1 Sept 2021

Vinod Kumar Kothari Liquidator in Edelweiss Asset Reconstruction Co Ltd vs Abhijeet MADC Nagpur Energy Pvt Ltd - Enforcement of Security Interest.

 NCLT Mumbai (22.10.2019) Vinod Kumar Kothari Liquidator in Edelweiss Asset Reconstruction Co Ltd vs Abhijeet MADC Nagpur Energy Pvt Ltd [MA 327/2019 in CP(IB)1315(MB)/2017] held that;

  • For realisation of the security interest, law provides two provisions. First option is to deal with the security interest in accordance with the provisions of Section 13 of SARFAESI Act, 2002.

  • Section 13 (9) of the above Act provides that subject to the provision of IBC, 2016, in case of financing of financial asset by more than one security creditors or joint financing of financial assets by secured creditor, no secured creditor shall be entitled to exercise any or all the rights conferred on him under or pursuant to sub section 4 unless exercise of such right is agreed upon by the secured creditors representing not less that 60% in value of the amount outstanding as on the record date and such action shall be binding on all the secured creditors.

  • Since liquidation process Regulation imposes a duty on Liquidator to prepare asset memorandum within 75 days, therefore, if a secured creditor does not want to relinquish its security and he wants to realise its security interest with any other mode, than he has to give information within the stipulated period of 75 days as provided under Section 34 of the Liquidation Process Regulations,2016.


Excerpts of the order;

The Liquidator has filed MA 327/2019 under Section 35(1)(f), 35(1)(n),60(5)(c), read with Section 52 and 53 of IBC, 2016, Regulation 32 of IBBI (Liquidation Process) Regulations, 2016, seeking clarification regarding the question of law raised by the applicant as under:

(a) In terms of Section 60(5)(c) of the Code, to adjudicate upon the questions of law:

  • (i) Whether, having filed the claim for the full amount without having opted to enforce security interest outside the process of liquidation, or without giving any such indication while filing the claim, and such claim for the whole of the debt due to the secured  creditor having been accepted, there is any scope for a secured creditor to enforce security interest outside the process of liquidation?

  • (ii) Whether a secured creditor may remain indecisive and ambivalent, and while on the one hand get into questions of valuation of the asset in the course of liquidation proceedings, and at the same time contend that the secured creditor will evaluate the option of either relinquishing security interest or enforcing the same? Whether a secured creditor is estopped from using the option of enforcement under Section 52 after the liquidator has gone ahead and invited expressions of interest from potential bidders and the EMD is received, and the process of auction is just about to take place?

  • (iii) Whether secured lenders have just two options- the option of relinquishing security interest so as to put the asset as a part of the liquidation estate, or the option of selling the asset outside liquidation, and the secured lenders do not have the third option of remaining indecisive, and avail of the option of not relinquishing security interest months after the process of valuation, invitation of expressions of interest and receiving of EMD has been completed?

  • (iv) Whether, in case of pari passu sharing of security interest by various secured lenders, the option of not relinquishing security interest and selling the asset outside liquidation is meaningful only where the secured lenders sharing such security interests jointly decide to sell the asset outside liquidation, and that in as  such as a single secured creditor, having a small stake value in the total amount of admitted claims, cannot sell the asset outside liquidation, such secured lender cannot contend and press for the right to stay outside liquidation?

  • (v) Whether a secured lender has to “clearly” either stay outside liquidation, and if permissible, sell the asset outside liquidation and claim for the balance amount, or to join liquidation proceedings, and that the secured lender does not have the option of contending to be ambivalent about the relinquishment of security interest, while at the same time raise issues about valuations in the course of liquidation proceedings involving a clear inherent conflict?

  • (vi) Whether liquidation proceeding are at all based on the consensus of secured creditors, and whether the consultation process, voluntarily adopted by the liquidator for an inclusive decision making, can be extended to mean that the liquidator, discharging his duties bonafide and as per law, has to be guided by the discretion of each individual secured creditor, or secured creditors, and whether the need for creditors consent, failure of which leads to failure of resolution process, which has been consciously kept out of liquidation proceedings, is at all required in liquidation process?

