Author: Pushpesh Srivastava, BBA.,LL.B (Hons), from Amity University, Lucknow.
Abstract:
The operational creditors and financial creditors, including both secured and unsecured creditors can file an application before the Adjudicating Authority for the corporate Insolvency resolution process. When the insolvency of corporate debtors cannot get settled then the process of liquidation will initiate under section 33 of the IBC, 2016.
The committee of creditors made up of both secured and unsecured creditors, both of them having almost same powers and voting share. Secured creditors are given priority over the unsecured creditors at the time of the liquidation process.
The first objective of Insolvency & Bankruptcy Code, 2016 is the resolution process of the corporate debtor, but the results of statistical data clearly show that the large number of matters, opt for liquidation. Whenever an order for liquidation will be passed by an adjudicating authority, the liquidator would be appointed. Liquidator acts in a professional manner and focus on fair distribution of assets. Hence, it is vital to discuss the role of liquidator in the liquidation process. In this article, we will discuss about the liquidator and the rights and obligations of secured creditor at the time of liquidation, as per the provisions of Insolvency & Bankruptcy Code, 2016.
Introduction:
Failure of the resolution process to find a resolution for a corporate debtor within a required time period as stated under IBC, 2016 or in case of non approval of a resolution plan by the committee of creditors by a voting share not less than 66%, a corporate debtor is considered to be a liquidated. Section 33 of the code talks about initiation of liquidation when there is non receipt of the resolution plan by Adjudicating Authority.
Committee of creditors, decide to liquidate the corporate debtor with at least 66% voting share, anytime before the approval of resolution plan. If the corporate debtor violates any part of resolution plan already approved and any person whose interests is getting affected by such violation may apply for a liquidation order of corporate debtor.
As per section 3 (30) secured creditor means a creditor in favor of whom security interest is created and as per section 3 (31)security interest means right, title or interest or a claim to property, created in favor of, or provided to a secured creditor with a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person. Provided that security interest shall not include a performance guarantee1
In short, if any, debt is secured by the mortgage, that debt is known as a secured debt and the creditor is known as secured creditors. The failure of debtors in respect of its commitment to repay, the secured creditors may enforce the security interest and recover the due amount.
Liquidator:
Section 34 of the code talks about appointment of liquidator. The Resolution Professional appointed under the process of CIRP shall act as a liquidator for liquidation purpose. Adjudicating Authority may pass an order to replace the Resolution Professional who is acting as a liquidator if there was a rejection of a resolution plan submitted by him under section 30 of the code as the resolution plan is not meeting the requirements stated under section 30(2), order for replacement may also pass on the recommendations of the board to replace the resolution professional with reason or when there is a failure of Resolution Professional to submit his written consent for appointment as liquidator.
Liquidator may procure professional assistance, he is also responsible for entire liquidation process and also supervise it. All powers key managerial personnel, board of directors and the partners of corporate debtor shall come to an end and shall vest with the liquidator.
Once the order for liquidation passed no suit or legal proceedings shall be instituted by or against the corporate debtor. A suit or other legal proceeding may be instituted by the liquidator, on behalf of the corporate debtor, with the prior approval of the Adjudicating Authority
Section 35 of the code talks about the powers and duties of liquidator. All assets come under the custody of liquidator to evaluate them and to dispose them properly and to act in a transparent manner to meet the objectives of the code.
A Liquidator is also responsible to preserve and protect the assets and also invite claims and verify those claims and after that either reject or admit those claims. He is also required to maintain cash book and ledgers
As per the section 37 of the code, liquidator have the power to access information for the purpose of admitting or rejecting the claims and also for the purpose of identification of liquidation estate and as per section 41, liquidator also determines the value of admitted claims as per the manner specified by the board.
As per section 43 to 51 of the code, Where preference has been given to certain transaction by corporate debtor or undervalued the transactions or has been a party to an extortionate credit transaction, the liquidator or the resolution professional for the avoidance of these types of transactions shall apply to the NCLT.
S. Muthuraju Vs. Commissioner of Police and Another: In this case, a group of people tried to threat the liquidator with weapons, to stop him to enter the premise of corporate debtor. They were doing this with an intent to stop the liquidator to perform his duties. The Adjudicating Authority directed to give sufficient police protection to the liquidator, to enable him to perform his duties.2
As per Regulation 5 of the Liquidation Regulations, Liquidator must prepare and submit the following:
A preliminary report ( not beyond 75 days of liquidation commencement date)
An asset memorandum
Progress reports on quarterly basis
Sale report
Minutes of consultation with stakeholders, and
The final report prior to dissolution to the Adjudicating Authority.
The liquidator is required to preserve physical and electronic copy of reports and books for 8 years after dissolution. 3
Rajive Kaul Vs. Vinod Kumar Kothari &Ors., It was held that the liquidator is provided with necessary powers to remove the nominee directors and is entitled to nominate the directors, and the company is bound to act upon the replacement proposal of the existing nominee directors. It is not required for him to inform the reasons for replacing nominee directors.4
Liquidation estate :
Under section 36 of the code, the liquidator shall form an estate of the assets with all the asset of corporate debtor, which is known as the liquidation estate in relation to the corporate debtor and liquidator here acts as a fiduciary, holds those liquidation estate for the benefits of all the creditors.
