Suraksha Asset Reconstruction Ltd. Vs. Varsha Bagri, Liquidator of Bharat NRE Coke Ltd. - In the facts of the above case, we are of the view that the liquidator did not commit any error in communicating decision dated 29.05.2023 to the Appellant that on account of non-payment of liquidation costs, security interest of the Appellant stood relinquished in terms of Regulation 21A (2) &(3) of the Liquidation Regulations.

 NCLAT (2024.12.09) in Suraksha Asset Reconstruction Ltd. Vs. Varsha Bagri, Liquidator of Bharat NRE Coke Ltd. [Company Appeal (AT) (Insolvency) No. 650 of 2024 & I.A. No. 2325 of 2024] held that;

• In the facts of the above case, we are of the view that the liquidator did not commit any error in communicating decision dated 29.05.2023 to the Appellant that on account of non-payment of liquidation costs, security interest of the Appellant stood relinquished in terms of Regulation 21A (2) &(3) of the Liquidation Regulations. 

Excerpts of the Order;

This appeal by a Financial Creditor has been filed challenging the order dated 13.03.2024 passed by the Adjudicating Authority (National Company Law Tribunal), Special Bench, Court No.II, Kolkata in I.A (I.B) No.1069/KB/2023. By the impugned order, I.A (I.B) No.1069/KB/2023 filed by the Appellant has been disposed of refusing the prayer made in the application. Appellant aggrieved by the order has come up in this Appeal.

# 2. Brief facts of the case necessary to be noticed for deciding the Appeal are:-

2.1. In the CIRP process of the Corporate Debtor- Bharat NRE Coke Limited, there being no resolution, order of liquidation was passed by the Adjudicating Authority on 11.12.2019. On 10.01.2020, the Appellant- Suraksha Asset Reconstruction Ltd. informed the liquidator of its intention to realise its security interest under SARFAESI Act, 2002. On 22.02.2020, Appellant issued notice under Section 13(2) of the SARFAESI Act for total claim of Rs.141 Crores. IA No.40/KB/2021 was filed by the Appellant seeking direction to liquidator to handover the possession of 47.07 acres of land mortgaged with Suraksha Asset Reconstruction Ltd. Adjudicating Authority vide order dated 07.01.2021 directed the Block and Land Development Officer of Dharwad to carry out a survey to demarcate the land hypothecated to Appellant, and upon such demarcation, the Liquidator of BNCL had to hand over the land to Appellant. Demarcation report was filed on 07.08.2021, thereafter the Appellant issued notice under Section 13(4) of the SARFAESI Act, 2002 on 20.08.2021. The Respondent- Varsha Bagri was appointed by the NCLT as liquidator of the corporate debtor. Appellant intimated the liquidator vide e-mail dated 04.04.2023 that it has taken symbolic possession of the assets. Liquidator on 07.04.2023 wrote back to the Appellant that steps taken by the Appellant is without process of law. On 29.05.2023, liquidator sent an e-mail informing that security interest of the Appellant stood relinquished in terms of Regulation 21A (2) (a) and 21 (3) of the IBBI (Liquidation Process) Regulation, 2016 on the ground of Appellant having failed to pay liquidation costs. Appellant thereafter filed IA  No.1069 of 2023 praying for quashing the e-mail dated 29.05.2023. IA filed by the Appellant was opposed by the liquidator. Liquidator pleaded that as far back as 16.02.2023 the liquidator had demanded payment of Rs.20 lakhs towards CIRP costs and liquidation costs, till date the said amount has not been paid. Appellant’s case that it has taken symbolic possession is incorrect since the actual possession was one with Jeju Metals Private Limited. Adjudicating Authority heard the parties and by impugned order dated 13.03.2024 held that the Appellant having failed to discharge its  obligations under Regulation 21A within 90 days, Security interest shall become part of the liquidation estate. Aggrieved by the order dated 13.03.2024, this Appeal has been filed.

# 3. We have heard Shri Abhijeet Sinha, Learned Senior Counsel for the Appellant and Shri Joy Saha, Learned Senior Counsel for the Liquidator.

# 4. Counsel for the Appellant challenging the order submits that the Appellant immediately after liquidation commencement on 11.12.2019 has submitted Form D on 09.01.2020 asserting its security interest in the assets. It was followed by an intimation dated 10.01.2020 that the Appellant intended to enforce its security interest under SARFAESI Act, 2002. Liquidator never handed over possession of the assets to the Appellant. Demarcation exercise was completed and report was submitted on 07.08.2021 on the basis of which Appellant had issued notice under Section 13(4) of the SARFAESI Act, 2002. Parties were directed by the NCLT to file draft consent order which was although prepared, but no order could be passed on the draft consent order. In the meantime, erstwhile liquidator was removed by the NCLT on 24.11.2022. On 16.02.2023, liquidator requested an ad hoc payment of Rs.20 lakhs towards the CIRP and liquidation costs. Appellant requested for a formal invoice to enable disbursal of payment which was never provided by the liquidator. On 18.02.2023, liquidator sent some unrelated sample bills. Appellant has taken symbolic possession by issuing notice under Section 13(4) which was shared with liquidator on 04.04.2024. The possession notice was objected by liquidator and by e-mail dated 29.05.2023, Appellant’s security interest was sought to be relinquished under Regulation 21A due to non-payment of costs. Even though liquidator failed to raise any invoice for the same, Appellant was already ready and willing to pay liquidation cost. Appellant having already intimated intention to realise its security interest vide letter dated 10.01.2020, there is no question of relinquishment of security interest of the Appellant. Appellant has right under Section 52 of the IBC to realise its security interest. Appellant having never refused to pay CIRP/Liquidation costs, there is no question of relinquishment of its security interest. Appellant could not proceed to realise its security interest because both the erstwhile liquidator and current liquidator never handed over possession of the mortgaged land and secured assets of the corporate debtor to the Appellant despite clear direction dated 07.01.2021 of the Adjudicating Authority. Counsel for the Appellant has relied on Section 52(3) and 52(8). It is submitted that there is anomaly in Regulation 21A(2) and 21A(3) which need to be harmoniously construed with Section 52 of the Code, failing which, the Regulation 21A (2) & (3) would be rendered ultra vires to Section 52 of the IBC.

