2020 (1) TMI 275 - AT - Insolvency and Bankruptcy

CIRP Proceedings - Secured Creditor has relinquished security interest or not - Jurisdiction - power of Adjudicating Authority u/s 52 r/w Regulation 37 of the IBBI (Liquidation Process) Regulations, 2016 to decide disputed question of fact with regard to realization of security interest by a Secured Creditor - HELD THAT - After enforcement of right under Section 52 by one of the Secured Creditor , no other Secured Creditor can enforce his right subsequently for realization 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. Only one Secured Creditor can enforce his right for realization of its debt out of the secured assets as per Section 52 - There is nothing on record to suggest that 1st Respondent has moved before the Liquidator in terms of sub-section (2) of Section 52 for realizing the security interest . It is also not clear whether the records of such security interest has been maintained by an information or utility or in the manner as specified by the Board or verified by the Liquidator. In absence of any allegation that there is resistance in recovering the secured assets, the question of entertaining the application by the Adjudicating Authority under sub-section (6) of Section 52 does not arise. Therefore, except the manner as prescribed under sub-section (2), (3) and (4) of Section 52, if a Secured Creditor directly applies before the Adjudicating Authority for allowing it to recover the secured assets under sub-section (6) of Section 52, such application is not maintainable. As in the present case, all the Secured Creditors have claimed right over the same secured asset, which is 91% of the total secured asset and particularly when a suit is pending for declaration, as to which Secured Creditors has the first charge, in such a case, it was not open to the Adjudicating Authority to allow the application filed by the 1st Respondent to realise the security interest under Section 52 - as the Liquidator has abdicated its power and the Adjudicating Authority without any jurisdiction by the impugned order directed the Liquidator to handover the symbolic possession of the fixed assets of the Corporate Debtor to Finquest Financial Solutions Pvt. Ltd. with a finding that the said Applicant is entitled to realise the security interest without noticing the relevant provisions, the impugned order passed by the Adjudicating Authority (National Company Law Tribunal), Mumbai Bench, Mumbai cannot be upheld. The matter is remitted to the Liquidator to proceed in accordance with law, following Section 53 r/w Section 52 of the I B Code - appeal allowed by way of remand.

Issues Involved:

1. Entitlement of Finquest Financial Solutions Pvt. Ltd. to realize its security interest.
2. Jurisdiction of the Adjudicating Authority under Section 52 of the I&B Code.
3. Priority and validity of first charge over the secured assets.
4. Procedure for realizing security interest under the I&B Code.
5. Role and responsibilities of the Liquidator in liquidation proceedings.

Issue-wise Detailed Analysis:

1. Entitlement of Finquest Financial Solutions Pvt. Ltd. to Realize Its Security Interest:

The primary issue is whether Finquest Financial Solutions Pvt. Ltd. (Finquest) is entitled to realize its security interest over the assets of the Corporate Debtor. Finquest filed a Miscellaneous Application under Section 60(5) read with Section 52 of the Insolvency and Bankruptcy Code (I&B Code) and Regulation 37 of the IBBI (Liquidation Process) Regulations, 2016, seeking permission to sell/dispose of the secured assets to realize its security interest. The Adjudicating Authority initially directed the Liquidator to hand over the symbolic possession of the fixed assets to Finquest, recognizing its entitlement to realize the security interest under Section 52(1)(b) read with Regulation 37.

2. Jurisdiction of the Adjudicating Authority under Section 52 of the I&B Code:

The Appellant argued that the Adjudicating Authority lacked the power to decide disputed questions of fact regarding the realization of security interest by a Secured Creditor and to determine inter-se priority of charges between Secured Creditors. The Tribunal agreed, noting that the Adjudicating Authority’s jurisdiction is limited under Section 52(6) to cases where a Secured Creditor faces resistance in realizing its security interest. Since there was no allegation of resistance in this case, the application by Finquest was deemed not maintainable.

3. Priority and Validity of First Charge over the Secured Assets:

The dispute centered on whether Finquest had an exclusive first charge over the secured assets. The Tribunal highlighted that the Adjudicating Authority failed to properly consider the pending suit (Suit No. 84 of 2013) regarding the first charge, which had not been adjudicated. The Tribunal emphasized that the Adjudicating Authority should not have passed an order on the issue of first charge while the suit was pending. Additionally, the Tribunal noted that the Recovery Certificate issued by the Debts Recovery Tribunal entitled Edelweiss Asset Reconstruction Company and other banks to recover sums from the sale of the Corporate Debtor’s properties, including the Mysore Plant.

4. Procedure for Realizing Security Interest under the I&B Code:

Section 52 of the I&B Code allows a Secured Creditor to either relinquish its security interest to the liquidation estate or realize it independently. The Tribunal clarified that the realization of security interest must follow the procedure outlined in Section 52(2) and (3), which requires the Liquidator to verify the security interest and permit realization based on records maintained by an information utility or as specified by the Board. The Tribunal found no evidence that Finquest had approached the Liquidator as required under Section 52(2) and (3).

5. Role and Responsibilities of the Liquidator in Liquidation Proceedings:

The Tribunal underscored the Liquidator’s role in verifying and permitting the realization of security interests. It noted that the Liquidator had abdicated its responsibility by not following the prescribed procedure. The Tribunal remitted the matter to the Liquidator to proceed in accordance with law, ensuring compliance with Sections 52 and 53 of the I&B Code. The Liquidator was directed to determine the first charge from records maintained by an information utility or as specified by the Board and to inform the parties if any dispute regarding the first charge was pending before a court.

Conclusion:

The Tribunal set aside the impugned order of the Adjudicating Authority and remitted the matter to the Liquidator to act in accordance with the law, following the procedures outlined in Sections 52 and 53 of the I&B Code. The Liquidator was instructed to verify the first charge and proceed accordingly, considering any pending disputes before a court. The appeal was allowed with the aforementioned observations and directions, with no costs awarded.

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