TMI Blog2021 (4) TMI 301X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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. - Company Appeal (AT) (Insolvency) No.731 of 2020 - - - Dated:- 5-4-2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted claims of Secured Creditors as per their voting rights and the Appellant having 14.54% share was entitled to ₹ 1,62,70,647 in the total proceeds which have been wrongly distributed by the Liquidator. Respondent No. 1 (Liquidator) contended before the Adjudicating Authority that due to failure of CIRP, process for liquidation of Corporate Debtor was set in motion on 17th January, 2018 and the decision on distribution of sale proceeds was made in accordance with Section 53 of I B Code. It was submitted that the Liquidator made the distribution of the liquidation proceeds based on the interpretation of Section 53(2) as given in para 21 of the Report of Insolvency Law Committee dated 26th March, 2018. Upon consideration of rival submissions, the Adjudicating Authority was of the view that the inter-se priorities amongst the Secured Creditors would remain valid and prevail in distribution of assets in liquidation. Appellant s application (I.A. No. 514 of 2019) was held to be non-maintainable. 3. Learned counsel for Appellant would submit that when the Company went into liquidation, Appellant being one of the Secured Creditors filed its proof of claim which was acknowledged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shment. 4. Per contra it is submitted on behalf of Respondent No. 1 (Liquidator) that the Appellant was not entitled to any amount disbursed to the Secured Creditors as the Appellant was admittedly a second charge holder. It is further submitted that the Appellant had not raised any objection to the charge sheet circulated by the Liquidator and the Liquidator disbursed the amount received from the sale of assets to Respondents 2 and 3 on the basis of understanding of para 21.6 of the Insolvency Law Committee Report dated 26th March, 2018 with regard to waterfall treatment of Section 53 of I B Code. It is submitted that the distribution of sale proceeds is in accordance with the judgment of Hon ble Apex Court in ICICI Bank Ltd. vs. Sidco Leathers Ltd. Ors. - Appeal (Civil) 2332 of 2006, decided on 28th April, 2006. Reliance was also placed on Section 48 of the Transfer of Property Act. The Liquidator has also placed reliance on judgment of this Appellate Tribunal in J M Financial asset Reconstruction Co. Ltd. vs. Finquest Financial Solutions Pvt. Ltd. Ors. , which held that only the first charge holder i.e. the Secured Creditor being highest in the inter creditor ranking i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s payable to the liquidator shall be deducted proportionately from the proceeds payable to each class of recipients under sub-section (1), and the proceeds to the relevant recipient shall be distributed after such deduction. Explanation.-For the purpose of this section- (i) it is hereby clarified that at each stage of the distribution of proceeds in respect of a class of recipients that rank equally, each of the debts will either be paid in full, or will be paid in equal proportion within the same class of recipients, if the proceeds are insufficient to meet the debts in full; and (ii) the term workmen s dues shall have the same meaning as assigned to it in section 326 of the Companies Act, 2013. 7. Sections 52 53 form part of Chapter III dealing with Liquidation Process. Chapters I to VII are incorporated in Part II of I B Code dealing with Insolvency Resolution and Liquidation for Corporate Persons. This arrangement under the legal framework would demonstrate that insolvency resolution and liquidation for Corporate Persons is interlinked but treated distinctly from insolvency resolution and bankruptcy for Individuals and Partnership Firms falling under Par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t bears direct and proximate nexus with the asset subject to such security interest, relinquishment of such security interest divests the Secured Creditor of enforcing its security interest qua the secured assets thereby rendering him subject to operation of Section 53 whereunder he would be entitled to distribution in order of priority enshrined therein out of the proceeds from the sale of liquidation assets. Section 53(1)(b)(ii) provides that the debts owed to a Secured Creditor, in the event of such Secured Creditor having relinquished security in the manner set out in Section 52 shall rank equally between and among the two sub-categories classified under Clause (b) viz. workmen dues for period of 24 months preceding the liquidation commencement date and the debts owed to a secured Creditor who relinquished its security interest. In order of priority beneficiaries classified under clause (b) would rank next only to clause (a) viz. insolvency resolution process cost and liquidation costs paid in full. 8. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be given to the provisions to make them workable and stand in harmony. 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. 9. The 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 clai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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