# 5. Shri Joy Saha, Learned Senior Counsel for the Respondent refuting the submissions of the Appellant submits that there is no issue that Appellant has not communicated its intention to realise its own security vide its letter dated 10.01.2020. It is, however, submitted that the Appellant has not paid the amount of CIRP costs and liquidation costs in spite of e-mail sent by the liquidator on 30.01.2020, 30.06.2020, 27.10.2020 and 16.02.2023. Appellant has admitted its liability to make payment of the estimated liquidation costs but has not made any payment. It is submitted that Suraksha Asset Reconstruction Ltd. being part of the Stakeholders’ Consultation Committee (SCC) has agreed in the SCC and Joint Lenders’ Meeting for joint sale of property of the corporate debtor located at Dharwad. It, at this stage, cannot contend that it shall realise its security in the assets. It is submitted that the Appellant having agreed for joint sale before the Joint Lenders’ Meeting of SCC, it has no right to maintain this Appeal praying that it shall realise its security interest. It is submitted that there is issue between Bharat NRE Coke Ltd. and Gujarat NRE Coke Ltd. regarding 32 acres which was leased out to Gujarat NRE Coke Ltd. It is submitted that IA No.476 of 2021 filed by Gujarat NRE Coke Ltd. praying that liquidator of Bharat NRE Coke Ltd. to transfer 32 acres is pending. Liquidator of Bharat NRE Coke Ltd. has also filed an IA No.333 of 2021 praying that the liquidator of Gujarat NRE Coke Ltd. be directed to handover possession of 32 acres which application is also pending. The claim of Suraksha over the property in question is subject to outcome of two applications. It is submitted that the liquidator has written to the Appellant to pay the liquidation costs on 16.02.2023 and 06.06.2023 which having not been paid, the security interest of Suraksha is subsumed in the liquidation estate. It is submitted that the premises were in possession of ‘Jeju Metals Pvt. Ltd.’ and it was liquidator of Bharat NRE Coke Ltd. who filed application IA No.1073 of 2021 praying for eviction of Jeju Metals Pvt. Ltd. which was finally allowed on 20.03.2024 and Jeju Metals Pvt. Ltd. has handed over possession of factory to the liquidator on 29.05.2024. Suraksha did not take any steps to evict Jeju Metals Pvt. Ltd. It is submitted that the security interest of the Appellant has been subsumed in the liquidation estate under Regulation 21A (2) and 21A (3) and present is not a case of applicability of Regulation 21A(1). It is submitted that the Appellant has intimated that he will realise its security interest on 10.01.2020. It is further submitted that in the Joint Lenders’ Meeting dated 17.11.2023, Suraksha agreed to obtain valuation for joint sale of the property by the two liquidators. Further, in the Joint Lenders’ Meeting held on 22.03.2024, Suraksha agreed for joint sale of the assets of Bharat NRE Coke Ltd. and Gujarat NRE Coke Ltd. by two liquidators. Again on 12.04.2024 in the Joint Lenders Meeting, Suraksha agreed for joint sale. In view of the aforesaid, when steps for joint sale has been agreed, Appellant cannot be heard in saying that he himself realise its security interest. Submission of the Appellant that Regulation 21A(2) and 21A(3) be read down cannot be accepted and needs to be rejected outright. 

# 6. We have considered the submissions of the Counsel for the parties and perused the record.

# 7. There is no dispute between the parties that after liquidation commencement on 11.12.2019, Appellant submitted Form D dated 09.01.2020 to the liquidator Bharat NRE Coke Ltd. and on 10.01.2020, it wrote letter to the liquidator intimating that Suraksha ARC which has to realise its security in the manner as specified in the Code read with Regulations. An order dated 07.01.2021 was passed by the Adjudicating Authority on the application IA No.854 of 2020 filed by the liquidator seeking direction against the Appellant to release the assets of the corporate debtor which was mortgaged to them whereas IA No.40 of 2020 was filed by Suraksha seeking direction against the liquidator to handover the property. Adjudicating Authority directed for obtaining a report from Block Land and Land Development Officer and directed the matter to be listed again on 03.02.2021. After order of the Adjudicating Authority report was submitted. A draft consent order was also to be prepared by the Appellant which was however never given effect to nor any order was passed by the Adjudicating Authority. The liquidator vide email dated 16.02.2023 asked the Appellant to make adhoc payment of Rs.20 Lakhs towards the proportionate share of the CIRP costs and estimated liquidation cost. The said email was replied by the Appellant asking invoice. Liquidator sent sample invoices. After certain correspondences between the parties, liquidator issued e-mail dated 29.05.2023 which was challenged by the Appellant before the Adjudicating Authority by filing IA No.1069 of 2023. Email dated 29.05.2023 issued by the liquidator to the Appellant is as follows:- 

• “From: bha6750@rediffmail.com on behalf of Bharat NRE Coke <bha6750@rediffmail.com> Sent: Monday, May 29, 2023 5:11 PM

• To: Kanhaiya Maheshwari

• Subject: Deemed relinquishment of your security interest on the assets of M/s Bharat NRE Coke Limited (BNCL) in liquidation under The Insolvency and Bankruptcy Code, 2016

• Sir,

• 1. Bharat NRE Coke Limited (BNCL) went under liquidation vide the order passed by Hon'ble NCLT on 11/12/2019. Pursuant to the order of the learned Adjudicating Authority, various public announcements were made whereon Suraksha Asset Reconstruction Limited (SARL) submitted their claim on 09/01/2020 through an email and later by registered post stating that SARL would not relinquish their security interest.

• 2. In reply the erstwhile liquidator through an email dated 30/01/2020 enquired about certain matters including the proportionate cost of CIRP & Liquidation cost. Subsequently, the relevant provisions of IBC were also specifically intimated and pointed out to SARL and SARL was repeatedly informed of its obligations with regard to and towards bearing the proportionate cost of CIRP & Liquidation cost (including estimates) through several mails on 30/06/2020 and 27/10/2020 sent by erstwhile liquidator.

• 3. The demands, requests and representations contained in the aforesaid emails were ignored and not even responded to by you and as such you failed to pay any heed towards any of these mails. Finally, the undersigned, being the present liquidator, had demanded an immediate payment of Rs. 20,00,000/- (Rupees Twenty Lacs only) towards the proportionate CIRP & liquidation cost (including estimates) through an email dated 16/02/2023 but still SARL chose not to take any steps to make any payment. 

• 4. In view of the facts as stated above and as provided by regulation 21A (2) (a) and 21 (3) of IBBI (Liquidation Process) Regulation 2016, you are hereby informed that all the assets, immovable and/or movable, comprising the security interest of SARL as security shall be deemed to be relinquished and shall now be and form a part of the liquidation estate of BNCL, in liquidation.

• 5. I acknowledge the receipt of your email dated 25/05/2023 whereby the undersigned was informed that SARL has received a communication through email from JMPL (unathourised occupier of the property) on 22/05/2023. SARL further stated that JMPL has requested SARL to take physical possession of the property and also intends to remove its security guards from the midnight of 31/05/2023. Upon receiving the said email dated 25/05/2023 the undersigned has requested you to share the email dated 22/05/2023 received from Jeju as stated by you. However, I have not yet received by you from JMPL. However, I have not yet received any reply from your end.

• 6. Having regard to the fact that your security interest has been subsumed to form a part of the liquidation estate of BNCL you are advised not to take any physical possession of the assets and the properties (both movable and immovable) of BNCL. You are also put to notice that all efforts and arrangements are being made by me in order to obtain physical possession of the assets and properties of BNCL from JMP

• 7. In light of the facts stated as above, SARL shall henceforth be recognized as an Unsecured Financial Creditor in the list of Stakeholders of BNCL, in liquidation. The relevant steps towards the regrouping of the list of Stakeholders would be done by the undersigned in the due course and the fresh list of Stakeholders would be available on the website of IBBI.

• 8. In the circumstances, SARL is requested to forbear and refrain from taking any steps to assert any security interest or take possession or to sell any of the movable and immovable assets and properties of BNCL failing which I shall take necessary and appropriate steps against you before the learned Adjudicating Authority in which event you will be responsible and liable for all costs and consequences arising there from.

• Regards,

• Varsha Bagri

• Bharat NRE Coke Limited Liquidator Insolvency Professional

• FCA, CS, CMA

• P-273 Maniktala Main Road,

• Kolkata-700054

• (M) 9339239644"

# 8. It was after issuance of the aforesaid e-mail, Appellant filed the application challenging the said e-mail. Prayers made in the IA No.1069 of 2023 are as follows:-

• “i. Allow the present application and quash the emails dated 29.05.2023 sent by the Liquidator for being unlawful;

• ii. Direct that no coercive action pursuant to such emails dated 29.05.2023 and/or any emails thereafter should be taken by the Liquidator of BNCL which may be prejudicial to the interest of the Applicant as a secured financial creditor; and

• iii. Pass any such other order(s) and further order(s) as this Hon'ble Tribunal deems fit and proper in the facts and circumstances of the present case."

# 9. Section 52 of the IBC empowers secured creditors to relinquish its security interest to the liquidation estates or to realise its security interest in the manner as specified in Section. Section 52(1) is as follows:-

• “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.”

