Priority of IBC over Arbitration Proceedings
NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI
Company Appeal (AT) (Insolvency) No. 1510 of 2019
[Arising out of Impugned Order dated 20th November 2019 passed by the Adjudicating Authority/National Company Law Tribunal, Chennai Bench, Chennai in Miscellaneous Application No.1052 of 2019 in Company Petition (IB) No. CP/646/CB/2017]
Mr. SRIKANTH DWARAKANATH, LIQUIDATOR
SURANA POWER LIMITED – IN LIQUIDATION – Appellant
BHARAT HEAVY ELECTRICALS LIMITED – Respondent
Facts of the case
- The NCLT, Chennai bench (“Adjudicating Authority”) admitted an application for insolvency u/s 9 of the IBC of Surana Power in January 2019.
- No resolution plan was approved and hence Surana Power was ordered to be liquidated. Accordingly, Mr. Srikanth Dwarakanath (Appellant) was appointed as liquidator of Surana Power Limited.
- While the liquidation process was underway, one of the secured creditors BHEL (Respondent) had succeeded in an arbitration proceeding against Surana Power. On 24th January 2018, an ex parte order was passed in favour of BHEL wherein BHEL was granted a lien over equipment and goods lying at the site of Surana Power. A charge over the partially erected facilities of Surana Power.
- The secured assets on which such lien was granted to BHEL were the assets which was hypothecated to ALL other secured creditors vide Hypothecation deed dated 24th September 2010.
- The liquidator sought to undertake a slump sale of the assets of Surana Power to give effect to the liquidation. For liquidation, the IBC requires ALL secured creditors to relinquish their interest in the securities of the corporate debtor.
- Of the 11 secured creditors, only 10 secured creditors (totaling 73.36% interest in securities) intimated about their relinquishment of interest in securities in favour of liquidation. The remaining 1 secured creditor, BHEL (holding interest of 26.24%) did not intimate to the liquidator about relinquishment of interest. As a result, the liquidator could not commence with the liquidation process.
- The liquidator approached the NCLT Chennai bench (Adjudicating Authority) seeking permission to sell the assets of Surana Power and liquidate the company. However, the AA rejected the petition. Aggrieved by the Order, the liquidator filed this appeal before the NCLAT, Delhi.
Appellant (Liquidator of Surana Power)
- The appellant/ liquidator submitted before the NCLAT, Delhi that NCLT Chennai bench (Adjudicating Authority) did not appreciate the fact that 10 out of 11 secured creditors had expressly relinquished their interest in favour of liquidation. by only 1 secured creditor not giving intimation, the entire liquidation process was stalled.
- The 10 secured creditors who intimated about relinquishment of their interest had a charge over the assets of Surana Power vide hypothecation deed dated 24th September 2010. This was much before the arbitration order was passed in favour of BHEL on 24th January 2018. The secured assets on which BHEL got lien on assets of Surana Power (through the arbitration award in 2018) are hypothecated to all other (10) secured creditors vide the hypothecation deed passed in 2010.
- The AA did not appreciate that the Code does not recognize different classes of secured creditors based on the nature of charge / security interest / order of ranking of charge. Secured creditors are recognized as one class of creditors.
- BHEL contended that it exercised its right under section 52 of the IBC. The section provides two options to secured creditors – (i) relinquish interest in favour of liquidation and received share from such proceeds OR (ii) realize security interest in the manner specified in section 52 itself.
- BHEL further contended that its right u/s 52 cannot be subjected to majority of secured creditors who have relinquished their interest.
- BHEL also contended that it never acquired unencumbered right, title or interest in the goods. Consequently, the hypothecation of goods by Surana Power to Banks would always be subject to the lien on such goods by BHEL.
The 3-member Bench of the NCLAT analyzed in detail, provisions of section 52 of the IBC. The Bench observed that that the NCLT, Chennai bench interpreted section 52(1)(b) of IBC to allow a secured creditor during liquidation to realize its ‘security interest’ in the manner specified in section 52(3).
The NCLAT, Delhi held that the section 52 has to be read in toto to obtain the true interpretation. Accordingly, the NCLAT held that –
- Section 52(2) expressly lays down that when a secured creditor seeks to realize its security interest u/s 52(1)(b), such secured creditor is required to inform the Liquidator of such ‘security interest’ and identify the asset subject to which the security interest is to be realized.
- When such ‘security interest’ is received by the Liquidator, he /she must verify such security interest and permit the ‘secured creditor’ to realize only such security interest. The existence of such security interest is provided by records maintained by an information utility (IU) or by such other specified means by the Insolvency Board. Therefore, it is clear that it is the Liquidator who must permit the ‘secured creditor’ to realize the security interest after ascertaining proof of existence of such security interest.
- Under section 52(5), if a secured creditor faces resistance from the Corporate debtor or any connected person in taking possession of such asset, then he may make an application before the Adjudicating Authority (AA) seeking relief. Otherwise there is no provision for a secured creditor to file an application u/s 52 before the AA for enforcement of any right. Any excess of proceeds is required to be deposited to the Liquidator’s account. After the enforcement of right u/s 52 by one of the secured creditor, no other secured creditor can enforce the right on the same (secured) asset as the excess money is deposited.
- The NCLAT held that in the absence of any resistance in recovering secured assets, the AA does not have authority to entertain any application u/s 52(6). Except in the manner provided u/s 52(2),(3) & (4), the secured creditor cannot apply directly before the AA u/s 52(6).
- The NCLAT also noted that in the present case all the secured creditors have claimed right over secured assets which totals 91% of the total secured asset. Also, there is a case pending as to who has first charge on such assets. That being the case, the AA had not authority to allow the application filed by the respondent BHEL. For the above reasons, the order passed by the NCLT Chennai bench (AA) dated 20th November 2019 is set aside.
The NCLAT, Delhi bench directed to remit the case to the Liquidator and directed him to follow the realization of secured assets in accordance with section 53 read with section 52of the IBC. Hence the appeal was allowed with no costs.
For the text of the Judgement, refer: