Technology Development Board vs Anil Goel Liquidator Of Gujarat Oleo ...

[Arising out of Order dated 27th February, 2020 passed by the Adjudicating Authority (National Company Law Tribunal), Ahmadabad Bench, Ahmadabad in I.A. No. 514 of 2019 in C.P. (IB) No. 04 of 2017]

IN THE MATTER OF:

Technology Development Board Through - Assistant Law Officer Vishwakarama Bhavan, Wing 'A', Shaheed Jeet Sing Marg, New Delhi - 110 016. ...Appellant Versus

1. Mr. Anil Goel Liquidator of Gujarat Oleo Chem Limited (GOCL), AAA Insolvency Professional LLP, E-104, Kailash Colony, Greater Kailash -1, New Delhi - 110 048.

2. Stressed Asset Stabilisation Fund, 5th Floor, IDBI Tower, WTC Complex, Cuff Parade, Mumbai - 400 005.

3. Gujarat State Finance Corporation, Block No. 10, Udyog Bhavan, Gandhinagar - 382017. ....Respondent Present: For Appellant: Mr. P. Vinay Kumar, Advocate & Ms. Nalini Negi, AR.

For Respondents: Mr. Kanishk Khetan, Advocate with Mr. Anil Goel, Liquidator for R-1. Mr. Pranab Kumar Mullick, Ms. Soma Mullick and Mr. Deepak Kochhar, Advocates for R-2. Mr. Indravadan R. Patel, Advocates for R-3. -2-

BANSI LAL BHAT, J.

The issue raised for consideration in this appeal is whether there can

be no sub-classification inter-se the Secured Creditors in the distribution

mechanism adopted in a Resolution Plan of the Corporate Debtor as

according priority to the first charge holder would leave nothing to satisfy

the claim of Appellant who too is a Secured Creditor.

2. For determining the issue a brief reference to the facts is inevitable.

I.A. No. 514 of 2019 in CP (IB) 404/2017 was filed by the Appellant -

'Technology Development Board' being a Financial Creditor of 'Gujarat Oleo

Chem Ltd.' - the Company under liquidation. It was asserted in the

application before the Adjudicating Authority (National Company Law

Tribunal) Ahmadabad Bench, Ahmadabad that the Appellant was part of the

Committee of Creditors (CoC) having voting share of 14.54% in Corporate

Insolvency Resolution Process (CIRP) of 'Gujarat Oleo Chem Ltd.' and had

lodged its claim for Rs.24,78,68,595/- with the Liquidator, who while did

not call for meeting of Creditors for one and a half years but upon inability

of Appellant to attend meeting of Creditors scheduled for 9th May, 2019

informed the Appellant that the sale proceeds had been distributed amongst

'Stressed Asset Stabilisation Fund' (Respondent No. 2) and 'Gujarat State

Finance Corporation' (Respondent No. 3) as security charge holders and

distributed Rs.9,59,03,179 to Respondent No. 2 and Rs.1,59,99,480 to

Company Appeal (AT) (Insolvency) No. 731 of 2020 -3-

Respondent No. 3. The Appellant was aggrieved that its claim as Secured

Creditor was not considered. The Appellant contended before the

Adjudicating Authority that the distribution by the Liquidator was not in

consonance with the provisions of the Insolvency and Bankruptcy Code,

2016 (for short 'I&B Code') more particularly as the Appellant's claim was

admitted and it was granted voting rights. The Appellant stressed that the

distribution had to be as per the admitted claims of Secured Creditors as

per their voting rights and the Appellant having 14.54% share was entitled

to Rs.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 in first CoC meeting as also in

fourth CoC Meeting. Voting share of 14.54% was assigned to Appellant.

Company Appeal (AT) (Insolvency) No. 731 of 2020 -4-

Proof of claim in Form B was filed for a total claim of Rs.24.78 Crores, which

was confirmed by the Liquidator vide email dated 1st March, 2018. However,

subsequently Liquidator had called for a meeting of the stakeholders to be

held in Mumbai on 9th May, 2019 which the Appellant could not attend as

he was in Delhi, however, the Liquidator went ahead with the meeting. The

security charge sheet provided amount of Rs.9,59,03,179/- to Respondent

No. 2 and Rs.1,59,99,480/- to Respondent No. 3. No amount was paid to

the Appellant. It is further submitted that the Appellant objected to the

disbursement of the sale proceeds and claimed a sum of Rs.1,62,70,647/-

on the basis of holding 14.54% voting share. The Liquidator, while stating

that the claim of Rs.24.78 Crores was admitted on the basis of the security

interest held by the Appellant, took the stand that distribution of sale

proceeds to Respondent No. 2 and 3 being first charge holders was as per

Para 21 of Insolvency Law Committee Report and since the Appellant only

had second charge, no amount was payable from the sale proceeds. It is

further submitted that the Secured Creditors relinquished their security

interest to the liquidation estate and thus forfeited their right on the assets.