# 10. Regulations have been framed under the IBC including under Section 52 namely— ‘Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations 2016’. Regulation 21A was inserted w.e.f. 25.07.2019 which is as follows:-

• “21A. Presumption of security interest. (1) A secured creditor shall inform the liquidator of its decision to relinquish its security interest to the liquidation estate or realise its security interest, as the case may be, in Form C or Form D of Schedule II:

• Provided that, where a secured creditor does not intimate its decision within thirty days from the liquidation commencement date, the assets covered under the security interest shall be presumed to be part of the liquidation estate.

• (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 subsection (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

• (b) the excess of the realised value of the asset, hich is subject to security interest, over the  amount of his claims admitted, to the liquidator within one hundred and eighty days from the liquidation commencement date:

• Provided that where the amount payable under this sub-regulation is not certain by the date the amount is payable under this sub-regulation, the secured creditor shall pay the amount, as estimated by the liquidator: Provided further that any difference between the amount payable under this subregulation and the amount paid under the first proviso shall be made good by the secured creditor or the liquidator, as the case may be, as soon as the amount payable under this sub-regulation is certain and so informed by the liquidator.

• (3) Where a secured creditor fails to comply with subregulation (2), the asset, which is subject to security interest, shall become part of the liquidation estate. [Explanation.- It is hereby clarified that the requirements of this regulation shall apply to the liquidation processes commencing on or after the date of the commencement of the Insolvency and Bankruptcy Board of India (Liquidation Process) (Amendment) Regulations, 2019.]”

# 11. In the present case, there are ample materials to indicate that Appellant has informed the liquidator of its decision to relinquish its security interest. Letter dated 10.01.2020 relied by the Appellant is referred, thus, there is no applicability of Section 21A(1) in the present case. Reliance which has been placed by the liquidator is on sub-regulations (2) and (3) of Regulation 21A. In the present case, the Appellant after informing the liquidator on 10.01.2020 proceeded to realise its security interest by issuing notice under Section 13(2) on 20.08.2021 which was already intimated to the liquidator on 10.01.2020. Present is a case where liquidator has communicated the Appellant twice for payment of proportionate share of the liquidation costs on 16.02.2023 and 29.05.2023 although communication was sent in response to the said letter by the Appellant but fact remains that no payment was made by the Appellant towards liquidation costs. Submission of the Counsel for the Appellant that Appellant is ready and has never denied to make the payment shall not make the sub-regulation (3) of Regulation 21A inapplicable. When Appellant has proceeded to realise its security interest it was required to pay the amount as referred to in Regulation 21A (2)(a). The Adjudicating Authority thus, has rightly referred to and relied on Regulation 21A (2) & (3). In paragraph 8.5, following was observed:-

• “8.5 The liquidator admittedly estimated the value at Rs. 20 lakhs and demanded the sum of Rs 20 lakhs on 16.02.2023 towards CIRP costs. Since it was not paid, the liquidator on 29th May 2023 has rightly declared the alleged security interest to have subsumed into the liquidation estate of Bharat NRE Coke Limited."

# 12. We however, agree with the submission of the Counsel for the Appellant as well as Counsel for the Respondent that present is a case where Appellant has communicated its intention to realise its security interest, hence, there is no applicability of Regulation 21A(1).

# 13. The second submission which has been much pressed by the Counsel for the Respondent is that Appellant in Joint Lenders Meeting has agreed for joint sale of the assets by both the liquidators. In Joint Lenders Meeting, the Appellant was represented and has agreed for joint sale of the assets. It is not open for the Appellant to now contend that it shall realise its security. Counsel for the Respondent has referred to Joint Lenders Meeting held on 22.03.2024 in which Joint Lenders Meeting representatives of Suraksha were also present. Counsel for the Respondent has referred to Minutes of Joint Lenders Meeting held on 22.03.2024 filed as Annexure R-5 to the reply filed by the Respondent which indicates that at Serial Nos.11 and 12 of virtual attendees, two representatives of Suraksha are present. In the minutes, following was noticed:-

• “Under the above situation, the participants present were of the view that both the liquidators should fast track the process of Joint sale of the above assets of the coke plants of both the Corporate Debtors. The representative of SARC also agreed that given the intermingling of assets and absence of physical demarcation of factories of both the Corporate Debtors at Dharwad, a joint sale for the purpose of value maximization is inevitable. Upon further enquiry by SARC, the liquidator of BNCL clarified that the distribution of the proceeds of the joint sale of assets as aforesaid shall be carried out in accordance with the provisions of Section 53 of the Code."

# 14. In the above meeting, all the stakeholders agreed to the suggestion of the liquidator towards joint sale of the assets. Another Joint Lenders Meeting relied by the Counsel for the Respondent is the Joint Lenders Meeting dated 12.04.2024 where again two representatives of Suraksha were present which is reflected from Annexure R-6 of the reply. In the minutes, it was noted that Suraksha although having agreed in the Joint Lenders Meeting held on 12.04.2024 for joint sale has filed the appeal against the order passed in IA No.1069 of 2023. The representatives of Appellant intimated that they have no instructions from the apposite parties so they are unable to comment on the matter. In the said meeting, even the modalities of the joint sale and appropriation of proceeds to the liquidation estates was mentioned. Suraksha has pleaded in the meeting that the above decision be put to vote, however, other lenders took the view that all having been consented separate voting is not required. 

# 15. We have also noticed the submission of the Counsel for the Respondent that certain issues regarding 32 acres of land claimed by Gujarat NRE Coke Ltd. is pending consideration before the Adjudicating Authority. Suraksha has not paid the CIRP costs or the liquidation costs.  

# 16. In the facts of the above case, we are of the view that the liquidator did not commit any error in communicating decision dated 29.05.2023 to the Appellant that on account of non-payment of liquidation costs, security interest of the Appellant stood relinquished in terms of Regulation 21A (2) &(3) of the Liquidation Regulations. Adjudicating Authority after considering the submissions of the parties has rightly refused to grant any relief to the Appellant in IA No.1069 of 2023.

# 17. In view of the facts and circumstances, as noticed above, we do not find that it is fit case to exercise our Appellate jurisdiction in interfering with the impugned order passed by the Adjudicating Authority. The Appeal is dismissed.

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IDBI Bank Limited & Ors. Vs. S. Hari Karthick - The regulation clearly states that the Secured creditor who has not relinquished the security interest under Section 52 cannot be part of the SCC. Thus from the above discussion the Applicant Banks herein cannot be included into the SCC as Secured Financial creditors claiming preference under section 53(1)(b)(ii). Liquidator shall constitute the reconstituted SCC as per the provision of the IBC.

 NCLT Chennai-2 (2024.12.11) in IDBI Bank Limited & Ors. Vs. S. Hari Karthick  [ IA (IBC) /635 (CHE) /2024 & IA (IBC) /560 (CHE) /2024  IN CP (IB) /1307 /2018] held that;

• That any secured creditor who did not relinquish the security interest at first instance cannot claim the same after three years, for relinquishment of security interest under virtue of Regulation 21A of Liquidation regulations.

• As per sub-regulation (3) of Regulation 21A, if the Secured Creditor fails to comply with Sub Regulation (2) then the asset, which is subject to security interest shall become part of liquidation estate.  In other words, if the Secured Creditor realises its security interest but fails to pay its share towards CIRP cost under section 53(1)(a) and towards workmen’s dues u/s 53(1)(b)(i), then such assets shall become part of liquidation estate which are subject to security interest.

