It is well settled under scheme of liquidation that all assets of the Corporate Debtor (CD) shall become part of the ‘Liquidation Estate’ under Section 36 of the IBC. A person, who claims to be a stakeholder, shall submit its claim on liquidation under Regulation 16 of IBBI (Liquidation Process) Regulations, 2016 and such claims will be settled as per “waterfall mechanism” i.e. in the priority order mentioned in Section 53. In case of any asset which is subject to security interest, only such of the assets become part of the Liquidation Estate over which the secured creditors have relinquished security interest. More clarity has been provided by Section 36(1)(g) and it provided that liquidation estate assets include “any asset of the corporate debtor in respect of which a secured creditor has relinquished security interest.” Therefore, if the secured creditor does not relinquish security interest, the asset will not even form part of the Liquidation Estate.
A “Secured Creditor” means ‘a creditor in favour of whom security interest is created’ [Section 3(30)]. “Security Interest” means right, title or interest or a claim to property created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person. [Section 3(31)]. However, as per proviso to Section 3(31), the term “Security Interest” does not include performance security.
We know very well that a secured creditor is not allowed to enforce its security interest against the CD during the Corporate Insolvency Resolution Process (CIRP) in view of moratorium clause under Section 14. Section 14(1)(c) specifically provides that the Adjudicating Authority (AA) on insolvency commencement date, shall by order declare moratorium for prohibiting any action to foreclose, recover or enforce any security interest created by the CD in respect of property including any action under the Securitizations and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002).
In the light of the above, the rights of the secured creditor in respect to enforce its security interest against the CD are restored only after the commencement of liquidation proceedings against the CD under Section 33.
After the commencement of liquidation proceedings, Section 52(1) provides two alternatives to a secured creditor in liquidation proceedings-
(a) relinquish the security interest to the liquidation estate and receive proceeds from the sale of relevant assets by the liquidator in the manner specified in Section 53, or
(b) realise the security interest in the manner specified in Section 52 itself.
If any secured creditor relinquish his security interest under Section 52(1)(a), he will be at 2nd number under “waterfall mechanism” i.e. in the priority order mentioned in Section 53. He is placed at par with workmen’s dues for 24 months preceding the liquidation commencement date under Section 53. As mentioned earlier, upon relinquishment of the security interest by the secured creditor, the secured assets become part of Liquidation Estate of the CD and the liquidator can sell such assets under Regulation 32 of IBBI (Liquidation Process) Regulations, 2016 [‘LP Regulations’].
If any secured creditor chooses to realise the security interest under Section 52(1)(b), he shall inform the liquidator of such security interest and identify the asset subject to such security interest to be realized. [Section 52(2)]. Regulation 21A(1) [Presumption of Security Interest] provides that if secured creditor does not inform the liquidator of its decision to relinquish its secured interest to the liquidation estate the security interest shall be presumed to be part of the Liquidation Estate. The said regulation provides that 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 30 days from the liquidation commencement date, the assets covered under the security interest shall be presumed to be part of Liquidation Estate. Therefore, secured creditor should exercise any of the rights provided by Section 52(1) [any one out of two alternatives] within 30 days from the liquidation commencement date.
Further, Section 52(2) provides that the secured creditors have to identify and inform the liquidator about the secured interest which it does not want to relinquish and want to realise at its own. This section does not lay down any timeline but Regulation 21A(1) provides that this act of informing to the Liquidator has to be completed within 30 days from liquidation commencement date, otherwise the secured assets will become part of the Liquidation Estate. Furthermore, Section 52(3) provides that before any secured interest is realised, liquidator has to verify the request received from secured creditors and permit the secured creditor to go ahead with the realisation of the security. Section 52(3) provides that liquidator shall verify security interest of secured creditor and permit the secured creditor to relaise 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.
