Housing Finance - Through Smart Contract

 Housing  finance is provided by the Banks & Housing Finance Cos.usually for the following types of properties.

- Ready to move in property.

- Under construction properties.

Present discussion is limited to the financing of under construction properties.

 

Following are usually the players in a real estate sector project.

- The Home Buyer.( The “Allottee”)

- The Bank, financing the home buyer.( The “Bank”)

- The real estate project developer (The “Developer”)

- The Project Financier for financing the real estate project. ( The “Project Financier”) 

 

Let’s identify the problems being faced by the different players of the real estate project.

 

1. From the Allottee’s (Home buyer) perspective:-

- Payment of EMI before possession of the flat / property. This problem is quite acute in delayed projects, or in failed projects. 

- Recovery of money from the Developer in a failed  project. 

i). Status of cases under IBC as on 30.06.2020 (Real Estate Companies, as per IBBI Newsletter June,2020)

1	Cases Admitted under IBC	186
2	Settled/ Withdrawn u.s 12A	42	22.5%
3	Resolved	5	2.7%
4	Companies pushed into Liquidation	17	9.1%
5	Ongoing	122	65.6%

 

Average time taken for completion of CIRP, yielding resolution is 423 days. Average time taken for completion of CIRP which yielded orders for liquidation is 312 days.  From the above it can be observed that resolution / settlement of  cases in the real estate sector is less than 25% of the cases, so far.

ii). Even if resolved or pushed into liquidation, home buyer being unsecured financial creditor, priority of payment to home buyers is subordinate to secured financial creditors (Banks & financial institutions which provided project finance) & employees, in the scheme of things under IBC.

 

2. From the Bank’s (Financier of Home Buyer / allottee) perspective.:-

- Unsecured financing during the construction period. The money paid by the bank to Developer on behalf of the home buyer remains unsecured till possession & ownership rights of the property are received by the Home Buyer & mortgage of the same is created by the Home Buyer in favour of the Bank.

- Recovery of Bank’s finance to the Allottee in a failed project.

 

3. From the Developer’s perspective.

- Timely financing of the project during the construction period.

 

4. From the Project  Financier's perspective.

- Excessive /over financing of the project, taking advance from the Allottees besides getting project financing from the project financier.

- Diversion of funds by the Developer.

- Recovery of project finance..

 

Mechanism of Housing Finance through Smart Contract in nutshell.

1. Prospective borrower / allottee approaches the bank & bank approves / sanctions, in principle  the housing finance (Usually 80% of the cost of the proposed property / flat)  

 

2. Prospective borrower / allottee negotiates with the developer & pays upfront 10% of the cost agreed. Developer issues the allotment letter and enters into a registered agreement to sale of the property (obligatory under RERA Act.), specifying therein  the  date of handing over the possession of the property by the developer to the allottee.

 

3. Bank on the basis of smart contract (tripartite contract between allottee, developer & bank), issues bank guarantee in favor of the developer on behalf of the allottee, for 90% of the cost  (Bank to obtain from allottee / borrower, 10% of the cost of the proposed flat as security / margin for the  proposed bank guarantee). The period of bank guarantee to coincide with the date of possession mentioned in the registered agreement.  

 

4. The developer get’s finance  to complete the project from the Project Financier against the security of project assets & assignment of bank guarantees obtained from allottees. The assignment of bank guarantees will facilitate obtaining finance on finer terms (competitive rates of interest).

 

5. On or before the expiry of the bank guarantee / smart contract, the developer approaches the allottee / bank with completion certificate of the project & offers possession of the property and requests for release of the amount of bank guarantee (balance 90% of the cost of property as per smart contract / allotment letter).

 

6. Bank releases the amount of the bank guarantee  to the developer / assignee of the bank guarantee by debit to the housing loan account (80% of the cost of property) &  security/margin money account (10% of the cost property) of the borrower / allottee. Thus the developer receives full payment of the agreed cost of property without any delay. Assignment of  bank guarantees in favor of the project financier, ensures assured repayment of project finance.

 

Advantages of Smart Contract.

1. In the above system of financing the prospective borrower / allottee is not under the obligation to pay pre-EMI Interest and / or EMI before possession, with the added bonus of saving of GST. As per rules, GST is not levied, if the cost of the property is paid after the issue of completion certificate of the project. However this benefit will be more or less nullified  from bank guarantee charges levied by the bank under smart contract. 

