2022 (12) TMI 1201 - HC - Insolvency and Bankruptcy

Permission to Liquidator of the respondent Company to withdraw a sum of Rs.15,55,290.10 which is lying to the credit of Application No.3703 of 2019 - whether the proceedings initiated under Insolvency and Bankruptcy Code, 2016 can replace the execution of the arbitral awards? - HELD THAT - Admittedly, the appellant finance company herein is an unsecured creditor. As per Section 53(1) of Insolvency and Bankruptcy Code, 2016, the priority to distribute the proceeds from the sale of the liquidation assets to the unsecured creditors shall be after distributing of workmen dues, wages and unpaid dues to employees. The Hon'ble Apex Court in the judgment in SWISS RIBBONS PVT. LTD. AND ANR. VERSUS UNION OF INDIA AND ORS. 2019 (1) TMI 1508 - SUPREME COURT had upheld the validity of Section 53(1) of Insolvency Code, which prescribes priority of distribution of assets in liquidation. In the present case, the respondent has submitted its proof of claim in the capacity as the Liquidator of the respondent Company claiming (i) principal amount of Rs.1,27,77,777.05 in terms of the Trip Loan agreement dated 17.4.2018; (ii) Legal charges of Rs.24,135/-; and (iii) Additional Financial charges of Rs.77,56,165/- in respect of the very same claim. Therefore, the Liquidator of the respondent Company seeks to recover its dues qua the applicant/respondent Company in accordance with the procedure envisaged under Insolvency and Bankruptcy Code, 2016 - a recovery certificate issued in respect of the same claim, which is essentially a crystallization of the claim through the process of adjudication, had also be classified as a financial debt under Insolvency and Bankruptcy Code, 2016. Consequently, the nature of the underlying claim of the creditor, would determine the categorisation of the amount payable under the final decree passed adjudication of the same claim. The liability arising out of an arbitral award or a court decree would be categorised as either financial or operational debt depending on the nature of the underlying claim which stands crystallised through the arbitral or court proceedings. The appellant, as per Section 9 of Insolvency and Bankruptcy Code, 2016, is a Non Banking Finance Company and admittedly an unsecured financial creditor. As per the decisions laid down by the Hon'ble Supreme Court cited supra and Section 53 of Insolvency and Bankruptcy Code, 2016, the financial debts owed to unsecured creditors have to be distributed by the liquidator as per the preference set out under Section 53(1) of Insolvency and Bankruptcy Code, 2016 i.e after distributing the workmen dues, wages and unpaid dues to the employees - there are no reason to interfere with the decision of the learned Single Judge, hence, the instant appeal challenging the said order of the learned Single Judge is liable to be dismissed. Appeal dismissed.

Summary

Issues Involved:
1. Legality of the Liquidator's withdrawal of funds.
2. Priority of debt repayment under the Insolvency and Bankruptcy Code (IBC), 2016.
3. Impact of arbitration awards on insolvency proceedings.

Detailed Analysis:

1. Legality of the Liquidator's Withdrawal of Funds:
The appellant challenged the order permitting the Liquidator of the respondent Company to withdraw Rs.15,55,290.10 lying to the credit of Application No.3703 of 2019. The appellant argued that the funds deposited by Garnishees should not have been allowed for withdrawal by the Liquidator since the appellant had initiated arbitration proceedings, resulting in an award in their favor. The appellant contended that filing a claim before the liquidator does not equate to abandoning the right to secure the deposited amount.

2. Priority of Debt Repayment under the IBC, 2016:
The respondent's counsel argued that the National Company Law Tribunal (NCLT) had declared a moratorium under Section 14(1) of the IBC, 2016, preventing continuation of pending proceedings against the respondent Company. The respondent, as the Liquidator, sought to recover dues in accordance with the liquidation process. Section 35 of the IBC, 2016, read with Regulation 39 of the IBBI (Liquidation Process), empowers the Liquidator to recover and realize all assets and dues to the corporate debtor for the benefit of stakeholders. The court emphasized Section 53(1) of the IBC, 2016, which prescribes the order of priority for distributing assets on liquidation, placing unsecured creditors after workmen's dues, wages, and unpaid dues to employees.

3. Impact of Arbitration Awards on Insolvency Proceedings:
The court examined whether proceedings under the IBC, 2016, could replace the execution of arbitral awards. The Supreme Court in Kotak Mahindra Bank Limited Vs. A. Balakrishnan held that a final judgment or decree gives rise to a fresh cause of action for the creditor, which can be used as proof of debt to initiate proceedings under the IBC, 2016. The court also referred to Swiss Ribbons Vs. Union of India, which upheld the validity of Section 53(1) of the IBC, 2016, regarding the priority of asset distribution.

Judgment:
The court concluded that the appellant, a Non-Banking Finance Company (NBFC) and an unsecured creditor, must adhere to the priority of distribution under Section 53(1) of the IBC, 2016. The Single Judge had correctly determined that the funds should be available for distribution among creditors according to the statutory priorities under the IBC, 2016. The appeal was dismissed, confirming the order allowing the Liquidator to withdraw the funds for distribution in accordance with the IBC, 2016.