors must register their charges to claim priority over other creditors
and government dues.
Limitation: Failure to register charges can subordinate secured creditors to other creditors or
government dues, significantly reducing their recovery.
 Prohibition on Transactions with Ineligible Persons:
Obligation: Secured creditors realizing security interests under Section 52(1)(b) of IBC cannot
sell secured assets to persons ineligible under Section 29A of IBC (e.g., defaulting promoters,
related parties, or persons with non-performing assets).
Limitation: This restriction narrows the pool of buyers, potentially reducing the sale value of
secured assets and complicating enforcement.
 Compliance with Resolution Plan Requirements:
Obligation: Secured creditors participating in the Committee of Creditors (CoC) under Section
21 of IBC must ensure resolution plans comply with Section 30(2), which mandates minimum
payments to creditors based on liquidation value.
Limitation: Secured creditors cannot unilaterally demand disproportionate payments in
resolution plans, as plans must meet statutory requirements, potentially limiting their recovery to
liquidation value.
 Judicial Oversight and Challenges:
Obligation: Secured creditors’ actions are subject to judicial scrutiny by the Adjudicating
Authority (NCLT) under Section 52(5) of IBC if enforcement is contested or if the liquidator
challenges the validity of the security interest.
Limitation: Secured creditors face the risk of legal challenges from debtors, other creditors, or
the liquidator, which can delay or derail enforcement efforts.
Case Laws in Favor of Secured Creditors:
 ICICI Bank Ltd. vs. Sidco Leathers Ltd. (2006) 10 SCC 452:
 Facts: ICICI Bank held a first charge over the debtor’s assets, while Punjab National
Bank (PNB) held a second charge. During liquidation, a dispute arose over the priority of
claims.
 Judgment: The Supreme Court upheld the priority of the first charge holder (ICICI
Bank) over the second charge holder (PNB), relying on Section 48 of the Transfer of
Property Act, 1882 (TPA), which establishes the principle of “Qui prior est tempore
potior est jure” (he who is earlier in time is stronger in law). The court emphasized that
property rights, including those of secured creditors, are constitutionally protected under
Article 300A of the Constitution of India and cannot be overridden unless explicitly
provided by law.
 Implication for Secured Creditors: This landmark judgment reinforces the priority of
first charge holders among secured creditors, ensuring their claims are satisfied before
subsequent charge holders in liquidation proceedings. It aligns with Section 53(1)(b)(ii)
of the Insolvency and Bankruptcy Code, 2016 (IBC), which prioritizes secured
creditors in the liquidation waterfall.
 Relevant Sections: Section 48 of TPA, Section 53 of IBC.

 M/S Innoventive Industries Ltd. vs. ICICI Bank (2018) 1 SCC 407:
 Facts: Innoventive Industries challenged the initiation of Corporate Insolvency
Resolution Process (CIRP) by ICICI Bank, a secured creditor, arguing that state
legislation (Maharashtra Relief Undertakings (Special Provisions) Act, 1958) suspended
debt enforcement.
 Judgment: The Supreme Court held that Section 238 of IBC overrides conflicting state
laws, allowing secured creditors to initiate CIRP under Section 7 of IBC. The court
affirmed the supremacy of the IBC in insolvency matters, protecting secured creditors’
rights to enforce claims.
 Implication for Secured Creditors: This case established the IBC’s precedence over
other laws, enabling secured creditors to pursue insolvency proceedings without
interference from conflicting statutes, thus safeguarding their ability to recover debts.
 Relevant Sections: Section 7 and 238 of IBC.

Case Laws Against Secured Creditors:

  State Tax Officer vs. Rainbow Papers Ltd. (2022):
 Facts: The Gujarat State Tax Department claimed priority for VAT dues as a “secured
creditor” under the Gujarat Value Added Tax Act, 2003, during the liquidation of
Rainbow Papers Ltd. under the IBC.
 Judgment: The Supreme Court controversially held that statutory dues under the Gujarat
VAT Act, which created a “first charge” on the debtor’s property, qualified the
government as a secured creditor under Section 3(30) of IBC. Consequently, such dues
were prioritized pari passu with other secured creditors under Section 53(1)(b)(ii), rather
than as government dues under Section 53(1)(e).
 Implication for Secured Creditors: This ruling diluted the priority of traditional secured
creditors (e.g., banks and financial institutions) by equating statutory dues with secured
claims, contradicting the BLRC’s intent to prioritize secured creditors over government
dues. It created ambiguity in the IBC’s waterfall mechanism, potentially reducing
recoveries for secured creditors.
 Criticism: The Insolvency Law Committee (2020) and subsequent judgments (e.g.,
Sundaresh Bhatt) criticized this interpretation, arguing that Section 238 of IBC should
override conflicting statutory provisions. The ruling remains a point of contention, with
calls for legislative clarification.
 Relevant Sections: Section 3(30), 53, 238 of IBC.