 

2. Allottee’s risk in the failed project is limited to 10% of the cost of the flat, paid by allottee to the developer at the time of booking of the flat. The housing finance through Smart Contract will substantially reduce the problems a home buyer faces in delayed / failed projects. This will go a long way in reducing the quantum of litigation at various forums ( IBC / RERA / Consumer Courts etc.) we are presently seeing in the real estate sector.

 

3. As the housing finance will be released by the bank at the time of possession of the concerned property / flat, the asset quality of the banks, under housing finance will improve. In the present system of housing finance during the construction period, there is no security for the bank  & in the failed projects the banks are left with unsecured NPA accounts. Under smart contracts this situation will never arise. This will be a good source of  non fund based business for the bank in the shape of bank guarantees. There will not be any risk for the Bank in the  failed project.

 

4. The developer can raise project finance on the strength of bank guarantees on finer terms and is assured of timely payment  by the allottee on completion of the project. This will inculcate discipline among the developers to adhere to the timelines of the project. The developer will also be saved from the hassles of keeping 70% of the allottee’s money in a separate account & paperwork involved in getting the same released from RERA authorities, as per the provisions of RERA Act.

 

5. As the source of funds for the developer, under the proposed system, are limited to the project financing, the project financier will be able to exercise  better control over  excessive / over financing of the project and can keep a check on the diversion of funds by the developers. Diversion of funds is the main reason for the majority of the failed real estate projects. Secondly, the project financier will be assured of timely repayment of  project finance, with the assignment of bank guarantees with the project financier.

 

The system of smart contract, in the long run, will create a better environment for all the players in the real estate sector.  A win - win situation for all the players of the real estate sector.

 

Reforms suggested for the Real Estate Sector.

1. Model agreement to sale, as per the RERA  rules & regulations, to contain a clause, creating hypothecation charge on the allotted under construction flat / property, so that the home buyer acquires the status of Secured Creditor. This will increase the chances of recovery for the home buyers during insolvency / liquidation proceedings of the developer. Secondly under the provisions of The Companies Act -2013, hypothecation charge is to be registered with ROC. This will prevent the multiple booking of the concerned under construction flat / property. (details of charges created by a company are visible online on the website of the Ministry of Corporate Affairs) 

2. Compulsory Credit rating of the developer from two independent Credit Rating Agencies.

3. Introduce License to book under construction flat, which is to be issued by RERA Authorities keeping in view:-

i). Technical & financial strength of the Builder / Developer.

ii). Past track record of the Builder / Developer and its promoters / directors.

All the above suggested reforms can be implemented under the present set of rules & regulations.

 

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.

Whether a holder of Corporate Guarantee / counter guarantee or indemnity is a secured creditor ?

Companies (corporate debtors) usually provide corporate guarantees /indemnities to financial creditors (usually banks) undertaking repayment of credit facilities ( i.e. Bank Guarantees , Letter of Credits etc.) extended by the banks to the corporate debtor & / or CD’s subsidiaries / associated companies. Often these financial creditors (banks) claim the status of secured creditor for priority in distribution of funds during CIRP / Liquidation proceedings.

As the provisions of the Code ( Sub-section 7& 8 of Section 5),holder of a corporate guarantee / counter-guarantee or indemnity  is a financial creditor .

Issues;

1. Whether the Corporate Guarantee / counter guarantee or indemnity creates any charge or lien on the assets of the company.

2. Whether the charge created, if any as above, is required to be registered with ROC.

The Company Law Board (1997.05.13) in S.T. Patil And Ors. vs ROC, held that corporate guarantee is not a charge over any specific assets of the company & when no charge has been created by an instrument (guarantee / indemnity), the concerned instrument / charge is not required to be registered with ROC.

Thus, following are the important ingredients to qualify a creditor as a secured creditor;

1. There has to be an instrument (deed / agreement etc.) creating charge / lien on the property of the company (CD).

2. The charge / lien so created is registered with ROC. As per section 77(3), a charge which is not registered is not to be recognised.

- Section 77(3) Notwithstanding anything contained in any other law for the time being in force, no charge created by a company shall be taken into account by the liquidator or any other creditor unless it is duly registered under sub-section (1)

Following are the provisions of different statutes on the matter, and extracts of the orders of the Company Law Board dated 13.05.1997 for ready reference please.

