This article is written by Purvi Devpura, pursuing a Certificate Course in Insolvency and Bankruptcy Code from lawsikho.com.

Introduction

Insolvency and Bankruptcy Code, 2016 (IBC) is a distinctive enactment providing revival opportunities to a company reeling under debt. The code has streamlined the existing fragmented laws dealing with insolvency of a company into a uniform code thereby accelerating the entire insolvency process in India. It is one integrated statute that enumerates provisions for both insolvency resolution and in case of the corporates wherein no course of action can resuscitate them, their liquidation and winding-up.

The Adjudicating Authority time and again keeps adding various tints to the yet evolving jurisprudence of the Code through its various orders and judgements. 

In this article, I will analyse a recent judgement dated 18th June, 2020 passed by the National Company Law Appellate Tribunal, New Delhi in the matter of Mr. Srikanth Dwarakanath, Liquidator of Surana Power Limited V. Bharat Heavy Electricals Limited. 

Why is the case in headlines?

The National Company Law Appellate Tribunal (NCLAT) set aside the order of National Company Law Tribunal, Chennai giving a nod to initiate the liquidation process of Surana Power Limited holding that the liquidation process under the said code outweighs the outcome of arbitration proceedings without hampering the process under IBC.

Facts of the case

• Surana Power Limited, a Tamil Nadu based company, was admitted by the Adjudicating Authority into Insolvency Resolution Process under IBC on 20th January 2019.
• The company did not receive any resolution plans and subsequently was ordered to be liquidated by the Adjudicating Authority.
• Meanwhile, a state-run Bharat Heavy Electricals Limited (BHEL) was successful in getting an ex parte arbitral award against the Surana Power Limited.
• The award granted lien to BHEL over the equipment and goods lying at the site of the Corporate Debtor along with the title rights over finished and unfinished buildings.
• However, BHEL is also one of the secured creditors to Surana Power holding 26.24% share (in value) who would get preference over other unsecured creditors. 
• But due to the waterfall mechanism the share of BHEL would fall to a great extent. 
• Therefore, on the basis of the arbitral award BHEL did not consent to the liquidation process by refusing to relinquish its security interest in the assets of the Corporate Debtor. 
• The refusal was challenged by the Liquidator by filing an application seeking permission to proceed with the sale of the assets of Surana Power before the National Company Law Tribunal, Chennai. 

Ruling of National Company Law Tribunal, Chennai

The Hon’ble Tribunal ruled out in favour of BHEL stating that BHEL’s lien has a preference over the charge created in favour of the remaining Secured Financial Creditors and the Liquidator cannot proceed with the sale of the assets of Surana Power unless BHEL relinquishes the Security interest. 

Appeal

Aggrieved by the order of the NCLT, Chennai an appeal was filed by the Liquidator before the NCLAT, New Delhi to set aside the impugned order of the Hon’ble Chennai bench and to allow the sale of the assets of the Corporate Debtor. 

Ruling of National Company Law Appellate Tribunal, New Delhi

The Hon’ble Tribunal set aside the impugned order dated 20th November 2019 allowing the Liquidator to proceed with the liquidation process of Surana Power Limited. The Hon’ble Bench established the precedence of the liquidation process over the outcome of the arbitral proceedings and thus no arbitral award can halt the proceedings under Insolvency and Bankruptcy Code,2016.

Reasoning and analysis of the judgement

To begin with it becomes imperative to note that upon liquidation, the Secured Creditors have the following two options to realise their Security Interest:

• To enforce its Security Interest by staying outside the liquidation process wherein there is a possibility that the Secured Creditors might lose their priority in distribution of assets with respect to any portion of debt that they could not recover on enforcement as per Section 52 of the code;
• To relinquish the Security Interest and be a part of the Liquidation process wherein their dues are placed at a high rank in the priority of distribution as stated under Section 53 of the Code.

It is pertinent to note that when all the Secured Creditors have relinquished their Security Interest in the liquidation estate of the Corporate Debtor, then only the Liquidator can proceed under Regulation 32 of the IBBI (Liquidation Process), Regulations, 2016 and dispose of the assets of the Corporate Debtor. In the present scenario, the refusal of BHEL to relinquish its Security Interest has created a deadlock situation wherein the Liquidator is unable to proceed with the sale of the assets of the Corporate Debtor despite the other Secured Creditors having a total value of 73.76% in the Secured Assets have relinquished their Security Interests.

