2023 (12) TMI 1016 - AT - Insolvency and Bankruptcy

Possession of goods - lien of the Appellant on the goods as a bailee - waterfall mechanism - main plank of argument of the Appellant is Section 171 of the Act on the basis of which it is claimed that the Appellant should have been declared as a secured creditor and should have been included in the list of stakeholders for the purpose of distribution in terms of Section 53 of the Code - HELD THAT - Section 3(30) of the Code defines secured creditor which means a creditor in favour of whom security interest is created. Section 3(31) deals with security interest which means right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person. Provided that security interest shall not include a performance guarantee. Section 3(4) deals with charge means an interest or lien created on the property or asset of any person or any of its undertakings or both as the case may be as security and includes a mortgage. The wharfingers as the Appellant claiming itself to be a security for a general balance of account any goods bailed to them whereas in the present case, the goods are not in possession of the Appellant which is also admitted by the Appellant during the course of hearing and thus there was no actual lien to invoke Section 171 of the Act. There are no error committed by the Adjudicating Authority in passing the impugned order and as such the present appeal is found without merit and the same is hereby dismissed.

Summary

Issues Involved:
The issues involved in the judgment are the misclassification of creditor status, application of Section 171 of the Indian Contract Act, 1872, interpretation of Section 53 of the Insolvency and Bankruptcy Code, 2016, and the definition of secured creditor under Section 3(30) of the Code.

Misclassification of Creditor Status:
The appeal challenged the liquidator's decision to categorize the Appellant as an Operational Creditor instead of a secured creditor for the purpose of distribution of liquidation assets under Section 53 of the Insolvency and Bankruptcy Code, 2016. The Appellant, a Port, claimed a significant amount and requested to be treated as a secured creditor, citing Section 171 of the Indian Contract Act, 1872. However, the liquidator maintained the classification based on the sale of the Corporate Debtor as a going concern and the distribution of sale proceeds to stakeholders in accordance with Section 53 of the Code. The Adjudicating Authority found that the Appellant lacked possession of the assets claimed, and as the goods were with the liquidator, Section 171 did not apply due to the absence of an actual lien.

Application of Section 171 of the Indian Contract Act, 1872:
The Appellant heavily relied on Section 171 of the Act, which pertains to the general lien of bankers, factors, wharfingers, attorneys, and policy-brokers. The provision allows certain entities to retain goods bailed to them as security for a general balance of account. However, in this case, the Appellant admitted during the hearing that they did not have possession of the goods in question, rendering Section 171 inapplicable due to the lack of an actual lien.

Interpretation of Section 53 of the Insolvency and Bankruptcy Code, 2016:
Section 53 of the Insolvency and Bankruptcy Code, 2016 governs the distribution of liquidation assets among stakeholders. The liquidator's decision to distribute the sale proceeds of the Corporate Debtor to stakeholders in accordance with this section was a key point of contention in the appeal. The Adjudicating Authority upheld the liquidator's actions, emphasizing that the sale had been completed, and the distribution was done as per the provisions of the Code.

Definition of Secured Creditor under Section 3(30) of the Code:
The definition of a secured creditor under Section 3(30) of the Insolvency and Bankruptcy Code, 2016 was crucial in determining the Appellant's status. A secured creditor is defined as a creditor in favor of whom security interest is created. The Appellant's argument for being declared a secured creditor hinged on this definition, but the lack of possession of the assets in question weakened their claim. The absence of a direct precedent or provision supporting the Appellant's position led to the dismissal of the appeal by the Appellate Tribunal.