Rewriting the Rules of the Game under IBC - Pari-passu charge.

NCLT Mumbai bench vide orders dated 10.05.2019 in Edelweiss Asset Reconstruction Co. Ltd.v/s. Reid and Taylor India Limited (M.A.No.1392/2019 in C.P. No. 382/IB/MB/MAH/2018)

held as under:-

# 8. “.........., only the first charge holder / the secured creditor with first pari-passu charge can stay outside the liquidation process by the Liquidator and realize his security interest in the manner provided under the above provisions of law…….”

Pari passu charge means, when more than one creditor has a charge like mortgage on the same property though created at different times, if they agree among themselves, their charge / mortgage will rank equal in enforcement. For e.g. A Bank having a charge on 1.1.2007 and B Bank has a charge on the same property on 2/2/2008, normally A Bank has the priority. Only after satisfying the dues of A Bank, B bank can claim any surplus realized over and above the dues to A Bank. But if both the banks agree that their charges are pari passu , they can have the share of the proceeds of the sale of the property in enforcement of their mortgages equally i.e. pro rata to their advances or outstandings depending upon the wording of the document under which the pari passu charge has been agreed among them.

Under the above mentioned orders AA has excluded the other pari-passu charge holders to participate in realising their security interest in the liquidation process. In my view, AA could  have allowed the first pari-passu charge holder to realise the security interest & hold the amount realised in trust for all the pari-passu charge holders, to be distributed according to the terms of document creating pari-passu charge.

Let’s look at some of the interesting provisions of “The Companies Act, 2013” & “The Transfer of Property Act, 1882”

Proviso to Section 325(1) of The Companies Act, 2013,reads as under:-

Provided that the security of every secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen to the extent of the workmen‘s portion therein, and, where a secured creditor, instead of relinquishing his security and proving his debts, opts to realise his security,

- (i) the liquidator shall be entitled to represent the workmen and enforce such charge;

- (ii) any amount realised by the liquidator by way of enforcement of such charge shall be applied rate-ably for the discharge of workmen‘s dues; and…………

The Transfer of Property Act, 1882

# Section 100. Charges Where immovable property of one person is by act of parties or operation of law made security for the payment of money to another, and the transaction does not amount to a mortgage, the latter person is said to have a charge on the property and all the provisions herein before contained which apply to a simple mortgage shall, so far as may be, apply to such charge.;

Charges, filing of which with ROC is not necessary:

- Guarantee doesn’t require Registration;

- Charge created by operation of law need not be filed;

- Negotiable Instrument (Hundi) is not a ‘Charge’ and registration not required.

Thus, as per the provisions of The Companies Act,  the dues of the workmen have deemed pari-passu charge with all the secured creditors and accordingly they have the right to participate to realise their security interest U/s 52 of the Code.

With the recent amendments in the Code, the amended Sub-section 4 of Section 30 reads as under:-

(4) The committee of creditors may approve a resolution plan by a vote of not less than sixty-six per cent. of voting share of the financial creditors, after considering its feasibility and viability, the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor and such other requirements as may be specified by the Board:

The  amended provisions of the Code now mandates that the resolution plan approved by the CoC provides for the distribution of funds as per Section 53(1) of the Code. Prerequisite to the distribution of funds of resolution plan as per Section 53(1) is to prepare the list of creditors accordingly. In my view the said recent amendments, indirectly thrust upon RP, the duty to follow the provisions of Section 38 to 42 of the Code in preparing the list of creditors.

The only question remains as to how to deal with partly secured financial creditor (i.e. the the liquidation value of the underlying security is less than the claim amount.) The answer to the same lies under section 123(3)  of the Code (Chapter IV under Part-III of the Code), reading as under:-

(3) If a secured creditor makes an application for bankruptcy and submits a statement under clause (b) of sub-section (2), the secured and unsecured parts of the debt shall be treated as separate debts.

Accordingly, during CIRP also, the secured (on the basis of liquidation value of the underlying security) & unsecured parts of the debt of a financial creditor can be treated as separate debts and accordingly listed, for proper distribution of resolution plan funds, as per the provisions of the code 

Reference;-

1. eBook  "Claims of Creditors" by Arvind Mangla, a publication of Amazon Kindle Store.

'Disclaimer: The sole purpose of this blog is of  creating awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog