IBC

TREATMENT OF THE SECURED CREDITOR UNDER INSOLVENCY AND BANKRUPTCY CODE, 2016

Secured Creditors enjoy privileges under the Liquidation Process although they do not enjoy any privileges under the Corporate Insolvency Resolution Process. In case of Liquidation of the Corporate Debtor, the Secured Creditor has option to remain out of Liquidation Proceedings and realise secured interest separately or to relinquish security interest to Liquidation Estate under Section 52 of the Code. Section 52 of the Code reads as under:

52. Secured Creditor in Liquidation Proceedings. –

 (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.

(2) Where the secured creditor realises security interest under clause (b) of subsection (1), he shall inform the liquidator of such security interest and identify the asset subject to such security interest to be realised.

(3) Before any security interest is realised by the secured creditor under this section, the liquidator shall verify such security interest and permit the secured creditor to realise only such security interest, the existence of which may be proved either – (a) by the records of such security interest maintained by an information utility; or (b) by such other means as may be specified by the Board.

(4) A secured creditor may enforce, realise, settle, compromise or deal with the secured assets in accordance with such law as applicable to the security interest being realised and to the secured creditor and apply the proceeds to recover the debts due to it.

(5) If in the course of realising a secured asset, any secured creditor faces resistance from the corporate debtor or any person connected therewith in taking possession of, selling or otherwise disposing off the security, the secured creditor may make an application to the Adjudicating Authority to facilitate the secured creditor to realise such security interest in accordance with law for the time being in force.

(6) The Adjudicating Authority, on the receipt of an application from a secured creditor under sub-section (5) may pass such order as may be necessary to permit a secured creditor to realise security interest in accordance with law for the time being in force.

(7) Where the enforcement of the security interest under sub-section (4) yields an amount by way of proceeds which is in excess of the debts due to the secured creditor, the secured creditor shall- (a) account to the Liquidator for such surplus; and (b) tender to the Liquidator any surplus funds received from the enforcement of such secured assets.

 (8) The amount of insolvency resolution process costs, due from secured creditors who realise their security interests in the manner provided in this section, shall be deducted from the proceeds of any realisation by such secured creditors, and they shall transfer such amounts to the Liquidator to be included in the liquidation estate.

 (9) Where the proceeds of the realisation of the secured assets are not adequate to repay debts owed to the Secured Creditor, the unpaid debts of such Secured Creditor shall be paid by the Liquidator in the manner specified in clause (e) of sub-section (1) of section 53.

Section 52 has to be read with Liquidation Regulation 21A and Liquidation Regulation 37 for comprehensive understanding.

Option to the Secured Creditor

Section 52 (1) states that a Secured Creditor in the Liquidation Proceedings may relinquish its security interest to the Liquidation Estate and receive proceeds from sale of assets by the Liquidator under Section 53 or realise its security interest separately.

Liquidation Regulation 21A provides procedure for availing options by the Secured Creditor. The Secured Creditor has to inform within thirty days of initiation of Liquidation Proceedings in Form C or Form D (forms specified for submitting claims) of Liquidation Regulations to the Liquidator whether it intends to relinquish security interest to Liquidation Estate or realise security interest separately.  If the Secured Creditor does not inform the Liquidator within thirty days of liquidation commencement date, it will be presumed that the Secured Creditor has relinquished the security interest to the Liquidation Estate.

When a Secured Creditor proceeds to realise its security interest, it has to pay CIRP cost under Section 53 (a) and amount payable to workmen under Section 53 (1)(b)(i) as it would have shared in case it had relinquished the security interest to the Liquidator within 90 days from the liquidation commencement date.

The Secured Creditor has to pay the excess of the realised value of asset, which is subject to security interest over the amount of his claims admitted, to the Liquidator within one hundred and eighty days from the liquidation commencement date

If the amount payable is not certain by the date the amount is payable, the Secured Creditor has to pay the amount as estimated by the Liquidator.  Any difference between the amount payable and the amount paid has to be made good by the Secured Creditor or the Liquidator as soon as the amount payable is certain and so informed by the Liquidator.

There are instances wherein same assets are subject to various security interests. Situations may arise when one Secured Creditor want to relinquish the security interest to Liquidation Estate and another may want to realise security interest outside Liquidation Proceedings.

In J.M. Financial Recosntruction1 the NCLT has allowed Finquest Financial Solutions Pvt. Ltd to realise security interest out of Liquidation Proceedings on basis of the claim that it is first charge holder of the security interest. J M Financial Asset Reconstruction was also Secured Creditor of the same security interest, who aggrieved by the order of the NCLT preferred appeal before the NCLAT. The NCLAT held that it is clear that after enforcement of right under Section 52 by one of the ‘Secured Creditor’, no other ‘Secured Creditor’ can enforce his right subsequently for realisation of the amount for the same secured assets, as the excess amount by way of proceeds pursuant to the first enforcement is deposited in the account of the Liquidator. Although, in the said case, the matter was remitted back to the NCLT with direction to the Liquidator to find out who the 1st charge holder over the security interest is.