If any secured creditor chooses to realise the security interest under Section 52(1)(b), Regulation 37 [Realization of security interest by secured creditor] provides the manner in this regard. It is pertinent to note that Section 52(4) itself provides a liberty to secured creditor that he may enforce, realize, settle, compromise or deal with the secured assets in accordance with such law as applicable to the security interest being realized and to the secured creditor and apply the proceeds to recover the debt due to it. If the secured creditor enforces his security interest under SARFAESI Act, 2002 or Recovery of Debts and Bankruptcy Act 1993, then Regulation 37 shall not be applicable to realise the security interest [exclusion provided by Regulation 37(7)]. It means to realise security interest, secured creditor has following options to –
– enforce security interest in accordance with Regulation 37; or
– enforces security interest under SARFAESI Act, 2002 or Recovery of Debts and Bankruptcy Act, 1993
Realization of security interest by secured creditor under Regulation 37.
Regulation 37(1) provides that the secured creditor which is to realise the security interest under section 52 shall intimate liquidator of the price at which he proposes to realise its secured assets. Regulation 37(2) further provides that liquidator has to reply the secured creditor within a period of 21 days from the receipt of the intimation, whether he has any person who is offering higher price than the price intimated by secured creditor. Regulation 37(3) further provides that in case liquidator inform secured creditor about such person, the secured creditor shall sell the asset to such person.
Furthermore, in case liquidator does not inform or inform about such person but such person does not buy secured asset, the secured creditor may realise the secured assets in the manner it deems fit, but at least at price as intimated under sub-regulation (1). Please note that the secured creditors cannot sell or transfer the secured asset to any person, who is not eligible under the Code to submit a resolution plan for the insolvency resolution of the CD in terms of the Regulation 37(8) of LP Regulations. The main purpose of insertion of the said Regulations 37(8) is to prevent the back-door entry of ineligible resolution applicants into the management of the CD.
Enforces security interest under SARFAESI Act, 2002 or Recovery of Debts and Bankruptcy Act, 1993.
As mentioned above, if the secured creditor enforces his security interest under SARFAESI Act, 2002 or Recovery of Debts and Bankruptcy Act 1993, the Regulation 37 shall not be applicable to realise the security interest. Section 52(7) provides that where the enforcement of the security interest under Section 52(4) i.e., the secured creditor enforces his security interest under SARFAESI Act, 2002 or Recovery of Debts and Bankruptcy Act 1993, 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.
CIRP cost due from Secured Creditor shall be deducted from realization.
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. [Section 52(8)]. When the proceeds from the realization of the secured interest are not adequate to repay the debt owed to the secured creditors, the unpaid portion of the secured debt would be paid out of the Liquidation Estate at 5th position in the order of priority under Section 53 after the payment to unsecured creditors. [Section 52(9)]
Duty on secured creditor to pay liquidator estimated amount or excess realised value within prescribed timeline.
Regulation 21A(2) casts duty on secured creditor to pay liquidator estimated amount or excess realised value within prescribed timeline, falling which assets becomes part of the Liquidation Estate. Regulation 21A(3) provides that where a secured creditor fails to comply with sub-regulation (2) , the asset, which is subject to security interest, would become part of the liquidation estate.
Regulation 21A(2)(a) provides for payment of CIRP Cost, Liquidation Cost and Workmen Dues for 24 months [only for his share in case it had relinquished the security interest] within 90 days from the liquidation commencement date by secured creditor. Regulation 21A(2)(b) provides that excess realized value of assets over the amount of his claims admitted, shall be paid by secured creditor to the liquidator within 180 days from the liquidation commencement date. This indicates that the realization of assets needs to be completed within 180 days.
In case amount is not certain under sub-regulation (2) i.e. share of secured creditor in amount of CIRP Cost, Liquidation Cost and Workmen Dues for 24 months is not certain, the secured creditor shall pay the amount, as estimated by the liquidator. Further, any difference between the amount payable under sub-regulation (2) and the amount paid by secured creditor as above on estimated basis, 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.
Application to Adjudicating Authority for enforcement of security interest
A secured creditor can file an application before Adjudicating Authority to facilitate the secured creditor for realizing the security interest under Section 52(5) of the IBC only when it is facing any resistance from the CD or any person connected therewith while taking possession of, selling or otherwise disposing off the security. Adjudicating Authority may pass such order as may be necessary to permit a secured creditor to realise security interest in accordance with law for the time being force [Section 52(6)].
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Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the author whatsoever and the content is to be used strictly for informational and educational purposes. While due care has been taken in preparing this article, certain mistakes and omissions may creep in. the author does not accept any liability for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.
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