Thursday 13 July 2023

PTC India Financial Services Ltd. Vs. Vikas Prakash Gupta RP - On careful examination of Section 53(1), case laws and other facts as discussed above we are of the view that Section 53(1) does not recognize any inter se ranking of charges among financial creditors existing before initiation of CIRP for distribution of sale proceeds under liquidation.

NCLT Hyderabad (06.07.2023) In PTC India Financial Services Ltd. Vs. Vikas Prakash Gupta RP [IA. No. 1341 of 2022 and I.A. No.254/2023  in CP (IB) No. 377/7/HDB/2018, (2023) ibclaw.in 329 NCLT] held that;

  • On careful examination of Section 53(1), case laws and other facts as discussed above we are of the view that Section 53(1) does not recognize any inter se ranking of charges among financial creditors existing before initiation of CIRP for distribution of sale proceeds under liquidation. 

  • Section 53(2) also further clarifies that liquidator shall disregard any contractual arrangement between recipient under Sub-Section 53(1) with equal ranking if disrupting the order of priority. 

  • Also, Section 53(1) very clearly defines the classes and order of water fall mechanism and has no scope for adding other sub-classes. 


Excerpts of the Order;

IA. No. 1341 of 2022

# 5. After hearing learned counsels from both sides and after perusal of written statements and other documents submitted to the Tribunal, the point for consideration is Point:

  • “Whether inter se ranking of the charges among Secured Financial Creditors existing before initiation of CIRP will be recognized while distributing the sale proceeds in liquidation under Section 53(1) of IBC, 2016”. 


6. Our observations in this regard are as under: 

a. This is an application filed by one of the secured financial creditor i.e PTC India Financial Services Limited against the Liquidator, and SBI challenging the distribution of proceeds from the sale of corporate debtor under liquidation. The third respondent is M/s. Indo Unique Flame Limited, who has also filed a similar Application, IA No.254/2023 against the Respondent No.1&2. 


b. In the stake holders meeting dated 28.09.2022, an opinion on the basis of a legal decision was taken to distribute the proceeds from the sale of assets of the corporate debtor as per the inter se ranking of charges and accordingly liquidator has given full amount to SBI who is the first charge holder amongst the Secured financial creditors. Some relevant extract from the above said report are reproduced below: 

  • “PTC India Financial Services are secured creditors with second charge on the movable and immovable fixed assets of the corporate debtor.” 

  • “Liquidator assured the financial creditors that as per Regulation 43 of the liquidation regulations, undertaking from the eligible stakeholders shall be taken wherein they are required to refund the amount of money which has been paid to them in excess if any to which they are not entitled to or no subsequently become entitled on the basis of decision of any court or authority. Accordingly, the same shall be taken from the SBI before the funds are distributed”. 


c. The Applicant herein has alleged that the act of liquidator is contrary to the Section 53(1) of the IBC, 2016 and he has wrongly distributed the sale proceeds to only one secured financial creditor i.e SBI and not made justice to the Applicant despite Applicant being a secured financial creditor. 


d. Applicant further pleaded that Section 53(1) does not stipulate any inter se ranking amongst secured financial creditor and all the secured financial creditors are in one category and there is no ranking or sub-clause like first charge holder or second charge holder amongst the secured financial creditors. The Applicant has relied on the Judgment of Hon’ble NCLAT dated 26.05.2022 in the matter of Oriental Bank of Commerce Vs Anil Anchalia and Anr. Being Comp.App(AT) (Ins) No.547/2022. The relevant portion of the judgment is reproduced below: 


In a recent judgment delivered by this Appellate Tribunal in Company Appeal (AT) (Ins.) No. 644 of 2021 dated 06.05.2022-"Indian Bank vs. Charu Committee of GB Global Ltd. & Anr.", a similar contention raised by the Indian Bank which was secured creditor who was Dissenting Financial Creditor was repelled. After relying the judgment of the Hon'ble Supreme Court in M/s. Amit Metaliks Ltd. (supra), this Tribunal in paragraphs 27 and 28 laid down following:- 

  • 27. The Judgment of the Hon'ble Supreme Court, in the above case, is that when the extent of value received by the creditors under Section 53 is given which is in the same proportion and percentage as provided to the other Financial Creditors, the challenge is to be repelled." 

