NCLT Chennai (2025.05.30) in State Bank of India Vs Liquidator, Hotel Milestonnez India Pvt. Ltd. [ IA(IBC)/1990(CHE)/2024 in CP(IB)/243(CHE)/2021] held that-
When a statute provides for a liquidation commencement date as the date up to which the claim can be filed and proved, no claim from the Applicant thereafter can be entertained by the Respondent.
this Tribunal is of the opinion that SBI has exceeded the scope of rights vested upon it under Section 53 of IBC, 2016 read with Regulation 16 of Liquidation Regulations, by claiming interest subsequent to the Liquidation Commencement Date
This Tribunal is of the view that the Liquidator’s Fees is to be calculated in accordance with Regulation 4(2)(b) of Liquidation Regulations and deducted in full from the Liquidation Estate before the distribution of liquidation proceeds to the remaining stakeholders as specified in Section 53(1)(a) of IBC, 2016.
Further, only after the settlement of the admitted claims of the stakeholders in terms of Section 53(1)(b) to Section 53(1)(g) the remaining proceeds can be distributed to the equity shareholders under Section 53(1)(h).
The approach adopted by the Liquidator by deducting the liquidator’s fee from the proceeds paid to the each of stakeholders does not confirm with the provisions of IBC, 2016 and Liquidation Regulations. The Liquidator ought to have deducted the entire liquidator’s fee from the liquidation estate before proceeding with the distribution of amount to the remaining stakeholders.
Blogger’s Comments; In my opinion the orders of Hon’ble NCLT are Per-Incuriam on the following counts;
1. Distribution of residual surplus to the equity shareholders under Section 53(1)(h). Here it is worth mentioning that specific recommendations of BLRC (Box 5.22: Drafting instructions for the priority of payout in Liquidation) for distribution of “surplus to shareholders/partners” were not adopted by the Parliament, instead section 53(1)(h) provides as under;
#53(1)(h) equity shareholders or partners, as the case may be.
Under Section 53 equity shareholders or partners are to be treated as a class of stakeholders/claimants, as various other classes of stakeholders are defined under Section 53(1), meaning thereby equity shareholders or partners are also required to go through the process of filing claim as other stakeholders, to be eligible for distribution under section 53(1). Under IBC, equity shareholders or partners do not have overarching rights for the residual surplus in liquidation process in contrast to the provisions under The Companies Act, 2013. Here it is worth mentioning that besides a general non-obstante clause under section 238, section 53 also provides for non-obstante clause.
2. Directions of the Hon’ble NCLT that “The Liquidator ought to have deducted the entire liquidator’s fee from the liquidation estate before proceeding with the distribution of amount to the remaining stakeholders.” is not in consonance with the letter & spirit of the provisions of Section 53(3). Provisions of Section 53(3) provides for equitable distribution of cost of Liquidator’s fees amongst all the stakeholders eligible for distribution given the priority of stakeholders & amount available for distribution. The directions of the Hon’ble NCLT puts the entire burden of the cost of Liquidator’s fees on the shoulders of stakeholder(s) in lower priority, whenever the amount available for distribution is equal to or less than the total claims admitted by the Liquidator. This direction can be acceptable, in the rarest of rare cases, where the amount available for distribution is more than the total admitted claims + Liquidator’s Fees. In my opinion the said direction should have been given under Rule-11 of the NCLT Rules, specifying the specific situation of the case of where the amount available for distribution is substantially more than total admitted claims + Liquidator’s Fees.
Excerpts of the Order;
1. By this common order, we dispose of three applications i.e., IA(IBC)/1825(CHE)/2024 and IA(IBC)/1934(CHE)/2024 filed by the Liquidator of Hotel Milestonnez India Private Limited (Corporate Debtor) against State Bank of India (hereinafter, SBI); and IA(IBC)/1990(CHE)/2024 filed by the Financial Creditor against the Liquidator.
# 6. IA(IBC)/1990(CHE)/2024
6.1. This is an Application filed by the Financial Creditor, State Bank of India against the Liquidator, under Section 53 and Section 5(16) of IBC, 2016 read with regulation 4(2) of Liquidation Regulations and Regulation 39B, 39C, 39D of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, seeking the following reliefs,
(i) Direct the Liquidator to distribute the balance claim of Rs. 2.08 Crs withheld by the Respondent Liquidator
(ii) Direct the Liquidator to refund Rs. 0.22 Crs deducted from the lready distributed amount of Rs. 9.01 Crs, while appropriating the same directly from the sale proceeds under the head Liquidation Cost.
(iii) the sale proceeds of Rs. 11.25 crores pertains to the sale of security interest created by the Guarantors under SARFAESI Act by the Authorised officer of the Applicant bank in joint action as per the order dated 09.02.2023 in IA No. 530 of 2024, shall not be taken into account for the purpose of liquidation fee by the Liquidator.
(iv) pleased to grant the applicant such relief which this Hon'ble Tribunal may deem fit and proper in the circumstances of the case and render justice.
