Section 52 IBC: Relinquish or realize security interest by secured creditor under liquidation

Sushil Kumar Antal 22 Jul 2025 1,623 Views 1 comment Print Corporate Law | Articles

The scheme of liquidation under Insolvency and Bankruptcy Code (IBC/Code), 2016 regarding secured assets and liquidation estate can be clearly understood through the combined reading of Sections 36, 52, and 53. The scheme of liquidation may be summarized as under-

Scheme of Liquidation:

1. General Rule – Formation of Liquidation Estate [Section 36]: On commencement of liquidation, all assets of the corporate debtor form the liquidation estate. These assets are pooled together by the liquidator and sold to repay creditors in the priority order under Section 53.

2. Exception for Secured Assets [Section 36(1)(g)]: Assets under security interest are excluded from the liquidation estate unless the secured creditor relinquishes their security interest to the liquidator. Therefore:

If the secured creditor relinquishes the asset, it joins the liquidation estate.
If the secured creditor does not relinquish, the asset remains outside the liquidation estate, and the creditor proceeds to enforce security separately (under Section 52).

3. Secured Creditor’s Choice [Section 52]: Secured creditors can:

Relinquish security interest and receive payment from the liquidator as per Section 53 waterfall, or
Realise their security interest independently, outside the liquidation estate, but following due process and applicable laws.

4. Claims Settlement [Section 53]: All admitted claims, including those from secured creditors who relinquish their security, are settled from the liquidation estate in the statutory priority waterfall.

It is well established under the scheme of liquidation that all assets of the Corporate Debtor shall form part of the liquidation estate as defined under Section 36 of IBC. Any person claiming to be a stakeholder must submit their claim in accordance with Regulation 16 of the IBBI (Liquidation Process) Regulations, 2016, and such claims are to be settled based on the waterfall mechanism laid down in Section 53 of the Code.

However, in the case of assets that are subject to security interest, only those assets over which the secured creditor has relinquished its security interest become part of the liquidation estate. This position is clarified under Section 36(1)(g), which expressly states that the liquidation estate includes “any asset of the corporate debtor in respect of which a secured creditor has relinquished security interest.”

Therefore, if a secured creditor chooses not to relinquish its security interest and instead opts to enforce it independently under Section 52, such secured assets will not form part of the liquidation estate and will remain outside the control of the liquidator.

A “Secured Creditor” means ‘a creditor in favour of whom security interest is created’ [Section 3(30) of IBC]. “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) of IBC]. However, as per proviso to Section 3(31), the term “Security Interest” does not include performance security.

It is well recognised that a secured creditor is prohibited from enforcing its security interest against the Corporate Debtor during the Corporate Insolvency Resolution Process (CIRP) due to the moratorium imposed under Section 14 of IBC. Specifically, Section 14(1)(c) provides that, from the insolvency commencement date, the Adjudicating Authority (NCLT) shall declare a moratorium prohibiting any action to foreclose, recover, or enforce any security interest created by the corporate debtor in respect of its property. This restriction includes any enforcement action under laws such as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002).

In essence, once CIRP commences, secured creditors are legally barred from initiating or continuing any enforcement proceedings, ensuring that the debtor’s assets remain protected for resolution efforts during the moratorium period.

In light of the above, the rights of secured creditors to enforce their security interest against the Corporate Debtor are restored only upon the commencement of liquidation proceedings under Section 33 of the IBC. It is at this stage, following the failure of the CIRP, that secured creditors may choose either to relinquish their security interest to the liquidation estate or to enforce it independently under Section 52.

Section 52 of IBC read as under-

“Section 52: Secured creditor in liquidation proceedings.

52. (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.

(5) If in the course of realising a secured asset, any secured creditor faces resistance from the corporate debtor or any person connected therewith in taking possession of, selling or otherwise disposing off the security, the secured creditor may make an application to the Adjudicating Authority to facilitate the secured creditor to realise such security interest in accordance with law for the time being in force.

(6) The Adjudicating Authority, on the receipt of an application from a secured creditor under sub-section (5) 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 in force.

(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.”

The purpose of Section 52 of IBC is to safeguard the rights of secured creditors during liquidation proceedings. It recognizes that secured creditors hold a legal charge over specific assets and provides them with two distinct options to recover their dues, balancing their rights with the collective liquidation process.

Section 52(1) – Two alternatives for Secured Creditors during liquidation proceedings.