  • We thus, do not find any merit in the submissions of the Learned Counsel for the Appellant. The submission that earlier judgment of this Tribunal in "Technology Development Board" having been stayed by the Hon'ble Supreme Court on 29.06.2021, no reliance can be placed on the said judgment looses its importance in view of the subsequent judgment of the Hon'ble Supreme Court dated 13.05.2021 M/s. Amit Metaliks Ltd. (supra). The issue is no more res integra and no error is committed by the Adjudicating Authority in rejecting the Application filed by the Appellant. There is no merit in the Appeal. The Appeal is dismissed. 


# 7. The respondents have placed reliance on Section 48 of the Transfer of Property Act, 1882, accordingly to which the claim of first charge holder shall prevail over the claim of second charge holder. In our view the contention of the respondents is not maintainable as Section 53(1) very clearly states that 

  • “Section 53(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 and in such manner as may be specified” and IBC being a new law, it will certainly prevail upon the Transfer of Property Act, 1882. 


8. In this case the issue revolve around Section 53(1) of IBC, 2016 and therefore the said section is reproduced below: 

  • Section 53 (2) 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 and in such manner as may be specified, 

  • (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 ARY relinquished security in the manner set out in section 52; 

  • c) wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date; 

  • (d) financial debts owed to unsecured creditors; 

  • (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; 

  • (f) any remaining debts and dues; 

  • (g) preference shareholders, if any; and 

  • (h) equity shareholders or partners, as the case may be. 



# 9. On careful examination of Section 53(1), case laws and other facts as discussed above we are of the view that Section 53(1) does not recognize any inter se ranking of charges among financial creditors existing before initiation of CIRP for distribution of sale proceeds under liquidation. Section 53(2) also further clarifies that liquidator shall disregard any contractual arrangement between recipient under Sub-Section 53(1) with equal ranking if disrupting the order of priority. Also, Section 53(1) very clearly defines the classes and order of water fall mechanism and has no scope for adding other sub-classes. 


# 10. In view of the above we allow this Application and direct the respondents as under 

  • 1. The 2 nd Respondent (SBI) is hereby directed to refund the amount as per the undertaking given by them to the Liquidator as referred in minutes of SCC meeting dated 07.10.2022. 

  • 2. Liquidator is directed to re-calculate and redistribute the amount to all secured financial creditors putting all of them on same pedestal irrespective of priority of charge. 


# 11. With the above directions IA No.1341/2022 is disposed of. 


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I.A. No.254/2023 

# 1. This application is filed under Section 60(5) of the Insolvency and Bankruptcy Code, 2016 Read With Rule 11 and 13 of the National Company Law Tribunal Rules, 2016 seeking following reliefs : 

  • a) Declare the decision as regards to the distribution of sale proceeds in stakeholders meeting dated 28.09.2022 as null and void. 

  • b) Directions to the Liquidator to distribute the proceeds from the sale of assets of the Corporate Debtor under liquidation, equally among all the secured creditors of the Corporate Debtor as envisaged under Section 53 of the Code; 

  • c) Directions to State Bank of India, i.e., Respondent No.2 to refund the amount as mentioned in the distribution chart with interest at the rate of SBI prime lending rate to the Liquidator for recalculation and redistribution to all Secured creditors, irrespective of nature of charges; 

  • d) Grant ex-parte ad interim stay on distribution of the proceeds of the sale of the assets of the Corporate Debtor to State Bank of India during the pendency of the instant Application; OR In the alternative in case proceeds already distributed, then direct SBI to secure the entire amount distributed to them in a No Lien Interest bearing account during the pendency of the instant application; and/or 

  • e) To pass any such orders as may be deemed fit, proper and necessary in the instant case. 


# 5. After hearing learned counsels from both sides and after perusal of written statements and other documents submitted to the Tribunal, the point for consideration is Point: 

  • “Whether inter se ranking of the charges among Secured Financial Creditors existing before initiation of CIRP will be recognized while distributing the sale proceeds in liquidation under Section 53(1) of IBC, 2016”. 