6.2. It is stated that as per Section 53 of IBC, 2016, CIRP/Liquidation costs are to be paid in full as first priority and ‘liquidation costs’ includes the Liquidator fee. As per Section 53 of IBC, 2016, the fee 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 recipients shall be distributed after such deduction. Explanation (i) to Section 53 makes it clear that the debts owed to the secured creditor who relinquished the security has to be paid in full as the proceeds are sufficiently available and hence the act of Liquidator is in violation to provisions of the Code.
6.3. It is stated that the sale proceeds are sufficient to meet the debts of all class of creditors in full. Therefore, deducting of liquidator fee from the distribution proceeds ear marked for the Applicant is not proper. Regulation 4(b) of the Liquidation Regulations, 2016 prescribes the manner for calculation of Liquidator fee but the definition of Liquidation cost under regulation 2(1)(ea) includes Liquidator fee as well. It shall be reimbursed from the first bucket in order of priority under sec. 53(i)(a) provisioned for CIRP cost and liquidation cost. Further, Regulation 42(3) Liquidation Regulations, 2016 also states that the CIRP cost, if any and the liquidation cost shall be deducted before any distribution is made.
6.4. It is stated that the Respondent has taken into account the sale proceeds of Rs. 11.25 crores in respect of enforcement of the security interest created by the guarantors in favour of the applicant bank under SARFAESI Act, for the purpose of liquidation fee which is not in accordance with the order dated 09.02.2023 passed in IA(IBC)/530(CHE)/2023 filed by the Respondent. The Applicant enforced the security interest which is not part of Liquidation Estate as the same was mortgaged by the personal guarantors who are liable to pay the entire dues as per the DRC No. 463 of 2017 dated 27.9.2017. Moreover, in the 9th SCC meeting, the Applicant as Sole secured creditor had categorically stated that as the property of Personal Guarantor is sold under SARFAESI, there is no provision to make fee payment to the Liquidator. Further, it was pointed out by the Applicant, in the 9th SCC, that the order dated 09.02.2024 clearly states that the Personal Guarantor property cannot be constituted as Liquidation asset. Therefore, Respondent contravened his power and duties by treating the secured asset belonging to the Personal Guarantor as part of Liquidation estate assets which has been specifically excluded under Section 36(4)(c) of IBС, 2016.
6.5. It is stated that the Applicant addressed a detailed letter on 27.08.2024 raising objection to the Liquidator's action in arriving at the liquidator fee, liquidation cost and deducting the same from the amount distributed to the Applicant as a sole secured creditor. Similarly, the Applicant objected strongly for not sharing the 10th SCC Minutes and their objections to the said Minutes. The Applicant requested for distribution of remaining portion of claim vide email dated 10.09.2024 but despite repeated requests by the Sole Secured Financial Creditor, the Respondent never shared the details of distribution made to different stake holders before the SCС.
# 7. Counter Affidavit filed by the Respondent/ Liquidator in IA(IBC)/1990(CHE)/2024
7.1. The Respondent filed counter affidavit vide S.R.No. 5620 dated 21.11.2024.
7.2. The Respondent/ Liquidator has reiterated the facts and averments made in IA(IBC)/1825(CHE)/2024 and IA(IBC)/1934(CHE)/2024.
7.3. It is stated that according to Section 128 of the Indian Contract Act of 1872, the Surety’s liability is co-extensive with that of the Principal Debtor. Since the Corporate Debtor’s liability to the Applicant Bank was fully settled on 03.08.2024 with both the claims accepted by the Respondent and the amount paid to the Applicant being Rs.20.25 Crores, the Surety’s liability would be extinguished as the Principal Debtor’s (Corporate Debtor) liability is fully discharged as on the liquidation commencement date. Once the debt of a creditor is satisfied
in full, as per the amount of claim admitted by the liquidator, nothing remains to be recovered from the Corporate Debtor. However, the Applicant, not satisfied with the full claim amount received from the Respondent under liquidation of the Corporate Debtor, filed this application for additional claims for interest and other expenses that occurred during the liquidation process period of the Corporate Debtor, therefore, the present application, is an abuse process of law and is liable to be dismissed in limini.
7.4. It is stated that in respect of any realisation, under the orders of the Tribunal, the Respondent must consider it as a recovery and adjust it within the admitted claim. As the admitted claim was crystallized on the liquidation commencement date, this adjustment is necessary to determine the remaining debt owed to the Applicant. When a statute provides for a liquidation commencement date as the date up to which the claim can be filed and proved, no claim from the Applicant thereafter can be entertained by the Respondent. Therefore, the amount realised and credited to the Corporate Debtor's Current Account from the joint e-auction sale of properties under the orders of the Tribunal to the proof of claim in Form D, should be reconciled with the claim settled by the Respondent. After adjustment of the amount disbursed to the Applicant Financial Creditor from the Corporate Debtor's Current Account, which was realized from the sale of the guarantor's property, and distributing the remaining sum from the liquidation sale proceeds of the Corporate Debtor, the liquidator is adhering to the IBC, 2016. Hence, there is no other option for the Respondent to reject the additional claim of the Applicant Bank to comply with the provisions of the IBC, 2016, and the Liquidation Regulations.