• In the present case, the Applicant, a secured creditor has already intimated the Liquidator its decision not to relinquish its security interest, in Form D. Therefore it is not open to the Applicant to now claim after three years that since they failed to comply with Regulation 21A(2), therefore by virtue of sub-regulation (3) they should be deemed as creditors having relinquished the security interest for the purpose of distribution of assets of the Corporate Debtor.

• Any other interpretation would encourage the secured creditors to exercise option under section 52(1)(b) i.e. not to relinquish the security interest and then wait and watch before enforcing its security interest and in case of its failure to take timely action, it would claim to be covered under section 53(1)(b)(ii) which cannot be the intent of the Code.

• If a secured creditor has exercised option under section 52(1)(a) i.e. relinquished the security interest, then consequently its position would be under 53(1)(b)(ii) and if a secured creditor has exercised option 52(1)(b) i.e. not to relinquish the security then its position would be under 53(1)(e)(ii).

• Therefore, the Applicant, who decided not to relinquish its security interest, cannot now, after a lapse of over three years, seek to benefit from its own failure to realize security interest. It is fundamental principal of law that one cannot derive advantages or benefits from their own wrongdoing/failure.

• For the aforementioned reasons, we are unable to agree with the Applicant that they are entitled to receive the sale proceeds of assets of Corporate Debtor in proportionate to the claims of Secured Creditors as distributed to other secured creditors in terms of Section 53(1)(b)(ii) of IBC Code, 2016.”

• The regulation clearly states that the Secured creditor who has not relinquished the security interest under Section 52 cannot be part of the SCC. Thus from the above discussion the Applicant Banks herein cannot be included into the SCC as Secured Financial creditors claiming preference under section 53(1)(b)(ii). Liquidator shall constitute the reconstituted SCC as per the provision of the IBC.

Excerpts of the Order;

# 1. The two Interlocutory Applications preferred under Sec 60(5) of the IBC, 2016 relates to M/s. The Jeypore Sugar Company Limited which is under Liquidation are counter applications, whereas in the IA(IBC)/560(CHE)/2024 Liquidator seeking relief before this Adjudicating Authority as below,

• “To clarify whether the Secured Financial Creditors/ Banks are eligible/ entitled to be part of SCC in the facts and circumstances of the instant case.”

And in the IA(IBC)/635(CHE)/2024 the Applicant/ Financial Creditors seeking both final relief as below,

• “Final Relief:

• To direct the Respondent Liquidator to include the Applicants/ Secured Financial Creditors as members of the Stakeholders Consultation Committee and to thereafter duly reconstitute the Stakeholders Consultation Committee as per Regulation 31A of the IBBI (Liquidation Process) Regulation, 2016.”

Brief Facts

# 2. The Corporate Debtor (hereinafter referred as CD) namely "The Jeypore Sugar Company Limited" was admitted into CIRP vide order dated 25.02.2019 in CP/1307/IB/2018 under Section 7 of the IBC, 2016 by this Tribunal and Mr. V. Venkata Sivakumar was appointed as Interim Resolution Professional (IRP).

# 3. Subsequently, Committee of Creditors (CoC) confirmed IRP as the Resolution Professional (RP) in their 1st CoC meeting and CIRP was continued. After completion of 330 days from initiation of CIRP, as there was no Resolution Plan, Liquidation of the CD was ordered on 29.05.2020 by this Tribunal. The RP was appointed as the Liquidator to carry out the process.

# 4. The Liquidator Mr. V. Venkata Sivakumar (erstwhile Liquidator), who was appointed has been removed and replaced by Mr. S. Hari Karthik vide order of this Tribunal dated 01.07.2022 in IA/815/IB/2020 moved by the IDBI Bank.

# 5. At present, Mr. S. Hari Karthik continues as Liquidator of the Corporate and manages the affairs of the CD.

 

Financial Creditors/ Applicant Banks Submissions:

# 6. It is stated that, the financial creditors pursuant to public announcement of the Liquidation process filed their claims before the erstwhile Liquidator in Form D. After due verification of the said claims, erstwhile Liquidator constituted the Stakeholders Consultation Committee (hereinafter referred as SCC) including all the 6 Applicant Banks / Financial Creditors.

# 7. It is stated that till 17th SCC meeting, which were under the chairmanship of erstwhile Liquidator the Applicant Banks were part of the SCC. On 20.10.2022, during the 18th SCC meeting which happened under the charge of the present Respondent/ Liquidator and the applicant in IA(IBC)/560(CHE)/2024, the question of legality on constitution of the SCC was raised by the erstwhile liquidator and decided to re-constitute the SCC after obtaining relevant claim forms records and documents.

# 8. It is stated that, the Respondent/ Liquidator sent an email dated 18.02.2023 informing that, the Applicants/ Secured Financial Creditors (hereinafter referred as ‘SFC’) were part of SCC despite having not relinquished their security interest towards the liquidation estate till date. The Clarification given by the SFC’s in this regard are noted. Further took a stand, as there was no effective resolution, claims filed by SFC values for whole debt amount and their continuance in the SCC, it is clear that the SFC have deemed to have relinquished their security interest to the liquidation estate of the CD. Thus in the process of re-constitution of SCC, all SFCs will be included along with other class of creditors.

# 9. It is stated that, the Respondent/ Liquidator has filed report of Constitution of SCC of CD under Sub Regulation (1) of Regulation 31A of IBBI (Liquidation Process) Regulations, 2016 dated 01.03.2023 before this Tribunal.

# 10. It is stated that on 21.03.2023, during the 19th SCC meeting issues of liquidation including the proposal for replacement of Respondent/ Liquidator of the CD, on considering the Size and complexity of the matter was discussed.

# 11. It is stated the Respondent/ Liquidator has sent an email dated 03.04.2023 intimating the revocation of the SCC which was constituted and filed before the Adjudicatory Authority as on 01.03.2023.

# 12. It is stated that subsequent to the above revocation of SCC, the Applicant Banks continuously insisted upon the Respondent/ Liquidator to constitute the SCC. The Liquidator in response stated that, only upon collection of all documents and records he could collate and verify the claims upon which he would constitute the SCC as per law.

 

# 13. It is stated that the Applicants received an email communication on 17.11.2023 from the Respondent/ Liquidator regarding the List of Stakeholders submitted before this Adjudicating Authority wherein the Applicant Banks were included as part of SCC as Secured Financial Creditors.

# 14. Further it is informed to the Applicants vide email communication dated 01.12.2023 by the Respondent/ Liquidator that, the SFCs who have not relinquished their security interest of the Corporate Debtor shall not be included as part of SCC and thus the Applicants who has not relinquished their security interests cannot be part of SCC.

# 15. It is stated that Liquidator again filed the Reconstituted Stakeholders Consultation Committee Report dated 06.12.2023 before this Adjudicating Authority in which the SFCs were removed.

# 16. It is stated that a Joint Lenders Meeting (hereinafter referred as ‘JLM’) was held on 14.12.2023, wherein it was unanimously decided and vide an email dated 20.12.2023 conveyed to the Respondent/ Liquidator as follows,

• i. Secured assets are neither realized by the secured creditors in terms of Sec 52 of the IBC nor the same is under the possession & custody of the secured creditors,

• ii. Secured assets have become part of the liquidation estate as the time lines stated under Regulation 21A has already elapsed, and

• iii. Secured assets are under the possession and management of the Liquidator.

 

Thereby wanted the Liquidator to include the Secured Financial Creditors as part of SCC. IA 

 

# 17. It is stated that the Respondent/ Liquidator vide email dated 26.12.2023 replied to the Applicant Banks in reference to JLM that, in view of Regulation 31A (2) of the IBBI (Liquidation Process) Regulations, 2016, Banks (SFCs) are not and cannot be member of the SCC of the CD because of non – relinquishment of Security interest within time limits.

