2025 (7) TMI 645 - AT - IBC

Liability of Secure Creditors in CIRP Proceedings - Direction to make a contribution out of the amount realised u/s 52 of the Insolvency and Bankruptcy Code 2016 - proportionate contribution towards workmen s dues in accordance with the Section 226(1)(b) of the Companies Act 2013 and also towards liquidation cost in terms of the Section 52(8) of the IBC - waterfall mechanism. Workmen dues - HELD THAT - The secured creditors having opted to realise its security outside the liquidation process and decided not to put the secured assets in the liquidation estate the provisions of Section 13(9) are fully attracted in the realization of security interest by the appellant. The statutory scheme as delineated by Section 13(9) proviso clearly indicates that amount realised from the sale of secured assets is to be distributed as per the Companies Act 1956. Companies Act 1956 having been repealed and Companies Act 2013 having been enforced the distribution contemplated has to be under the Companies Act 2013. Secured creditor is liable to pay workmen s dues as per the statutory scheme under Section 13(9) of the SARFAESI Act 2002. Under the statutory scheme under Section 13(9) secured creditors were obliged to carry on distribution of the assets as per Section 529A of the Companies Act 1956 which is now pari materia to Section 326 of the Companies Act 2013. The secured creditors statutorily required to deposit the workmen s dues with the liquidator. Appellant having realised its security interest under SARFAESI Act 2002. It cannot shirk of its obligation to deposit the workmen s dues with the liquidator which is the scheme of legislation. There are no error in the order of the adjudicating authority placing reliance on Section 13(9) of the SARFAESI Act 2002 to support his direction to the appellant to deposit the proportionate workmen s dues with the liquidator. Liquidation cost - HELD THAT - The expression insolvency resolution process cost itself is clearly referred to Section 5(13) and any cost which is payable by secured creditor under Section 52(8) has to confine to insolvency resolution process cost mentioned in Section 5(13). Section 5(13) of the IBC does not include any liquidation cost - the view of the adjudicating authority that direction to pay liquidation cost can be sustained under Section 52(8) of the IBC cannot be subscribed. The waterfall mechanism is to be restored with regard to workmen s dues only when secured creditors have relinquished their security interest. The direction of the adjudicating authority directing the appellant to make contribution out of the amount realised under Section 52 of the Code proportionate towards workmen s dues sustained. However direction to make contribution towards liquidation cost in terms of Section 52(8) cannot be sustained. Appeal allowed in part.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

(a) Whether Regulation 21A of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, as amended on 25.07.2019, applies retrospectively to liquidation proceedings commenced prior to its insertion, specifically to the liquidation process initiated on 09.08.2018 in this case;

(b) Whether a secured creditor who has realised its security interest outside the liquidation process under the SARFAESI Act, 2002, is liable to contribute proportionately towards the workmen's dues in accordance with Section 226(1)(b) of the Companies Act, 2013, as applied through Section 13(9) of the SARFAESI Act, 2002, during liquidation under the Insolvency and Bankruptcy Code, 2016 (IBC);

(c) Whether the liquidator can claim liquidation costs from secured creditors who have realised their security interest outside the liquidation process under Section 52(8) of the IBC;

(d) The applicability and interplay of provisions of the Companies Act, 2013, SARFAESI Act, 2002, and the Insolvency and Bankruptcy Code, 2016, in the context of liquidation and security interest realization;

(e) The validity and scope of the adjudicating authority's directions requiring contribution from secured creditors towards workmen's dues and liquidation costs under the facts of the present case.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Applicability of Regulation 21A of Liquidation Regulations 2016

Relevant legal framework and precedents: Regulation 21A was inserted into the Liquidation Regulations with effect from 25.07.2019, prescribing obligations on secured creditors who choose to realise their security interest outside the liquidation estate, including payment towards liquidation costs and workmen's dues. An Explanation inserted by notification dated 28.04.2022 clarified that Regulation 21A applies only to liquidation processes commencing on or after 25.07.2019.

Court's interpretation and reasoning: The liquidation in the present case commenced on 09.08.2018, prior to the insertion of Regulation 21A. The adjudicating authority acknowledged this fact and observed that Regulation 21A is prospective in nature and does not apply to the instant case. However, the adjudicating authority sought to find an equitable solution to address the absence of statutory provisions for contribution by secured creditors who realise security outside liquidation in pre-amendment cases.