7.5. It is stated that while analyzing the additional claim schedule submitted by the Applicant, it is mentioned in column No.2, that the interest accrued for payment by the CD is net off with the realization of SARFAESI proceeds.
7.6. Upon analysis, the Respondent requested the Applicant to provide the details of the SARFAESI sales they had during the liquidation process period of the Corporate Debtor. However, the Applicant hesitated to disclose the details of the SARFAESI Sales to the Respondent and informed that "there is no justifiable reason to the liquidator seeking clarification in respect of the SARFAESI Sales executed by the Bank."
7.7. It is stated that as per Section 53(1)(a) of IBC, 2016, the "Liquidator's Fees", as part of liquidation cost, is to be paid in full in priority to the distribution to stakeholders from the proceeds of assets of liquidation estate. The priority of payment of "Liquidator's Fees", has been expressly specified in Section 53(3), as per which 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. The construct of the provisions under section 53(3) specifies that the fees of the Liquidator remain as "fees payable to the liquidator" up to the stage of distribution of the proceeds of assets to stakeholders and the sourcing of the same (Liquidator's Fees) shall be from the deductions proportionately from the proceeds payable to each class of recipients under Sub-section (1) of Section 53. Thus, liquidator's fees cannot be paid prior to the distribution to stakeholders under Section 53(1).
7.8. It is stated that the legislative intent as reflected under section 34(9) read with section 53(3) is that the liquidator should not be able to draw his fees prior to the distribution of proceeds of assets to the stakeholders. This incentivizes the liquidator to close the liquidation process as fast as possible. Further sharing of liquidator's fees proportionately from the proceeds payable to each class of recipients under sub-section (1) is intended to deepen and broad base the distribution under the waterfall mechanism of Section 53.
7.9. It is stated that this confusion about the priority of payment of "Liquidator's Fees" has arisen because IBBI under Liquidation Regulations defined "Liquidator's Fees" as part of "Liquidation Cost". On 28.09.2023, the Insolvency and Bankruptcy Board of India (IBBI) issued Circular No. IBBI/LIQ/61/2023, to address diverse interpretations and concerns raised by stakeholders concerning computation of fees under clause (b) of sub-regulation (2) of Regulation 4 of the IBBI (Liquidation Process) Regulations, 2016. Thus, defining Liquidator's
Fees as part of Liquidation Cost under Regulation 2(ea), gave rise to conflict between the provisions of the Code & Liquidation Regulations on the following counts:
Whether the Liquidator's Fees is to be paid in priority to the distribution to stakeholders under section 53(1)(a) or to be paid under section 53(3).
Whether the Liquidator's Fees is to be paid from the proceeds of assets in liquidation estate or is to 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.
7.10. It is stated that Section 240(1) of the IBC, 2016 empowers the IBBI to make regulations consistent with the IBC, 2016 and the rules made thereunder, to carry out the provisions of this Code. Thus, if there is a conflict between the provisions of the Code with that of provisions of the Regulations, provisions of the Code shall prevail.
7.11. It is stated that the above referred IBBI Clarification Circular aims to address diverse interpretations and concerns raised by stakeholders concerning the computation of fees under clause (b) of sub-regulation (2) of Regulation 4 of the IBBI (Liquidation Process) Regulations, 2016. Following are the key points of the circular, shedding light on the IBBI's clarifications and their implications,
a. One of the primary clarifications provided by the IBBI pertains to the term "Amount Realised." Regulation 4(2) (b) specifies that the liquidator's fee is calculated "as a percentage of the amount realised net of other liquidation costs, and of the amount distributed." The circular addresses a significant source of confusion regarding "other liquidation costs." While Regulation 4(2)(b) states that "Amount of Realisation (exclusive of liquidation costs)" should be used for fee calculation. The IBBI clarifies that all components of liquidation costs, except the liquidator's fee, should be considered as part of "other liquidation costs."
b. Defining "Amount Distributed to Stakeholders": The IBBI clarifies the definition of "Amount Distributed to Stakeholders." Regulation 4(2)(b) indicates that liquidator's fees are calculated as a percentage of the "Amount Distributed to Stakeholders." To prevent misinterpretation, the IBBI specifies that the liquidator shall be entitled to a fee as a percentage of the amount realized net of other liquidation costs, and the amount distributed, for the balance period of liquidation.
c. Section 53(1)(a) of the code only specifies that Insolvency Resolution Process Cost & Liquidation costs are to be paid in full. Further section 53(3) specifies the time frame for payment of the liquidator's fees. Therefore section 34(9) read with section 53(3) is that the liquidator cannot draw his fees before the distribution of proceeds of assets to the stakeholders.
d. Further sub-section (1) of Section 53 of the code gives insights into the sharing of liquidator's fees proportionately from the proceeds payable to each class of recipients under the waterfall mechanism of Section 53.
e. Thus, the liquidation costs mentioned in section 53(1)(a) is to be bifurcated into two parts as under; Liquidation cost other than the Liquidator's fees. Liquidator's fees.
7.12. It is stated that insolvency Resolution Process Cost along with Liquidation cost other than the Liquidator's fees may be paid in full before the distribution of proceeds of assets to the stakeholders. Liquidator's fees will be paid in full as per the provisions of section 53(3) of the code and read with Liquidation Regulation 4 (3).
