2020 (2) TMI 1484 - Tri - Insolvency and Bankruptcy

Distribution of the sale proceeds of the company under Liquidation - ranking of secured creditors - preferential treatment for first charge holders over second charge holders - secured creditors' security is relinquished in a common pool - HELD THAT - Perusal of the records, it is observed that the Applicant is having secured interest (second charge) only on the movable properties and not on immovable properties. Hence, the security interest is limited only to movable properties and not on entire assets of the Corporate Debtor. For distribution of assets under Section 53 of the Insolvency and Bankruptcy Code, 2016, his security interest is limited to movable assets. Whether inter-se priorities between the secured creditors i.e. between the first charge holder and second charge holder has to be taken into consideration while distributing the liquidation proceeds? - HELD THAT - The whole stance in liquidation proceedings is to ensure parity and proportionality. However, the idea of proportionality is only as far as claims of similar ranking are concerned. A security interest determines the recovery rate of a defaulted loan; hence, the ranking of security interest directly determines the value of the defaulted loan. If, contractually, parties had put Mr. A on first priority, and Mr. B on second priority, there will be no parity whatsoever in the law pushing back Mr. A to the same status as Mr. B, as that would substantially erode the recovery rate for Mr. A - The concept of distribution waterfall existed both in the Companies Act, 1956 and 2013, and not a concept unique to the Code. In fact, Companies Act is the parent Act, based on which the Code was formulated, and it is important to refer to Section 529A which was introduced in the Companies Act, 1956 by virtue of Companies (Amendment) Act, 1985, to provide a protection to the workmen. The issue of ranking of secured creditors have been discussed by the Supreme Court in ICICI BANK LTD. VERSUS SIDCO LEATHERS LTD. 2006 (4) TMI 264 - SUPREME COURT - If the secured creditors relinquish their security interest and make claim on the liquidation estate, will the first/second ranking remain, or all secured creditors will be of the same ranking. In this case, the Supreme Court discussed the legal position and maintained the ranking of the secured creditors. This Adjudicating Authority is of the considered view that the inter se priorities amongst the secured creditors will remain valid and prevail in distribution of assets in liquidation - Petition disposed off.

Summary

Issues Involved:

1. Whether the distribution of liquidation proceeds by the liquidator was in accordance with the Insolvency and Bankruptcy Code, 2016 (IB Code).
2. Whether the inter-se priorities between secured creditors should be considered in the distribution of liquidation proceeds.
3. Whether the Applicant is entitled to a pro-rata share of the liquidation proceeds.
4. Whether the liquidator should retrieve and redistribute the liquidation proceeds.
5. Whether the Applicant is entitled to interest on the delayed distribution of liquidation proceeds.

Issue-wise Detailed Analysis:

1. Distribution of Liquidation Proceeds by the Liquidator:

The Applicant, a secured creditor with a 14.54% voting share, claimed that the liquidator distributed the sale proceeds to other creditors without considering the Applicant's claim. The Applicant argued that this distribution was arbitrary and not in consonance with the IB Code. The liquidator, however, contended that the distribution was made in accordance with Section 53 of the IB Code, based on the interpretation provided in the Insolvency Law Committee Report dated 26th March 2018.

2. Inter-se Priorities Between Secured Creditors:

The core dispute was whether the inter-se priorities between the first charge holder and the second charge holder should be considered during the distribution of liquidation proceeds. The liquidator argued that the first charge holder should receive the sale proceeds in priority, followed by the second charge holders. The Applicant, however, contended that all secured creditors should rank equally (pari passu) once they relinquish their security interest under Section 53 of the IB Code.

3. Entitlement to Pro-rata Share of Liquidation Proceeds:

The Applicant asserted that being a secured creditor with an admitted claim, they were entitled to a pro-rata share of the liquidation proceeds, which amounted to ?1,62,70,647/-. The liquidator, however, had distributed the proceeds based on the first and second charge holders' priority, which the Applicant challenged.

4. Retrieval and Redistribution of Liquidation Proceeds:

The Applicant requested the Tribunal to direct the liquidator to retrieve the distributed proceeds from the other creditors and redistribute them on a pro-rata basis. The liquidator maintained that the distribution was done correctly as per the IB Code and relevant judicial interpretations.

5. Interest on Delayed Distribution:

The Applicant sought interest at 18% per annum on their share of the liquidation proceeds from the date of the alleged arbitrary distribution by the liquidator. The liquidator did not specifically address this claim for interest in the response.

Findings:

The Tribunal observed that the Applicant had a second charge only on movable properties, not on immovable properties. The Tribunal emphasized that upon relinquishment of security interest, all secured creditors should rank equally (pari passu) under Section 53 of the IB Code. However, the Tribunal also noted that the concept of inter-se priorities among secured creditors remains valid and should be considered during the distribution of assets in liquidation. The Tribunal referred to the Supreme Court's judgment in ICICI Bank Ltd Vs. Sidco Leathers Ltd., which upheld the ranking of secured creditors even in liquidation proceedings.

Conclusion:

The Tribunal concluded that the inter-se priorities among secured creditors should be maintained in the distribution of liquidation proceeds. Therefore, the application by the Applicant was not maintainable, and the Tribunal disposed of IA 514/2019 in CP(IB) 04/2017 with no order as to costs.