# 18. In the meanwhile, the Hon’ble NCLAT vide its Order dated 16.01.2024 in Company Appeal (AT) (INS) (CH) No. 302/ 2021 upheld the order of this Tribunal dated 17.11.2021 in IA(IBC)/255(CHE)/2021 relating to fresh valuation of assets of the CD including the ‘Rayagada Property’ located at Orissa followed by updating the Asset Memorandum and thereafter inviting Schemes from Prospective Scheme Proponents as per Section 230 of the Companies Act.

# 19. It is stated that the appellate order directs for fresh revival process in terms of Section 230 of the Companies Act, which requires consideration and approval of 75% of the Secured Financial Creditors (SFCs).

# 20. It is stated that the Applicant Banks vide email communication dated 19.01.2024 and 20.01.2024 has communicated their unequivocal relinquishment of the Security interest to the Liquidation estate. Further upon requested to reconstitute the SCC including the Applicants as SFCs.

# 21. It is stated that the Respondent/ Liquidator called the SFCs for a meeting on 24.01.2024 to discuss on the Hon’ble NCLATs order dated 16.01.2024 and way forward for a fresh revival process under Section 230 of the Companies Act. Further the issue of non-inclusion of the SFCs into the SCC were also discussed and the Liquidator informed the Applicant Banks about filing an application before this Tribunal for getting a clarification.

# 22. It is stated that, the above said application filed by the Liquidator is the IA(IBC)/560(CHE)/2024 in CP/1307/IB/2018. Further it is stated that, in order to place their perspective and facts Applicant Banks have filed the IA(IBC)/635(CHE)/2024 in CP/1307/IB/2018.

# 23. It is averred by the Applicant Banks that, the moment when the security interest of the Applicants is included as part of liquidation estate or resolution or any scheme, then their exclusion as members of the SCC would be contrary to the object of the Code and Regulations which aims for effective resolution and revival of the Corporate Debtor.

# 24. Further Applicant Banks during averments referred to Regulation 21A of the IBBI (Liquidation Regulation), 2016 which stipulates a timeline of 180 days within which the security interest is to be realized by a Secured Creditor and upon expiry of the said period, it is deemed that the security interest is relinquished to the liquidation estate of the CD. The same situation exists in the present case, where the Security interest were not realized even after an expiry of 3 years from the date of Liquidation Commencement Date (hereinafter referred as ‘LCD’) by the SFCs thereby resulting in deemed relinquishment. 

 

# 25. The Applicant Banks also rely upon following judicial pronouncements in support of their pleas as follows,

• i. Dhanalaxmi Bank V. Techno Fab Manufacturing Limited & others (Company Appeal (AT) (INS) No.777/ 2021) – Hon’ble NCLAT

• ii. IDBI Bank Limited V. Koyenco Auto Private Limited and Others (MANU/ NC/ 4593/ 2023) – By NCLT Kochi

• iii. Yes Bank Limited and Others V. Anil Mehta Liquidator of Pratibha Industries Limited and Others (MANU/ NC/ 0758/ 2023) – By NCLT, Mumbai

• iv. The Federal Bank Limited V. Platino Classic Motors (India) Private Limited (MANU/ NC/ 3494/ 2023) – By NCLT Kochi

• v. Ply Com Private Limited and Others V. Nippon Alloy Limited and Others (MANU/ NC/ 2218/ 2022) – By NCLT, Kolkata

• vi. Triumph Global India Private Limited V. Mr. Naren Sheth (IA(IBC)/ 1404/2023 in CP(IB) No.199/7/HDB/2019) – By NCLT, Hyderabad

 

Respondent/ Liquidator Submissions:

# 26. It is stated that the Liquidator/ Respondent herein was appointed by replacing the erstwhile Liquidator Mr. V. Venkata Sivakumar vide order of this Tribunal dated 01.07.2022 in IA(IBC)/815/2020.

# 27. It is stated that due to non-co-operation from the erstwhile Liquidator, he could not to finalise the List of Stakeholders and constitute the Stakeholders Consultation Committee within stipulated time.

# 28. It is stated that the SFCs have submitted their claims amounting to Rs.571 Crores in Form D which was admitted both by the erstwhile Liquidator and subsequently by Respondent Liquidator herein.

 

# 29. It is stated as per point 8A of the Claim Form D submitted by the SFCs, all the Applicant Banks have not relinquished their Security interest to the liquidation estate of the CD. Despite the clear fact of SFCs not relinquishing the Security interests, the erstwhile liquidator included all the Applicant Banks as members of the SCC. The legality of such constitution was raised during the 18th SCC meeting dated 20.10.2022 by the Respondent/ Liquidator for which Applicant Banks have given their explanation. It is clarified that none of the Applicant Banks have relinquished their security interest to the liquidation estate and the existing SCC might continue until the Process under Section 230 of Companies Act get completed and in case of any failure of said Sec 230 Process, a new SCC may be reconstituted.

# 30. It is stated that the Liquidator has constituted the SCC on 01.03.2023 including the SFCs only on deemed relinquishment of their Security interest for smooth conduct of the liquidation process on a limited purpose.

# 31. It is stated that after careful consideration of the relevant provisions of the IBC and relevant regulations, the Liquidator has realized that inclusion of Applicant Banks in the SCC as complete contravention and error. Subsequently in order to rectify the said error, the Notice of Revocation of SCC dated 03.04.2023 was issued.

# 32. It is stated that Liquidator upon admission of various claims, the List of Stakeholders was revised and modified as on 17.11.2023, filed the same before this Tribunal as IA(IBC)/ 2320/ 2023 and subsequently taken on record vide order dated 15.12.2023.

# 33. It is further stated that, Reconstituted SCC report excluding all the Applicant Banks dated 06.12.2023 was filed before this Tribunal as IA(IBC)/ 2429/ 2023 and subsequently taken on record vide order dated 05.01.2024.

# 34. It is stated by the Liquidator, that the Applicant Banks neither expressly relinquished nor realized their security interest. Further he did not call upon SFCs to realize and enforce the securities because of pending Sec 230 Process.

# 35. It is averred that Regulation 21A of IBBI (Liquidation Process) Regulations, 2016 requires SFCs to inform the liquidator in Claim Form as to whether they are relinquishing the Security interest to the liquidation estate or realising outside the liquidation process.

# 36. It is averred that Applicant Banks having not relinquished the Security interest to the liquidation estate and in the event of proceeds realised by them are inadequate to their claims then the unsatisfied claim shall be paid by the liquidator in accordance with Section 53(1)(e) of the IBC, 2016.

# 37. It is stated pursuant to exclusion of the SFCs from the SCC, the Liquidator is convening separate meetings as SCC meeting with Stakeholders and Class of Creditors Meeting – SFC with the Applicant Banks in order to discuss the way forward in the Process under Section 230 of Companies Act, 2013.

# 38. It is stated that the Liquidator was advised by the existing SCC on its meeting dated 06.2.2024, to follow the Provisions of the IBC and relevant regulations in respect of inclusion of the SFCs as members of the SCC at the juncture of expiry of more than 3 years from the LCD without creating any prejudice to their rights under waterfall mechanism enshrined under the IBC, 2016.

# 39. Liquidator also submits that the Applicants/SFCs cannot be member of the SCC and want to continue with SFCs as separate class wherever their interest involved for distribution in line with the powers granted to him under Section 35(2), IBC, 2016.

# 40. The Respondent Liquidator rely upon following judicial pronouncements in support of his pleas as follows,

• i. Small Industries Development Bank of India V. Amit Gupta Liquidator of Provogue (India) Limited (IA. No.1555/2023 in CP(IB)/1667/IB/MB/2018) – By NCLT Mumbai.