Section 52(1) of IBC grants secured creditors two clear options during liquidation:

1. Relinquish the security interest: The secured creditor can choose to relinquish its security interest to the liquidation estate. In this case, the secured asset becomes part of the liquidation pool. The creditor then receives proceeds from the sale of assets by the liquidator, as per the priority waterfall in Section 53.

2. Realise the security interest: Alternatively, the secured creditor may choose to realise its security interest independently, outside of the liquidation estate. This process must comply with Section 52, including compliance with applicable laws (like the SARFAESI Act) and intimation to the liquidator. If the realised amount exceeds the debt, the surplus must be handed over to the liquidator. If it falls short, the balance is treated as unsecured and claims filed accordingly.

If a secured creditor chooses to relinquish its security interest under Section 52(1)(a) of the IBC, it becomes entitled to distribution of proceeds from the liquidation estate in accordance with the “waterfall mechanism” prescribed under Section 53 of IBC. In such a case, the secured creditor is ranked at second priority, on par with the workmen’s dues for the period of twenty-four months preceding the liquidation commencement date, as specified in Section 53(1)(b).

As mentioned earlier, once the secured creditor relinquishes its security interest, the secured asset becomes part of the liquidation estate of the Corporate Debtor. The liquidator is then empowered to sell the asset in accordance with Regulation 32 of the IBBI (Liquidation Process) Regulations, 2016 [IBBI Liquidation Regulations], and distribute the sale proceeds as per the statutory priority.

If a secured creditor chooses to realise its security interest under Section 52(1)(b) of the IBC, it must inform the liquidator of such decision and identify the secured asset intended to be realised, as required under Section 52(2). Additionally, Regulation 21A(1) of IBBI Liquidation Regulations [Presumption of Security Interest] provides that where a secured creditor fails to inform the liquidator of its decision to either relinquish or realise its security interest, the security interest shall be presumed to form part of the liquidation estate.

Regulation 21A read as under-

“Regulation 21A: Presumption of security interest.

21A. (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) XXX…”

As per Regulation 21A, a secured creditor is required to submit its decision in FORM C or FORM D of Schedule II, indicating whether it chooses to relinquish its security interest to the liquidation estate or realise it independently. Importantly, if the secured creditor does not communicate its decision within 30 days from the liquidation commencement date, the asset covered under the security interest shall automatically be presumed to be part of the liquidation estate.

Therefore, it is critical that the secured creditor exercises one of the two alternatives provided under Section 52(1) either relinquishment or realisation within 30 days from the liquidation commencement date, to avoid the deemed presumption under Regulation 21A of IBBI Liquidation Regulations.

If a secured creditor opts to realise its security interest under Section 52(1)(b) of the IBC, the process for doing so is governed by Regulation 37 of the IBBI (Liquidation Process) Regulations, 2016, titled “Realisation of security interest by secured creditor”.

The purpose of Regulation 37 of the IBBI Liquidation Regulations, in relation to Section 52 of the IBC, is to operationalise and clarify the procedure for secured creditors who choose to realise their security interest independently, outside the liquidation estate. While Section 52 of the IBC provides the substantive rights of secured creditors, Regulation 37 lays down the procedural framework to ensure uniformity, transparency, and accountability in the exercise of those rights.

Section 52(2) – Intimation and identification of secured asset.

Sub-section (2) of Section 52 provides that when a secured creditor elects to realise its security interest (rather than relinquish it to the liquidation estate), the following obligations arise:

1. Mandatory Intimation to the Liquidator: The secured creditor must formally inform the liquidator of its decision to enforce the security interest independently.

2. Identification of Secured Asset: The secured creditor must specify and identify the particular asset over which the security interest exists and which it proposes to realise.

It means, if a secured creditor decides to enforce their charge directly (instead of handing the asset to the liquidator), they must officially notify the liquidator and specify exactly which asset they’re enforcing against.

Section 52(2) of the IBC requires that a secured creditor opting to realise its security interest must identify and inform the liquidator about the specific secured asset it intends to enforce and does not wish to relinquish. While Section 52(2) itself does not prescribe any specific timeline for such intimation, Regulation 21A(1) of the IBBI Liquidation Regulations mandates that this intimation must be made within 30 days from the liquidation commencement date. Failure to communicate this decision within the specified period results in the presumption that the secured assets are part of the liquidation estate, thereby forfeiting the secured creditor’s independent enforcement right. Thus, it is crucial for the secured creditor to formally inform the liquidator within this 30-day period to safeguard its right under Section 52(1)(b).