In Mr. Srikanth Dwarkadas2 many Secured Creditors were having charge over the same secured asset. Secured Creditors with a value of 73.76% of secured assets had relinquished the security interest into the Liquidation Estate. The respondent has not relinquished the security interest and due to same Liquidator was unable to proceed with the sale of the secured assets. The NCLAT relied on Section 13 (9) of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and held that decision of 73.76% of Secured Creditors will be binding on the dissenting Secured Creditors. The Relevant para are as under:

16. In the present case, the Secured Creditors which 73.76% in value have already relinquished the Security Interest into the liquidation estate. Thus, it would be prejudicial to stall the liquidation process at the instance of a single creditor having only 26.24% share (in value), in the secured assets. The Respondent does not hold a superior charge from the rest of the Secured Financial Creditors in the secured Assets. The above provision of SARFAESI Act will be applicable in this case to end this deadlock, and the decision of 73.76% of majority Secured Creditors, who have relinquished the Security Interest shall also be binding on the dissenting Secured Creditors, i.e., Respondent.

Realisation of the Secured Interest

Section 52 (3) and Section 52 (4) provide for verification and realisation of secured interests. Once the Liquidator gets information from the Secured Creditor that it wants to realise its secured interest separately, the Liquidator has to verify security interest and after such verification only permit the Secured Creditor to realise security interest. Secured interest can be proved by security interest maintained by information utility or by such other means as may be specified by IBBI.

A Secured Creditor is free to enforce, realise, settle, compromise or deal with the secured assets in accordance with such law as applicable to the security interest being realised and use the proceeds to recover debts due to it.

Liquidation Regulation 37 provides further procedure of realisation of secured interests. A Secured Creditor who seeks to realise its security interest has to intimate the Liquidator of the price at which he proposes to realise its secured asset. The Liquidator has to inform the Secured Creditor within 21 days of receipt of the intimation, if a person is willing to buy the secured asset before the expiry of thirty days from the date of intimation at a price higher than the price intimated by the Secured Creditor.

Where the Liquidator informs the Secured Creditor of a person willing to buy the secured asset, the Secured Creditor has to sell the asset to such persons.  In such cases the Secured Creditor has to bear the cost of identification of the buyer.

If the Liquidator does not inform the Secured Creditor about a person willing to buy the secured asset or any such person does not buy the secured asset, the Secured Creditor may realise the secured asset in the manner it deems fit but at least at the price intimated by the Secured Creditor.  In such cases the Liquidator has to bear the cost of identifying buyer.

These provisions will not apply in cases wherein the Secured Creditor enforces his security interest under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 or the Recovery of Debts and Bankruptcy Act.

A Secured Creditor cannot sell or transfer an asset, which is subject to security interest to any person, who is not eligible under the Code to submit a Resolution Plan for insolvency resolution   of the Corporate Debtor.

In Anuj Vajpayee3 the issue before the NCLAT was whether the Secured Creditor, who has opted to realise the security interest out of Liquidation Process, can sell the assets of the Corporate Debtor to disqualified persons under Section 29A. The NCLAT held that if during the Liquidation Process assets cannot be sold to a person who is ineligible under Section 29A, the said provision is not only applicable to the Liquidator but also to the Secured Creditor, who opt out of Section 53 to realise the claim in terms of Section 52(1)(b) read with Section 52(4) of the Code.

Application to Adjudicating Authority

Section 52 (5) and (6) deals with filing of   application by Secured Creditor before the Adjudicating Authority. If a Secured Creditor in course of realising secured interest faces resistance from the Corporate Debtor or any other person connected therewith in taking possession of, selling or otherwise disposing off the security, the Secured Creditor may make an application to the Adjudicating Authority to realise such security interest in accordance with law for the time being in force. The Adjudicating Authority on receipt of such application may pass such order as may be necessary to permit a Secured Creditor to realise such security interest in accordance with law.

Payment of Surplus Amount

Section 52(7) provides that where enforcement of security interest yields an amount which is in excess of debt due to the Secured Creditor, the Secured Creditor has to account to the Liquidator for such surplus and tender to the Liquidator any surplus fund received from enforcement of such secured interest.

Section 52 (8) provides that CIRP cost due from the Secured Creditor who realise their security interests has to be deducted from the proceeds of any realisation by such Secured Creditor and they have to transfer such amounts to the Liquidator to be included in the Liquidation Estate.

Section 52 (9) provides that where the proceeds of realization of the secured assets are not adequate to repay debts owed to the Secured Creditor, the unpaid debts of such Secured Creditor have to be paid by the Liquidator as per Section 53 (e).

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  1. J.M. Financial Reconstruction Vs. Finquest Financial Solutions Pvt. Ltd.; Company Appeal (AT) (Insolvency) No. 593 of 2019
  2. Mr. Srikanth Dwarkadas Vs. Bharat Heavy Electricals Ltd; CA(AT)(Insol) 1510 of 2019
  3. State Bank of India Vs. Anuj Vajpayee; CA(AT) (Insol) 509/2019

Mukesh Kumar Suman is an advocate and legal author based at Delhi. He regularly appears before various Judicial Forums including NCLT, NCLAT, High Courts and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.

Mukesh Kumar Suman

Mukesh Kumar Suman

Mukesh Kumar Suman is an advocate based at Delhi. He has rich experience in civil, criminal, commercial, arbitration and corporate insolvency matters. He regularly appears before District Courts, NCLT, NCLAT, High Court and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.

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