# 6. Our observations in this regard are as under: 


a. This is an application filed by one of the secured financial creditor i.e M/s Indo Unique Flame Limited against the Liquidator and SBI challenging the distribution of proceeds from the sale of corporate debtor under liquidation. 


b. In the stake holders meeting dated 28.09.2022, an opinion on the basis of a legal decision was taken to distribute the proceeds from the sale of assets of the corporate debtor as per the inter se ranking of charges and accordingly liquidator has given full amount to SBI who is the first charge holder amongst the Secured financial creditors. Some relevant extract from the above said report are reproduced below: “The Representative of Indo Unique Flame Limited enquired the reasons and whey he should not be categorized as a secured first charge holder when the charge is registered with MCA and NOC obtained from SBI has been submitted with liquidator.” 


c. The Applicant herein has alleged that the act of liquidator is contrary to the Section 53(1) of the IBC, 2016 and he has wrongly distributed the sale proceeds to only one secured financial creditor i.e SBI and not made justice to the Applicant despite Applicant being a secured financial creditor. 


d. Applicant further pleaded that Section 53(1) does not stipulate any inter se ranking amongst secured financial creditor and all the secured financial creditors are in one category

and there is no ranking or sub-clause like first charge holder or second charge holder amongst the secured financial creditors. The Applicant has relied on the Judgment of Hon’ble NCLAT dated 26.05.2022 in the matter of Oriental Bank of Commerce Vs Anil Anchalia and Anr. Being Comp.App(AT) (Ins) No.547/2022. The relevant portion of the judgment is reproduced below: 

  • In a recent judgment delivered by this Appellate Tribunal in Company Appeal (AT) (Ins.) No. 644 of 2021 dated 06.05.2022-"Indian Bank vs. Charu Committee of GB Global Ltd. & Anr.", a similar contention raised by the Indian Bank which was secured creditor who was Dissenting Financial Creditor was repelled. After relying the judgment of the Hon'ble Supreme Court in M/s. Amit Metaliks Ltd. (supra), this Tribunal in paragraphs 27 and 28 laid down following:- 

  • 27. The Judgment of the Hon'ble Supreme Court, in the above case, is that when the extent of value received by the creditors under Section 53 is given which is in the same proportion and percentage as provided to the other Financial Creditors, the challenge is to be repelled." 

  • We thus, do not find any merit in the submissions of the Learned Counsel for the Appellant. The submission that earlier judgment of this Tribunal in "Technology Development Board" having been stayed by the Hon'ble Supreme Court on 29.06.2021, no reliance can be placed on the said judgment looses its importance in view of the subsequent judgment of the Hon'ble Supreme Court dated 13.05.2021 M/s. Amit Metaliks Ltd. (supra). 

  • The issue is no more res integra and no error is committed by the Adjudicating Authority in rejecting the Application filed by the Appellant. There is no merit in the Appeal. The Appeal is dismissed. 


e) The respondents have placed reliance on Section 48 of the Transfer of Property Act, 1882, accordingly to which the claim of first charge holder shall prevail over the claim of second charge holder. In our view the contention of the respondents is not maintainable as Section 53(1) very clearly states that 

  • “ Section 53(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 and in such manner as may be specified” and IBC being a new law, it will certainly prevail upon the Transfer of Property Act, 1882.


f) In this case the issue revolve around Section 53(1) of IBC, 2016 and therefore the said section is reproduced below: 

  • Section 53 (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 and in such manner as may be specified, 

  • (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 ARY relinquished security in the manner set out in section 52; 

  • c) wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date; 

  • (d) financial debts owed to unsecured creditors; 

  • (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; 

  • (f) any remaining debts and dues; 

  • (g) preference shareholders, if any; and 

  • (h) equity shareholders or partners, as the case may be. 


g) On careful examination of Section 53(1), case laws and other facts as discussed above we are of the view that Section 53(1) does not recognize any inter se ranking of charges among financial creditors existing before initiation of CIRP for distribution of sale proceeds under liquidation. Section 53(2) also further clarifies that liquidator shall disregard any contractual arrangement between recipient under Sub-Section 53(1) with equal ranking if disrupting the order of priority. Also, Section 53(1) very clearly defines the classes and order of water fall mechanism and has no scope for adding other sub-classes. 


h) In view of the above we allow this Application and direct the respondents as under 

  • 1. The 2nd Respondent (SBI) is hereby directed to refund the amount as per the undertaking given by them to the Liquidator as referred in minutes of SCC meeting dated 07.10.2022.

  •  2. Liquidator is directed to re-calculate and redistribute the amount to all secured financial creditors putting all of them on same pedestal irrespective of priority of charge. 


i) With the above directions IA No.254/2023 is disposed of.


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