IBC UPDATE | NCLAT DIRECTS THE SALE OF ASSETS OF THE CORPORATE DEBTOR |OVERRIDES THE CLAIM OF SECURED CREDITOR
The National Company Law Appellate Tribunal (NCLAT) recently passed an Order directing the liquidator of Surana Power Limited (Corporate Debtor) to complete the liquidation process of the Corporate Debtor and rejected Bharat Heavy Electricals Limited`s (BHEL) claim of realising security interest over certain assets of the Corporate Debtor, over which BHEL had a lien.
BACKGROUND
The Chennai Bench of the National Company Law Tribunal (NCLT) had passed an order initiating Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor on 20 January 2019. As no resolution plan was approved, the Corporate Debtor was ordered to be liquidated. BHEL had succeeded in an arbitration proceeding against the Corporate Debtor, and an arbitral award, granting BHEL a lien on certain assets and equipment (Assets) of the Corporate Debtor was passed in favour of BHEL, thus making it a secured creditor. The Assets over which BHEL had been granted a lien were the ones which were already hypothecated to all other secured creditors.
However, the liquidator could not proceed with the liquidation process of the Corporate Debtor, as BHEL conveyed its unwillingness to relinquish the security interest over the assets of the Corporate Debtor. All the other secured creditors, representing 73.76% of the value of the total secured assets, had already relinquished the security interest into the liquidation estate. In light of the above, the liquidator filed an application before the NCLT, seeking permission to sell the assets of the Corporate Debtor and distribute the proceeds thereof in accordance with section 53 of the Insolvency and Bankruptcy Code, 2016 (IBC).
The NCLT held that any person having a lien over an asset has a right to enforce the lien against the asset in preference to any charge of hypothecation created over that asset. Thus, the NCLT observed that BHEL, being a secured creditor by virtue of a lien, was entitled to realise security interest in terms of Section 52 of the IBC and the liquidator could not dispose of the Assets as per Section 53 of the IBC.
The order of the NCLT was challenged before the NCLAT by the liquidator.
NCLAT observed that:
BACKGROUND
The Chennai Bench of the National Company Law Tribunal (NCLT) had passed an order initiating Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor on 20 January 2019. As no resolution plan was approved, the Corporate Debtor was ordered to be liquidated. BHEL had succeeded in an arbitration proceeding against the Corporate Debtor, and an arbitral award, granting BHEL a lien on certain assets and equipment (Assets) of the Corporate Debtor was passed in favour of BHEL, thus making it a secured creditor. The Assets over which BHEL had been granted a lien were the ones which were already hypothecated to all other secured creditors.
However, the liquidator could not proceed with the liquidation process of the Corporate Debtor, as BHEL conveyed its unwillingness to relinquish the security interest over the assets of the Corporate Debtor. All the other secured creditors, representing 73.76% of the value of the total secured assets, had already relinquished the security interest into the liquidation estate. In light of the above, the liquidator filed an application before the NCLT, seeking permission to sell the assets of the Corporate Debtor and distribute the proceeds thereof in accordance with section 53 of the Insolvency and Bankruptcy Code, 2016 (IBC).
The NCLT held that any person having a lien over an asset has a right to enforce the lien against the asset in preference to any charge of hypothecation created over that asset. Thus, the NCLT observed that BHEL, being a secured creditor by virtue of a lien, was entitled to realise security interest in terms of Section 52 of the IBC and the liquidator could not dispose of the Assets as per Section 53 of the IBC.
The order of the NCLT was challenged before the NCLAT by the liquidator.
NCLAT observed that:
- A deadlock situation had arisen wherein the liquidator was not able to sell the Assets due to the legal bar created by the proviso to Regulation 32 of the Insolvency And Bankruptcy Board Of India (Liquidation Process) Regulations, 2016, which requires the relinquishment of security interest from all the secured creditors before proceeding with the sale of such secured assets, despite secured creditors representing more than 73% of the value of the secured assets having relinquished their security interest.
- For the purpose of the IBC, all the secured creditors are on the same footing, regardless of the mode of creation of charge. Thus, BHEL, a secured creditor, stands at par with the remaining ten other secured creditors.
- The enforcement of security interest is governed by Section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act). As per Section 13(9) of the SARFAESI Act, any step regarding the realization of security interest by the secured creditors requires confirmation from the creditors having at least 60% of the value of total debt.
- In the present case, the secured creditors, representing 73.76% of the value of the total secured assets, have already relinquished the security interest into the liquidation estate. Thus, it would be prejudicial to stall the liquidation process solely at the instance of BHEL, having only 26.24% of the value of the secured assets.
- Since BHEL does not have the requisite 60% share in value, it does not have right to realize its security interest, because it would be detrimental to the liquidation process and the interest of the remaining ten secured creditors.
- Thus, in light of the above, the NCLAT reversed the decision of the NCLT, and directed the liquidator to complete the liquidation proceedings as per Section 53 of the IBC.
MHCO Comment: This decision of the NCLAT paves the way for liquidators, who may face problems due to minority secured creditors unwilling to relinquish security interest, and thus, delaying the liquidation process. The requirement of having at least 60% of the value of the secured assets, in order to realise security interest, will ensure a smooth and prompt liquidation process. Further the order of the NCLAT also makes it clear that the waterfall mechanism for liquidation under the IBC cannot be stalled by virtue of an arbitration award.
The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance
No comments:
Post a Comment