# 8. The Respondent has filed the details of the distribution of the realization of assets under Section 53 by way of Affidavit dated 10.12.2024 vide S.R. No. 6006.
# 9. FINDINGS OF THIS TRIBUNAL
9.1. We have heard ld. counsels for the parties and perused the documents placed on record.
9.2. The Corporate Debtor was admitted to Corporate Resolution Insolvency Process (CIRP) vide order of this Tribunal dated 19.04.2022 in CP(IB)/243(CHE)/2021. Subsequently, liquidation proceedings were initiated against the Corporate Debtor vide order of this Tribunal dated 15.02.2023 in IA(IBC)/1452(CHE)/2022 and Amier Hamsa Ali Abbas Rawther (hereinafter, Liquidator) was appointed as the Liquidator of the Corporate Debtor.
9.3. The State Bank of India (hereinafter, SBI) filed a claim in Form-D dated 06.03.2023 of Rs. 20,45,26,600.57. As per the Form-D, SBI was a secured creditor holding security interest in the current assets of the Corporate Debtor, the commercial land with hotel building of the Corporate Debtor and the commercial land along with the swimming pool. Additionally, SBI also held collateral security interest in the residential property of two of its guarantors, M. Rajamanickam and R. Manimegalai. SBI also had personal guarantee of M. Rajamanickam, R. Ramachandrana. B. Sivagamani and R. Manimegalai. The details of the security details of SBI are extracted hereunder,
M/s. Hotel Milestonnez India Private Limited – Available Security details
XXXXX
Personal Guarantee of:
1. M. Rajamanickam
2. R. Ramachandran
3. B. Sivagami
4. R. Manimegalai
(Form D of SBI is marked as Annexure 2 in the Application)
9.4. The 1st sale notice cum public announcement was made on 02.04.2023 for the sale of the Corporate Debtor as a going concern. The sale notice included the following assets,
a. Hotel Complex Building admeasuring 50,000 sq. ft in the name of the Corporate Debtor
b. Land property admeasuring 146 cents with Survey Nos. 112/7 and 112/9 in the name of the suspended promoter director/ personal guarantor of the Corporate Debtor, Mr. Ramachandran
c. Land property along with swimming pool and buildings thereon admeasuring 132 cents with Survey Nos. 112/6 in the name of the suspended promoter director/ personal guarantor of the Corporate Debtor, Mr. M. Rajamanickam.
d. Leasehold land of 50 cents held by the Corporate Debtor leased by SIPCOT.
9.5. In the 1st SCC meeting held on 22.02.2023, it was resolved to seek directions from the Tribunal for intermingling of the hotel building belonging to the Corporate Debtor and the land property belonging to the guarantors, both mortgaged with the financial creditor of the Corporate Debtor, SBI and inclusion of such assets in the liquidation estate of the Corporate Debtor.
9.6. Pursuant to the resolution passed in the 1st SCC meeting, IA(IBC)/530(CHE)/2023, was filed before this Tribunal seeking to handover physical possession of the lands mortgaged to SBI and to include the said property in the Liquidation Estate of the Corporate Debtor. This Tribunal vide order dated 09.02.2024, held that the relinquishment of security interest in the properties of personal guarantor in favour of the liquidation estate of the Corporate Debtor is not provided under the provisions of IBC, 2016. It was held that it is not within the scope of the provisions of Section 36 of IBC, 2013 or the regulations framed thereunder, for the financial creditor to relinquish his security interest in the personal guarantor’s property in favour of the liquidation estate of the Corporate Debtor. However, keeping in view the object of value maximisation, this Tribunal permitted joint sale of the properties of the Corporate Debtor and the Guarantor both under the provisions of IBC, 2016 and SARFAESI Act, 2002 by issuing a joint e-auction sale notice. Further, the Tribunal also protected the rights and remedies available to guarantors/suspended promoters under SARFAESI Act, 2002.
9.7. Subsequently, joint e-auction sale notices dated 28.02.2024, 12.04.2024 and 24.05.2024 were issued by the Liquidator and SBI. It is seen that the joint e-auction sale notice explicitly mentioned that the sale of the assets shall be concluded in accordance with the respective Acts. Hence, the sale of all the part and parcel of the land owned by R. Ramachandran and Rajamanickam i.e., the personal guarantors of the Corporate Debtor shall take place under SARFAESI Act, 2002 and the sale of the assets of the Corporate Debtor shall take place under IBC, 2016. However, the attempts for joint e-auction were not successful and did not yield any positive results.
9.8. Subsequently, the Liquidator and SBI issued a joint e-auction sale notice dated 14.06.2024 with two options provided to the auction bidders i.e.,
Option A: Sale as a going concern of the assets of the Corporate Debtor under IBC, 2016 and the lands of the guarantors under SARFAESI; and
Option B: Sale land parcels owned by the guarantors under SARFAESI, 2002 and sale of the assets of the Corporate Debtor collectively under IBC, 2016.
