Secured Creditor Has To Take Calculated Decision Whether Or Not To Relinquish Secured Interest: SC In Appeal Challenging Liquidation Proceedings
The Supreme Court while dealing with an Appeal challenging the order of the National Company Law Appellate Tribunal (NCLAT) dismissed the appeal challenging the liquidation process. Paschimanchal Vidyut Vitran Nigam Limited (PVVNL) appealed against an order of the NCLAT that rejected their appeal against the release of attached property for liquidation. PVVNL argued that the Electricity Act, 2003, gave them priority over the Insolvency and Bankruptcy Code, 2016 (IBC).
The Supreme Court upheld the NCLAT’s decision, stating that the IBC takes precedence over the Electricity Act and that electricity dues do not enjoy priority.
The Two Judge Bench comprising of Justice S. Ravindra Bhat and Justice Dipankar Datta said that “It is thus, apparent, that a secured creditor has to take a calculated decision, at the outset of the liquidation process, whether or not to relinquish its secured interest. In case it does so, its dues rank high in the waterfall mechanism. In case it chooses not to relinquish its security interest, and instead proceeds to enforce it without success or is unable to realize all its dues in the process of enforcement, it has to then perforce stand lower in priority, and await distribution of assets upon realization of the liquidation estate, by the liquidator, vis-à-vis the balance of its dues.”
The initiation of the insolvency process by financial creditors and operational creditors is controlled by Sections 7 and 8 of the IBC, respectively. The corporate debtor can contest a debt within a specified time period. The Adjudicating Authority determines the existence of a default based on the records of the information utility or evidence furnished by the creditors.
AOR Pradeep Misra appeared for the Appellant while AOR Purti Gupta appeared for the Respondent.
The case involves an appeal by PVVNL against an order issued by the NCLAT. PVVNL contested the order of the National Company Law Tribunal, Allahabad (NCLT), which allowed the release of attached property, previously attached by PVVNL, in favor of the liquidator of the Respondent, Raman Ispat Pvt. Ltd. The purpose of releasing the property was to facilitate its sale and subsequent distribution of proceeds in accordance with the Insolvency and Bankruptcy Code, 2016 (IBC). The liquidator argued that the attachment orders needed to be set aside by the NCLT in order to enable the sale of the property, as potential buyers were hesitant due to uncertainties surrounding the liquidator's authority to sell.
The liquidator also contended that PVVNL's claim would be classified according to the priority prescribed under Section 53 of the IBC, entitling PVVNL to a pro rata distribution of proceeds along with other secured creditors from the sale of liquidation assets. The NCLAT upheld the NCLT's decision and directed the District Magistrate and Tehsildar, Muzaffarnagar, to release the attached property in favor of the liquidator. This decision aimed to facilitate the sale of the property and ensure its distribution in accordance with the relevant provisions of the IBC. The NCLAT also agreed with the NCLT's interpretation that PVVNL fell within the definition of an "operational creditor" and could recover its dues through the liquidation process as prescribed by the law.
The Apex Court after a careful examination of provisions of the IBC said that "During the insolvency resolution process, a secured creditor is not permitted to realize its dues by initiating any proceeding. This is by virtue of Section 14 (1) (c) which enables the imposition of a moratorium period, during which a secured creditor is precluded from bringing any action to foreclose, recover or enforce any security interest. Secured creditors’ rights are restored only in the event of failure of the insolvency resolution process, at the stage of liquidation."
The Supreme Court further added that Debts owed to a secured creditor receive a higher priority if the secured creditor has relinquished security in the manner set out in Section 52, IBC. In cases where the secured creditor does not relinquish security, the priority of claim is lower in respect of any amount unpaid following the enforcement of security interest under (Section 53(1)(e)(ii)), IBC.
Section 52 of the IBC provides an option for secured creditors to either relinquish their security interest or proceed to enforce it. If the secured creditor chooses to enforce its security interest, it must indicate its option within the prescribed time and can realize the proved dues as security debts with the permission of the liquidator. Any excess amount realized should be tendered to the liquidator.
Accordingly, the Supreme Court dismissed PVVNL’s appeal and directed the liquidator to consider PVVNL's claim in accordance with the law and complete the process within 10 weeks.
Cause Title: Paschimanchal Vidyut Vitran Nigam Ltd V. Raman Ispat Private Limited & Ors. (Neutral Citation: 2023 INSC 625)
