2019 (5) TMI 401 - Tri - Insolvency and Bankruptcy

Initiation of Corporate Insolvency Resolution Process - Financial Creditor - Secured creditor in liquidation proceedings - Whether SBI, the Financial Creditor is legally entitled to stay out of liquidation? - HELD THAT - The rights of a secured financial creditor are protected by giving him an option to take away the assets secured with him out of liquidation. In such a scenario, the secured creditor has a liberty to realise its security interest on its own. All that has to be seen by the liquidator at this juncture is that whether the secured creditor is complying with the provisions of above subsection 3 of section 52 i.e. the records of such security interest maintained by an information utility and whether the Secured Creditor is complying with Regulation 37 of the IBBI (Liquidation Process), Regulations, 2016. Sub-regulation (7) of the above said Regulation 37 (Liquidation Process) mentions that the provisions of regulation 37 shall not apply if the secured creditor enforces his security interest under SARFAESI Act, 2002 or RDDB Act, 1993. In the present case, SARFAESI proceedings are already initiated, hence, the Secured Creditor SBI is not even under an obligation to tell the liquidator the estimate of the amount that can be realized from sale of secured assets as per Regulation 37 stated above. Therefore, all SBI has to prove to the liquidator is that there was some property which was secured with itself against the loan granted. The secured creditor s rights have to be protected and respected. They must have the choice of taking their collateral and selling it on their own. Hence, the first question with respect to the secured creditor opting out of the liquidation estate, stands answered in affirmative. Whether Section 29A is applicable to liquidation proceedings in a situation when the Secured creditor realises the security interest on its own? - HELD THAT - The Hon ble legislatures were very much aware about this attempt of the defaulters to indirectly take control of the stressed assets, therefore, restriction was imposed in the Proviso annexed to sub-section f of S. 35(1). As far as s. 52 is concerned, the scope is limited to grant rights to a Financial Creditor for sale of a property. Naturally, that right should not give permission to a Financial Creditor to sell that property to a defaulter/promoter/director. Therefore, it is necessary as well as need of the hour to read the rights enshrined U/s 52 along with the proviso of sub-section (f) of S. 35(1) as well as S. 29A of the Code - this prayer of the applicant/Liquidator, that the secured creditor availing its option U/s 52 of the Code should not sell the assets to the erstwhile promoters/directors, is hereby accepted - question answered in affirmative. Whether the Secured Creditor exercising his right U/s 52(1)(b) of the Code has to make payment of workmen s dues out of the amount realised from the sale of such secured assets as the EPF/workmen s dues, which do not form part of the liquidation estate? - HELD THAT - The present position is that Sec 53 of the Code gives the waterfall mechanism for distribution of proceeds from the sale of assets of the Corporate Debtor. S. 53 (1)(b) states that after meeting the CIRP and liquidation cost, second priority will be given equally to (i.) workmen s dues for the period of two years preceding the liquidation commencement date and,( ii). the debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52(1)(a). Therefore, workmen s dues or EPF dues are placed in the waterfall mechanism and are not to be paid as per S. 326 of the Companies Act, 2013 because of S. 238 of the Code which gives overriding provisions to the insolvency Code and secondly, S. 326 as of now stood de-notified - the interpretation of Sec 53(1)(b)(ii) of the Code is that if the secured creditors do not relinquish the charge over the secured assets but exercise their option to liquidate a secured asset by exercising option U/s 52 , then it is mandated that the workmen s dues and the debt of secured creditor shall not rank equally. Once the secured creditor is out of liquidation U/s 52(1)(b) of the Code, it is relieved from all the clutches of the insolvency code or the liquidation process. To move under SARFAESI Act, or any other act, to sell the assets to any party, is all the prerogative of the secured creditor because his rights are given a specific protection by the code. Application allowed in part.

Summary

Issues Involved:
1. Whether SBI, the Financial Creditor, is legally entitled to stay out of liquidation.
2. Whether there is any bar on the Secured Creditor to sell the assets to erstwhile promoters/directors of the Corporate Debtor if the secured creditor opts out of liquidation.
3. Whether the Secured Creditor exercising its right under Section 52(1)(b) of the Code has to make payment of workmen’s dues out of the amount realized from the sale of such secured assets as the EPF/workmen’s dues, which do not form part of the liquidation estate.

Detailed Analysis:

1. Legal Entitlement of SBI to Stay Out of Liquidation:
The tribunal examined Section 52 of the Insolvency and Bankruptcy Code (IBC), which provides secured creditors with the option to either relinquish their security interest to the liquidation estate or realize it on their own. The tribunal noted that SBI had initiated proceedings under the SARFAESI Act, and hence, was not obligated to inform the liquidator of the estimated amount from the sale of secured assets. The tribunal confirmed that the rights of secured financial creditors are protected under Section 52, allowing them to realize their security interest independently. Consequently, the tribunal affirmed that SBI is legally entitled to stay out of the liquidation process.

2. Bar on Secured Creditor Selling Assets to Erstwhile Promoters/Directors:
The tribunal analyzed Section 35(1)(f) of the IBC, which prohibits the liquidator from selling assets to persons not eligible to be resolution applicants, as per Section 29A. The tribunal emphasized that the intent of the legislation is to prevent defaulters from re-acquiring assets through back-door entries. The tribunal extended the scope of Section 29A to include secured creditors exercising their rights under Section 52, thereby disallowing them from selling assets to disqualified persons. This interpretation aligns with the Supreme Court's decision in Swiss Ribbons Pvt. Ltd. & Ors V. Union Of India & Ors, which stated that the provisions of Section 29A apply to both resolution and liquidation processes. Thus, the tribunal imposed a bar on SBI from selling assets to erstwhile promoters/directors.

3. Payment of Workmen’s Dues from Sale Proceeds of Secured Assets:
The tribunal examined Section 53 of the IBC, which provides a waterfall mechanism for the distribution of proceeds from the sale of assets. It clarified that workmen’s dues and EPF dues are prioritized in the waterfall mechanism only if the secured creditor relinquishes security. If the secured creditor opts to realize its security under Section 52, the workmen’s dues do not rank equally with the secured creditor’s debts. The tribunal noted that Section 326 of the Companies Act, which was relied upon by the liquidator, had been substituted by the IBC. Consequently, the tribunal held that the secured creditor is not liable to pay EPF dues out of the sale proceeds of secured assets when exercising their option under Section 52. Thus, this prayer of the liquidator was rejected.

Conclusion:
The tribunal allowed the secured creditor, SBI, to opt out of the liquidation process but imposed a restriction on selling the assets to disqualified persons under Section 29A. The tribunal rejected the liquidator's request to mandate the secured creditor to pay EPF dues from the sale proceeds of secured assets. The tribunal's order was partly allowed, aligning with the legislative intent to prevent defaulters from benefiting under the IBC.