• ii. Paschimanchal Vidyut Vitran Nigam Limited V. Raman Ispat Private Limited (2023 10 SCC 60) – By Hon’ble Supreme Court.

 

Issues

# 41. Whether relinquishment of Security Interest is permissible after 3 years from the date of Liquidation Commencement, as per Regulation 21A of IBBI (Liquidation Process) Regulations, 2016 and Section 52 of IBC, 2016?

# 42. Whether the Secured Financial Creditors/ Banks can be part of Stakeholders Consultation Committee (SCC) in the present case?

 

Findings

# 43. The cursory and plain reading of the following provisions would conveys us scope, ambit and application of the code and relevant regulation in regard to Security Interest, their relinquishment or realization, conditions of relinquishment/ realization, operation of law on different situations of realization process and the position of claimants in the distribution stake mandated as per the waterfall mechanism under Section 53 IBC.

# 44. At this Juncture, it is necessary to refer the relevant IBC provisions and IBBI (Liquidation Process) regulations, 2016 of to have clarity on the legal position.

# 45. “Sec. 35. Powers and duties of liquidator:

 XXXXX

(2) The liquidator shall have the power to consult any of the stakeholders entitled to a distribution of proceeds under section 53

Provided that any such consultation shall not be binding on the liquidator: Provided further that the records of any such consultation shall be made available to all other stakeholders not so consulted, in a manner specified by the Board.”

Sec. 35(2) of IBC, enables the Liquidator to consult stakeholders who are entitled to distribution under waterfall mechanism whereas any advice or recommendation of such consultation is not binding upon him.

# 46. “Sec. 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.

(2) The liquidator shall hold the liquidation estate as a fiduciary for the benefit of all the creditors.

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

(a) …

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

Sec. 36 of IBC, speaks about the Liquidation estate and its composition. The Liquidator holds and maintains the liquidation estate for the benefit of all the creditors in a fiduciary capacity. The liquidation estate includes any assets of the CD which being a security interest to any creditor, who has relinquished the said interest in the liquidation process.

# 47. “Reg. 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  …

(2) The liquidator shall file the list of stakeholders with the Adjudicating Authority within forty-five days from the last date for receipt of the claims.

3) The liquidator may apply to the Adjudicating Authority to modify an entry in the list of stakeholders filed with the Adjudicating Authority, when he comes across additional information warranting such modification, and shall modify the entry in the manner directed by the Adjudicating Authority.

(4) …”

Reg. 31 directs the liquidator to prepare a list of stakeholders, category wise based on the proof of claims submitted and which were accepted by him. Further he has to file the same before the Adjudicating Authority (‘AA’) within 45 days from the last date fixed for receiving claims.

Reg. 31 also provides for modification and manner in which the list of stakeholders can be done. It directs liquidator to come before this AA with an application for making any modification in the said list and only can modify the list in the manner as directed by the Adjudicating Authority.

48. “Reg. 31A. Stakeholders’ consultation committee:

(1) The liquidator shall constitute a consultation committee, comprising of all creditors of the corporate debtor, within sixty days from the liquidation commencement date, based on the list of stakeholders prepared under regulation 31, to advise him on matters relating to

… 

(1A) The committee of creditors under section 21 shall function as the consultation committee with same voting rights till constitution of the consultation committee under sub regulation (1).

(2) The voting share of a member of the consultation committee shall be in proportion to his admitted claim in the total admitted claim:

Provided a secured creditor who has not relinquished his security interest under section 52 shall not be part of the consultation committee;

Provided that the promoters, directors, partners or their representatives may attend the meeting of the consultation committee, but shall not have any right to vote.

Provided further that a financial creditor or his representative, if he is a related party of the corporate debtor, shall not have right to vote.

(3) The liquidator may facilitate the stakeholders of each class namely financial creditors in a class, workmen, employees, government departments, other operational creditors, shareholders, partners, to nominate their representative for participation in the consultation committee.

…

(4A) The representative under sub-regulation (3) or (4) shall vote in proportion to the voting share of the stakeholders it represents.

...

(6) The liquidator shall convene the first meeting of the consultation committee within seven days of the liquidation commencement date and may convene other meetings, if he considers necessary, on a request received from one or more members of the consultation committee.

Provided that when a request is received by the liquidator from members, individually or collectively, having at least thirty three percent of the total voting rights, the liquidator shall mandatorily convene the meeting.

…

(9) The consultation committee shall advise the liquidator, by a vote of not less than sixty-six percent of the representatives of the consultation committee voting.

Explanation: For the purpose of this sub-regulation, the term ‘voting’ shall mean voting cast by the representatives of the consultation committee.

(10) The advice of the consultation committee shall not be binding on the liquidator:

…

(11) The consultation committee, after recording the reasons, may by a majority vote of not less sixty-six per cent., propose to replace the liquidator and shall file an application, after obtaining the written consent of the proposed liquidator in Form AA of the Schedule II, before the Adjudicating Authority for replacement of the liquidator:

Provided that where a liquidator is proposed to be replaced, he shall

(a) continue to work till his replacement; and

(b) be suitably remunerated for work performed till his replacement. …”

Reg. 31A discuss about Liquidator role in respect of Stakeholders consultation committee (SCC). It mandates the liquidator to constitute a Consultation committee comprising of all creditor of the CD within 60 days from the LCD, based on the list of stakeholders prepared by him and submitted before the AA.

The SCC is bestowed with duty to advise the liquidator on the matters of remuneration, sale under Reg. 32, fee of the liquidator, valuation, suit proceedings, marketing strategy, extension for balance payment and PUFE (Preferential, Undervalued, Extortionate credit/ Fraudulent/ Wrongful trading Transactions) proceedings. The Committee of Creditor (‘CoC’) under Sec. 21 IBC, functions as consultation committee with same voting rights till SCC is constituted.

Reg. 31A(2) provides for voting share of member of the SCC which shall be in proportionate to value of his admitted claim in total admitted claim, whereas a secured creditor who has not relinquished his security interest under Sec. 52 of IBC, cannot be part of SCC.

It means a secured creditor, who opted to realize his security interest outside the Liquidation Process cannot be part of SCC, because he don’t have any entitlement in the proceeds of liquidation estate. 

 

But it should not be considered as a complete bar for a secured creditor who has not relinquished the security interest into the liquidation from becoming the member of the SCC, because when the proceeds realized from the Security interest is inadequate towards his admitted claims, Sec. 52(9) enables him to get paid the remaining unpaid dues from the liquidator in the queue next to the unsecured creditor and at par with the government dues as specified in Sec. 53(1)(e)(ii) of IBC.

Reg. 31A(6) directs the Liquidator to convene the 1st SCC meeting within 7 days from the LCD. SCC with a voting share of 66% has the advisory power which is not a binding obligation on the liquidator. It is not that, Liquidator can function against the advise of the SCC, but has to function in line with law. Liquidator, for his every different decision form the advise of SCC, has to record the reasons in writing for taking such decision and submit the same before the AA and the Board (IBBI).

The SCC can propose to replace the Liquidator appointed after recording the reasons, with a majority of 66% voting and file an application to that effect before the AA.

# 49. “Sec. 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.

(3) Before any security interest is realised by the secured creditor under this section, the liquidator shall verify such security interest and permit the secured creditor to realise only such security interest, the existence of which may be proved either –

(a) by the records of such security interest maintained by an information utility; or

(b) by such other means as may be specified by the Board.

(4) A secured creditor may enforce, realise, settle, compromise or deal with the secured assets in accordance with such law as applicable to the security interest being realised and to the secured creditor and apply the proceeds to recover the debts due to it.

