NCLT grants permission to Secured Creditors to opt out of the Liquidation process but imposes a bar on the secured creditors to sell the assets of the Corporate Debtor to disqualified persons U/s 29A of the Insolvency & Bankruptcy Code, 2016.
The present Miscellaneous Application has been preferred under section 60(5)(c) of I&BC, 2016 (the Code) by the Liquidator Mr. Anuj Bajpai, seeking necessary directions of NCLT on decision of Secured Financial Creditor, State Bank of India to keep its mortgaged assets out of liquidation of the Corporate Debtor.
NCLT identified three primary questions for consideration in the present case –
- Whether SBI, the Financial Creditor is legally entitled to stay out of liquidation?
- Whether there is any bar on the Secured Creditor to sell the assets to erstwhile promoters/directors of the Corporate Debtor, if the secured creditor opts out of liquidation? Or Whether S. 29A is applicable to liquidation proceedings in a situation when the Secured creditor realises the security interest on its own?
- Whether the Secured Creditor exercising his right U/s 52(1)(b) of the Code has to make payment of workmen’s dues out of the amount realised from the sale of such secured assets as the EPF/workmen’s dues, which do not form part of the liquidation estate?
NCLT examines section 52 of the Code which refers to Secured Creditor in liquidation proceeding (Readers can access Section 52 at the end in the note Section ) and finds it implicit that the rights of a secured financial creditor are protected by giving him an option to take away the assets secured with him out of liquidation and in such a scenario, the secured creditor has a liberty to realise its security interest on its own. NCLT observes that Regulation 37 (7) (Liquidation Process) of the IBBI (Liquidation Process), Regulations, 2016 mentions that the provisions of regulation 37 shall not apply if the secured creditor enforces his security interest under SARFAESI Act, 2002 or RDDB Act, 1993. In the present case, NCLT notes that SARFAESI proceedings are already initiated, hence, the Secured Creditor SBI is not even under an obligation to tell the liquidator the estimate of the amount that can be realized from sale of secured assets as per Regulation 37. NCLT observes that it is an undisputed assertion that the secured creditor’s rights have to be protected and respected and they must have the choice of taking their collateral and selling it on their own. NCLT answers the first question with respect to the secured creditor opting out of the liquidation estate in affirmative.
With regards the second question NCLT examines S. 35(1)(f) of the Code and observes that the Liquidator shall have the powers to sell the immovable property by public auction in the manner as specified. This is the general rule that a liquidator has the power to liquidate an asset of a Corporate Debtor. However, an exception is carved out by introducing a clause i.e. “subject to section 52”. Therefore, the intention of the legislation is unambiguous that if a secured creditor is exercising its rights U/s 52 to liquidate an asset of the Corporate Debtor independently by opting out of the liquidation process, then in that situation the liquidator is debarred not to exercise his power of sale as provided U/s 35(1)(f) of the Code. This restriction is definitely limited to the scope and ambits of S. 52 of the Code wherein Secured Creditor is provided with certain exclusive rights and options during the commencement of liquidation proceedings. S. 52 is silent about a restriction as per the proviso annexed to S. 35(1)(f) according to which a liquidator is not applied to sell an immovable property to any person not eligible to be a resolution applicant. Thereafter NCLT mentions S. 29A wherein the long list of disqualification of such persons demarcated as “disqualified persons” for submission of a resolution plan. The intent of the introduction of S. 29A is not to give benefit to defaulters. The defaulters disqualified U/s 29A should not get any benefit under this code. This is a clear message conveyed through S. 29A. A defaulter must not be benefitted by entering into those very assets through side doors, otherwise not permitted to enter from the front doors, for e.g. by submission of resolution plan. Therefore, it is logical as well as legally justifiable to extend the scope of S. 29A while dealing with the liquidation of the assets a debtor company. The legislatures were very much aware about this attempt of the defaulters to indirectly take control of the stressed assets, therefore, restriction was imposed in the Proviso annexed of S. 35(1) (f). As far as s. 52 is concerned, the scope is limited to grant rights to a Financial Creditor for sale of a property. Naturally, that right should not give permission to a Financial Creditor to sell that property to a defaulter/promoter/director. Therefore, it is necessary as well as need of the hour to read the rights enshrined U/s 52 along with the proviso of subsection (f) of S. 35(1) as well as S. 29A of the Code. NCLT accepts the second prayer of the Liquidator, that the secured creditor availing its option U/s 52 of the Code should not sell the assets to the erstwhile promoters/directors and answers question No. (ii) as affirmative.
Further, NCLT examines section 53 of the Code and notes that workmen’s dues or EPF dues are placed in the waterfall mechanism and are not to be paid as per S. 326 of the Companies Act, 2013 because of S. 238 of the Code which gives overriding provisions to the insolvency Code. Secondly, S. 326 as of now stood de-notified.
