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TMI Blog2021 (6) TMI 357X X X X Extracts X X X X X X X X Extracts X X X X ..... or. At this stage, it is required to be noted that there is no distinction being made between a Financial Creditor having a charge over the assets or not and the term used is COC in general. It is quite evident no distinction has been made in relation to contribution to Liquidation Cost as defined under Section 5(16) of IBC, 2016 read with Regulation 2(1)(ea) of Liquidation Process Regulations as framed by IBBI, be that by a secured financial creditor who chooses to exercise its option to realise on its own its security interest or a secured creditor who relinquishes its security to be aggregated to the Liquidation Estate for realisation and distribution by the Liquidator in accordance with Section 53 of the IBC, 2016 and the water fall mechanism provided thereunder or in relation to a financial creditor not secured at all who will also be covered under Section 53 of IBC, 2016. A secured creditor having a security interest over the entire realizable assets of the Corporate Debtor cannot claim that it would not make a contribution to the estimated liquidation costs on the premise that it had opted to realize the security on its own. However, in this regard, it is also required to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtent of 44.64 cents situated at Canal Road, Basivireddypeta, Nidadavole Village and Mandal, West Godavari District, Andhra Pradesh. 4. As between the Applicant and the Company under liquidation, it is averred that there was a long standing relationship and that the Corporate Debtor/Company under liquidation has availed multiple loans since the year 1963. 5. The Corporate Debtor had defaulted in repayment of Medium Term Loans granted to it by the Applicant in a sum of ₹ 7,15,00,000/- and in relation to which security has been created by the Corporate Debtor by way of a Memorandum of Deposit of Title Deeds dated 05.04.2012, 30.03.2013 and 31.01.2014 in relation to the property as described in Paragraph supra. 6. In addition, deeds of hypothecation were also created in favour of the Applicant with respect to Plant & Machinery of SSP Plant, NKP Granulated Mixture Plant, Bio-Fertilizer Plant etc. 7. In view of the default which had arisen, it is averred that the Applicant had issued letters dated 04.04.2019 and 08.04.2019 in relation to the arrears outstanding and thereby intimated the Corporate Debtor that the Applicant would be constrained to proceed under Section 29 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12. The response from the Respondent came forth for the above, vide e-mail dated 11.09.2020, in relation to the receipt of the claim wherein it was intimated to the Applicant that the claim is under verification. Thereafter, it was also communicated by the Applicant that the Applicant will realize the security interest of not less than ₹ 25 Crore vide e-mail dated 15.09.2020. 13. In the meanwhile, on 09.09.2020, a communication was received from the Respondent to the Applicant and Maximus ARC Limited, the other Financial Secured Creditor, disclosing the liquidation cost budget for the period between 27.07.2020 and 31.12.2020 and also sought from the Applicant to transfer a sum of ₹ 1,55,375/- towards liquidation cost for the above period. 14. The Applicant submits that in relation to the demand of the liquidation cost with a view to ensure a smooth and speedy closure of the issues on hand, the same was remitted. 15. However, it is contended by the Applicant that being a person standing outside the liquidation process in relation to the security interest and its realization, the Applicant in fact is not required to meet out the liquidation cost as demanded by the Li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .10.2020 from the Respondent and the e-mail dated 28.10.2020 from the Respondent is untenable and unlawful. d) Injunct the Respondent from going ahead and enforcing the Applicant's security interest and realise the proceeds from the sale of the security interest. e) Injunct the Respondent from obstructing the Applicant from enforcing its security interest u/s. 52(1)(b) of IBC. f) Injunct the Respondent from proceeding to conduct 1st SCC on 17.11.2020. g) Pass any such further orders as this Hon'ble Tribunal may deem fit in the circumstances of the case. 20. In relation to the legal issue as sought to be raised by the Applicant to avoid payment of portion of the liquidation cost as directed by the Respondent, a counter statement has been filed by the Respondent to the effect that Regulation 21(A) of the Liquidation Process Regulations, 2016 as sought to be projected by the Applicant is not inconsistent with the provisions of the Code and in the circumstances not ultra vires the provisions of the code. 21. In this connection, the provisions of Section 34, 36, 52, 53 and 240 of the Code is brought into play in the counter statement and upon a detailed analysis of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above context, Regulation 2(A) was introduced under which Regulation the Liquidator is required to call upon the Financial Creditors, being Financial Institutions to contribute to the excess of the Liquidation Costs over the liquid assets of the Corporate Debtor and further it is in relation to the above said context, Regulation 21A also was notified. 