The Insolvency and Bankruptcy Code, 2016.

# Section 3 Definitions. –

(4) “charge” means an interest or lien created on the property or assets of any person or any of its undertakings or both, as the case may be, as security and includes a mortgage;

(27) “property” includes money, goods, actionable claims, land and every description of property situated in India or outside India and every description of interest including present or future or vested or contingent interest arising out of, or incidental to, property;

(30) “secured creditor” means a creditor in favour of whom security interest is created;

(31) “security interest” means right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person:

- Provided that security interest shall not include a performance guarantee;

The Companies Act, 2013.

# Section 2. Definitions.-

(16) “charge” means an interest or lien created on the property or assets of a company or any of its undertakings or both as security and includes a mortgage;

# Section 77. Duty to register charges, etc.—

(1) It shall be the duty of every company creating a charge within or outside India, on its property or assets or any of its undertakings, whether tangible or otherwise, and situated in or outside India, to register the particulars of the charge signed by the company and the charge-holder together with the instruments, if any, creating such charge in such form, on payment of such fees and in such manner as may be prescribed, with the Registrar within thirty days of its creation:

- Provided that the Registrar may, on an application by the company, allow such registration to be made within a period of three hundred days of such creation on payment of such additional fees as may be prescribed:

- Provided further that if registration is not made within a period of three hundred days of such creation, the company shall seek extension of time in accordance with section 87:

- Provided also that any subsequent registration of a charge shall not prejudice any right acquired in respect of any property before the charge is actually registered.

(2) Where a charge is registered with the Registrar under sub-section (1), he shall issue a certificate of registration of such charge in such form and in such manner as may be prescribed to the company and, as the case may be, to the person in whose favour the charge is created.

(3) Notwithstanding anything contained in any other law for the time being in force, no charge created by a company shall be taken into account by the liquidator or any other creditor unless it is duly registered under sub-section (1) and a certificate of registration of such charge is given by the Registrar under sub-section (2).

The Indian Contract Act, 1872

# Section 171. General lien of bankers, factors, wharfingers, attorneys and policy-brokers.  - Bankers, factors, wharfingers, attorneys of a High Court and policy-brokers may, in the absence of a contract to the contrary, retain as a security for a general balance of account, any goods bailed to them; but no other persons have a right to retain, as a security for such balance, goods bailed to them, unless there is an express contract to that effect.

Company Law Board (1997.05.13) in S.T. Patil And Ors. vs ROC, held that corporate guarantee is not a charge over any specific assets of the company;

# 5. When the matter came up for hearing, notice was ordered by this Bench to the company. In response to the notice served upon the company, it has raised objections to the registration of the charges. It is contended on behalf of the company that the deeds of guarantee executed by the company as well as the Jawalkar group are not valid documents creating charge over any of the assets of the company. The said documents are not valid in law, as they are not duly stamped. Nor do they create charge over any specific assets of the company. 

#  8. I have considered the pleadings and heard the arguments of learned counsel for the petitioners and the company. The issues that arise for consideration are : 

• (a) Whether the transaction covered under the deeds of guarantee and commitment dated July 7, 1988, is registrable under Section 125 of the Act ?

# 11. In this case, the petitioners are seeking extension of time for registration of the particulars of charge covered by the following deeds dated July 7, 1988. 

• (a) Deed of guarantee executed by the company through its chairman and managing director and one of the directors (annexure "J") undertaking not to transfer or mortgage or hypothecate or alienate by any other means the company's assets till discharge of the liabilities. 

• (b) Deed of guarantee executed by the newly constituted board of directors and shareholders of the company undertaking to clear all the liabilities of the company and relieve the erstwhile chairman, managing director, director and other shareholders from the liabilities (annexure "K") and 

• (c) Deed of guarantee executed by the chairman and managing director of the company in his official as well as individual capacity undertaking not to mortgage or sell the company's assets or the shares till settlement of the entire dues (annexure "L"). 

# 12. It is clear from the deeds of guarantee that the undertaking was not to encumber the company's assets till closure of the liabilities due to the petitioners. None of the deeds of guarantee created a charge on the company's assets. The learned principal civil judge, Jamakhandi in O. S. No. 40/1991/LQs had upheld execution of the aforesaid deeds undertaking not to transfer shares or by any means encumber the company's assets.