9.9. It is seen that GBJ Hotels Private Limited emerged as a successful auction bidder for a final bid price of Rs. 28,40,00,000 for Option A of the sale notice dated 14.06.2024 and a Letter of Intent dated 18.07.2024 was issued by the Liquidator in this regard. (The Letter of Intent dated 18.07.2024 is annexed and marked as Annexure 11 of the Application)
9.10. The e-auction sale notice dated 14.06.2024 does not set separate reserve price for the corporate debtor’s property and guarantor’s property. The Letter of Intent dated 18.07.2024 provides the bifurcation of the sale price pertaining to the land of the personal guarantor and the assets of the Corporate Debtor. The details are as follows,
9.11. It is seen from the Letter of Intent that the 10% of the Reserve Price amounting to Rs. 2,84,00,000 was received into the Corporate Debtor’s Liquidation Account at Union Bank of India, Egmore via RTGS on 15.07.2024. The balance due of Rs. 25,56,00,000 was to be paid into the Liquidation Account of the Corporate Debtor in three instalments i.e., Rs. 1,68,75,000 pertaining to 15% of the SARFAESI sale proceeds on 18.07.2024, Rs. 8,43,75,000 pertaining to 75% of the SARFAESI sale proceeds on 01.08.2024 and Rs. 15,43,50,000 pertaining to the sale proceeds of the assets of the Corporate Debtor on 19.08.2024.
9.12. It is seen from the minutes of the 9th SCC meeting held on 01.08.2024 that the successful auction purchaser disbursed the sale proceedings in terms of the deadlines set by the Letter of Intent dated 18.07.2024. The details of the disbursement are extracted hereunder,
9.13. It is seen that the amount of Rs. 2,81,25,000 representing 25% of the SARFAESI Sale proceeds was transferred from the Liquidation Account of the Corporate Debtor to the Current Account of State Bank of India, Stressed Assets Management Branch (SAMB), Chennai at theSBI Anna Salai, on 20.07.2024. Subsequently, an amount of Rs. 8,32,50,000 representing 75% of the SARFAESI sale proceeds (after deducting 1% TDS of Rs. 11,25,000) was transferred to SBI, SAMB on 31.07.2024.
9.14. However, at that stage, disputes arose between the Liquidator and SBI regarding settlement of claims and payment of liquidator’s fees. As a result, the present applications came to be filed before this Tribunal. The details of the applications filed and reliefs sought, in brief, are as follows,
a. IA(IBC)/1825(CHE)/2024 filed by the Liquidator seeking SBI to pay Liquidator’s fees for the realisation of the personal guarantor’s property and distribution of the SARFAESI sale proceeds thereof.
b. IA(IBC)/1934(CHE)/2024 filed by the Liquidator seeking SBI to return Rs. 1,06,00,000, being amount realised by SBI out of the sale of residential property of the personal guarantor
c. IA(IBC)/1990(CHE)/2024 file by SBI seeking the Liquidator to return the balance claim of Rs. 2.08 crores and to refund the liquidator’s fee of Rs. 0.22 crores deducted by the Liquidator. XXXXXX
IA(IBC)/1990(CHE)/2024
9.34. This is an Application filed by SBI seeking directions to the liquidator to distribute balance claim arrived at after the revision of claim amounting to approximately Rs. 2,08,00,000/- (Rupees Two Crores Eight Lakhs) and to refund the liquidator’s fee of Rs. 0.22 Crores deducted from the amount distributed to SBI.
9.35. It is seen that SBI vide e-mail dated 09.08.2024 submitted its revised claim after deducting the amounts recovered from the SARFAESI sale proceeds to the Liquidator. The revised claim calculation is reproduced hereunder for reference,
Revised claim calculation sheet
(The Revised Claim Calculation Sheet is annexed and marked as Annexure 13 in the Counter Affidavit filed by the Liquidator)
9.36. On perusal of the revised claim calculation sheet submitted by SBI, we find that,
a. SBI has claimed additional interest at the rate of 12% till date as per the DRC No. 463/2017.
b. While considering the amount recovered through sale of the personal guarantor’s property under SARFAESI Act, 2016, SBI has taken into the SARFAESI sale proceeds net off TDS at the rate of 1% i.e., Rs. 11,13,75,000 (Rs. 11,25,00,000 – Rs. 11,25,000).
c. While considering the amount distributed by the Liquidator from realisation of the liquidation estate, SBI has taken into account the amount distributed net off the liquidator’s fee i.e., Rs. 8,77,60,996 (Rs. 9,00,97,474 – Rs. 22,36,478)
9.37. The Liquidator has presented the reworked claim calculation data, which is extracted below for reference,
Revised Claim submitted by SBI on 05.08.2024
As per SBI mail, they added Liquidator’s Fee and TDS amount deducted for the SARFAESI realisation
(The reworked calculation of the Liquidator is annexed and marked as
Annexure 14 in the Counter Affidavit filed by the Liquidator)
9.38. The issues arising in this application are twofold, firstly, whether the financial Creditor is entitled to claim interest even after the Liquidation Commencement Date and secondly, whether the liquidator’s fee is to be deducted from the amount distributed under Section 53 of IBC, 2016.