Further, the view taken by the Adjudicating Authority that BHEL’s lien has a preference over the Secured Assets of the Corporate Debtor as against the remaining Secured creditors is violative of Section 53 of the IBC which enumerates the waterfall mechanism. 

What is the waterfall mechanism under Section 53?

• It sets forth the manner in which the proceeds from the sale of liquidation assets are to be distributed amongst various stakeholders.
• The top most priority is given to the Insolvency Resolution Process costs followed by the Workmen dues of the Corporate Debtor.
• The Workmen dues include all sorts of funds maintained for the welfare and social being of the Workforce such as salaries, provident, pension, retirement etc.
• Under this mechanism, Secured Creditors are prioritized over Unsecured Creditors. The Secured Creditors are to be paid in full to the extent of their admitted claim before proceeding with the claims of the Unsecured Creditors.
• Therefore, it becomes evident that only when all the dues of the Secured Creditors are served, the Liquidator can move towards the claims of the Unsecured Creditors.[1]

Hence, the Adjudicating Authority has erred in realizing that all the Secured Creditors are placed at the equal footing in the liquidation process and BHEL cannot presume to have a preferential right over the assets against the other Secured Creditors. 

As BHEL is also a Secured Creditor at par with the remaining other ten Secured Creditors of the Corporate Debtor, it becomes pertinent to state the provisions of SARFAESI Act dealing with the enforcement of Security Interest. 

As per Section 13(9) of the SARFAESI Act, 2002:

[Subject to the provisions of the Insolvency and Bankruptcy Code, 2016, in the case of] financing of a financial asset by more than one secured creditors or joint financing of a financial asset by secured creditors, no secured creditor shall be entitled to exercise any or all of the rights conferred on him under or pursuant to sub-section (4) unless exercise of such right is agreed upon by the secured creditors representing not less than [sixty per cent] in value of the amount outstanding as on a record date and such action shall be binding on all the secured creditors;

Considering the above stated provision, the NCLAT opined that it would be prejudicial to stall the liquidation process at the instance of one creditor having only 26.24% share (in value) wherein all the other creditors having 73.76% share (in value) have already relinquished their Security Interest into the liquidation estate. Hence, the decision of the 73.76% Secured creditors who are in majority shall be binding on the other dissenting Secured creditors, herein, BHEL.

Further, the Appellate Tribunal placed reliance on its verdict in JM Financial Asset Reconstruction Company Ltd. Vs. Finquest Financial Solutions Pvt. Ltd wherein it opined that under Section 52 only one Secured Creditor can enforce his right to realise his Security Interest out of the Secured Assets of the Corporate Debtor. When one Secured Creditor has enforced his right by virtue of Section 52, no other Secured Creditor can enforce his right subsequently with respect to the same Secured Assets, as the excess amount after the first enforcement is required to be deposited in the account of the Liquidator.[2] 

In the present case the Liquidator has cleared the air by reiterating that the right of BHEL is not exclusive as there are other ten Secured Creditors placed at par with the Creditor in question in respect of the same Secured Assets. Therefore, the only option left with BHEL was to realise its Security Interest in accordance with provisions of Section 13(9) of the SARFAESI Act, 2002. 

Since, BHEL did not have the requisite 60% share (in value) it cannot be allowed to realise its Security Interest as it would become detrimental to the interest of other Secured Creditors thereby subverting the very essence of the Liquidation process.

Conclusively, in the above-mentioned case the Appellate Tribunal reiterated that the Insolvency and Bankruptcy Code,2016 is itself a complete code and no outcome of Arbitral Proceedings can halt the proceedings under IBC. It further stated that all the Secured Creditors under IBC are placed at the equal footing and no Secured Creditor can said to have a preferential right as against the other Secured Creditors over the Secured Assets of the Corporate Debtor as it would violate the purpose of the Liquidation process itself. In order to ensure that every stakeholder receives fair value of their shares, it becomes indispensable to follow the waterfall mechanism as it enumerates a crystal-clear manner in which the assets of the Corporate Debtor are to be distributed at the time of Liquidation. Hence, the verdict of the Appellate Tribunal explicitly states the precedence of liquidation process under IBC over the outcome of arbitral proceedings.  

References

1. https://www.iasparliament.com/current-affairs/daily-news/nclat-ruling-liquidation-holds-precedence
2. https://ibbi.gov.in//uploads/order/2020-06-23-175455-7my21-8f14e45fceea167a5a36d edd4bea2543.pdf

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