Secured Creditors Relinquishing Security Interest Cannot Claim Priority During Distribution Of Sale Proceeds Of Secured Assets: NCLT Cuttack

Background

A liquidation application was filed before the Hon'ble NCLT, Mumbai and accordingly the Tribunal admitted the Corporate Debtor into CIRP. As there was no successful resolution plan was achieved during the CIRP and based on the decision taken by the CoC, an order of Liquidation was passed by the NCLT Mumbai Bench and the present Applicant was appointed as the Liquidator of the Corporate Debtor.

Pursuant to the same, the liquidator-initiated e-auction for sale of assets of the Corporate Debtor on slump sale basis with a reserve price of Rs. 400 Crores. Jindal Steel and Power Limited (JSPL) emerged as the highest bidder and, accordingly, began depositing the sale consideration amount.

Thereafter an Interim Application was filed by the liquidator of the Corporate Debtor seeking clarification and directions from the Hon'ble NCLT, Cuttack regarding the distribution of balance sale consideration of Rs. 30,26,42,850/- which was the share of the second charge financial creditors was to be distributed amongst the secured creditors under Section 53 of the IBC since the Corporate Debtor had 2 categories.

The Adjudicating Authority in its order dated 15.01 .2024, directed the Applicant to send notices to all the Secured Creditors of the Corporate Debtor.

Indian Bank Reply

Indian Bank, which is a first pari passu charge holder as well as a second pari passu charge holder of the Corporate Debtor filed its reply and submitted that it has received its share as a Secured Creditor holding first charge over the assets of the Corporate Debtor from the proceeds of sale and was yet to receive its share as a second-charge holder. The council also cited the judgment of the Hon'ble NCLAT in Technology Development Board vs. Mr. Anit Goel, Liquidator of M/s. Gujarat Oleo Chemicals Limited & Ors., Company Appeal (ATf (Insl No. 731 of 2020 which was later stayed by the Hon'ble Supreme Court of India in Kotak Mahindra Bank Ltd. Vs. Technology Development Board & Ors., Civil Appeal No. 11060 of 202.

The Liquidator filed the application before the authority for seeking appropriate directions from regarding the distribution of sale proceeds which pertains to the share of second charge holders. The Liquidator sought directions from the Adjudicating Authority because the Hon'ble Supreme Court of India has not yet pronounced its judgment in the case of Kotak Mahindra Bank Ltd. Vs. Technology Development Board & Ors., Civil Appeal No.11060 of 2C/21, that involves the same question of law as in the present case.

NCLT Judgement

The question answered by the tribunal in this case was;

“Whether there can be any classification inter se the Secured Creditors in relation to the distribution of the sale proceeds received from the sale of the assets of the Corporate Debtor as per Section 53 of the Code.”

The Tribunal in depth analysed the case of Hon'ble NCLAT in Technology Development Board vs. Anil Goel, 2O2L SCC OnLine NCLAT 349 while dealing with the issue of inter-se priorities among the Secured creditors in the CIRP and the Liquidation proceedings. The Tribunal also considered the judgement of Hon'ble NCLAT in the case of Oriental Bank of Commerce vs. Anil Anchalia 2022 SCC Online NCLAT 3456, wherein the Hon'ble NCLAT relied upon the judgment of the Hon'ble Supreme Court in the case of India Resurgence ARC Pvt. Ltd. vs. Amit Metaliks 202 SCC Online SC 409.

The Tribunal agreed with the arguments submitted by the Respondents. The court held that the secured creditors, after relinquishing their security interests, cannot seek priority over other similar creditors during the distribution of sale proceeds of the secured assets. Accordingly, the Hon'ble NCLT directed the liquidator to distribute the balance sale proceeds among the secured creditors on pro-rata basis without giving any priority to the first charge financial creditors.

“Thus, we are of the opinion that once a Secured Creditor relinquishes its security interest to the liquidation estate, it cannot seek priority among other secured creditors on the basis of the charge and is only entitled to receive proceeds from the sale of assets in the manner specified under Section 53 of the Code.”

Case Title: IDFC Bank v. Monnet

Case Number: IA (IB) No. 69/CB/2023

Tribunal: National Company Law Tribunal (NCLT), Cuttack

Coram: Justice Deep Chandra Joshi (Member (Judicial) and Banwari Lal Meena (Member (Technical)

For Applicant: Saswat K. Acharya, Advocate

For the Respondents:

IF'CI Limited, IL&FS Financial Services Limited, Indian Bank: Abhinay Sharma, Advocate, Aishwarya Dash, Advocate, Raj Kumar Rout, Advocate, Parul Khurana, Advocate, Deeksha Prakash, Advocate, Pooram Chand Roy, Advocate and Lakshmi Kant Srivastava, Advocate.

For Canara Bank: Supriyo Ranjan Mahapatra, Advocate, Prakash Chandra Mahapatra, Advocate, Binay Kumar Pattajoshi, Advocate and Sarthak Mishra, Advocate

Date of Judgement: 02.05.2025

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