Whether the Financial Creditor is entitled to claim interest even after the Liquidation Commencement Date?
9.39. The arguments advanced by SBI are summarised below,
a. The Financial Creditor is entitled to interest subsequent to the Liquidation Commencement Date under Section 53(1)(f) of IBC, 2016which provides for payment of "any remaining debts and dues".
b. As per Box 6.18 Para 7 of the Report of the Bankruptcy Law Reforms Committee (November, 2015) (hereinafter, BLRC Report), any surplus remaining after the payment of debts will be applied in paying interest on those debts in respect of the periods during which they have been outstanding since the Bankruptcy Commencement Date. Since there is surplus remaining after having made payments under Section of 53(1)(a) to (e) of IBC, 2016, SBI is entitled to claim interest from the Liquidation Commencement Date.
c. The decision of Hon’ble NCLAT, Principal Bench, in the matter of DBS Bank India Ltd. vs. Kuldeep Verma, Liquidator of Eastern Gases Ltd., Company Appeal (AT) (Insolvency) No. 1048 of 2022 decided on 06.02.2023, relied upon by the Liquidator is irrelevant in light of the facts and circumstances of the present case since it did not deal with the scope of "any remaining debts and dues" enumerated under Section 53(1)(f) of IBC, 2016.
9.40. The arguments advanced by the Liquidator in this regard are summarized below,
a. Regulation 16 of Liquidation Regulations, mandates that all claims must be filed as on the Liquidation Commencement Date (LCD).
b. The Hon’ble NCLAT, Principal Bench, in the matter of DBS Bank India Ltd (supra), has held that claimants cannot be allowed to claim any additional amounts beyond what they have claimed as on the LCD in their Form D.
c. The BLRC Report recommendations referred to by SBI pertain to distribution in the Bankruptcy Process for Individuals, reflected in Section 178 (5) of the IBC, 2016 for distribution in the Bankruptcy Process for individuals and does not pertain to distribution during the liquidation process of the Corporate Debtor.
d. Since the full amount claimed by the Financial Creditor, SBI, has been disbursed from the Corporate Debtor's Liquidation account, the liquidator is legally barred from admitting the claim for interest and other charges of the Financial Creditor after the Liquidation Commencement Date.
9.41. Regulation 16 of Liquidation Regulations states that any claim for debt or dues, including the interest component, has to be proved by the creditor as on the Liquidation Commencement Date. Regulation 16 is reproduced hereunder for reference,
“16. Submission of claim.
(1) A person, who claims to be a stakeholder, shall submit its claim, or update its claim submitted during the corporate insolvency resolution process, including interest, if any, on or before the last date mentioned in the public announcement.
(2) A person shall prove its claim for debt or dues to him, including interest, if any, as on the liquidation commencement date.”
9.42. This Tribunal refers to the decision of DBS Bank India Ltd(supra)¸ wherein it was held that as per Regulation 16, claim including the interest is to be calculated as at the Liquidation Commencement Date and the claimants cannot be allowed to make any further claims in addition to the amounts claimed in Form D. The relevant paragraphs of the order are extracted below for reference,
“17. Form D also clearly mentions that total amount of claim including an interest, “As at The Liquidation Commencement Date”. The Liquidation Regulation thus clearly contemplated the claim which also includes the interest “As at The Liquidation Commencement Date”. Liquidation commencement date is a defined term in Section 5(17) to following effect:
“(17) “liquidation commencement date” means the date on which proceedings for liquidation commence in accordance with section 33 or section 59, as the case may be;”
18. In the present case, Liquidation Commencement Date is a date when the Adjudicating Authority passed the Order of Liquidation. Thus claim has to be with reference to the liquidation commencement date. The statute pegs the claim on a particular date for a purpose and object. When a claim is filed in Form D where interest and principal have been included up to the date of liquidation commencement date, claimants cannot be allowed to claim any further amount in addition to the amount which they have claimed in their Form D.
20. We have noticed above that statutory scheme provides submission of claim on a liquidation commencement date which is a fixed connotation. When a statute provides for liquidation commencement date as a date up to which claims can be filed and proved, no claim thereafter can be entertained by the Liquidator. The amount of interest which was retained by the Appellant claiming to be interest in addition to the claim as filed by it in Form D till the date of realization of receipt of the sale, cannot be permitted to be retained by the Appellant and the Adjudicating Authority has rightly passed the order allowing application filed by the Liquidator to hand over the additional amount to the Liquidator. Learned Counsel for the Appellant submits that out of Rs. 1.84 Crores, amount of Rs. 20 Lakhs have already been paid.”
9.43. It is seen that Box 6.18 Para 7 of the Report of the Bankruptcy Law Reforms Committee (November, 2015) relied upon by SBI discusses the bankruptcy process of a personal guarantor and not the liquidation process of a Corporate Debtor. Hence, this Tribunal agrees with the contention of the Liquidator that the BLRC report is not relevant in the present case.
