The present appeal arose from order dated November 20, 2019 (“Impugned Order”) passed by the National Company Law Tribunal, Chennai (“NCLT”). By way of the Impugned Order, the NCLT had dismissed the liquidator’s application seeking permission to enable the sale of assets of ‘Surana Power Limited’ (“SPL”) on the basis of consent given by majority of the secured creditors. The National Company Law Appellate Tribunal (“NCLAT”) by its judgment (decided on June 18, 2020) set aside the Impugned Order passed by the NCLT.

Facts
The NCLT had passed an order on January 20, 2019 initiating Corporate Insolvency Resolution Process (“CIRP”) against SPL under Section 9 (application for initiation of corporate insolvency resolution process by operational creditor) of the Insolvency and Bankruptcy Code, 2016 (“IBC”). However, when no resolution came to be approved, SPL was ordered to be liquidated and Mr. Srikanth Dwarakanath (“Appellant Liquidator”) was appointed as the liquidator.

Before the CIRP had been initiated, Bharat Heavy Electricals Limited (“Respondent Company”) had secured an exparte award on January 24, 2018 (“Arbitral Award”) against SPL in an arbitration proceeding. Basis the Arbitral Award: (i) lien was created on the equipment and goods lying at the site of SPL (“Secured Assets”); (ii) a charge was created over entirely or partially erected facilities at SPL’s site; (iii) the Secured Assets on which a lien had now been created in favour of the Respondent Company owing to the Arbitral Award, had already been hypothecated to all other secured creditors by a deed of hypothecation dated September 24, 2010 (“Hypothecation Deed”).

The Appellant Liquidator had not been able to commence liquidation process earlier as some of the secured creditors had not intimated their decision concerning relinquishment of securities, well in time. The Respondent Company was one of the last remaining secured creditors required to intimate its decision on relinquishment. However, by letter dated August 23, 2019, the Respondent Company expressed unwillingness to relinquish its security interest. In fact, all other secured creditors had relinquished their security interest into the liquidation estate of SPL.

The Appellant Liquidator, however, was not able to proceed with any sale of asset without the receipt of relinquishment of security interest from all the secured creditors. Therefore, the Appellant Liquidator approached the NCLT seeking permission to sell all assets of SPL. The Appellant Liquidator’s application came to be rejected by way of the Impugned Order. Thereafter, this appeal was filed before NCLAT to challenge the Impugned Order.

Issue
Whether all the assets of SPL could be sold owing to non-relinquishment of security interest by the Respondent Company, when other secured creditors having value of 73.76% had already relinquished their security interest.

Arguments

Contentions of the Appellant Liquidator:

The NCLT had not appreciated that ten out of eleven secured creditors, representing 73.76% (in value of the admitted claims) of the total secured assets had already relinquished their security interest into the liquidation estate of SPL. It was only because of the Respondent Company’s unwillingness to relinquish its security interest that the Appellant Liquidator had been unable to proceed with the sale of assets.

Further, the secured creditors other than the Respondent Company had a prior charge over the Secured Assets by way of the Hypothecation Deed. Notably, the Hypothecation Deed was executed in the year 2010, much before the Arbitral Award which was passed in the year 2018.

The NCLT had also failed to consider that IBC did not provide for different categories of secured creditors either based on the nature of charge/ security interest or on the basis of the rankings of the respective charge. The Appellant Liquidator was to attempt the sale of SPL assets on a slump sale basis, however owing to the Respondent Company’s unwillingness to relinquish its security interest, the Appellant Liquidator was unable to conduct the sale as aforesaid. The Respondent Company’s refusal, had created a ‘deadlock situation’ wherein SPL assets could not be sold due to the proviso to Regulation 32 (sale of assets, etc.) of the Insolvency and Bankruptcy Board of India (Liquidation Process), Regulations, 2016 (“Liquidation Process Regulations”). As per the proviso, an asset which is subject to
security interest is not to be sold unless the security interest therein has been relinquished to the liquidation estate. The view taken by the NCLT violated the ‘waterfall mechanism’ provided under Section 53 (distribution of assets) of IBC.

Furthermore, during the pendency of this present appeal, the Respondent Company had written a letter dated January 27, 2020 to the Appellant Liquidator, inter alia, notifying its intention to realize security interest in respect of the Secured Assets.

Contentions of the Respondent Company:

It was contended that the Respondent Company had exercised its rights as per Section 52 (secured creditor in liquidation proceedings) of IBC. The exercise of the Respondent Company’s rights under Section 52 of IBC could not be subjected to the majority of the security creditors who had relinquished their security interest. As under Section 52(1)(b) of IBC, the Respondent Company had chosen to realize its security interest as per section 52(iv) of IBC.