1.Included under liquidation estate:
Assets having ownership rights of corporate debtor, assets which are owned and in possession, including those assets which are not in possession of corporate debtor.
Assets listed in information utility and account books,should be detected and taken in control. Including both types of assets movable and immovable, as well as securities and shares held in joint ventures and subsidiaries.
Intangible assets are also included, for example: Intellectual Properties
2.Not included under liquidation estate:
Assets of 3rd party in possession of corporate debtor.
Secured creditors in liquidation proceedings:
In the matter of Clutch Auto Ltd, it was held by the Adjudicating Authority that if it is concluded by the liquidator that a creditor has security interest over the assets of the corporate debtor, The creditor shall be permitted by liquidator to utilize its right under section 52 of the Code.5
After an order for liquidation, the secured creditors have two options under IBC, 2016. Either to relinquish his security interest in the secured asset and acquired the proceeds from the liquidation estate under the waterfall mechanisms or may realise his security interest. The decision of secured creditors whether to relinquish or realise his security interest is irreversible and generally based on the facts and the situation of the matter involved. While choosing from the options available to the secured creditors, he has to perform two actions. First one is to inform the liquidator regarding the realization of the security interest and another one is related to identification of security and than informing it to the liquidator.
Waterfall mechanisms under the IBC,2016, provide a layout of sequence for repayment to creditors at the time of liquidation. According to this, secured creditors have to be paid fully prior to settlement or any payments can be made to unsecured creditors who in turn have priority over operational creditors.
Relinquishment of the security interest:
Under section 52(1)(a) 6, a secured creditor may relinquish his security interest, after that the secured asset considered as a part of the liquidation estate and would be under the control of the liquidator. No efforts need to be taken by the secured creditor for the sale or realization of the asset and in the waterfall mechanism, it would be in second place, paid after the full payment made for the insolvency resolution process costs and the liquidation costs and workmens dues for the period of twenty-four months preceding the liquidation commencement date as provided under section 53 7 of the code which talks about the distribution of assets. Secured creditors did not face any resistance and he is also certain regarding the whole amount of debt except the scenario where liquidator obtains shortfall in recovery.
Realization of the secured asset:
On the default of the corporate debtor, the secured creditor may impose his right in the secured asset and recover the dues. A secured creditor has a right under IBC, 2016 to enforce his security interest even outside the liquidation. Regulation 32 states that the liquidator is also forbidden to sell the secured asset subjected to security interest until the security interest has relinquished by the secured creditors.
The secured creditor must submit his proof of claims to realize the security interest and shall inform the decision to relinquish his security interest within 30 days from the commencement of the liquidation process 8 by proving the security interest on the basis of available records in an information utility or by such others means as specified by board.9 If the secured creditor has not informed the liquidator about the decision as to realisation of the security interest, the secured asset shall be presumed to be a part of the liquidation estate.
Two provisions are provided under IBC,2016 for the realization of the security interest by the secured creditor:
The first one is to deal with the secured asset outside the code, i.e. as per the laws which are applicable for the purpose of realization of the security interest and another one in according to the code specified under Regulation 37 of IBBI (Liquidation Process) Regulations. If the secured creditor chooses the first option, he may deal with the secured assets on the basis of laws which are applicable to the enforcement of the security interest, for example SARFAESI Act,2002 or RDDB Act. During the course of realizing the assets, if any kind of resistance from the corporate debtor, he may obtain an order by writing an application from the Adjudicating Authority seeking for a smooth realisation.
If the amount received from the secured asset is surplus as compared to the admitted claims, then it would be treated as liquidation estate and the same shall be delivered to the liquidator. If in case, the amount realised is not enough for the debts of the secured creditor, the unrealized amount can be claimed from the liquidation estate on par with the unsecured creditor.
Conclusion:
IBC, 2016 , has provided a framework to protect the interest of secured creditors at the time of the liquidation. Secured creditors are given priority over the unsecured creditors at the time of the liquidation process. The first objective of Insolvency & Bankruptcy Code, 2016 is the resolution process of the corporate debtors, but results of statistical data clearly show that the large number of matters, opt for liquidation. Whenever an order for liquidation will be passed by an adjudicating authority, the liquidator would be appointed. Liquidator acts in a professional manner and focus on lawful distribution of assets.
End Notes:
[MA/504/2019 in CP/288/IB/2018]
[CA-1432(PB)/2019 & CA-1433(PB)/2019 in (IB)-15(PB)/2017]
[CA(AT)(Ins) No. 44, 224 & 1518/2020]
Regulation 21A of the IBBI (Liquidation Process) Regulations, 2016
section 52(3)(a) & (b)