9.44. In view of Regulation 16 of Liquidation Regulations and the decision of the Hon’ble NCLAT in DBS Bank India Ltd (supra)¸ this Tribunal is of the opinion that SBI has exceeded the scope of rights vested upon it under Section 53 of IBC, 2016 read with Regulation 16 of Liquidation Regulations, by claiming interest subsequent to the Liquidation Commencement Date. We therefore hold that SBI is not entitled to any additional claim by way of interest beyond the claim made in Form D dated 06.03.2023.
Whether the liquidator’s fee is to be deducted from the amount distributed under Section 53 of IBC, 2016?
9.45. The arguments advanced by SBI are summarised below,
a. According to Section 53(1)(a) of the IBC, 2016 payment of CIRP costs and liquidation costs is to be made in priority and in full. According to Regulation 2(1)(ea) of the Liquidation Regulations read with Section 34(8) and (9) of IBC, 2016, the liquidation costs include liquidator’s fee. Hence, payment of liquidator's fee is to be made in full and upfront under the waterfall mechanism from the liquidation estate.
b. According to Regulation 42(3) of Liquidation Regulations, CIRP cost, if any, and Liquidation cost shall be deducted before the distribution is made by the Liquidator, which means that the payment of fees is to be made from the liquidation estate.
c. As per Section 53(3) of IBC, 2016, the liquidator's fee must be proportionately borne/ reduced by each class while computing the share of entitlement of each class and not reduced from and out of the share of the amounts payable to the class of creditors.
d. The sale proceeds are sufficient to first pay the liquidator’s fees and then meet the debts of all class of creditors in full. Therefore, the deducting the liquidator fee from the distribution proceeds earmarked for the SBI is misapplication of the provisions of the IBC, 2016.
9.46. The arguments advanced by Liquidator are summarised below,
a. As per Section 53(3) of IBC, 2016 read with Regulation 4(2)(b) r/w 4(3) of the Liquidation Regulation, the amount of fees payable to the Liquidator must be deducted from the proceeds to each class at the time of distribution. The priority of payment of “Liquidator’s Fees”, has been expressly specified in Section 53(3) of IBC, 2016, that the fees payable to the liquidator shall be deducted proportionately from the proceeds payable to each class of recipients under Section 53(1) of IBC, 2016, and the proceeds to the relevant recipient shall be distributed after such deduction. Thus, the liquidator’s fees cannot be paid before the distribution to stakeholders under Section 53(1) of IBC, 2016.
b. Circular. No. IBBI/LIQ/61/2023 dated 28.09.2023 issued by IBBI clarifies that Liquidator’s Fees is as part of Liquidation Cost under Regulation 2(ea) of Liquidation Regulations. Regulation 4(2)(b) of Liquidation Regulations specifies that the liquidator’s fee is calculated “as a percentage of the amount realized net of other liquidation costs, and of the amount distributed.” The circular addressed that all components of liquidation costs, except the liquidator’s fee, should be considered as part of “other liquidation costs.”. Further, while defining “Amount Distributed to Stakeholders”, IBBI specifies that the liquidator shall be entitled to a fee as a percentage of the amount realized net of other liquidation costs, and the amount distributed, for the balance period of liquidation. Thus, the liquidation costs mentioned in section 53(1)(a) is to be bifurcated in two parts as under; a. Liquidation cost other than the Liquidator's fee and Liquidator's fees.
9.47. It has already been established that as per Section 34(8) of IBC, 2016, the liquidator can charge a fee for the conduct of liquidation proceedings in proportion to the value of the liquidation estate assets as may be specified by the Board. Further, as per Section 34(9), the
liquidator’s fee shall be paid from the proceeds of the liquidation estate as specified under Section 53.
9.48. The manner of calculation of liquidator’s fee is provided under Regulation 4 of Liquidation Regulations. According to Regulation 4(2)(b), the liquidator is entitled to fees as a percentage of the amount realised net of other liquidation costs, and of the amount distributed, for the balance period of liquidation. The IBBI vide its Circular. No. IBBI/LIQ/61/2023 dated 28.09.2023 has provided further clarification that ‘other liquidation costs’ shall be construed to mean liquidation costs paid in priority under Section 53(1)(a) excluding the liquidator’s fee. The object of Regulation 4 of Liquidation Regulations is to provide method of computation of liquidator’s fee specified in Section 34(8) in case no fee for liquidator is fixed by the Committee of Creditors under Regulation 39D of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 or by the Stakeholders Consultation Committee under Regulation 4(1A) of Liquidation Regulations. Regulation 4 of Liquidation regulations is extracted hereunder,
“4. Liquidator’s Fee
(1) The fee payable to the liquidator shall be in accordance with the decision taken by the committee of creditors under regulation 39D of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
(1A) Where no fee has been fixed under sub-regulation (1), the consultation committee may fix the fee of the liquidator in its first meeting
(2) In cases other than those covered under sub-regulation (1) [and (1A)], the liquidator shall be entitled to a fee-
(a) at the same rate as the resolution professional was entitled to during the corporate insolvency resolution process, for the period of compromise or arrangement under section 230 of the Companies Act, 2013 (18 of 2013); and
(b) as a percentage of the amount realised net of other liquidation costs, and of the amount distributed, for the balance period of liquidation, as under:
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[Clarification: For the purposes of clause (b), it is hereby clarified that where a liquidator realises any amount, but does not distribute the same, he shall be entitled to a fee corresponding to the amount realised by him. Where a liquidator distributes any amount, which is not realised by him, he shall be entitled to a fee corresponding to the amount distributed by him.]