In this context, the decision in Heathstar Properties Ltd. (No. 2), In re [1966] 36 Comp Cas 768 ; [1966] 2 Comp LJ 246 (Ch D) relied upon by counsel for the petitioners, has no relevance for the issue before this Bench. It may be worthwhile to quote the words of the learned judge (Plowman J.) in the said decision at page 777 which run as follows :

•  "If the case were one which the document sought to be registered could not in any circumstances be described as a charge, the position might be different. . ."

# 15. Thus, considering all facts and circumstances mentioned in the petition and the legal position as explained above, I am of the view that the transaction covered by the deeds of guarantee dated July 7, 1988, (annexures "J", "K" and "L") is not a registrable charge under the provisions of Section 125 of the Act.

Concept of Negative Lien or Negative Pledge

There is no legal definition of 'negative lien'. Lien is the right to retain goods of a  borrower or pledgor for the debt. Negative Lien is used in banking parlance for a  borrower to undertake not to create any charge on his property without the consent  of the lender. 

 

The borrower may sometimes be having non-encumbered assets which are not  charged to the bank as security. The borrower is thus free to deal with these assets  and may even sell them if he so desires. To restrict this right of the borrower, the bank may sometimes request him to give an undertaking to the effect that he will neither create any encumbrance on these assets nor sell them without the previous  permission of the bank so long as the advance continues.

 

This type of an undertaking obtained by the bank is known as 'Negative Lien'. Negative lien is in the  form of a personal assurance or undertaking which has binding effect but confers no right on the bank to proceed against the property itself and thus creates no encumbrance or charge on the property. The case of Knott v. Shepherdstown Manufacturing Co. 5 S.E. 266 (W. Va. 1888) may be examined at this juncture to help bring some clarity to the issue. It was held in Knott that Negative Pledgee’s remedies are purely contractual and that the covenant confers no right in the property. The Court held, “Of course the agreement’s negative pledge covenant creates no lien on or pledge of any property. It is simply negative; an agreement not to do a particular thing. The creation of a lien is an affirmative act, and the intention to do such act cannot be implied from an express negative. It seems to me that both of these clauses of the obligation that is, the negative pledge covenant and a covenant to keep the property insured are simply personal covenants, for the breach of which the remedy must be sought in a court of law. ” 

 

The generally accepted view as mentioned before is that the negative pledge does not create a proprietary or security interest and is therefore not registrable. [Tracy Hobbs, The Negative Pledge: A Brief Guide, 8(7) J.I.B.L.269(1993)] 

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.

 

Secured Creditor - Distribution of funds during Liquidation process

Query; What are the options/rights of  a secured creditor in distribution of funds during the liquidation process. 

Let’s look into the various provisions of the Code & Regulations framed thereunder.

# Section 30. Submission of resolution plan.

(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:

# Section 36. Liquidation estate. -

(1) For the purposes of liquidation, the liquidator shall form an estate of the assets mentioned in sub-section (3), which will be called the liquidation estate in relation to the corporate debtor.

(3) Subject to sub-section (4), the liquidation estate shall comprise all liquidation estate assets which shall include the following: -

• (g) any asset of the corporate debtor in respect of which a secured creditor has relinquished security interest;

# Section 52. Secured creditor in liquidation proceedings.

(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 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;

(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;

Regulation 21A. Presumption of security interest.

(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; and

Regulation 31. List of stakeholders.

(1) The liquidator shall prepare a list of stakeholders, category-wise, on the basis of proofs

of claims submitted and accepted under these Regulations, with-

• (a) the amounts of claim admitted, if applicable,

• (b) the extent to which the debts or dues are secured or unsecured, if applicable,

• (c) the details of the stakeholders, and

• (d) the proofs admitted or rejected in part, and the proofs wholly rejected.

Regulation 32. Sale of Assets, etc.

The liquidator may sell-

• (a) an asset on a standalone basis;

• (b) the assets in a slump sale;

• (c) a set of assets collectively;

• (d) the assets in parcels;

• (e) the corporate debtor as a going concern; or

• (f) the business(s) of the corporate debtor as a going concern:

Provided that where an asset is subject to security interest, it shall not be sold under any of the clauses (a) to (f) unless the security interest therein has been relinquished to the liquidation estate.

