TREATMENT OF SECURED CREDITORS UNDER IBC

One of the important aspects under Insolvency and Bankruptcy Code, 2016 (“IBC”)  is treatment of secured creditors.  Secured creditor has been defined under Section 3 (30) IBC as a creditor in whose favour security interest has been  created. This article covers treatment of Secured Creditor during Corporate Insolvency Resolution Process ( “CIRP”) as well as Liquidation Proceedings.

TREATMENT OF SECURED CREDITOR DURING CIRP

Treatment of secured creditors during CIRP has not been dealt in detail under IBC or regulations made thereunder, which has caused several litigations before Tribunals as well the Supreme Court.

Secured Creditor and Financial Creditor

Secured Creditor may not be Financial Creditor in some cases. If a secured creditor does not fulfill the criteria of a Financial Creditor, it may not be treated as Financial Creditor. In such cases Secured Creditor will not be part of Committee of Creditors (CoC) and  will not be able play any role in decision making in respect of resolution of the Corporate Debtor.

In Anuj Jain Interim Resolution Professional for Jaypee Infratech Vs. Axis Bank Ltd (2020) 8 SCC 401 Secured Creditors of Jayprakash Associates Ltd. were not treated as Financial Creditor as there was no disbursement of loan to the Corporate Debtor Jaypee Infratech.

Similarly in Phoenix ARC Private Ltd Vs. Ketulbhai Ramubhai Patel (2021) 2 SCC 799  the Supreme Court has held that Corporate Debtor has extended only security by pledging shares. As such Phoenix Arc will be only a Secured Creditor and not a Financial Creditor.

Secured Creditor and Resolution Plan

The Resolution Professional has to examine a Resolution Plan on certain aspects provided under Section 30  IBC  before submitting the same to the CoC. Section 30 (2) (b) provides that dissenting Financial Creditors who do not vote in favour of the resolution plan has to paid amount  which will not be less than the amount to be paid to such creditors in accordance with sub-section (1) of Section 53 in the event of a liquidation of the corporate debtor.

Section 30 (4) of the Code provides that  CoC has to take into consideration the order of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor when a Resolution Plan is submitted before the CoC for approval.

The Supreme Court in India Resurgence ARC Pvt. Ltd.  Vs Amit Metaliks Ltd. (Civil Appeal No. 1700 of 2021 ) noted that it has not been intent of the legislature that a security interest available to a dissenting financial creditor over the assets of the corporate debtor gives him some right over and above other financial creditors so as to enforce the entire of the security interest and thereby bring an inequitable scenario by receiving excess amount beyond the receivable liquidation value proposed for the same class of creditors.

A shift towards equitable treatment to the secured creditors during CIRP can be discerned in approach of the Supreme Court in Vistra ITCL (India) Ltd. Vs. Mr. Dinkar Venkatasubramanian & Anr  (Civil Appeal No. 3606 of 2020 ) wherein the Supreme Court granted the secured creditor rights during CIRP which are available to the secured creditor during liquidation proceedings.  

The Supreme Court in DBS Bank Ltd. Singapore Vs. Ruchi Soya Industries Ltd (Civil Appeal 9133 of 2019)    noted that there is  contradiction between the findings of the Supreme Court in  India Resurgence ARC Pvt. Ltd.  Vs Amit Metaliks Ltd. (Civil Appeal No. 1700 of 2021 )  and findings of the Supreme Court in  Committee of Creditors of Essar Steel India Ltd  vs. Satish Kumar Gupta (Civil Appeal No. 8766-67 of 2019)  and Jaypee Kensington Boulevard Apartments Welfare Association Vs. NBCC (India) Ltd. (Civil Appeal No. 3395 of 2020 ) in respect of interpretation of 30 (2)(b) (ii) IBC. India Resurgence judgment provides for equal treatment given to the secured financial creditors as well as other financial creditors while other judgments provides for giving dissenting secured creditors amount as specified under Section 53 IBC. The Supreme Court has referred the matter to a larger bench.

TREATMENT OF SECURED CREDITOR DURING LIQUIDATION

The provisions for treatment of Secured Creditor during liquidation are much more detailed during Liquidation proceedings. Section 52 gives option to the secured creditor to realise security interest separately or to relinquish security interest to the Liquidation Estate.  Section 52 (1) reads as under:

(1) A secured creditor in the liquidation proceedings may _

(a) Relinquish its security interest to the liquidation estate and receive proceeds from the sale of assets by the liquidator in the manner specified in Section 53 or

(b) Realise  its security interest in the manner specified in this section

In case the Secured Creditor has relinquished its security interest to the Liquidation Estate, Secured Creditor has been given highest priority in distribution of assets under Section 53 IBC after  payment of CIRP and Liquidation Cost.

CONCLUSION

Provisions regarding treatment of Secured Creditor during CIRP is not as detailed as in case of Liquidation Proceedings. There is need of clarity in treatment of the secured creditor during CIRP on two aspects -firstly, how a Secured Creditor has to be treated during CIRP when such creditor does not fall under category of Financial Creditor and , secondly, how a Secured Creditor has to be treated when such creditor falls into category of Financial Creditor. We hope that the larger bench of the Supreme Court will provide the required clarity.

_________________________________________________