Secured Creditor Is Obligated To Contribute Towards Workmen's Dues When Security Interest Is Realised Under SARFAESI Act: NCLAT

Brief Facts:

The corporate debtor mortgaged its immovable property with the appellant as a guarantor to two borrower companies namely M/s. Pandit Automotive Sangli Private Limited and M/s. Pandit Automotive Satara Private Ltd.

On an application filed under Section 7 by Reliance Commercial Finance Limited, Corporate Insolvency Resolution Process (CIRP) against the corporate debtor commenced on 12.03.2018. The Committee of Creditors (CoC) on 09.07.2018 decided to proceed with the liquidation of the corporate debtor. Adjudicating Authority passed an order on 09.08.2018, directing for liquidation of the corporate debtor.

Liquidator on 13.08.2018 published notice inviting claim from stakeholders of the corporate debtor. vi. vii. viii. ix. x. xi. On 04.09.2018, appellant filed its claim that is of ₹60,50,002,003/-. Appellant also sent a letter dated 22.11.2018, intimating liquidator that appellant shall realise its security interest under Section 52(1) of the IBC.

Liquidator filed an application I.A. No.4874/2023, under Section 60(5) of the IBC seeking contribution from secured creditors including the appellant who had chosen to exercise their rights to realise the secured interest. The appellant was impleaded as Respondent No. 2 in the application 4874/2023. The Adjudicating Authority heard the liquidator as well as the secured creditor in the application and by impugned order has allowed the application.

Contentions:

The Appellant submitted that Regulation 21A was inserted in the Liquidation Regulation 2016 only on 25.07.2019, which entitled the liquidator to receive cost of liquidation from secured creditors, who have realised their security interest outside the liquidation which regulation is not applicable in the facts of the present case since the liquidation commenced against the corporate debtor on 09.08.2018.

It was further submitted that Adjudicating authority, although in the impugned order has accepted that Regulation 21A does not apply to the facts of the present case but in substance, applied the regulation by directing payments towards the workmen's dues and liquidation cost.

Per contra, the Respondent submitted that Appellant has realised its security interest under the provisions of SARFAESI Act, 2002. Appellant is liable to comply the requirement of SARFAESI Act, 2002, under which provisions appellant was liable to contribute towards workmen's dues.

Observations:

The Tribunal noted that Regulation 21A of the Liquidation Regulation, 2016 has been inserted in regulation with effect from vide notification dated 25.07.2019. In the present case,liquidation proceeding had commenced vide order dated 09.08.2018. Regulation 21A thus is clearly not applicable in the facts of the present case.

It further observed that Section 52(1) entitles the secured creditor to realise its security interest in the manner specified in this Section. The Tribunal further observed that sub section 4 of section 52 of the IBC allows the creditor to realise the security interest under the Applicable law and recover dues. Accordingly, the creditor has exercised its right under section 13(2) and 13(4) of the SARFAESI Act to realise its security interest

It held that it is an undisputed case of the parties that realization of security interest by appellant is under the SARFAESI Act, 2002. When the appellant has realised its security interest under SARFAESI Act, 2002, it is obviously obliged to follow the provisions of SARFAESI Act, 2002.

The Tribunal held that as noted above, section 52(4) of the IBC allows the secured creditor to realise its security interest as per applicable laws. In the present case, the Appellant has chosen to realize its security interest under the SARFAESI Act. Since the security interest has been realised under the SARFAESI Act, section 13(9) of the Act is fully applicable in the present case and sale proceeds shall be distributed as per section 326 of the Companies Act. As per section 326 of the Companies Act, the Appellant is obligated to deposit towards workmen's dues.

Coming to the next issue, it observed 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 Tribunal disagreed with the view taken by the Adjudicating Authority that direction to pay liquidation costs can be sustained under Section 52(8) of the IBC.

In para 29, the Supreme Court in Mosar Baer Karamchari Union' Vs. 'Union of India & Ors.' held that workmen are treated on an equal footing with the secured creditor when the secured creditor has chosen to relinquish its security interest under section 52 of the IBC thereby making the asset part of the liquidation estate. It was due to the waterfall mechanism under section 53 of the IBC, section 327(7) of the Companies Act was upheld.

In light of the above discussion, it held that “it goes without saying that when secured creditors are relinquishing their security interest, it is Section 53, which shall be applied for distribution. In the present case, applicability of Section 53 in the distribution is not attracted, secured creditors having not relinquished their security interest.”

Accordingly, the present appeal was partly allowed.

Case Title: Cosmos Co-Operative Bank Ltd. Versus CS Anaghaanasingaraju, Liquidator for Pandit Automotive Pvt. Ltd. & Ors.

Case Number:Company Appeal (AT) (Insolvency) No. 67 of 2025

Judgment Date: 08/07/2025

For Appellant : Mr. Ramchandra Madan and Mr. Tushar Nigam, Advocates.

For Respondents : Mr. Avinash R. Khanolkar, Ms. Surekha Yadav and Ms. Khushbu Bhanushali, Advocates.

Mr. V. Deshpande, Advocate for R-3

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