Section 52(3) – Verification Before Realisation.

A secured creditor must obtain permission from the liquidator before realising its security interest independently. Before a secured creditor is permitted to realise its security interest independently, the following process must be followed:

1. Duty of Liquidator – Verification: The liquidator must verify the existence and validity of the claimed security interest. The liquidator acts as a checkpoint to ensure that only genuine and valid security interests are enforced.

2. Mode of Verification: The liquidator can verify the security interest through:

(a) Information Utility Records:

- - Records of security interest maintained by an Information Utility (IU) under the IBC framework serve as primary evidence.

(b) Other Means as Specified by IBBI:

- - If IU records are unavailable or insufficient, the Board (IBBI) may specify alternative verification methods (such as registered charges with the Registrar of Companies or other documentary proof).

3. Conditional Permission:

- Only after successful verification, the liquidator can permit the secured creditor to proceed with the realisation of their security interest.

The purpose of the aforesaid process is to safeguard the liquidation proceedings from fraudulent or unsubstantiated enforcement actions. By mandating verification of security interests before permitting realisation, the process ensures that only genuine and legally valid secured creditors are allowed to enforce their claims. This mechanism protects the liquidation estate and the interests of other stakeholders from wrongful or excessive claims, thereby maintaining transparency, fairness, and integrity in the liquidation process.

Section 52(4) – Realisation of Secured Assets by Secured Creditor.

Once the secured creditor has obtained permission from the liquidator [following verification under Section 52(3)], it may proceed to enforce, realise, settle, compromise, or otherwise deal with the secured assets. This process must be carried out strictly in accordance with:

The law applicable to the security interest being enforced (such as the SARFAESI Act, the Companies Act, or any other relevant legislation).
The legal framework applicable to the secured creditor, depending on its nature (e.g., banks, financial institutions, or other lending entities).
The proceeds realised from such enforcement may be applied by the secured creditor towards recovery of its outstanding dues, as per the applicable law.

According to the said provisions, secured creditors are required to enforce their security strictly within the framework of applicable laws. While they have the flexibility to choose the mode of enforcement, whether through sale, settlement, compromise, or any other lawful method, such actions must comply with the relevant legal provisions governing both the security interest and the creditor. The proceeds realised from the enforcement are applied directly by the secured creditor towards recovery of its outstanding debt, allowing for independent realisation without waiting for distribution under Section 53 of the IBC.

It is important to note that Section 52(4) of the IBC grants secured creditors the liberty to enforce, realise, settle, compromise, or otherwise deal with their secured assets in accordance with the applicable laws governing the security interest and the secured creditor itself. The proceeds realised from such enforcement can be directly applied towards recovery of the debts owed to the creditor.

However, if a secured creditor chooses to enforce its security interest under specific statutes such as the SARFAESI Act, 2002 or the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act), then the procedural requirements of Regulation 37 of the IBBI Liquidation Regulations do not apply, as explicitly provided under Regulation 37(7). This exclusion recognises that those specialised statutes already provide their own enforcement mechanisms and procedures for secured creditors.

This means that, for the purpose of realising its security interest, a secured creditor has the following two options:

Option 1: Enforce the security interest in accordance with the procedure laid down under Regulation 37 of the IBBI (Liquidation Process) Regulations, 2016; or
Option 2: Enforce the security interest independently under the applicable laws, such as the SARFAESI Act, 2002 or the Recovery of Debts and Bankruptcy Act, 1993, where Regulation 37 does not apply due to the specific exclusion under Regulation 37(7).

Section 52(5) – Assistance from Adjudicating Authority in case of obstruction.

If, during the process of realising a secured asset, the secured creditor faces resistance or obstruction from the corporate debtor or any person connected with the corporate debtor in taking possession of, selling, or otherwise disposing of the secured asset, the secured creditor is entitled to seek assistance. In such circumstances, the secured creditor may file an application before the Adjudicating Authority, seeking appropriate directions or assistance to facilitate the enforcement and realisation of its security interest, in accordance with the applicable law.

Section 52(6) – Powers of the Adjudicating Authority.

Upon receiving an application from a secured creditor under sub-section (5), the Adjudicating Authority may pass such orders as it deems necessary to facilitate the secured creditor in realising its security interest in accordance with applicable law. This provision empowers the Adjudicating Authority to issue appropriate directions or extend necessary assistance to ensure that the secured creditor’s right to enforce its security interest is effectively exercised, particularly in situations where possession, sale, or disposal of the secured asset is hindered or obstructed.

