TMI Blog2020 (2) TMI 1484X X X X Extracts X X X X X X X X Extracts X X X X ..... far as claims of similar ranking are concerned. A security interest determines the recovery rate of a defaulted loan; hence, the ranking of security interest directly determines the value of the defaulted loan. If, contractually, parties had put Mr. A on first priority, and Mr. B on second priority, there will be no parity whatsoever in the law pushing back Mr. A to the same status as Mr. B, as that would substantially erode the recovery rate for Mr. A - The concept of distribution waterfall existed both in the Companies Act, 1956 and 2013, and not a concept unique to the Code. In fact, Companies Act is the parent Act, based on which the Code was formulated, and it is important to refer to Section 529A which was introduced in the Companies Act, 1956 by virtue of Companies (Amendment) Act, 1985, to provide a protection to the workmen. The issue of ranking of secured creditors have been discussed by the Supreme Court in ICICI BANK LTD. VERSUS SIDCO LEATHERS LTD. [ 2006 (4) TMI 264 - SUPREME COURT] - If the secured creditors relinquish their security interest and make claim on the liquidation estate, will the first/second ranking remain, or all secured creditors will be of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed creditor. 3. The Applicant further states that the said distribution made by the liquidator is done without following requisite procedure and approval of the other creditors including the present Applicant. The Applicant submitted that the said action of the Respondent No. 1 is arbitrary and without due process of law. Even otherwise, the same is not in consonance with the provisions of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as IB Code). More particularly, the Applicant's claim was admitted and the Applicant was granted voting rights. The Applicant further submits that in accordance with law, admitted claims of secured creditors and as per voting rights of the Applicant, his share is 14.54% which comes to ₹ 1,62,70,647/- in the total proceeds wrongly distributed by the Respondent No. 1, 4. It is stated that Applicant under such circumstances, addressed letter dated 14.06.2019 to the liquidator. However, the Respondent No. 1 reiterated his stand and declined the request of the Applicant by his communication dated 19.06.2019. 5. The Applicant submits that in pursuance of Section 52(1)(a) of the IB Code, all the secured creditors i.e. R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to direct initiation of appropriate proceedings against the erring concern. (E) To pass such other and further orders as this Hon'ble Tribunal may deem just and proper. 10. The Respondent No. 1 in his reply submitted that application for initiation of Corporate Insolvency Resolution Process was filed by the Corporate Debtor in the year 2017 under Section 10 of the IB Code in view of the financial default of ₹ 48,79,000.63. 11. The Respondent No. 1 further submits that due to failure of CIRP, the liquidation process of the Corporate Debtor commenced on 17.01.2018. 12. The Respondent No. 1 submits that at the outset, the application filed by the Applicant is liable to be rejected by this Tribunal as the decision taken by the liquidator on distribution of the sale proceeds has been made in accordance with Section 53 of IB Code. It is further submitted that the Respondent No. 1 had made the disbursement of the liquidation proceeds based on the interpretation of Section 53(2) as given in paragraph 21 of the Report of the Insolvency Law Committee dated 26th March, 2018 13. The Respondent No. 1 further submits that the Applicant has a second charge on the moveabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived, the Respondent No. 1 disbursed the amount received from the sale of assets on 14.07.2018, in consideration of charge held by the creditors on the assets of the Corporate Debtor in the following manner: 18. The Respondent No. 1 submits that Respondent No. 1 has distributed the liquidation proceeds as per the provisions of the IB Code and based on understanding of paragraph 21.6 of Insolvency Law Committee (ILC) Report dated 26/03/2018 with regard to waterfall treatment of section 53 in the following manner- I. The CIRP Costs and Liquidation Costs shall be paid off in priority, thereafter; II. The first charge holder of a particular asset will be entitled to receive sale proceeds in priority up to the payment of its debt in full, after which, the second charge holders would be paid from the balance sale proceeds, if any; III. If a particular Secured Stakeholder has exclusive charge on any asset, it alone shall be entitled to receive the proceeds from sale of such asset; IV. Pari-pasu charge holders shall be paid in proportion of their debt; V. The first charge holder of any current asset will be entitled to receive sale proceeds in priority up to the paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. It is important to understand what a first charge and second charge is. The first charge holder has a security interest on the asset of a company; the second charge holder has a subsequent charge over the remainder of the asset of the company, which is remaining after settling the claims of the first charge holder. In that sense, the charges are sequential and not proportional. It is a settled position that when a charge is created on a property already subject to encumbrance, it is no good to say that the existing charge holder ought to have objected to the creation of the second charge. In fact, if the charge is existing and registered, the charge is deemed to be a public notice, and anyone acquiring any interest in the same property is presumed to have notice of the charge. To understand the interplay of charges, one needs to understand Section 53(2) of the Code which provides that Any contractual arrangements between recipients under subsection (1) with equal ranking, if disrupting the order of priority under that subsection shall be disregarded by the liquidator. On interpretation of the aforesaid provision, the stress is clearly on the words 'with equal ranking ..... X X X X Extracts X X X X X X X X Extracts X X X X
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