The National Company Law Appellate Tribunal (“NCLAT”) on June 18, 2020 in the case of Mr. Srikanth Dwarakanath, Liquidator of Surana Power Limited (“Appellant”) v. Bharat Heavy Electricals Limited (“Respondent”), Company Appeal (AT) (Insolvency) No. 1510 of 2019, while relying upon Section 13(9) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (“SARFAESI Act”), has decided on realizing of security interest of the secured creditors when one of the secured creditor refuses to relinquish its security interest in secured assets.

Brief Facts:

An application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) was admitted by NCLT, Chennai (“Adjudicating Authority”) against the Appellant, for initiation of corporate insolvency resolution process (“CIRP”) vide order dated January 20, 2019. Since no resolution was approved, the corporate debtor was liquidated, and the Appellant was appointed as the Liquidator.

During liquidation, the Respondent succeeded in the arbitration proceeding against the corporate debtor and an ex-parte award was passed in favour of the Respondent. Based on the arbitral award, the Respondent had been granted lien over the equipment and goods (secured assets) lying at the site of the corporate debtor and a charge over its entire or partial erected facilities at the site of the corporate debtor was created. The secured assets, on which the Respondent had been granted lien or a charge was also hypothecated to all other secured creditors vide hypothecated deed dated September 24, 2010.

The Appellant could not commence the liquidation process as some of the secured lenders including the Respondent did not intimate in time about their decision concerning relinquishment of their securities. Subsequently, the Respondent on August 23, 2019 informed about his unwillingness to relinquish their security interest in the asset of the corporate debtor. Consequently, the secured creditors with a value of 73.76% of the secured assets had relinquished the security interest into the liquidation estate. However, the Appellant was unable to proceed with the sale of assets without the receipts of relinquishment of security interest from all the secured creditors to whom the said assets were charged.

The Appellant thereafter, filed a Misc. Application No. 1052 of 2019 seeking permission from the Adjudicating Authority to sell the assets of the corporate debtor. The said application was rejected by the Adjudicating Authority. Thus, the Appellant was constrained to file the instant appeal before the NCLAT. 

Ground for Adjudicating Authority to reject the miscellaneous application:

The Adjudicating Authority rejected the application on the ground that the Respondent is a secured creditor entitled to proceed under Section 52 of the IBC to realize its security interest. The Appellant/Liquidator cannot sell the asset as specified under Section 53 of IBC unless the charge holder relinquishes the security interest as per Section 52 of IBC.

Grounds for filing Appeal before NCLAT:

1. Ten out of eleven secured creditors, representing together 73.76% (in value of the admitted claims) of the total secured assets have relinquished their security interest into the liquidation estate and only because of the Respondent, who has decided not to relinquish its security Interest, the Appellant is unable to proceed any further with the sale of assets.
2. The secured creditors other than the Respondent had a prior charge over the secured assets by a deed of hypothecation executed in the year 2010 i.e. much before the arbitral award dated January 24, 2018.
3. The secured assets on which the Respondent has a lien or a charged are also hypothecated to all other secured creditors vide clause 3(vii) of the deed of hypothecation dated September 24, 2010.
4. The IBC does not provide for different categories of secured creditors neither based on nature of charge/security interest nor based on the ranking of the respective charge.
5.  The Appellant is to attempt to undertake the sale of the corporate debtor on a slump sale basis, which is not possible if the security interest of the Respondent is not relinquished.
6. The Respondent in its written submissions contends that the Respondent has exercised its rights in terms of Section 52 of IBC.

It is also the case of the Appellant that exercise of the Respondent's right under Section 52 cannot be subjected to the majority of the secured creditors, who have relinquished their security interest. It is also contended that the Corporate Debtor never acquired unencumbered right, title or interest in the goods. Consequently, the hypothecation of the goods by the Corporate Debtor to the banks would always be subject to the Respondent's lien. The Appellant further contended that due to Respondent’s refusal to relinquish their security interest deadlock situation is created wherein the Appellant is not able to sale the secured creditors due to the legal bar of the proviso to Regulation 32 of the Liquidation Process Regulations, which requires the relinquishment from all the secured creditors before proceeding with the sale of such secured assets.

