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TMI Blog2021 (4) TMI 301X X X X Extracts X X X X X X X X Extracts X X X X ..... d leave nothing to satisfy the claim of Appellant who too is a Secured Creditor. 2. For determining the issue a brief reference to the facts is inevitable. I.A. No. 514 of 2019 in CP (IB) 404/2017 was filed by the Appellant - 'Technology Development Board' being a Financial Creditor of 'Gujarat Oleo Chem Ltd.' - the Company under liquidation. It was asserted in the application before the Adjudicating Authority (National Company Law Tribunal) Ahmadabad Bench, Ahmadabad that the Appellant was part of the Committee of Creditors (CoC) having voting share of 14.54% in Corporate Insolvency Resolution Process (CIRP) of 'Gujarat Oleo Chem Ltd.' and had lodged its claim for Rs. 24,78,68,595/- with the Liquidator, who while did not call for meeting of Creditors for one and a half years but upon inability of Appellant to attend meeting of Creditors scheduled for 9th May, 2019 informed the Appellant that the sale proceeds had been distributed amongst 'Stressed Asset Stabilisation Fund' (Respondent No. 2) and 'Gujarat State Finance Corporation' (Respondent No. 3) as security charge holders and distributed Rs. 9,59,03,179 to Respondent No. 2 and Rs. 1,59,99,480 to Respondent No. 3. The Appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - on the basis of holding 14.54% voting share. The Liquidator, while stating that the claim of Rs. 24.78 Crores was admitted on the basis of the security interest held by the Appellant, took the stand that distribution of sale proceeds to Respondent No. 2 and 3 being first charge holders was as per Para 21 of Insolvency Law Committee Report and since the Appellant only had second charge, no amount was payable from the sale proceeds. It is further submitted that the Secured Creditors relinquished their security interest to the liquidation estate and thus forfeited their right on the assets. The only right available to them was to receive proceeds from the sale of assets in the manner provided in Section 53. It is submitted that the priority of charge i.e. first charge or second charge loses its significance on relinquishment of the security interest and the sale proceeds are put in a common pool of money to be distributed in accordance with Section 53 of I&B Code which does not provide for further classification of Secured Creditors. When the asset itself is non-existent and rights attached with it are relinquished, there is no question of claim in priority on the basis of being fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther submitted that Section 48 of Transfer of Property Act gives precedence to first charge holder over a second charge holder in respect of an immovable property. Section 53 of I&B Code does not take away that right on relinquishment. 6. Heard learned counsel for the parties and perused the record. Sections 52 and 53 of I&B Code relevant for our purposes are reproduced hereinabelow:- "52. Secured creditor in liquidation proceedings. - (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. (2) Where the secured creditor realises security interest under clause (b) of sub-section (1), he shall inform the liquidator of such security interest and identify the asset subject to such security interest to be realised. (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 exist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such period and in such manner as may be specified, namely :- (a) the insolvency resolution process costs and the liquidation costs paid in full; (b) the following debts which shall rank equally between and among the following :- (i) workmen's dues for the period of twenty-four months preceding the liquidation commencement date; and (ii) debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52; (c) wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date; (d) financial debts owed to unsecured creditors; (e) the following dues shall rank equally between and among the following:- (i) any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date; (ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest; (f) any remaining debts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only such security interest the existence of which is proved in the prescribed manner. Section 52(4), further dealing with realisation of security interest provides the mode of realisation of security interest and application of proceeds to recover the debts due to it. It is abundantly clear that the realisation of security interest is directly linked with the asset subject to such security interest to be realised. On the other hand, Section 53 deals with distribution of assets by providing that the proceeds from the sale of liquidation assets shall be distributed in the order of priority laid down in the Section. The provision engrafted in Section 53 has an overriding effect over all other laws in force. The vital distinction between the two provisions viz. Section 52 and Section 53 lies in regard to realisation of interest with Section 52 providing option to the Secured Creditor in liquidation proceedings to choose between relinquishment of its security interest and realisation of its security interest while Section 53 is confined to mode of distribution of the proceeds from the sale of the liquidation assets. While the realisation of security interest can be exercised only qua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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). Once a Secured Creditor elects to relinquish its security interest to the liquidation estate, it ranks higher in waterfall mechanism under Section 53 to a Secured Creditor who has enforced its security interest but failed to realise its claim in full and for the unpaid part of its claim ranks lower to the Secured Creditor who has relinquished its security interest. Viewed in this context the argument advanced that sub-classification amongst Secured Creditors is impermissible cannot be accepted. Section 52 incorporating the doctrine of election, read in juxtaposition with Section 53 providing for distribution of assets treats Secured Creditor relinquishing its Security interest to the liquidation estate differently from a Secured Creditor who opts to realise its security interest, in so far as any amount remains unpaid follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 10. In "ICICI Bank vs. Sidco Leathers Ltd. & Ors. (2006) 10 SCC 452", 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 Firest ..... X X X X Extracts X X X X X X X X Extracts X X X X
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