9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2021 (4) TMI 301 - AT - Insolvency and BankruptcyPriority to the first charge holder - Secured Creditor - relinquishment of security interest - Sub-classification inter-se the Secured Creditors in the distribution mechanism adopted in a Resolution Plan of the Corporate Debtor - Appellant s claim that it was initially having first charge on the immovable and movable assets of the Company which was later changed to second charge is disputed by the Respondents by contending that in absence of Appellant substantiating its claim of holding second charge over immovable properties of Corporate Debtor and no certificate having been issued by ROC to such effect, no charge on the part of Appellant could be taken into account by the Liquidator. HELD THAT - While it is true that the relinquishment of security interest affects the order of distribution, it is equally true that the Secured Creditor does not lose its status of being a Secured Creditor though he has elected to forego his right of enforcing security interest. Whether the Secured Creditor holds first charge or second charge is material only if the Secured Creditor elects to realise its security interest. A conjoint reading of Sections 52 and 53 of I B Code, leaves no room for doubt that the legislature in its wisdom thought it proper to provide an option to the Secured Creditor armed with a security interest to choose out of the two options viz. either enforce security interest against the asset out of liquidation estate which is the subject of security interest or relinquish the same and claim as Secured Creditor in the manner set out under Section 53(1)(b)(ii) ranking equal to other Secured Creditors. It is manifestly clear that in the event of a Secured Creditor electing to realise its security interest but failing to realise the whole amount due to it would be entitled to distribution of assets under Section 53(1)(e)(ii) for any amount that remains unpaid following the enforcement of security interest thereby ranking lower in priority as compared to a Secured Creditor who has relinquished its security interest to the liquidation estate and is entitled to distribution of assets under Section 53(1)(b)(ii) - It is significant to note that Section 53 has been given overriding effect and the non-obstanate clause contained in the very opening words of the Section leaves no room for doubt that the distribution mechanism provided thereunder applies in disregard of any provision to the contrary contained in any Central or State law in force. Of course first charge holder will have priority in realising its security interest if it elects to realize its security interest and does not relinquish the same. However, once a Secured Creditor opts to relinquish its security interest, the distribution of assets would be governed by the provision engrafted in Section 53(1)(b)(ii) whereunder all Secured Creditors having relinquished security interest rank equally and in the waterfall mechanism are second only to the insolvency resolution process costs and the liquidation costs. The Secured Creditors admittedly having relinquished their security interest to the liquidation estate, Section 53 would come into play and the Secured Creditors viz. Appellant and the Respondents 2 and 3 shall rank equally under Section 53(1)(b)(ii) for distribution of assets. Admittedly, Respondents 2 and 3 were first charge holders. They would have enjoyed priority in the event they had not relinquished their security interest. Once they elected for relinquishment of security interest, for distribution of assets they would be governed by the waterfall mechanism recognised under Section 53 of the I B Code mandating equal ranking amongst the Secured Creditors. Sale proceeds in such case have to be distributed equitably amongst the Secured Creditors who rank equally and it would be irrespective of any charge they were holding prior to relinquishment of security interest. In ICICI Bank vs. Sidco Leathers Ltd. Ors. 2006 (4) TMI 264 - SUPREME COURT , the Hon ble Apex Court, while taking note of Section 48 of Transfer of Property Act, observed that the claim of first charge holder shall prevail over the claim of the second charge holder and where debts due to both the first charge holder and the second charge holder are to be realised from the property belonging to the mortgager, the first charge holder will have to be repaid first. - The Hon ble Apex Court observed that while enacting the Companies Act parliament cannot be held to have intended to deprive the first charge holder of the said right. Such a valuable right must be held to have been kept preserved. It referred to an earlier judgment titled Workmen of Firestone Tyre and Rubber Company of India vs. Management Ors. 1973 (3) TMI 134 - SUPREME COURT observing that if such valuable right of first charge holder was intended to be taken away, Parliament, while amending the Companies Act would have stated so explicitly. The view taken by the Adjudicating Authority on the basis of judgment of Hon ble Apex Court in ICICI Bank vs. Sidco Leathers Ltd. 2006 (4) TMI 264 - SUPREME COURT (which is pre-IBC), ignoring the mandate of Section 53 of I B Code which has an overriding effect and came to be enacted subsequent to the aforesaid judgment rendered by Hon ble Apex Court explicitly excluding operation of all Central and State legislations having provisions contrary to Section 53 of I B Code, is erroneous and cannot be supported. The impugned order holding that the inter-se priorities amongst the Secured Creditors will remain valid and prevail in distribution of assets in liquidation cannot be sustained - Appeal allowed.