Another argument raised by the Appellant was that the view taken by the Adjudicating Authority is violative of the waterfall mechanism as provided under Section 53 of IBC. 

Respondent’s case:

The Respondent has placed reliance on the decision of the NCLAT passed in case of JM Financial Asset Reconstruction Company Ltd. v. Finquest Financial Solutions Pvt. Limited and others, 2019 SCC OnLine NCLAT 918.

The said judgment was rejected by the NCLAT, as the facts were different from the present case. 

Decision of the court:

The NCLAT has relied upon enforcement of security interest as governed by Section 13 of the SARFAESI Act and specifically on Section 13(9) of the SARFAESI Act, 2002.  Any step about the realisation of assets by the secured creditors requires confirmation from the creditors having at least 60% of the value of total debt. The relevant provision is as under:

“(9) [Subject to the provisions of the Insolvency and Bankruptcy Code, 2016, in the case of] financing of a financial asset by more than one secured creditors or joint financing of a financial asset by secured creditors, no secured creditor shall be entitled to exercise any or all of the rights conferred on him under or pursuant to sub-section (4) unless exercise of such right is agreed upon by the secured creditors representing not less than [sixty per cent] in value of the amount outstanding as on a record date and such action shall be binding on all the secured creditors:

Provided that in the case of a company in liquidation, the amount realized from the sale of secured assets shall be distributed in accordance with the provisions of Section 529- A of the Companies Act, 1956 (1 of 1956):

Provided further that in the case of a company being wound up on or after the commencement of this Act, the secured creditor of such Company, who opts to realize his security instead of relinquishing his security and proving his debt under proviso to sub-section (1) of Section 529 of the Companies Act, 1956 (1 of 1956), may retain the sale proceeds of his secured assets after depositing the workmen's dues with the Liquidator in accordance with the provisions of Section 529- A of that Act:

Provided also that Liquidator referred to in the second proviso shall intimate the secured creditor the workmen's dues in accordance with the provisions of Section 529-A of the Companies Act, 1956 (1 of 1956) and in case such workmen's dues cannot be ascertained, the Liquidator shall intimate the estimated amount or workmen's dues under that section to the secured creditor and in such case the secured creditor may retain the sale proceeds of the secured assets after depositing the amount of such estimated dues with the Liquidator: Provided also that in case the secured creditor deposits the estimated amount of workmen's dues, such creditor shall be liable to pay the balance of the workmen's dues or entitled to receive the excess amount, if any, deposited by the secured creditor with the Liquidator:

Provided also that the secured creditor shall furnish an undertaking to the Liquidator to pay the balance of the workmen's dues, if any.

Explanation.—For the purposes of this sub-section,—

(a) "record date" means the date agreed upon by the secured creditors representing not less than [sixty per cent] in value of the amount outstanding on such date;

(b) "amount outstanding" shall include principal, interest and any other dues payable by the borrower to the secured creditor in respect of secured asset as per the books of account of the secured creditor.”                                                                         (emphasis supplied) 

The NCLAT thus, held that the secured creditors which is 73.76% in value have already relinquished the security interest into the liquidation estate. Thus, it would be prejudicial to stall the liquidation process at the instance of a single creditor having only 26.24% share (in value), in the secured assets. The NCLAT further held that the Respondent can the realize security interest as per the provision of Section 13(9) of the SARFAESI Act. Since the Respondent does not have a requisite 60% value in secured interest, therefore, the Respondent does not have right to realize its security interest, because it would be detrimental to the liquidation process and the interest of the remaining ten secured creditors. 

This update has been contributed by R. Sudhinder (Senior Partner) and Ekta Bhasin (Senior Associate).