Section 52(7) – Treatment of surplus from enforcement of Secured Assets.

If the enforcement of security interest by the secured creditor (under sub-section 4) results in the realisation of proceeds exceeding the amount of debt owed to the secured creditor, the following obligations arise:

1. Accounting of Surplus: The secured creditor must account to the liquidator for the surplus amount generated from the enforcement of the secured asset.

2. Payment of Surplus: The secured creditor is required to tender the surplus funds to the liquidator, so that such excess amount becomes part of the liquidation estate, available for distribution among other creditors in accordance with Section 53.

Section 52(8) – Payment of Insolvency Resolution Process Costs (IRPC) by Secured Creditors.

Where a secured creditor realises its security interest independently (under Section 52), the insolvency resolution process costs (IRPC) attributable to such creditor must be handled as follows:

The amount of IRPC due from the secured creditor must be deducted from the proceeds realised through enforcement of its secured asset.
The secured creditor is obligated to transfer this deducted amount to the liquidator.
The liquidator will then include this amount in the liquidation estate for distribution in accordance with the statutory priority.

This provision ensures that secured creditors contribute their fair share of the insolvency resolution process costs, even when they choose to enforce their security interest independently, outside the liquidation estate. It prevents the unfair burdening of the common pool of the liquidation estate with costs that should rightly be borne by secured creditors who benefit from separate enforcement. In this way, the provision promotes equity and fairness in the distribution of costs among all creditors.

Example: Suppose Bank A is owed a debt of ₹8 crore and realises ₹9 crore by selling its secured asset, i.e., machinery. The IRPC attributable to Bank A are ₹40 lakh. As per the requirements, Bank A must first deduct ₹40 lakh from the sale proceeds towards its share of the IRPC and transfer this amount to the liquidator for inclusion in the liquidation estate. From the remaining ₹8.60 crore, Bank A can retain ₹8 crore towards full settlement of its secured debt. The surplus amount of ₹60 lakh must then be transferred to the liquidator, as required under Section 52(7). This process ensures that Bank A contributes fairly to the resolution process costs and that any excess realisation is returned to the liquidation estate for distribution to other creditors.

Section 52(9) – Treatment of Unpaid Debts of Secured Creditors.

Where the realisation proceeds from the secured assets are insufficient to fully discharge the secured creditor’s dues, the unpaid portion of the debt shall be treated as an unsecured claim for the balance amount. The liquidator is required to pay the unpaid portion of such debt in accordance with clause (e) of sub-section (1) of Section 53, which relates to the priority waterfall for distribution of liquidation proceeds. Specifically, such unpaid dues rank at the fifth position in the distribution hierarchy after the claims of unsecured financial creditors have been satisfied.

Realization of security interest by secured creditor under Regulation 37 of IBBI (Liquidation Process) Regulations, 2016.

Regulation 37(1) – Intimation of proposed realisation price.

When a secured creditor opts to realise its security interest independently under Section 52 of the IBC, it must intimate the liquidator of the price at which it proposes to realise the secured asset. Regulation 37(1) of IBBI Liquidation Regulations 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) – Liquidator’s obligation to inform Secured Creditor about higher offer.

When a secured creditor informs the liquidator of its intention to sell a secured asset and mentions the proposed sale price (as per sub-regulation 1), the liquidator must, within 21 days of receiving this intimation, inform the secured creditor if any third party has offered to buy the asset, within 30 days, at a higher price than the price proposed by the secured creditor.

Regulation 37(2) provides that the liquidator must respond to the secured creditor within 21 days from the date of receiving the secured creditor’s intimation, informing whether there is any prospective buyer willing to purchase the secured asset at a price higher than that proposed by the secured creditor. It ensures that the asset is not sold at a lower price and the secured creditor gets the best possible value.

Regulation 37(3) – Sell of asset to third party at higher price.

If the liquidator informs the secured creditor that a buyer is available, offering a higher price for the secured asset (as per sub-regulation 2), the secured creditor is required to sell the asset to that buyer.

It is pertinent to note that if the secured asset is sold to the buyer identified by the liquidator (as per sub-regulation 3), then the secured creditor must bear the cost incurred in identifying that buyer under sub-regulation 2. [Sub-regulation 5 of Regulation 37]

Regulation 37(4) –Right of Secured Creditor to realise asset if no higher offer or buyer materialises.