A secured creditor has the following options;

1. Secured creditor can exercise his right to enforce his security interest as per the provisions of section 52, but will have to share the proceeds of realisation of security interest. On sharing of the security interest provisions of the Code & Liquidation Regulations are in variance as follows;

1.  Section 52(8) of the Code provides that 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,

2. Liquidation regulation 21A(2) provides that 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. 

Author’s comments; It’s quite illogical that, when a property, which is not part of Liquidation Estate [Section 36(3)(g)], i.e. where secured creditor has enforced his security interest, secured creditor be asked to share the proceeds of enforcement of security interest for liquidation cost & workmen dues.

Disadvantages under this option is that where the proceeds of the realisation of the secured assets are not adequate to repay debts owed to the secured creditor, the priority of such unpaid debts of such secured creditor is lowered [Section 52(9)] in the waterfall under Section 53(1)(e). 

2. Secured creditor can relinquish his security interest to the liquidation estate and stand second highest priority under the liquidation waterfall [Section 53(1)(b)]. This priority is given to “debts owed to a secured creditor in the event such secured creditor has relinquished security interest in favour of the liquidator”. This does not specify whether such debts owed are limited only to the value of the secured portion of the creditors’ debt,

Advantages are that Code does not specify whether such secured debts are limited to the value of the secured portion of the creditor’s debt only. This fact assumes greater significance in light of the wording of section 30(4) of Code for distribution of funds during insolvency proceedings;

• Section 30 (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:

There is a significant absence of the term “value of the security interest “  in Section 53 of the Code. Thus the legislative intent of the Parliament is very clear that the amount of secured credit under section 53(1)(b) will not be limited to the extent of the underlying value of the security interest.

Secondly, if debt of the secured creditor, under second priority under section 53(1)(b) is limited to the extent of value of security interest, then the following provision of the Code will be left infructuous & meaningless.

- Section 52(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.

Disadvantages under the option is that the value of security interest realized by the liquidator will be shared towards;

1. Insolvency Resolution Process Cost.

2. Liquidation cost.

3. Workmen’s dues.

Apparently, the advantages under the second option are more significant, which may vary from case to case. Maybe this is to promote sale of CD as a going concern, to maximise the asset realization & relinquishment of security interest by the secured creditors is the precondition of sale of CD as a going concern.

• Regulation 32A. Sale as a going concern.

(1) Where the committee of creditors has recommended sale under clause (e) or (f) of regulation 32 or where the liquidator is of the opinion that sale under clause (e) or (f) of regulation 32 shall maximise the value of the corporate debtor, he shall endeavour to first sell under the said clauses.

Some important judgements;

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 that a secured creditor is not required to share proceeds of realization of security interest with workmen:-

• “# 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?

• # 11. Therefore, it is an undisputed assertion that the secured creditor’s rights have to be protected and respected. They must have the choice of taking their collateral and selling it on their own. Hence, the first question with respect to the secured creditor opting out of the liquidation estate, stands answered in the affirmative.

• # 15. Hence, this prayer of the applicant/Liquidator, that the secured creditor availing its option U/s 52 of the Code should not sell the assets to the erstwhile promoters/directors, is hereby accepted. The answer to question No. (ii) is in affirmative.

• # 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.”

ii). NCLT Allahabad (24.07.2018) in J.R. Agro Industries P Limited V/s. Swadisht Oils P Ltd. [CA 59 of 2018 in CP 13/ALD/2017] held as under:-

• (Page 33/50) “Notably, distinction under section 53 is a two-fold distinction – (i) secured/unsecured, and (ii) operational/financial. As regards secured creditors, it does not matter whether the creditor is financial or operational, since section 53(1)(b) uses the expression “secured,” and there is no indication as to the nature of debt (financial/operational) owed to such secured creditor. However, when it comes to unsecured creditors, unsecured financial creditors appear in the 4th rank; but unsecured operational creditors come in the 6th rank.”

 

Here it will not be out of place to mention that Board does not have  mandate to frame regulations for the provisions of Section 52(8) as per section 240(2)(zh, zi, zj & zk) read with Section 3(32), Section 196(t) & Section 238. As such the Board is requested to drop the Regulation 21A(2) of Liquidation Regulations which provides for sharing of proceeds of realization of security interest for liquidation cost and workmen dues.

 

Similar is the situation with Regulation 31(1)(b) of Liquidation Regulations, which is in variance with the provisions of Section 53(1)(b).

 

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