The only right available to them was to receive proceeds from the sale of

assets in the manner provided in Section 53. It is submitted that the

priority of charge i.e. first charge or second charge loses its significance on

relinquishment of the security interest and the sale proceeds are put in a

common pool of money to be distributed in accordance with Section 53 of

I&B Code which does not provide for further classification of Secured

Creditors. When the asset itself is non-existent and rights attached with it

Company Appeal (AT) (Insolvency) No. 731 of 2020 -5-

are relinquished, there is no question of claim in priority on the basis of

being first charge holder. It is further submitted that the first charge

holders would have got priority in the event they had not relinquished their

rights but having relinquished their rights, Section 53 mandating equal

ranking among Secured Creditors would come into play and the sale

proceeds will have to be distributed equitably among the Secured Creditors

irrespective of their priorities held before such relinquishment.

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

Company Appeal (AT) (Insolvency) No. 731 of 2020 -6-

ranking is entitled to enforce his right for the realization of its debt out the

secured asset.

5. Learned counsel for Respondent No. 2 would submit that the

Appellant cannot be said to hold second charge over immovable properties of

Corporate Debtor as it failed to produce requisite documents before the

Liquidator. It is submitted that in absence of certificate issued by ROC no

charge shall be taken in account by Liquidator or any other creditors. It is

further submitted that voting share during CIRP does not entitle the

Appellant to get the same share in liquidation. The two processes are

entirely different as on liquidation CoC comes to an end and voting rights do

not subsist any longer. The creditors would rank in liquidation in

accordance with their class and security held. It is further submitted that

Section 48 of Transfer of Property Act gives precedence to first charge holder

over a second charge holder in respect of an immovable property. Section

53 of I&B Code does not take away that right on relinquishment.

6. Heard learned counsel for the parties and perused the record.

Sections 52 and 53 of I&B Code relevant for our purposes are reproduced

hereinabelow:-

"52. Secured creditor in liquidation proceedings. -

(1) A secured creditor in the liquidation proceedings may--

(a) relinquish its security interest to the liquidation estate and receive proceeds from the sale of assets by the liquidator in the manner specified in section 53; or

Company Appeal (AT) (Insolvency) No. 731 of 2020 -7-

(b) realise its security interest in the manner specified in this section.

(2) Where the secured creditor realises security interest under clause (b) of sub-section (1), he shall inform the liquidator of such security interest and identify the asset subject to such security interest to be realised.

(3) Before any security interest is realised by the secured creditor under this section, the liquidator shall verify such security interest and permit the secured creditor to realise only such security interest, the existence of which may be proved either--

(a) by the records of such security interest maintained by an information utility; or

(b) by such other means as may be specified by the Board.

(4) A secured creditor may enforce, realise, settle, compromise or deal with the secured assets in accordance with such law as applicable to the security interest being realised and to the secured 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.

Company Appeal (AT) (Insolvency) No. 731 of 2020 -8-

(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 creditors who realise their security interests in the manner provided in this section, shall be deducted from the proceeds of any realisation by such secured creditors, and they shall transfer such amounts to the liquidator to be included in the liquidation estate.

(9) Where the proceeds of the realisation of the secured assets are not adequate to repay debts owed to the secured creditor, the unpaid debts of such secured creditor shall be paid by the liquidator in the manner specified in clause (e) of sub-section (1) of section 53.

53. Distribution of assets. - (1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority

Company Appeal (AT) (Insolvency) No. 731 of 2020 -9-

and within such period and in such manner as may be specified, namely :--

(a) the insolvency resolution process costs and the liquidation costs paid in full;

(b) the following debts which shall rank equally between and among the following :--

(i) workmen's dues for the period of twenty-

four months preceding the liquidation commencement date; and

(ii) debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52;

(c) wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;

(d) financial debts owed to unsecured creditors;

(e) the following dues shall rank equally between and among the following:--

(i) any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date;

Company Appeal (AT) (Insolvency) No. 731 of 2020 -10-

(ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;

(f) any remaining debts and dues;

(g) preference shareholders, if any; and

(h) equity shareholders or partners, as the case may be.

(2) Any contractual arrangements between recipients under sub-section (1) with equal ranking, if disrupting the order of priority under that sub-section shall be disregarded by the liquidator.