(3) Where the fee is payable under clause (b) of sub-regulation (2), the liquidator shall be entitled to receive half of the fee payable on realisation only after such realised amount is distributed.
Clarification: Regulation 4 of these regulations, as it stood before the commencement of the Insolvency and Bankruptcy Board of India (Liquidation Process) (Amendment) Regulations, 2019 shall continue to be applicable in relation to the liquidation processes already commenced before the coming into force of the said amendment Regulations.]
9.49. Section 53(1)(a) states that the insolvency resolution process costs and liquidation costs are to be paid in full. Further, Section 53(3) of IBC, 2016 envisages that the liquidator’s fee shall be deducted proportionately from the liquidation proceeds payable to the creditors under Section 53(1). According Regulation 42(3) of Liquidation Regulations, the distribution of liquidation proceeds under Section 53(3) shall be made only after the CIRP costs and liquidation costs are deducted. Regulation 42 of Liquidation Regulations, is extracted below,
“42. Distribution.
(1) Subject to the provisions of section 53, the liquidator shall not commence distribution before the list of stakeholders and the asset memorandum has been filed with the Adjudicating Authority.
(2) The liquidator shall distribute the proceeds from realization within 90 [ninety days] from the receipt of the amount to the stakeholders.
(3) The insolvency resolution process costs, if any, and the liquidation costs shall be deducted before such distribution is made.”
9.50. On a plain reading of Section 53(1)(a) read with Section 53(3) and Regulation 42(3) of Liquidation Regulations, it is clear that the liquidator’s fee is to be paid in full before any pay outs are made to the remaining stakeholders in terms of Section 53(1)(b) to Section 53(1)(h).
The intent of differentiating between liquidator’s fee and other liquidation costs under Regulation 4 of the Liquidation Regulations and the IBBI Circular. No. IBBI/LIQ/61/2023 dated 28.09.2023 is only to provide the method of computing liquidator’s fee and not to bypass the waterfall mechanism provided under Section 53 (1) of IBC, 2016
9.51. In view of the above, the distribution of proceeds from the sale of liquidation estate to the stakeholders under Section 53(1) of IBC, 2016 shall be made only after the liquidator’s fee is deducted from the liquidation estate.
9.52. This Tribunal is of the view that the Liquidator’s Fees is to be calculated in accordance with Regulation 4(2)(b) of Liquidation Regulations and deducted in full from the Liquidation Estate before the distribution of liquidation proceeds to the remaining stakeholders as specified in Section 53(1)(a) of IBC, 2016. Further, only after the settlement of the admitted claims of the stakeholders in terms of Section 53(1)(b) to Section 53(1)(g) the remaining proceeds can be distributed to the equity shareholders under Section 53(1)(h).
9.53. For instance, if the total amount realised is Rs. 1,00,00,000 by sale of liquidation estate of a corporate debtor, the amount to be distributed to the stakeholders under Section 53(1)(b) is Rs. 80,00,000, the amount to be paid under Section 53(1)(a) excluding Liquidator’s fee is Rs. 3,00,000 and the Liquidator’s fee is Rs. 2,00,000. Assuming that there are no other stakeholders other than equity shareholders, then the distribution should be made in the following manner in terms of Section 53 of IBC, 2016,
9.54. In the above instance, the Liquidator’s fee is deducted in full before any distribution is made to the stakeholder under sub-section 53(1)(b) to (h). Thereafter, the claims of the secured financial creditors are settled in full under Section 53(1)(b) and only the remaining amount is paid out to the equity shareholders under sub-section (h). Hence, any amount paid to a class of stakeholders under a specific sub-section under Section 53 shall be made only after the claims of the stakeholders pertaining to the preceding sub-sections are settled in full.
9.55. In the present case, a fee of Rs.23,36,478 has been deducted by the Liquidator from the amount of Rs. 9,00,97,474 to be distributed to SBI in terms of Section 53(1)(a) read with Section 53(3). However, on perusal of the Affidavit dated 10.12.2024 vide S.R. No. 6006, it is seen that the Liquidator has deducted the liquidator’s fee from the amount payable to the creditors of the Corporate Debtor and an amount of Rs. 6,85,30,293 is payable to the shareholders under Section 53(1)(h) of IBC, 2016.
9.56. The approach adopted by the Liquidator by deducting the liquidator’s fee from the proceeds paid to the each of stakeholders does not confirm with the provisions of IBC, 2016 and Liquidation Regulations. The Liquidator ought to have deducted the entire liquidator’s fee from the liquidation estate before proceeding with the distribution of amount to the remaining stakeholders.
9.57. Hence, this Tribunal directs the Liquidator to disburse a sum of Rs. 23,36,478 to SBI and recover the same from the amounts remaining in the liquidation estate.
9.58. IA(IBC)/1990(CHE)/2024 is accordingly disposed of.
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