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2021 (4) TMI 301 - AT - Insolvency and BankruptcyPriority to the first charge holder - Secured Creditor - relinquishment of security interest - Sub-classification inter-se the Secured Creditors in the distribution mechanism adopted in a Resolution Plan of the Corporate Debtor - Appellant’s claim that it was initially having first charge on the immovable and movable assets of the Company which was later changed to second charge is disputed by the Respondents by contending that in absence of Appellant substantiating its claim of holding second charge over immovable properties of Corporate Debtor and no certificate having been issued by ROC to such effect, no charge on the part of Appellant could be taken into account by the Liquidator. HELD THAT:- While it is true that the relinquishment of security interest affects the order of distribution, it is equally true that the Secured Creditor does not lose its status of being a Secured Creditor though he has elected to forego his right of enforcing security interest. Whether the Secured Creditor holds first charge or second charge is material only if the Secured Creditor elects to realise its security interest. A conjoint reading of Sections 52 and 53 of I&B Code, leaves no room for doubt that the legislature in its wisdom thought it proper to provide an option to the Secured Creditor armed with a security interest to choose out of the two options viz. either enforce security interest against the asset out of liquidation estate which is the subject of security interest or relinquish the same and claim as Secured Creditor in the manner set out under Section 53(1)(b)(ii) ranking equal to other Secured Creditors. It is manifestly clear that in the event of a Secured Creditor electing to realise its security interest but failing to realise the whole amount due to it would be entitled to distribution of assets under Section 53(1)(e)(ii) for any amount that remains unpaid following the enforcement of security interest thereby ranking lower in priority as compared to a Secured Creditor who has relinquished its security interest to the liquidation estate and is entitled to distribution of assets under Section 53(1)(b)(ii) - It is significant to note that Section 53 has been given overriding effect and the non-obstanate clause contained in the very opening words of the Section leaves no room for doubt that the distribution mechanism provided thereunder applies in disregard of any provision to the contrary contained in any Central or State law in force. Of course first charge holder will have priority in realising its security interest if it elects to realize its security interest and does not relinquish the same. However, once a Secured Creditor opts to relinquish its security interest, the distribution of assets would be governed by the provision engrafted in Section 53(1)(b)(ii) whereunder all Secured Creditors having relinquished security interest rank equally and in the waterfall mechanism are second only to the insolvency resolution process costs and the liquidation costs. The Secured Creditors admittedly having relinquished their security interest to the liquidation estate, Section 53 would come into play and the Secured Creditors viz. Appellant and the Respondents 2 and 3 shall rank equally under Section 53(1)(b)(ii) for distribution of assets. Admittedly, Respondents 2 and 3 were first charge holders. They would have enjoyed priority in the event they had not relinquished their security interest. Once they elected for relinquishment of security interest, for distribution of assets they would be governed by the waterfall mechanism recognised under Section 53 of the I&B Code mandating equal ranking amongst the Secured Creditors. Sale proceeds in such case have to be distributed equitably amongst the Secured Creditors who rank equally and it would be irrespective of any charge they were holding prior to relinquishment of security interest. In ICICI Bank vs. Sidco Leathers Ltd. & Ors. [2006 (4) TMI 264 - SUPREME COURT], the Hon’ble Apex Court, while taking note of Section 48 of Transfer of Property Act, observed that the claim of first charge holder shall prevail over the claim of the second charge holder and where debts due to both the first charge holder and the second charge holder are to be realised from the property belonging to the mortgager, the first charge holder will have to be repaid first. - The Hon’ble Apex Court observed that while enacting the Companies Act parliament cannot be held to have intended to deprive the first charge holder of the said right. Such a valuable right must be held to have been kept preserved. It referred to an earlier judgment titled Workmen of Firestone Tyre and Rubber Company of India vs. Management & Ors. [1973 (3) TMI 134 - SUPREME COURT] observing that if such valuable right of first charge holder was intended to be taken away, Parliament, while amending the Companies Act would have stated so explicitly. The view taken by the Adjudicating Authority on the basis of judgment of Hon’ble Apex Court in ICICI Bank vs. Sidco Leathers Ltd. [2006 (4) TMI 264 - SUPREME COURT] (which is pre-IBC), ignoring the mandate of Section 53 of I&B Code which has an overriding effect and came to be enacted subsequent to the aforesaid judgment rendered by Hon’ble Apex Court explicitly excluding operation of all Central and State legislations having provisions contrary to Section 53 of I&B Code, is erroneous and cannot be supported. The impugned order holding that the inter-se priorities amongst the Secured Creditors will remain valid and prevail in distribution of assets in liquidation cannot be sustained - Appeal allowed.
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