(3) The fees 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."

Company Appeal (AT) (Insolvency) No. 731 of 2020 -11-

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 Part III of I&B Code. Section 52, being a

part of the liquidation process prescribes one of the two courses which, at

its option, a Secured Creditor can adopt in liquidation proceedings:

(i) The Secured Creditor may relinquish its security interest to the

liquidation estate. If it does so, it shall be entitled to receive

proceeds from sale of assets by Liquidator in accordance with the

waterfall mechanism engrafted in Section 53; or

(ii) The Secured Creditor may realise its security interest as provided

in Section 52 of I&B Code.

Section 52(2) provides that in the event of the Secured Creditor

choosing to realise the security interest, it shall inform the Liquidator of

such security interest and also identify the asset subject to such security

interest to be realised. It shall be the duty of the Liquidator to verify such

security interest and permit the Secured Creditor to realise only such

security interest the existence of which is proved in the prescribed manner.

Section 52(4), further dealing with realisation of security interest provides

the mode of realisation of security interest and application of proceeds to

Company Appeal (AT) (Insolvency) No. 731 of 2020 -12-

recover the debts due to it. It is abundantly clear that the realisation of

security interest is directly linked with the asset subject to such security

interest to be realised. On the other hand, Section 53 deals with

distribution of assets by providing that the proceeds from the sale of

liquidation assets shall be distributed in the order of priority laid down in

the Section. The provision engrafted in Section 53 has an overriding effect

over all other laws in force. The vital distinction between the two provisions

viz. Section 52 and Section 53 lies in regard to realisation of interest with

Section 52 providing option to the Secured Creditor in liquidation

proceedings to choose between relinquishment of its security interest and

realisation of its security interest while Section 53 is confined to mode of

distribution of the proceeds from the sale of the liquidation assets. While

the realisation of security interest can be exercised only qua the asset which

is subject to such realisable security interest, relinquishment of security

interest to the liquidation estate would leave the Secured Creditor entitled to

claim distribution in the proceeds from the sale of the liquidation assets. It

is therefore clear that while the security interest 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

Company Appeal (AT) (Insolvency) No. 731 of 2020 -13-

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 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

Company Appeal (AT) (Insolvency) No. 731 of 2020 -14-

who has relinquished its security interest to the liquidation estate and is

entitled to distribution of assets under Section 53(1)(b)(ii). Once a Secured

Creditor elects to relinquish its security interest to the liquidation estate, it

ranks higher in waterfall mechanism under Section 53 to a Secured Creditor

who has enforced its security interest but failed to realise its claim in full

and for the unpaid part of its claim ranks lower to the Secured Creditor who

has relinquished its security interest. Viewed in this context the argument

advanced that sub-classification amongst Secured Creditors is

impermissible cannot be accepted. Section 52 incorporating the doctrine of

election, read in juxtaposition with Section 53 providing for distribution of

assets treats Secured Creditor relinquishing its Security interest to the

liquidation estate differently from a Secured Creditor who opts to realise its

security interest, in so far as any amount remains unpaid following

enforcement of security interest to a Secured Creditor is concerned by

relegating it to a position low in priority. The two sets of Secured Creditors,

one relinquishing the security interest and the other realising its security

interest are treated differently. A creative interpretation has to 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

Company Appeal (AT) (Insolvency) No. 731 of 2020 -15-

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 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. Voting share of 14.54% assigned to

Appellant was material during CIRP proceedings but would not extend to

allotting commensurate share to Appellant in liquidation proceedings. The

creditors rank in liquidation as per their class and security interest. 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

Company Appeal (AT) (Insolvency) No. 731 of 2020 -16-

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.

10. In "ICICI Bank vs. Sidco Leathers Ltd. & Ors. (2006) 10 SCC 452", 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.'

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. (supra)" (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.

Company Appeal (AT) (Insolvency) No. 731 of 2020 -17-

11. For the foregoing reasons 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.

12. We accordingly allow the appeal and set aside the impugned order.

I.A. 514 of 2019 in CP(IB) No. 04/2017 is held to be maintainable and we

allow the same with direction to the Liquidator to treat the Secured

Creditors relinquishing the security interest as one class ranking equally for

distribution of assets under Section 53(1)(b)(ii) of I&B Code and distribute

the proceeds in accordance therewith.

[Justice Bansi Lal Bhat] Acting Chairperson

[Dr. Ashok Kumar Mishra] Member (Technical)

[Dr. Alok Srivastava] Member (Technical) NEW DELHI

5th April, 2021

AM

Company Appeal (AT) (Insolvency) No. 731 of 2020