INDIA Law and Practice Contributed by: Utsav Johri, Sucheta Bhattacharya and Nishal Makharia, JSA Advocates & Solicitors
5.7 Rules Governing the Priority of Competing Security Interests and/or Claims Indian laws allow multiple lenders or groups of lenders to hold a charge on the same asset. The ranking and priority of the charge can be determined between the lenders based on the commercial agreement between the parties. The subordination of debt is typically effected by an intercreditor agreement or a subordination deed. Indi - an courts typically recognise intercreditor agreements providing for a different ranking of security or lien in a non-liquidation scenario. Under the Insolvency and Bankruptcy Code, 2016 (IBC), any contractual agree - ments between parties who have equal ranking and that disrupt the order of priority under the IBC must be disregarded by the liquidator in the liquidation of a company. Certain amendments have been proposed to the IBC, which, when notified, may provide clarity on the treat - ment of contractual arrangements. The IBC expressly provides that any contractual arrangements that are not in line with the priority set out in the IBC will be disregarded. However, proposed amendments to the IBC provide that contractual arrangement amongst the creditors, having the same priority under law, will be recognised. 5.8 Priming Liens and/or Claims Under the Indian IT Act, if any proceedings are pend - ing against the security provider (above a de mini - mums threshold), they may be held to be void to the extent of any claims of the income tax authorities aris - ing out of those proceedings, other than for certain specified exceptions. Furthermore, as per the provisions of the CGST Act, if a company creates a charge over its assets after amounts under the CGST Act are due from such com - pany and with the intention to defraud the government revenue, such charge will be void against any claim in respect of any tax or any other sum payable by the company. Typically, lenders require the security provider to obtain permission from the assessing officer under the IT Act and the proper officer under the CGST Act
Please see 5.4 Restrictions on the Target regarding upstream guarantees for acquisition financings. 5.4 Restrictions on the Target Under the Companies Act, 2013, a public company is prohibited from providing any direct or indirect finan - cial assistance to any person for subscription to or the purchase of its own shares or the shares of its holding company. The term “financial assistance” is broad and includes assistance in the form of loans and guarantees, and the provision of security. This restric - tion does not apply to a private company. In view of the above, a target company that is a public company cannot create security nor provide guarantees in rela - tion to an acquisition financing for the acquisition of its shares. 5.5 Other Restrictions Stamp duties and registration fees are required to be paid on the guarantees and security documents at the time of or prior to execution. An insufficiently stamped document is not admissible as evidence in a court of law. Stamp duty differs from state to state and is determined based on the nature of the document. Please see 7.6 Transactions Voidable Upon Insol- vency regarding hardening periods. 5.6 Release of Typical Forms of Security Security is released either on complete repayment of the debt or by way of approvals or mutual agreement between the parties. To effectuate such release, the borrower/security provider (which is a company) is required to carry out the requisite regulatory formali - ties, which are typically as follows: • a release deed is executed to record the release of security; • Form CHG-4 is required to be filed with the ROC to record the release of security with the ROC; • where the security is over immovable property, the release deed may need to be registered with the relevant land registry where the mortgage was registered; and • filing is required to be made with the depositories for the release of any pledge created on shares or other dematerialised securities.
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