 Allahabad Bank vs. Canara Bank (2000) 4 SCC 406:

 Facts: A dispute arose between two banks regarding the priority of their charges over a
debtor’s assets during recovery proceedings.
 Judgment: The Supreme Court held that where multiple secured creditors hold charges,
the priority is determined by the date of creation of the charge, as per Section 48 of TPA.
However, if a secured creditor fails to register its charge or act diligently, it may lose
priority to other creditors or statutory claims.
 Implication for Secured Creditors: This case highlights a potential disadvantage for
secured creditors who fail to register their security interests or delay enforcement, as their
priority could be subordinated to other creditors or statutory claims. It underscores the
importance of compliance with registration requirements under Section 26E of
SARFAESI Act or Section 77 of Companies Act, 2013.
 Relevant Sections: Section 48 of TPA, Section 26E of SARFAESI Act, Section 77 of
Companies Act, 2013.
Q. If a farmer takes loan against his agriculture land from the jamindar and does not
provide any proper documents and gives a thumb imprint on a paper. Whether the
jamindar can be called a secured creditor under this situation?
Ans. Two situations:

1. If the thump imprint is given on a blank paper:

The Jamindar can not be a Secured Creditor. Because:
No Registered Document or Valid Mortgage is provided as:
 A mortgage under Section 58 of TPA, 1882, requires an agreement which should be
registered, especially for immovable property above ₹100 (which will apply in all
agriculture land cases.)
 A thumb impression on plain paper is not sufficient to create a valid legal
charge/mortgage.
Jamindar is not a Notified Financial Institution:
 Under SARFAESI or IBC, a jamindar or private moneylender is not a “secured creditor”
unless notified by the government, which is rare.
Security Interest is not Legally Enforceable:
 “Security Interest” as defined under Section 2(1) (zf) of SARFAESI refers to a legal
interest created by documentation which is missing in this situation.
Invalidity under Indian Evidence Act:
 A thumb impression without a properly written and attested document may be
inadmissible or at least legally unreliable as proof of mortgage or loan terms.

Supporting Case Laws:

 Krishna Mohan Kul v. Pratima Maity, (2004) 9 SCC 468
Facts: An agreement to sell land was signed and thumb-impressed by an illiterate lady on a
document prepared later. It was alleged that she did not understand the document.
Held: The Supreme Court ruled that the burden is on the person relying on the document to
prove that the executant understood its contents, particularly if the document is written in a
language unfamiliar to the signer or if the signer is illiterate.
Principle: A person taking the thumb impression must prove the document was explained
properly and executed with full understanding.
 Ramasamy v. M. Sundaram & Ors., (2014) 12 SCC 296:
Facts: The case involved a loan document executed by thumb impression on a blank paper, later
filled in by the moneylender claiming to have taken land as security.
Held: The Supreme Court stated that taking thumb impressions on blank papers and later
inserting terms is unethical and legally unreliable. Courts will not uphold such documents unless
independent witnesses or clear evidence proves genuine understanding and intent.

2. When the paper on which the thump impression is taken is a contract:

If the paper on which the thump impression is takes is a contract for a loan against agricultural
land, the situation changes slightly but still does not make the jamindar a “secured creditor” in
the legal sense unless certain conditions are fulfilled which are:
Legal Validity of Contract with Thump Impression:
Thump impression is legally valid if:
 The person understood the contents of the contract.
 The contract was made with free consent.
 It was witnessed.
 The document is not forged or obtained by misrepresentation.
Section 10 of Indian Contract Act: A contract is valid if made by free consent of parties
competent to contract, for a lawful consideration and lawful object, and not expressly declared
void.
Section 67 of Evidence Act: Thumb impression must be proved to be that of the person alleged
to have made it.
So yes, the contract can be valid, but that does not automatically make the jamindar a secured
creditor.
Why the Zamindar Still Cannot Be Called a Secured Creditor?
To be a secured creditor, the security interest must be legally enforceable under specific laws:
No Registered Mortgage:
Under Section 59 of TPA, 1882: A mortgage of immovable property (like agricultural land) must
be registered if the principal amount is ₹100 or more.
A contract (even with thumb impression) not registered = no valid mortgage = no security
interest.

No Security Interest under SARFAESI:

 Section 2(1) (zf) & 2(1) (zd) of SARFAESI define “security interest” and “secured
creditor.”
 Zamindar is not a notified financial institution.
 SARFAESI applies only to banks, financial institutions, etc., not private lenders.
Under IBC, 2016:
 A secured creditor under IBC must have a registered security interest.
 Informal contracts or private agreements do not create enforceable secured rights under
IBC.
What Rights Does the Zamindar Have?
Right to Enforce Contract (Civil Suit):
 Zamindar can file a suit for recovery of money based on the contract.
 If the contract mentions agricultural land as security, he may try for equitable mortgage,
but must prove it.
Possibility of Mortgage by Deposit of Title Deeds (Equitable Mortgage – Section 58(f), TPA):
 Only valid if title deeds were deposited in a notified town (like Mumbai, Delhi, etc.).
 Not applicable in rural/agricultural contexts usually.

Conclusion
In conclusion, we can say that merely obtaining a thump impression on a document, especially in
informal or non-registered or even in registered agreements, does not establish a legally
enforceable security interest or classify a jamindar as a secured creditor under Indian law. For a
security interest to be valid and recognized under laws such as the Indian Contract Act, TPA,
SARFAESI and IBC proper registration, documentation and proof of understanding are essential.
The Supreme Court emphasizes the importance of ensuring that the signatory fully comprehends
the contents of the document, particularly when dealing with illiterate lenders or borrowers.
Therefore, without compliance with legal formalities, a jamindar can not be deemed a secured
creditor purely based on informal agreements or thump impressions, especially when the security
involves immovable agriculture land.