Secured Creditors in Liquidation Proceedings [ Section 52 ] - Insolvency Resolution And Liquidation For Corporate Persons - IBC

Secured Creditors in Liquidation Proceedings Secured credit drives the economy and creates wealth, generates employment, and encourages entrepreneurship. If a secured creditor s rights to priority over other claims and taxation dues are recognized under the secured transactions law as well as insolvency law, it will promote secured lending. The IBC protects the secured creditor s rights in liquidation by permitting it to enforce its security, by staying outside the liquidation process. Hence, the secured creditor need not give up its security to the liquidation estate and can enforce it on its own. This right is provided under section 52 of the IBC. Upon commencement of the liquidation process, secured creditors have two options for the recovery of money owed to them either to relinquish their security interest to the liquidation estate and receive proceeds from the sale of assets by the liquidator, or to stay outside the liquidation process and recover the debt owed to them by enforcement of their security interest in accordance with section 52 of the IBC. Right of secured creditor [ Section 52(1) ] A secured creditor in the liquidation proceedings may- (a) relinquish its security interest to the liquidation estate and receive proceeds from the sale of assets by the liquidator in the manner specified in section 53; or (b) realise its security interest in the manner specified in this section. To Informa the liquidator of decision to release security interest [ Section 50(2) ] Where the secured creditor realises security interest under section 52(1)(b), he shall inform the liquidator of such security interest and identify the asset subject to such security interest to be realised. Verification by liquidator of security interest [ Section 52(3) ] Before any security interest is realised by the secured creditor under this section, the liquidator shall verify such security interest and permit the secured creditor to realise only such security interest, the existence of which may be proved either- (a) by the records of such security interest maintained by an information utility; or (b) by such other means as may be specified by the Board. Rights of secured creditor related to secured assets [ Section 52(4) ] A secured creditor may enforce, realise, settle, compromise or deal with the secured assets in accordance with such law as applicable to the security interest being realised and to the secured creditor and apply the proceeds to recover the debts due to it. Restriction in realising of a secured asset [ Section 52(5) ] If in the course of realising a secured asset, any secured creditor faces resistance from the corporate debtor or any person connected therewith in taking possession of, selling or otherwise disposing off the security, the secured creditor may make an application to the Adjudicating Authority to facilitate the secured creditor to realise such security interest in accordance with law for the time being in force. Passing of order by Adjudicating Authority [ Section 52(6) ] The Adjudicating Authority, on the receipt of an application from a secured creditor under section 52(5) may pass such order as may be necessary to permit a secured creditor to realise security interest in accordance with law for the time being in force. Yield of surplus [ Section 52(7) ] Where the enforcement of the security interest under section 52(4) yields an amount by way of proceeds which is in excess of the debts due to the secured creditor, the secured creditor shall- (a) account to the liquidator for such surplus; and (b) tender to the liquidator any surplus funds received from the enforcement of such secured assets. Amount of insolvency resolution process to be included in the liquidation estate [ Section 52(8) ] The amount of insolvency resolution process costs, due from secured creditors who realise their security interests in the manner provided in this section, shall be deducted from the proceeds of any realisation by such secured creditors, and they shall transfer such amounts to the liquidator to be included in the liquidation estate. Unpaid debts to be paid by liquidator [ Section 52(9) ] Where the proceeds of the realisation of the secured assets are not adequate to repay debts owed to the secured creditor, the unpaid debts of such secured creditor shall be paid by the liquidator in the manner specified in section 53(1)(e). Relevant Case laws JM Financial Asset Reconstruction Company Limited Vs. Finquest Financial Solutions Private Limited, Dated 11.12.2019 A secured FC filed an application under section 60(5) (read with section 52 of the IBC and regulation 37 of the Liquidation Process Regulations) to sell off its secured assets to realize its security interest in the liquidation proceeding. The AA directed the liquidator to hand over symbolic possession of the assets to the secured FC. The NCLAT held that only one secured creditor can enforce its right for realization of its debt out of the secured assets as per section 52. It also held that the AA has no jurisdiction to entertain the application under section 52(6) in absence of any cause of action as per section 52(5). It noted that for realization of secured assets by a secured creditor, it must inform the liquidator, who is required to verify such security interest and