Key evidence and findings: The Tribunal noted the dates of commencement of liquidation and insertion of Regulation 21A, and the clarificatory explanation issued by IBBI.

Application of law to facts: The Tribunal held that Regulation 21A is clearly not applicable to liquidation proceedings commenced before 25.07.2019 and cannot be invoked to impose obligations on secured creditors in this case.

Treatment of competing arguments: The appellant argued that Regulation 21A cannot be applied retrospectively, while the liquidator contended that the adjudicating authority's direction was justified even without Regulation 21A. The Tribunal accepted the appellant's position on non-applicability of Regulation 21A.

Conclusions: Regulation 21A does not apply to the present case and cannot form the basis for the impugned directions.

Issue (b): Liability of secured creditor to contribute towards workmen's dues under SARFAESI Act and IBC

Relevant legal framework and precedents: Section 52(4) of the IBC permits secured creditors to realise their security interest in accordance with applicable law. The appellant realised security under the SARFAESI Act, 2002. Section 13(9) of the SARFAESI Act, 2002, subject to the IBC, provides that in liquidation, the amount realised from sale of secured assets shall be distributed according to Section 529A of the Companies Act, 1956 (now pari materia to Section 326 of the Companies Act, 2013), which mandates deposit of workmen's dues by secured creditors who realise security interest outside liquidation. Section 327(7) of the Companies Act, 2013 excludes Sections 326 and 327 from application in liquidation under the IBC.

Court's interpretation and reasoning: The Tribunal held that the appellant, having realised security under SARFAESI Act, 2002, is bound by its provisions, including Section 13(9). The phrase "subject to the provisions of the Insolvency and Bankruptcy Code, 2016" in Section 13(9) indicates that SARFAESI provisions operate in harmony with IBC. The statutory scheme requires secured creditors realising security outside liquidation to deposit workmen's dues with the liquidator. The Tribunal rejected the appellant's contention that provisions of the Companies Act, 2013, including Section 326 and 327, are inapplicable, noting that Section 327(7) excludes these only in respect of liquidation under IBC, but the statutory scheme under SARFAESI and IBC read together obligates contribution towards workmen's dues.

Key evidence and findings: The appellant's invocation of SARFAESI Act for security realisation, the admitted facts of issuance of Section 13(2) and 13(4) notices, and the statutory provisions cited.

Application of law to facts: The appellant's exercise of rights under SARFAESI Act, 2002, entails compliance with the obligation to deposit proportionate workmen's dues with the liquidator during liquidation under IBC.

Treatment of competing arguments: The appellant argued that the IBC excludes application of Companies Act provisions and that Section 13(9) is not attracted. The Tribunal found no conflict between SARFAESI and IBC provisions and upheld the adjudicating authority's reliance on Section 13(9) to impose the contribution obligation.

Conclusions: The secured creditor is liable to contribute proportionately towards workmen's dues under the combined statutory scheme of SARFAESI Act and IBC.

Issue (c): Liability of secured creditor to contribute towards liquidation costs under Section 52(8) of IBC

Relevant legal framework and precedents: Section 52(8) of the IBC provides that insolvency resolution process costs due from secured creditors who realise security interest shall be deducted from the proceeds and transferred to the liquidator. Insolvency resolution process costs are defined in Section 5(13) of the IBC and do not include liquidation costs.

Court's interpretation and reasoning: The Tribunal distinguished insolvency resolution process costs from liquidation costs and held that Section 52(8) cannot be invoked to require secured creditors to contribute towards liquidation costs. The adjudicating authority's direction to pay liquidation costs under Section 52(8) was found unsustainable.

Key evidence and findings: The statutory definition of insolvency resolution process costs, and the absence of liquidation costs therein.

Application of law to facts: The appellant's obligation under Section 52(8) is confined to insolvency resolution process costs, not liquidation costs.

Treatment of competing arguments: The liquidator argued for contribution towards liquidation costs, relying on Section 52(8), but the Tribunal rejected this interpretation.

Conclusions: The direction to contribute towards liquidation costs under Section 52(8) is set aside.