Thereafter, NCLT observes that the decision of the NCLT Mumbai Bench in Precision Fasteners V. EPF is inapplicable in the present matter because of a common understanding that the EPF dues are not being treated as the assets to be covered in the liquidation estate, however, the same are the liability of the Corporate Debtor which has to be paid by the liquidator as per S. 53 of the Code, and not by the secured creditor out of the proceeds from the sale of secured assets if exercised their option U/s 52(1)(b) of the Code. NCLT hence rejected the third prayer of the Applicant and answered question (iii) in negative.
NCLT observes that once the secured creditor is out of liquidation U/s 52(1)(b) of the Code, it is relieved from all the clutches of the insolvency code or the liquidation process. NCLT partly allows the petition and granting permission to the Secured Creditors to opt out of the Liquidation process, however, imposes a bar on the secured creditors to sell the assets of the Corporate Debtor to disqualified persons U/s 29A. As far as the question of EPF dues to be paid by secured creditor moving out of liquidation is concerned, the same is out of the ambits of Sec 53 of the Code, hence, rejected.
SECTION 35 : Powers and duties of liquidator
1[(1) Subject to the directions of the Adjudicating Authority, the liquidator shall have the following powers and duties, namely:–
(a) to verify claims of all the creditors;
(b) to take into his custody or control all the assets, property, effects and actionable claims of the corporate debtor;
(c) to evaluate the assets and property of the corporate debtor in the manner as may be specified by the Board and prepare a report;
(d) to take such measures to protect and preserve the assets and properties of the corporate debtor as he considers necessary;
(e) to carry on the business of the corporate debtor for its beneficial liquidation as he considers necessary;
(f) subject to section 52, to sell the immovable and movable property and actionable claims of the corporate debtor in liquidation by public auction or private contract, with power to transfer such property to any person or body corporate, or to sell the same in parcels in such manner as may be specified;
(g) to draw, accept, make and endorse any negotiable instruments including bill of exchange, hundi or promissory note in the name and on behalf of the corporate debtor, with the same effect with respect to the liability as if such instruments were drawn, accepted, made or endorsed by or on behalf of the corporate debtor in the ordinary course of its business;
(h) to take out, in his official name, letter of administration to any deceased contributory and to do in his official name any other act necessary for obtaining payment of any money due and payable from a contributory or his estate which cannot be ordinarily done in the name of the corporate debtor, and in all such cases, the money due and payable shall, for the purpose of enabling the liquidator to take out the letter of administration or recover the money, be deemed to be due to the liquidator himself;
(i) to obtain any professional assistance from any person or appoint any professional, in discharge of his duties, obligations and responsibilities;
(j) to invite and settle claims of creditors and claimants and distribute proceeds in accordance with the provisions of this Code;
(k) to institute or defend any suit, prosecution or other legal proceedings, civil or criminal, in the name of on behalf of the corporate debtor;
(l) to investigate the financial affairs of the corporate debtor to determine undervalued or preferential transactions;
(m) to take all such actions, steps, or to sign, execute and verify any paper, deed, receipt document, application, petition, affidavit, bond or instrument and for such purpose to use the common seal, if any, as may be necessary for liquidation, distribution of assets and in discharge of his duties and obligations and functions as liquidator;
(n) to apply to the Adjudicating Authority for such orders or directions as may be necessary for the liquidation of the corporate debtor and to report the progress of the liquidation process in a manner as may be specified by the Board; and
(o) to perform such other functions as may be specified by the Board.
(2) The liquidator shall have the power to consult any of the stakeholders entitled to a distribution of proceeds under section 53:
Provided that any such consultation shall not be binding on the liquidator:
Provided further that the records of any such consultation shall be made available to all other stakeholders not so consulted, in a manner specified by the Board.]
SECTION 52 : Secured Creditor in liquidation proceeding
- (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 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.
(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.
(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.
(6) The Adjudicating Authority, on the receipt of an application from a secured creditor under sub-section (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.
(7) Where the enforcement of the security interest under sub-section (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.
(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.
(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 clause (e) of sub-section (1) of section 53.
SECTION 53 : Distribution of assets
(1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within 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 dues; (g) preference shareholders, if any; and (h) equity shareholders or partners, as the case may be.
(2) Any contractual arrangements between recipients under sub-section (1) with equal ranking, if disrupting the order of priority under that sub-section shall be disregarded by the liquidator.
(3) The fees payable to the liquidator shall be deducted proportionately from the proceeds payable to each class of recipients under sub-section (1), and the proceeds to the relevant recipient shall be distributed after such deduction.
Explanation.—For the purpose of this section—
(i) it is hereby clarified that at each stage of the distribution of proceeds in respect of a class of recipients that rank equally, each of the debts will either be paid in full, or will be paid in equal proportion within the same class of recipients, if the proceeds are insufficient to meet the debts in full; and (ii) the term “workmen’s dues” shall have the same meaning as assigned to it in section 326 of the Companies Act, 2013.