permit the secured creditor to realize it. If a secured creditor applies directly to the AA for realization of secured assets under section 52(6), such an application is not maintainable. It remitted the matter to the liquidator to proceed in accordance with section 53 (read with section 52) of the IBC. Mr. Srikanth Dwarakanath, Liquidator of Surana Power Limited Vs. Bharat Heavy Electricals Limited - NCLAT Dated 18.06.2020 An appeal was filed against the AA s order dismissing the application for permission for sale of assets of the CD based on the consent of a majority of the secured creditors. The respondent had succeeded in arbitration proceedings against the CD and an ex parte award was passed in its favor. Based on such award, the respondent had been granted lien over certain assets of the CD. These secured assets were already hypothecated to other secured creditors. While other secured creditors relinquished their security to the liquidation estate, the respondent expressed its unwillingness to relinquish its security interest, as a result of which the liquidator was unable to proceed with the sale of the liquidation assets. Thus, the liquidator filed an application seeking permission to proceed with sale of the assets based on majority consent (of 73.76 percent) of the secured creditors, which was dismissed by the AA. The NCLAT observed that the respondent is also a secured creditor on par with the remaining ten secured creditors. Enforcement of security interest is governed by section 13 of the SARFAESI Act. As per section 13(9) of the SARFAESI Act, any steps for realization of assets by the secured creditors would require confirmation from the creditors having at least 60 percent of the value of total debt. In this case, 73.76 percent of the secured creditors had already relinquished the security interest to the liquidation estate. Thus, it would be prejudicial to stall the liquidation process at the instance of a single creditor having only 26.24 percent share (in value) in the secured assets. The respondent did not hold a superior charge from the rest of the secured FCs. The NCLAT applied section 13(9) of the SARFAESI Act to end the deadlock, and held that the decision of 73.76 percent of the secured creditors, who had relinquished their security interest, shall be binding on the dissenting secured creditors. Bank of Baroda Vs. Mrs. Deepa Venkat Ramani Another - NCLAT Dated 04.12.2019 The appellant bank, a secured creditor of the CD, challenged the AA s order directing the liquidator to collect a certain amount from the Debt Recovery Tribunal (DRT-2 Chennai) for being dealt with under section 53 of Code. The appellant bank submitted that it had never relinquished its security interest to the liquidation estate and that if the DRT amount was released in its favor towards satisfaction of its claim, the appellant bank should move out of the liquidation process without claiming any further amount from the CD. On perusal of records, the NCLAT observed that the CD gave, as security to the appellant bank, the sums that it had to receive from Southern Railways for certain projects. The CD s submission that the sums deposited by Southern Railways into the credit of the account in the Original Application before DRT were all receivables from projects for which no loans were taken from the appellant was found to be untenable. Therefore, the NCLAT set aside the impugned order and remanded the matter to the AA to decide the security interest of the appellant before the liquidator could be given the assets of the CD to be dealt with under section 53 of the Code. State Bank of India Vs. Anuj Bajpai - NCLAT Dated 18.11.2019 If it comes to the notice of the liquidator that a secured creditor intends to sell the assets to a person who is ineligible in terms of section 29A, it is always open to him to reject the application under section 52(1)(b) read with section 52(2) and (3) of the Code. B.R. Traders Vs. Venkataramanarao Nagarajan Ors. - NCLAT Dated 13.11.2019 Even during liquidation process, the liquidator is to ensure that CD remains a going concern. If no arrangement or scheme framed under section 230 to 232 of the Companies Act, 2013 becomes possible or the CD is not sold in its totality along with the employees and there is no option but to sell the assets of the CD and to distribute the same amongst the creditors in terms of section 53 read with section 52 of the Code, the liquidator may be asked to return the third party assets. Leo Edibles Fats Ltd. Vs. The Tax Recovery Officer (Central) Ors. - HC, Hyderabad Dated 26.07.2018 Income-tax Department does not enjoy the status of a secured creditor, on par with a secured creditor covered by a mortgage or other security interest, who can avail the provisions of section 52 of the Code. At best, it can only claim a charge under the attachment order, in terms of section 281 of the Income-tax Act, 1961 . Volkswagen Finance Pvt. Ltd. Vs. Shree Balaji Printopack Pvt. Ltd. Anr . - NCLAT Dated 19.10.2020 Under section 52(3)(a) of the Code before any security interest is sought to be realised by the secured creditor under this section, the Liquidator shall verify such security interest and permit the secured creditors to realise only such security interest, the existence of which may be proved either by the records of such security interest maintained by an IU or by such other means as may be specified by IBBI.