…

(7) Where the enforcement of the security interest under sub-section (4) yields an amount by way of proceeds which is in excess of the debts due to the secured creditor, the secured creditor shall-

(a) account to the liquidator for such surplus; and

(b) tender to the liquidator any surplus funds received from the enforcement of such secured assets.

(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.

Reg. 21. Proving security interest:

The existence of a security interest may be proved by a secured creditor on the basis of:

(a) the records available in an information utility, if any;

(b) certificate of registration of charge issued by the Registrar of Companies; or

(c) proof of registration of charge with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India.

 

Reg. 21A. Presumption of security interest:  

(1) A Secured creditor shall inform the liquidator of its decision to relinquish its security interest to the liquidation estate or realise its security interest, as the case may be, in Form C or Form D of Schedule II:

Provided that, where a secured creditor does not intimate its decision within thirty days from the liquidation commencement date, the assets covered under the security interest shall be presumed to be part of the liquidation estate.

(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

(b) the excess of the realised value of the asset, which is subject to security interest, over the amount of his claims admitted, to the liquidator within one hundred and eighty days from the liquidation commencement date:

Provided that where the amount payable under this sub-regulation is not certain by the date the amount is payable under this sub-regulation, the secured creditor shall pay the amount, as estimated by the liquidator:

Provided further that any difference between the amount payable under this sub regulation and the amount paid under the first proviso shall be made good by the secured creditor or the liquidator, as the case may be, as soon as the amount payable under this sub-regulation is certain and so informed by the liquidator.

(3) Where a secured creditor fails to comply with sub-regulation (2), the asset, which is subject to security interest, shall become part of the liquidation estate.

Explanation:

It is hereby clarified that the requirements of this regulation shall apply to the liquidation processes commencing on or after the date of the commencement of the Insolvency and Bankruptcy Board of India (Liquidation Process) (Amendment) Regulations, 2019.

Reg. 37. Realization of security interest by secured creditor:

….

(7) The provisions of this Regulation shall not apply if the secured creditor enforces his security interest under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002) or the Recovery of Debts and Bankruptcy Act, 1993 (51 of 1993)   …” 

 

Sec 52 of IBC, discuss about the Secured Creditor and security interest in liquidation proceedings. It allows the secured creditor either to relinquish or to realize the assets of the CD, wherever the Security /Charge is created and registered as prescribed under the Reg. 21. It discusses 2 options that a Secured Creditor can exercise with the Security in the event of initiation of liquidation as follows,

i. Relinquishment:

When the secured creditor relinquishes his security interest to the liquidation estate, he will be given priority in the waterfall mechanism during the process of distribution of liquidation proceeds, in equivalence with the workmen’s dues as per Sec. 53(1)(a). Further Reg. 21A presumes when the secured creditor, in case fails to intimate his decision about realisation within 30 days from the commencement of Liquidation.

ii. Realization:

When the Secured creditor decide not to relinquish and wishes to realize the security interest, he will be allowed to proceed with security out of the liquidation process subject to certain conditions. There are both pre and post conditions in respect of realization of security interest.

The Pre - Conditions are as follows,

a. Within 30 days secured creditor in Form C or Form D of Schedule II of IBBI (Liquidation Process) Regulations, 2016 has to intimate the liquidator about his decision of realization. 

b. Identification of the asset against which the Security is created by the secured creditor

c. Liquidator has to verify the existence of the security based on information utility and permit the secured creditor to realize the same.

 

The Post – Conditions are as follows,

a. Realization of the Secured asset is regulated under Reg. 37. The regulation also gives exception under sub clause (7) to creditors whenever he enforces his security under Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, (SARFAESI) Act, 2002 or under Recovery of Debts and Bankruptcy (RDB) Act, 1993.

b. Secured Creditor has to take measures to enforce his security as per applicable laws applicable to the security interest and to the secured creditor himself, thereby apply the proceeds received form such realization to recover the debts due to him.

c. Reg. 21A (2) compels the secured creditor to pay the amount of his share under Sec. 53(a) and Sec. 53(b)(i) of IBC, within 90 days from the LCD, same as to which is contributable in case of relinquishment under Sec. 52(1)(a). Subsequently, whenever the proceeds of enforcement of security interest yields an excess amount than the claimed and admitted debt due, the secured creditor should account and pay such surplus to the Liquidator within 180 days of LCD, which would go to the liquidation estate.

d. Further, whenever the amount payable as per the Reg. 21A(2)(a) and Reg. 21A(2)(b) is not certain on the date when it becomes payable, i.e., 90 or 180 days from the LCD as the case may be, the creditor has to pay the amount as estimated by the liquidator. Any difference on the amount payable and paid should be made good by the creditor or the liquidator depending upon the case, when informed by the liquidator.

e. Any failure to comply with Reg. 21A(2) by the secured creditor will lead to the security interest falling back into the part of liquidation estate by virtue of Reg. 21A(3).

f. When the proceeds of realization of the secured assets are not adequate to recover the debts due to the secured creditor, the unpaid debts shall be paid by the liquidator in waterfall under Sec. 53(1)(e) of IBC.

50. “Sec. 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 and in such manner 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;  

(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) …

(2) Any contractual arrangements between recipients under sub-section (1) with equal ranking, if disrupting the order of priority under that sub-section shall be disregarded by the liquidator.

(3) The fees payable to the liquidator shall be deducted proportionately from the proceeds payable to each class of recipients under sub-section (1), and the proceeds to the relevant recipient shall be distributed after such deduction.

Explanation: For the purpose of this section

(i) it is hereby clarified that at each stage of the distribution of proceeds in respect of a class of recipients that rank equally, each of the debts will either be paid in full, or will be paid in equal proportion within the same class of recipients, if the proceeds are insufficient to meet the debts in full; and

(ii) the term “workmen’s dues” shall have the same meaning as assigned to it in section 326 of the Companies Act, 2013 (18 of 2013).”

Sec. 53 IBC is a non-obstante clause which overrides all priorities under any law for the time being it exist and contemplates the waterfall mechanism for distribution of proceeds realized from the liquidation estate. It categorised the creditors into different clauses and formulated a preferential strategy in the process of distribution. It is aimed to prevent disputes between the beneficiaries of liquidation.

 

Waterfall mechanism rest on the structured mathematical formula and the hierarchy is created in terms of payment of debts in order of priority with several qualifications. Striking down any one of the provisions or rearranging it may lead to several trips and disrupts the working equilibrium which is whole and stasis at present and would result in instability.

Sec. 53(1)(b)(ii) provides for distribution of proceeds at par with workmen dues for the period of 24 months preceding the LCD, to a secured creditor who has relinquished his security interest as mandated under Sec. 52 of IBC in queue after paying out CIRP and Liquidation cost in full.

Sec. 53(1)(e)(ii) provides for distribution of proceeds at par with Government dues for the period of 2 years, preceding the LCD, to a secured creditor who has enforced his security interest to an inadequate value, where there exists a remaining unpaid dues, has also contributed as per Reg.21A(2)(a) and has demanded the liquidator for the payment of same in queue after paying out following categories,

• I. CIRP & Liquidation cost,

• ii. Workmen dues for period of 24 preceding LCD & Dues of Secured creditors who has relinquished their security interest,

• iii. wages and dues owed to employees other workmen for period of 12 months preceding LCD,

• iv. Financial debts owed to unsecured creditors.

 

# 51. The sequence of events which is averred and observed form the records, in context of the present case is tabulated as follows,

# 52. We have heard both the parties and have gone through the records very carefully. 

# 53. Hearing rival arguments advanced by both the parties, the facts of the case before us is to adjudicate whether the Secured Financial Creditor/ Banks are eligible/ entitle to be part of SCC and secondly, whether Respondent Liquidator may be directed to include the Secured Financial Creditors/ Applicants as the members of Stakeholder Consultation Committee (SCC) and thereto reconstitute the Stakeholder Constitution Committee as per Regulation 31 of the IBBI (Liquidation Process Regulation, 2016).