As per section 52(iv) of IBC, 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. The right of the Respondent Company under Section 52 of IBC is unqualified and unbridled. Such right could not be subjected to the majority of other secured creditors having relinquished their security interests.

Further, SPL had never acquired unencumbered right, title or interest in the Secured Assets. Therefore, hypothecation of the Secured Assets would always be subject to the Respondent Company’s lien. The Respondent Company also cited the decision of the NCLAT in JM Financial Asset Reconstruction Company Limited v. Finquest inancial Solutions Private Limited and Others [2019 SCC OnLine NCLAT 918].

Observations of the NCLAT

The NCLT had rejected the application filed by the Appellant Liquidator primarily because the Respondent Company was a secured creditor, and could proceed under Section 52 of IBC to realize its security interest. The Appellant Liquidator could not cause the sale of asset filed under Section 52 of IBC in the manner specified under Section 53 (distribution of assets) of IBC unless the security interest was relinquished by the Respondent Company. All secured creditors representing value of 73.76% in the secured assets had relinquished their security interest in the liquidation estate of SPL. This would have enabled the Appellant Liquidator to proceed under Regulation 32 of the Liquidation Process Regulations and dispose all SPL assets.

However, in light of the proviso to Regulation 32 of the Liquidation Process Regulations and on account of the Respondent Company’s unwillingness to relinquish its security interest, the Appellant Liquidator could not sell SPL assets.

The NCLT had held that the Respondent Company’s lien had a preference over the hypothecation created in favour of other secured creditors. The NCLAT noted that the NCLT had failed to appreciate that all secured creditors were on the same footing, irrespective of the mode of creation of charge. The Respondent Company, was a secured operational creditor by the Arbitral Award, by way of which, the Respondent Company was claiming lien over the Secured Assets. While, all other secured creditors, that is, (financial creditors) had relinquished their security interest, the Respondent Company’s refusal had created a deadlock situation.

Clearly, as per the proviso to Regulation 32 of the Liquidation Process Regulations, the Appellant Liquidator could not proceed to sell all SPL assets. This was despite the fact that more than 73% of the secured creditors had already relinquished their security interests.

Decision of the NCLAT

The Respondent Company is a secured creditor at par with ten other remaining secured creditors. The enforcement of security interest is governed under Section 13 (enforcement of security interest) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”). Further, as per Section 13(9) of the SARFAESI Act, any steps about the realization of assets by the secured creditors required confirmation from creditors having at least 60% of the value of total debt.

It would be prejudicial to stall the liquidation process because of a single creditor having value of only 26.24% in the secured assets when other secured creditors having value of 73.76% had already relinquished their security interest into the liquidation estate of SPL. The Respondent Company did not hold a superior charge from the rest of the secured creditors.

Further, Section 13 of the SARFAESI Act would be applicable in this case, in order to end the deadlock, and the decision of majority secured creditors would be made binding on the dissenting Respondent Company. Moreover, the facts of the case in JM Financial Asset Reconstruction Company Limited v. Finquest Financial Solutions Private Limited and Others [2019 SCC OnLine NCLAT 918] were different from the instant case. This is because in the aforesaid case, NCLAT was dealing with the issue whether more than one secured creditor could enforce security interest simultaneously under Section 52 of IBC. In the instant case, the question was if the Respondent Company had a right to realize its security interest as per section 52 of IBC.

In the instant case, the Appellant Liquidator had already concluded that the Respondent Company’s lien on the Secured Assets was not exclusive. Further, since the Respondent Company did not have at least 60% value in the total security interest, the Respondent Company could not exercise right to realize its security interest. If the Respondent Company was to be allowed to do so, it would be detrimental to the process of liquidation and interest of ten other remaining secured creditors. The Impugned Order was set aside and the Appellant Liquidator was directed to complete the process of liquidation.

Vaish Associates Advocates View
This is a progressive view taken by the NCLAT in protecting the interests of the majority of the secured creditors. The liquidation process should not have been affected given the facts and circumstances of this case.

In the instant case, ten out of eleven creditors holding more than 73% of the total debt had already consented to relinquishing their security interests. As far as the Respondent Company was concerned, there were two main reasons that were working in opposition to itssubmissions. First and foremost, it did not have 60% of the value in the secured interest and secondly, as far as the Secured Assets were concerned, it neither had an exclusive charge, nor a superior charge from the rest of the secured creditors.

If the sale of SPL assets would have been stalled merely because the Respondent Company without having the requisite value of at least 60% debt was unwilling to relinquish its interest, it would have been very detrimental to the liquidation process and would have affected the remaining ten other creditors.

In view of the provisions of IBC, a secured creditor’s claim could be allowed only if they had met the minimum threshold of 60% of the debt. Accepting the Respondent Company’s claim, therefore, would have affected the entire liquidation process and set a bad judicial precedent.

For more information please write to Mr. Bomi Daruwala at [email protected]

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