If the liquidator does not inform the secured creditor about any higher offer (as required under sub-regulation 2), or if the interested buyer identified by the liquidator fails to purchase the secured asset, the secured creditor is free to sell the asset in any manner it chooses. However, the sale must be conducted at a price not less than the price it had originally informed to the liquidator under sub-regulation (1).

It is important to 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 IBBI Liquidation Regulations [Inserted by IBBI (Liquidation Process) (Amendment) Regulations, 2020 vide Notification No. IBBI/2019-20/GN/REG053, dated 6th January, 2020, w.e.f. 06-01-2020]. It is important to note that secured creditors are prohibited from selling or transferring the secured asset to any person who is ineligible to submit a resolution plan for the corporate debtor under Regulation 37(8).

The primary purpose of inserting Regulation 37(8) is to prevent back-door entry of persons who are otherwise disqualified under Section 29A of the IBC from regaining control of the corporate debtor’s assets through the enforcement of security interests. This provision safeguards the integrity of the liquidation process by ensuring that such ineligible persons cannot indirectly regain access to the corporate debtor’s assets.

If the secured creditor sells the secured asset on its own (as per sub-regulation 4) that is, when no higher offer materialises through the liquidator, the liquidator is required to bear the cost incurred in identifying the buyer. [Sub-regulation 6 of Regulation 37]

Regulation 37(5) – Cost of identifying Buyer to be borne by Secured Creditor.

It is important to note that where the secured asset is ultimately sold to the buyer identified by the liquidator (as per sub-regulation 3), the secured creditor is required to bear the cost incurred in identifying that buyer. This ensures that the expenses involved in securing a better price for the asset are appropriately allocated to the benefiting secured creditor.

Regulation 37(6) – Cost of identifying Buyer to be borne by Liquidator.

This provision applies because, in such cases, the liquidator’s efforts to find a higher-paying buyer did not result in a sale, and therefore, the secured creditor should not be burdened with those identification costs.

Regulation 37(7) – Non-Applicability of Regulation 37 in case of enforcement under SARFAESI or RDB Act.

If a secured creditor chooses to enforce its security interest under specific statutes such as the SARFAESI Act, 2002 or the Recovery of Debts and Bankruptcy Act, 1993, then the procedural requirements of Regulation 37 of the IBBI Liquidation Regulations do not apply, as explicitly provided under Regulation 37(7). This exclusion recognises that those specialised statutes already provide their own enforcement mechanisms and procedures for secured creditors.

Regulation 37(8) – Restriction on sale to Ineligible Persons.

It is pertinent to mention that Regulation 37 was amended vide IBBI (Liquidation Process) (Amendment) Regulations, 2020 vide Notification No. IBBI/2019-20/GN/REG053, dated 6th January, 2020, w.e.f. 06-01-2020 and a new sub-regulation (8) was inserted as under

“(8) A secured creditor shall not sell or transfer an asset, which is subject to security interest, to any person, who is not eligible under the Code to submit a resolution plan for insolvency resolution of the corporate debtor.”

A secured creditor is prohibited from selling or transferring any secured asset to any person who is not eligible under the IBC to submit a resolution plan for the insolvency resolution of the corporate debtor. This essentially means that persons disqualified under Section 29A of the IBC cannot purchase secured assets from secured creditors during liquidation. The primary purpose of inserting Regulation 37(8) is to prevent back-door entry of persons who are otherwise disqualified under Section 29A of the IBC from regaining control of the corporate debtor’s assets through the enforcement of security interests. This provision safeguards the integrity of the liquidation process by ensuring that such ineligible persons cannot indirectly regain access to the corporate debtor’s assets.

Regulation 21A: Presumption of security interest

Regulation 21A was introduced by the IBBI (Liquidation Process) (Amendment) Regulations, 2019, vide Notification No. IBBI/2019-20/GN/REG047, dated 25th July 2019, with effect from the same date. This regulation aims to bring clarity and procedural discipline to the liquidation process by requiring secured creditors to decide, within a specified timeframe, whether to relinquish or realise their security interest.

By mandating that secured creditors must formally intimate their decision within 30 days of the liquidation commencement date, Regulation 21A helps prevent delays and uncertainty in the liquidation process. If no intimation is received within the prescribed period, it is presumed that the secured creditor has relinquished its security interest to the liquidation estate. This ensures that secured creditors do not retain control over secured assets indefinitely without formal communication, thereby promoting transparency, fairness, and timely resolution.