26. Taking into consideration the power vested with the Board viz., IBBI u/s. 240 of IBC, 2016 to issue such Regulations, an attempt is also made in the counter as filed by the Respondent/Liquidator to make a distinction between liquidation assets as given under Section 53(1) of IBC, 2016 and the liquidation estate as defined under Section 36 of IBC, 2016 and that consciously the legislature had been careful in using the term "liquidation asset" under Section 53 of IBC, 2016 and "not liquidation estate" and in the circumstances both cannot be equated to as one and the same. 27. Further it is contended that a reading of Regulation 21(A) of (Liquidation Process) Regulations also discloses that IBBI has provided specific time line a) within which a secured creditor is required to take a decision for standing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ured creditor. Regulation 21 of the Regulations may provide that if a secured creditor, instead of relinquishing his security and proving for his debt, proceeds to realise his security, he shall be liable to pay his share of the expenses incurred by the Liquidator for the preservation of the security before its realisation by the secured creditor. 29. Further during the course of submissions it is also brought to the notice of this Tribunal, the report of the Insolvency & Bankruptcy Board of India pertaining to the Regulation 21(A) in relation to payment for liquidation expenses as given in paragraph Nos. 7.6 to 7.8 of the said report which are relevant for the instant case and it is reproduced as below:- 7.6 The Committee discussed whether a secured creditor that opts to stand outside the liquidation process under Section 52 should be mandated to bear a share of the liquidation costs as well, as is currently provided for in the Liquidation Regulations. 7.7 It was brought to the Committee that in cases where a secured creditors choose to realise their security interest instead of relinquishing it to the liquidation estate, they opt to stand out of the collective process of liq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the counter filed to I.A./1205/2020 (SR No. 1267/2020) as well as its Application in Application I.A. No. 39 of 2021 seeking inter alia for a declaration on his part that the Auction Notice dated 01.01.2021 issued by the Respondent/Secured Creditor as null and void and injunct it from proceeding in terms of the auction notice in view of the Asset described therein having become a part of the Liquidation estate with effect from 24.10.2020 taking into consideration Regulation 21A(2)(a) of the IBBI (Liquidation Process) Regulations, 2016. 33. Since the facts leading to the filing of the respective applications are in common, both the applications are taken together and is sought to be disposed of accordingly. 34. Before going into the merits of the applications, it is required to be noted that a prayer has been sought for by the Applicant in I.A. No. 1205 of 2020 seeking for a declaration that Regulation 21A of the IBBI (Liquidation Process) Regulations, 2016 is ultra vires and the same is in contravention of the several sections cited in the relief portion of the said application, of the provisions of IBC, 2016, and in the circumstances to strike it down as ultra vires. In this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;, we are of the considered view that this Tribunal does not have the power to strike down any provisions of the Statute nor the Rules and Regulations framed thereunder. In the circumstances this Tribunal is not required to delve any further on the said relief sought for striking down Regulation 21A of IBBI (Liquidation Process) Regulations, 2016 any further and the same stands rejected. 36. However, it is required to be noted that this will not detract of this Tribunal from going into the issue of any inconsistency, if any prevalent as between the Statute, namely IBC, 2016 and the Rules and Regulations framed thereunder by virtue of the delegated legislation either to the Central Government or to the Regulator, namely IBBI as sought to be portrayed by the Applicant/Secured Creditor and if that were so in relation to the limited purpose of its interpretation. 37. For this purpose a requiem of the concerned provisions as sought to be relied on by the parties taken together with the consideration of appropriate Regulations as framed by IBBI is required to be seen. Since the issue is concerning the Liquidation Cost as sought to be demanded by the Liquidator which is sought to be off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idator high and dry for want of funds in carrying out the Liquidation Process which he had agreed to undertake for the benefit of the stakeholders concerned predominantly of the creditors, IBBI has framed regulations, both under IBBI (Insolvency Resolution Process for Corporate Persons) Regulation, 2016 (for short hereinafter called as "IRCP Regulations') prior to Liquidation under Regulation 39B of the said Regulations for meeting the Liquidation Cost and the fees of the Liquidator as provided under Regulation 39D of the said Regulations as a situation has been envisaged by the Regulator in framing these Regulations taking into consideration that the companies covered under the CIRP are predominantly commercially Insolvent Companies and in the circumstances short of liquid assets. Both the Regulations referred above, namely 39B and 39D of the IRCP Regulations are reproduced hereunder for ready reference:- 39B. Meeting liquidation cost. (1) While approving a resolution plan under sub-section (4) of section 30 or deciding to liquidate the corporate debtor under sub-section (2) of section 33, the committee may make a best estimate of the amount required to meet liquidati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets or not and the term used is 'COC in general. 41. Now coming to the stage where the Corporate Debtor is ordered to be liquidated, then Regulations concerning liquidation, namely IBBI (Liquidation Process) Regulations, 2016 become applicable and it is required to be noted that the said Regulations contemplate a situation in the absence of Plan being proposed in relation to Liquidation Costs under Regulation 39B of IRCP Regulations, 2016 of which we have already noted as above, under Regulation 2A of the Liquidation Process Regulations as framed by IBBI. The said Regulations as well, for ready reference is reproduced below:- 2A. Contributions to liquidation costs. (1) Where the committee of creditors did not approve a plan under sub-regulations (3) of regulation 39B of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the liquidator shall call upon the financial creditors, being financial institutions, to contribute the excess of the liquidation costs over the liquid assets of the corporate debtor, as estimated by him, in proportion to the financial debts owed to them by the corporate debtor. Illustrati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso be covered under Section 53 of IBC, 2016. 