In these matters, applicants has sought to direct the Liquidator to reconstitute Stakeholder Committee and to include all the Secured Financial Creditors/ Applicants in the list of Stakeholder Committee and in counter the Liquidator has moved an application seeking direction whether Financial Creditor may be included as members of SCC. From the facts of the both IAs the factual thing and relief which has been sought is likewise and both the parties want this Adjudicating Authority to clarify whether Financial Creditor/Applicants may be included in Stakeholder Consultation Committee or not.

It is admitted fact that on the behest of Secured Financial Creditor, an application was moved under Section 7 of IBC to initiate CIRP against the Corporate Debtor. As a result, CIRP was initiated against Corporate Debtor and CoC was constituted and no resolution plans fructified. Subsequently, the CoC and has recommended liquidation of the Corporate Debtor by this Adjudicating Authority. Subsequently this tribunal vide order dated 29.05.2020 passed liquidation of the Corporate Debtor on 29.05.2020. The Applicants were initially made party to the Stakeholder Consultation Committee by the erstwhile Liquidator namely Mr. V Venkata Sivakumar. Till 19th SCC Meeting the Applicants were included as part of SCC. The Present Respondent Liquidator was appointed by this Tribunal on 01.07.2022. Respondent Liquidator sent a detailed E-mail to the SCC Members/ Applicants that he would be in charge of members of Stakeholder Committee list.

In the meantime, the Liquidator moved before Adjudicating Authority for changing the List of the Stakeholders and obtained the permission of this Tribunal. It would be pertinent to mention here that when the new Liquidator moved before Adjudicating Authority to get permission of change of list of the members of the Stakeholders Committee, no objections were raised by the Financial Creditor/Banks. Applicant in this IA has not challenged the same or they did not move any Application before this Adjudicating Authority relating to change of Stakeholder Committee member’s list.

# 54. From Form D, it was clear that the intention of the Applicants were, not to relinquish the security interest at the initiation of the Liquidation process. The Applicants dual stand of non-relinquishing the security asset and being part of SCC as SFC is not acceptable as per law. It is understood that, the liquidation Process which is under the stage of receiving Scheme under Section 230 CA in respect of the CD does make the applicant entitle to get dual benefits. The applicants should had taken one stand either of relinquishing the Security interest and being part of SCC as Secured Financial Creditors or Stepping out of liquidation process by realizing the Secured Interest and not claiming the Preference as Secured Financial Creditors.

# 55. We observe that all timelines mandated under IBC and it’s relevant regulations were not followed strictly in this case and same is apparent from the records submitted before us. Various litigations before different forums, change of liquidator, issues relating to valuation, proposal of scheme under section 230 of the Companies Act, 2013 may be factors for such non – compliance with the timelines stipulated.

# 56. However, the Regulation 21A discussed above provides for definite timeline for relinquishment of the Secured Assets both voluntarily and by operation of law. IBC is a time bound process where things has to be done in time for the interest of all stakeholders. It is admitted that, the Financial Creditors who realized their security assets did not reap or gain any amounts till now. In such instance, the Secured assets of the Applicant Banks/ Financial creditors devolved automatically into the liquidation estate of the Corporate Debtor by operation of law. So the Unequivocal decision of the applicants to relinquish the Secured assets after expiry of time limit prescribed under law from the commencement of Liquidation does not arise. Therefore, the Issue 1 is answered in negative in respect of the applicant/ SFCs.

 

# 57. In Small Industries Development Bank of India V. Amit Gupta Liquidator of Provogue (India) Limited, the NCLT, Mumbai has opined that any secured creditor who did not relinquish the security interest at first instance cannot claim the same after three years, for relinquishment of security interest under virtue of Regulation 21A of Liquidation regulations. The relevant portions are extracted as follows,

• “21. The Applicant’s reliance on Regulation 21A(3) of the Liquidation Regulations to contend that the asset which were subject to security interest, have become part of liquidation estate and therefore by operation of law it should be covered under 53(1)(b)(ii) is mis-conceived.

• …

• 23. As per sub-regulation (2) of Regulation 21A, if the Secured Creditor proceeds to realise its security then it shall pay to the liquidator within 90 days from the liquidation. Commencement date, as much amount as would have been payable under Section 53 as if it had relinquished the security interest. Further timeline of 180 days is provided payment of excess realised value of assets. The First proviso states that where payable amount is not certain, Secured Creditor will pay the amount as estimated by the Liquidator.

• 24. As per sub-regulation (3) of Regulation 21A, if the Secured Creditor fails to comply with Sub Regulation (2) then the asset, which is subject to security interest shall become part of liquidation estate. In other words, if the Secured Creditor realises its security interest but fails to pay its share towards CIRP cost under section 53(1)(a) and towards workmen’s dues u/s 53(1)(b)(i), then such assets shall become part of liquidation estate which are subject to security interest. In the absence of timeframe for the secured creditors to intimate their decision, it would hinder the time bound process of liquidation.

• 25. In the present case, the Applicant, a secured creditor has already intimated the Liquidator its decision not to relinquish its security interest, in Form D. Therefore it is not open to the Applicant to now claim after three years that since they failed to comply with Regulation 21A(2), therefore by virtue of sub-regulation (3) they should be deemed as creditors having relinquished the security interest for the purpose of distribution of assets of the Corporate Debtor. This is neither expressly provided in the Code or Regulations nor can be the intent of the Code. Any other interpretation would encourage the secured creditors to exercise option under section 52(1)(b) i.e. not to relinquish the security interest and then wait and watch before enforcing its security interest and in case of its failure to take timely action, it would claim to be covered under section 53(1)(b)(ii) which cannot be the intent of the Code. If a secured creditor has exercised option under section 52(1)(a) i.e. relinquished the security interest, then consequently its position would be under 53(1)(b)(ii) and if a secured creditor has exercised option 52(1)(b) i.e. not to relinquish the security then its position would be under 53(1)(e)(ii).

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• 29. Further, the Regulation 21A was introduced in the interest of conducting the liquidation process in a certain and time bound manner. Therefore, the Applicant, who decided not to relinquish its security interest, cannot now, after a lapse of over three years, seek to benefit from its own failure to realize security interest. It is fundamental principal of law that one cannot derive advantages or benefits from their own wrongdoing/failure. For the aforementioned reasons, we are unable to agree with the Applicant that they are entitled to receive the sale proceeds of assets of Corporate Debtor in proportionate to the claims of Secured Creditors as distributed to other secured creditors in terms of Section 53(1)(b)(ii) of IBC Code, 2016.”

# 58. The Position and stand of the Applicant Bank/ Secured Creditors were clear at the beginning phase of the Liquidation itself. Further, the constitution of SCC has to be performed as per Regulation 31A of the IBBI, Liquidation Process Regulations. The Liquidator is bound by the law in such constitution. The regulation clearly states that the Secured creditor who has not relinquished the security interest under Section 52 cannot be part of the SCC. Thus from the above discussion the Applicant Banks herein cannot be included into the SCC as Secured Financial creditors claiming preference under section 53(1)(b)(ii). Liquidator shall constitute the reconstituted SCC as per the provision of the IBC. Therefore, the Issue 2 is also answered in negative in respect of applicant/ SFCs.

# 59. Accordingly, IA/560/2024 moved by the Respondent Liquidator is dismissed.

# 60. Connected IA/635/2024 which is moved by the Applicant Financial Creditors is also dismissed in respect of their inclusion in the SCC as Secured Financial Creditors.

# 61. No costs as to the Order. Both IAs are disposed of and file consigned to records.

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