Regulation 21A read as under-

“Regulation 21A: Presumption of security interest.

(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.”

If a secured creditor chooses to realise its security interest under Section 52(1)(b) of the IBC, it must inform the liquidator of such decision and identify the secured asset intended to be realised, as required under Section 52(2). Additionally, Regulation 21A(1) provides that where a secured creditor fails to inform the liquidator of its decision to either relinquish or realise its security interest, the security interest shall be presumed to form part of the liquidation estate.

Regulation 21A(2) – Duty of Secured Creditor to pay estimated amount or excess realisation to Liquidator.

It is important to note that sub-regulation (2) of Regulation 21A was substituted by the IBBI (Liquidation Process) (Amendment) Regulations, 2020, vide Notification No. IBBI/2019-20/GN/REG053, dated 6th January 2020, effective from the same date.

Prior to said amendment, sub-regulation (2) may be read as under-

“(2) Where a secured creditor proceeds to realise its security interest, it shall pay 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.”.

After amendment, sub-regulation (2) may be read as under-

“(2) Where a secured creditor proceeds to realise its security interest, it shall pay –

Amended Regulation 21A(2) places a clear obligation on the secured creditor to pay the liquidator either the estimated realisable value or any excess amount realised from the enforcement of the secured asset, within the prescribed timeline. Failure to comply with this obligation triggers consequences under Regulation 21A(3).

When a secured creditor chooses to realise its security interest (instead of relinquishing it), certain payments must be made by the secured creditor to the liquidator, as detailed below:

1. Contribution Towards Priority Payments under Section 53 obligations [Regulation 21A(2)(a)]: The secured creditor must pay to the liquidator, within 90 days from the liquidation commencement date, an amount equal to what it would have contributed if it had relinquished its security. This includes:

- Its share of the insolvency resolution process costs [Section 53(1)(a)]; and
- Its share of workmen’s dues for the 24 months preceding the liquidation commencement date [Section 53(1)(b)(i)].

2. Payment of Surplus Realisation (Excess Amount) [Regulation 21A(2)(b)]: If the value realised from the sale of the secured asset exceeds the creditor’s admitted claim, the excess amount must be paid to the liquidator within 180 days from the liquidation commencement date.

3. Estimated Payments: If the actual payable amounts are not determined by the due date, the secured creditor must pay the estimated amount as determined by the liquidator.

4. Final Settlement: Any difference between the estimated and final amount must be adjusted as soon as the actual amount becomes certain.

Regulation 21A(2)(a) requires the secured creditor, if opting to realise its security interest, to pay its proportionate share of the CIRP costs, liquidation costs, and workmen’s dues for the preceding 24 months (i.e., the amount it would have contributed had it relinquished the security interest) to the liquidator within 90 days from the liquidation commencement date. Regulation 21A(2)(b) further provides that any excess amount realised from the secured asset beyond the secured creditor’s admitted claim must be paid to the liquidator within 180 days from the liquidation commencement date.

This timeline indicates that the realisation of the secured asset should ideally be completed within 180 days, ensuring timely distribution and avoiding prolonged retention of sale proceeds by the secured creditor.

Example: Suppose Bank X (secured creditor) is owed a debt of ₹8 crore, and it realises ₹9 crore from the sale of the secured asset. The admitted claim of Bank X is ₹8 crore, while its share of CIRP cost, liquidation cost, and workmen’s dues amounts to ₹50 lakh.

In this case:

As per Regulation 21A(2)(a), Bank X must pay ₹50 lakh (its share of CIRP cost, liquidation cost, and workmen’s dues) to the liquidator within 90 days from the liquidation commencement date.
As per Regulation 21A(2)(b), since Bank X’s realisation of ₹9 crore exceeds its admitted claim of ₹8 crore, the surplus ₹1 crore must be transferred to the liquidator within 180 days from the liquidation commencement date.

This ensures that Bank X satisfies its priority payment obligations and does not retain surplus amounts, benefiting the liquidation estate and other stakeholders.

Regulation 21A(3) – Consequences of non-payment by Secured Creditor [Asset deemed part of Liquidation Estate].

As per Regulation 21A(3), if the secured creditor fails to pay the required amount within the stipulated period, the asset subject to the security interest will automatically become part of the liquidation estate. This ensures that secured creditors act in a timely and transparent manner, and prevents indefinite retention or misuse of secured assets.

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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.