Section 52 of the Code provides for enforcement of security interest by a secured creditor during liquidation process. In the present discussion, the following two issues are being examined.
1. Realization of the security interest by the secured creditor - pari-passu charge holders.
Following are the provisions of different Statutes & regulations
# Section 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.
Proviso to Section 325(1) of The Companies Act, 2013, provides 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…………
Section 100 of the “Transfer of Property Act, 1882” provides as under;-
# 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 hereinbefore contained which apply to a simple mortgage shall, so far as may be, apply to such charge.
Author’s comment - As the workmen’s dues have pari passu charge with the secured creditors, now the question arises about the treatment of dues of workmen, for a period exceeding twenty four months, will they be covered under 6th priority, as “any remaining debts and dues” under the waterfall [Section 53(1)] or ignored due to non-obstante clause as per Section 238 of the Code.
NCLT Ruling;-
i) NCLT Mumbai (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…….”
Author’s comments -
1. 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 documents creating pari-passu charge & Proviso to Section 325(1) of The Companies Act, 2013.
2. If the orders of AA will tantamount to suo-moto relinquishing of security interest by the second & subsequent pari-passu charge holders and workmen holding charge in terms of Proviso to Section 325(1) of The Companies Act, 2013
2. Sharing of the proceed on realization of the security interest by the secured creditor,
Let’s look at the provisions of different Statutes & regulations.
# Section 52(8) of the Code:-
(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.
Proviso to Section 325(1) of The Companies Act, 2013, provides 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,
Regulation 21A(2) of Liquidation Regulations under the Code.
(2) Where a secured creditor proceeds to realise its security interest, it shall pay -
(a) as much towards the amount payable under clause (a) and sub-clause (i) of clause (b) of sub-section (1) of section 53, as it would have shared in case it had relinquished the security interest, to the liquidator within ninety days from the liquidation commencement date;
# 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 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;
Sub-regulation (2) of regulation 21A, has three components-
Author’s comments - The questions here are:-
1. Whether the provisions of “Section-52(8) of the Code”, overrides the “Proviso to Section 325(1) of The Companies Act, 2013”, due to non-obstante clause under Section 238 of the Code or both the provisions are to run concurrently ?
2. Whether the Board through Subordinate Legislation (Regulations) can provide for something beyond the scope & provisions of Principal Legislation ( IBC,2016) ?
3, Whether the provisions of Section 238 are not applicable on the regulations framed by the Board ?.
NCLT Ruling
i). NCLT Mumbai (08.04.2019) in SBI Global Factors Ltd. V/s. Sanaa Syntex Private Limited (MA 1123/2018 in CP No. 172/IBC/NCLT/MB/MAH/2017) held as under:-
“# 5. On perusal of the prayers made in this application, three pertinent questions come up for consideration of this Bench:
i. Whether SBI, the Financial Creditor is legally entitled to stay out of liquidation?
ii. 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?
iii. 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?
# 17…..Although the applicant/Liquidator has placed reliance on the judgement dated 12.09.2018 in the matter of Precision Fasteners V. EPF, passed by NCLT Mumbai in MA 576&752 of 2018 in CP No.1339/2017, wherein it was held that “All sums due to any workman or employee from the provident fund, pension fund and gratuity fund, shall not be a part of the liquidation estate and shall not be used for recovery in liquidation”. But this decision is in context of the rights of the employees and not in the context of the restriction imposed U/s 53(1)(b)(ii). This judgement is therefore, not applicable in the present context 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. Hence, this prayer of the applicant is rejected on above findings. Question (iii) is answered in negative.”
References;-
1. Insolvency and Bankruptcy Code, 2016
2. The Companies Act, 2013
3. Transfer of Property Act, 1882
4. eBook "Claims of Creditors" by Arvind Mangla, a publication of Amazon Kindle Store..
Disclaimer: The sole purpose of this blog is to create 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.
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