43. At this stage, it will also be appropriate to consider the provisions of Section 52 of IBC, 2016 on which much reliance was placed by the Ld. Counsel for the Applicant/Secured Creditor in relation to contribution to Liquidation Cost by a Secured Financial Creditor opting to realise the security on its own. Section 52 of IBC, 2016 is also extracted hereunder, viz., 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 secu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd await for the same to be realised and proceeds distributed under Section 53 of IBC, 2016. 44. A careful analysis of Section 52 of IBC, 2016 as extracted above also demonstrates that under the situation where a surplus arises after realisation of the security interest and adjustment of the proceeds against the amount due from the corporate debtor by the Secured creditor opting out, the same is required to be accounted to the Liquidation Estate by such Secured Creditor. However, in case of deficit arising after adjustments of proceeds after realisation of security interest against the debt due then in such a situation Section 52 itself provides that such a Secured Creditor can look to the Liquidator in relation to balance amounts due in terms of the provisions of Section 53 of IBC, 2016 which deals with the waterfall mechanism. A further careful analysis of Section 52, more particularly sub-section (8) of the said section brings forth that the Insolvency Resolution Process Costs is required to be deducted and deposited to the Liquidation Estate out of the proceeds realised by the secured creditor who had chosen to exercise the option of realising the security on its own without r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iquidator under Regulation 2A of Liquidation Process Regulations, 2016 an estimate of liquidation cost is required to be ascertained and also to ascertain the available liquid asset, meaning Cash at Bank and at the hands of the RP/Liquidator. Since this is required to be approved in the COC meeting or the Stakeholders committee meeting depending upon the stage at which the corporate debtor is undergoing the process, the creditors, more particularly the financial creditors including the financial institutions are put on advance notice for it to effectively raise objections about the Liquidation Costs payable by it or the quantum which it is bound to pay taking into consideration the option which it seeks to exercise. Additionally, the RP/Liquidator is also required to report on the estimated liquidation cost in Form H depending on the stage i.e., CIRP or Liquidation Process and subsequently immediately after Liquidation every quarter during the Liquidation Process in case where Liquidation is ordered, the divergence between the estimated liquidation cost on the one hand and the actual costs incurred. 47. Thus, effectively the meetings initially as well as subsequently based on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , however, seems to have resiled from the position in view of rebuff on the part of the applicant/secured creditor of his demand in relation to sharing the estimated liquidation cost, raised in terms of Regulation 2A of IBBI (Liquidation Process) Regulations, 2016 vide communication dated 21.10.2020. Even though the Liquidator claims that he had only exercised his right in view of Regulation 21A of Liquidation Process Regulations, 2016 as framed by IBBI, however, we are of the view that the Liquidator has acted with undue haste in this regard by claiming that in terms of Regulation 21A, the security interest in favour of the applicant/secured creditor has become part of the Liquidation Estate in view of the demand made by the Liquidator in terms of sub regulation (2) of Regulation 21A read with sub regulation (3) of the said Regulations. 50. As already seen the main provision concerning realization of a security interest by the secured creditor with whom it is available as per Section 52 does not contemplate, as in the case of Insolvency Resolution costs, to set aside any amount for the Liquidation costs prior to the appropriation to the debt owed to such secured creditor. However ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s non-adherence. 51. To sum up, based on the above elaborate discussions which we thought necessary, this Tribunal chooses to issue the following directions, namely:- i) Taking into consideration the saying that no person is to be prejudiced by the actions of the court (in this case the Tribunal) in view of application pending all along before this Tribunal in IA/1205/2020 as filed by the applicant/secured creditor of which the Liquidator was fully aware as demonstrated by the minutes of the 1st SCC meeting held on 17.11.2020, the action of the Liquidator in making the security interest as part of the Liquidation Estate is unjustified and further totally unjustified by virtue of his actions taken to sell those security interest as evident from the action taken by way of paper publication dated 30.12.2020 which under the circumstances is required to be set aside and accordingly set aside and any action taken in furtherance of the above sale notice dated 30.12.2020 on the part of Liquidator is also set aside. ii) We find the attitude of the applicant/secured creditor totally unjustified in refusing to contribute to the estimated liquidation cost as sought for by the Liquidator, ..... 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