Issue (d): Interplay of Companies Act, SARFAESI Act, and IBC provisions in liquidation and security realisation

Relevant legal framework and precedents: The Companies Act, 2013 Sections 326 and 327 (pari materia to Sections 529A and 530 of Companies Act, 1956) deal with distribution of sale proceeds and payment of workmen's dues in winding up. Section 327(7) excludes these provisions in liquidation under IBC. The Supreme Court in a recent judgment upheld the constitutionality of this exclusion and clarified that the IBC is a complete code with a distinct waterfall mechanism under Section 53 for distribution in liquidation.

Court's interpretation and reasoning: The Tribunal noted that the Supreme Court held that workmen's dues have pari passu priority with secured creditors only when secured creditors relinquish security interest and assets form part of the liquidation estate under Section 53 of IBC. In the present case, secured creditors have not relinquished security interest but realised it outside liquidation. Therefore, Section 53 waterfall mechanism is not attracted. The statutory scheme under SARFAESI and Companies Act provisions invoked through SARFAESI apply for deposit of workmen's dues by secured creditors realising security outside liquidation.

Key evidence and findings: The Supreme Court's observations on Sections 326, 327, and 53 of IBC; the facts regarding the appellant's choice to realise security interest outside liquidation.

Application of law to facts: The appellant's position as secured creditor realising security outside liquidation triggers obligations under SARFAESI and Companies Act provisions for workmen's dues, but not under Section 53 waterfall mechanism.

Treatment of competing arguments: The appellant's reliance on exclusion of Companies Act provisions under Section 327(7) was distinguished by the Tribunal based on the nature of security realisation and the statutory scheme.

Conclusions: The interplay of statutes requires secured creditors realising security outside liquidation to deposit proportionate workmen's dues under SARFAESI and Companies Act provisions, notwithstanding the exclusion of Sections 326 and 327 in liquidation under IBC.

Issue (e): Validity and scope of adjudicating authority's directions

Court's interpretation and reasoning: The Tribunal upheld the direction requiring the appellant to contribute proportionately towards workmen's dues under Section 13(9) of SARFAESI Act and Companies Act provisions. However, the direction to contribute towards liquidation costs under Section 52(8) of IBC was set aside. The Tribunal emphasized that the appellant's realisation of security interest under SARFAESI Act entails compliance with statutory obligations to pay workmen's dues, but does not extend to liquidation costs under the IBC.

Key evidence and findings: The impugned order, statutory provisions, and legal principles.

Application of law to facts: The directions were partially sustained and partially set aside accordingly.

Conclusions: The appellant is directed to deposit proportionate workmen's dues but is not liable to contribute towards liquidation costs under Section 52(8) of IBC.

3. SIGNIFICANT HOLDINGS

"31. The liquidator has candidly admitted that Regulation 21 A of the Liquidation Rules, 2016 was introduced only with effect from 25.07.2019 and the explanation to the said Regulation itself provides that the requirements of this Regulation shall apply to the liquidation processes commencing on or after the date of commencement of the said amendment i.e. 25.07.2019 whereas the liquidation in this case commenced much earlier on 09.08.2018."

"33. However, the question is that Regulation 21 A is not applicable to the instant case, being prospective in nature, and in the absence of the said Regulation, how and in what manner, the situation cropping up in this case has to be or can be resolved which should be fair and equitable to all the stakeholders."

"14. ... The statutory scheme as delineated by Section 13(9) proviso clearly indicates that amount realised from the sale of secured assets is to be distributed as per the Companies Act 1956. Companies Act 1956, having been repealed and Companies Act 2013 having been enforced, the distribution contemplated has to be under the Companies Act 2013. Secured creditor is liable to pay workmen's dues as per the statutory scheme under Section 13(9) of the SARFAESI Act, 2002."

"18. The expression insolvency resolution process cost itself is clearly referred to Section 5(13) and any cost which is payable by secured creditor under Section 52(8) has to confine to insolvency resolution process cost mentioned in Section 5(13). Section 5(13) of the IBC does not include any liquidation cost."

"26. ... The parties shall be governed by the provisions of IBC in case of liquidation of a company under the provisions of IBC. ... As per Section 53(1)(b) the workmen's dues for the period of twenty-four months preceding the liquidation commencement date shall rank equally between the workmen and the secured creditor in the event such secured creditor has relinquished security in the manner set out in Section 52."

"27. In view of the above discussions, we sustain the direction of the adjudicating authority directing the appellant to make contribution out of the amount realised under Section 52 of the Code proportionate towards workmen's dues. However, direction to make contribution towards liquidation cost in terms of Section 52(8) cannot be sustained."