Issues Involved:
1. Sub-classification inter-se the Secured Creditors in the distribution mechanism of a Resolution Plan. 2. Distribution of sale proceeds among Secured Creditors. 3. Applicability of Section 53 of the Insolvency and Bankruptcy Code (I&B Code), 2016. 4. Priority of claims among Secured Creditors. 5. Validity of relinquishment of security interest and its impact on distribution. Detailed Analysis: Issue 1: Sub-classification inter-se the Secured Creditors in the distribution mechanism of a Resolution Plan The primary issue in this appeal was whether there can be no sub-classification among Secured Creditors in the distribution mechanism of a Resolution Plan. The Appellant argued that giving priority to the first charge holder would leave nothing to satisfy the claim of the Appellant, who is also a Secured Creditor. Issue 2: Distribution of sale proceeds among Secured Creditors The Appellant, a Financial Creditor of the Corporate Debtor under liquidation, contended that the distribution by the Liquidator was not in consonance with the provisions of the I&B Code. The Appellant's claim was admitted, and it was granted voting rights with a 14.54% share. However, the Liquidator distributed the sale proceeds among other Secured Creditors without considering the Appellant's claim. The Appellant argued that the distribution should be as per the admitted claims of Secured Creditors based on their voting rights. Issue 3: Applicability of Section 53 of the Insolvency and Bankruptcy Code (I&B Code), 2016 The Liquidator defended the distribution of the sale proceeds based on Section 53 of the I&B Code, which outlines the order of priority for distribution of liquidation assets. The Liquidator relied on the interpretation provided in the Insolvency Law Committee Report dated 26th March 2018. The Appellant argued that once Secured Creditors relinquish their security interest, the priority of charge loses significance, and the sale proceeds should be distributed equitably among all Secured Creditors. Issue 4: Priority of claims among Secured Creditors The Respondents argued that the Appellant, being a second charge holder, was not entitled to any amount disbursed to the Secured Creditors with the first charge. They cited Section 48 of the Transfer of Property Act, which gives precedence to the first charge holder. However, the Appellant countered that upon relinquishment of security interest, all Secured Creditors should rank equally under Section 53 of the I&B Code. Issue 5: Validity of relinquishment of security interest and its impact on distribution The Tribunal examined Sections 52 and 53 of the I&B Code. Section 52 provides an option to Secured Creditors to either relinquish their security interest to the liquidation estate or realize their security interest. Section 53 deals with the distribution of assets and has an overriding effect over other laws. The Tribunal clarified that relinquishment of security interest does not make a Secured Creditor lose its status. It emphasized that once Secured Creditors relinquish their security interest, they rank equally for distribution under Section 53(1)(b)(ii), irrespective of their prior charge status. Conclusion: The Tribunal concluded that the argument against sub-classification among Secured Creditors is untenable. It stated that Sections 52 and 53 provide distinct mechanisms for Secured Creditors either to realize their security interest or to relinquish it and participate in the distribution of liquidation assets. The Tribunal held that the relinquishment of security interest mandates equal ranking among Secured Creditors under Section 53(1)(b)(ii). Consequently, the appeal was allowed, the impugned order was set aside, and the Liquidator was directed to treat the Secured Creditors relinquishing their security interest as one class for distribution of assets under Section 53(1)(b)(ii) of the I&B Code.
|