  • (vii) Whether, where valuations have been done by valuers in accordance with the Regulation 35 of the Liquidation Regulations, and such valuations carried by multiple valuers, not indicating any substantial difference in the valuations, and being broadly in line with the valuation carried during the resolution process, a secured creditor is estopped from questioning the valuations and insisting on parallel valuations, and thereby stall the process of auction on the very eve of the auction?

  • (viii) Whether the liquidator, having taken decisions in conduct of liquidation proceedings, in good faith and based on advice of competent advisers is answerable to an individual secured creditor, or secured creditors, and whether the Liquidator, who has been regarded as an officer of the Adjudicating Authority and works under the supervision of the Hon’ble Adjudicating Authority, can be put to vexatious questions and asked to supply information by a creditor beyond the provisions of section 37(2) of the Code read with Regulation 5 of the Liquidation Regulations?

  • (ix) Whether the liquidator acting as fiduciary of the stakeholders, can ever carry out his fiduciary duties, if each stakeholder puts the liquidator’s actions to intensive probe, and whether the liquidator may indeed be answerable to a single creditor, or be subject to supervision/directions of the Adjudicating Authority?

  • (x) Whether the consultative process referred to provisions of Section35(2) of the Code may be turned into a single secured creditor or some secured creditors trying to dominate the functioning of the liquidator?


(b) To clarify settle the question of law as to whether filing of claim for the entire debt with the Liquidator shall amount to relinquishment as per Section 52 of the Code, and to settle the law about the rights of a secured creditor to stay out of liquidation by not relinquishing security interest;


(c) To settle the law as to the scope of intervention by a secured creditor, even though forming part of consultative committee, while the liquidator, in bonafide discharge of his duties and functions in terms of section 33(1)(m) of the code and other applicable provisions of law takes decisions based on advice of competent persons and professionals;


The applicant contends that Section 35 (1) (n) of the code stipulates that the liquidator may apply to the Adjudicating Authority for such orders or directions as may be necessary for the liquidation of the corporate debtor.Further section 60 (5) (c) provides that the National Company Law Tribunal shall have jurisdiction to entertain or dispose of any question of priorities or any question of law or facts, arising out of or in relation to the liquidation proceedings of the corporate debtor.


The applicant further contends that under the order of this Bench dated 31.08.2018, under section 33 (1) (a) of the code the order of liquidation of the corporate debtor was passed, and the applicant was appointed as the liquidator of the corporate debtor. This application deals with several connected matters, and is accordingly, classified into the following parts:

  • Relinquishment of security interests;

  • Insistence of conducting a fresh round of valuations

  • Settlement of claims with R- Infra and continued trail of questions by Respondent, seeming to be vexatious, and rife with unreasonable mistrust; and

  • Respondent claiming to represent all secured lenders, though without any evidence.


The applicant submits that in response to the public announcement inviting claims from stakeholders, the applicant has received the claims. On perusal of the claim submitted with the Applicant, it was observed that all the secured creditors of the corporate debtor have filed their claim for the full amount, without any indication as to whether any of the secured creditors were considering the option of realizing the security interest outside liquidation in terms of section 52 of the code. Further, it was also noted that the security interest is shared pari-passu by all the secured creditors.


The applicant contends that under Section 35 (2) of the Code, the applicant has the power to consult any of the stakeholders entitled to distribution of proceeds under Section 53. After filing of the list of stakeholders with this Bench on 30.09.2018, the applicant constituted a consultative committee, comprising of all the secured financial creditors of the corporate debtor (“Consultative Committee”), including the Respondent.


It is important to peruse certain provision of law which will clarify the position of law which is created on account of indecision regarding relinquishment of security interest by one of the secured creditor.


It is pertinent to mention that secured creditor have two options only either to relinquish the security interest or to take action to enforce the same. But in the present case, while the majority of the secured creditors have taken explicit action and relinquished their security interest, some of them have neither done any explicit relinquishment nor given any indication of willingness to enforce security interest outside liquidation. In this case, secured creditors have filed their claim for the full amount and the security interest is shared pari passu.The Respondent itself had asked for the details of the bidders in the auction, and login details of the scheduled auction and at the same time, Respondent raised objection about the auction itself. Auction was scheduled to be held on 26.12.2018 but it was informed by the Respondent that the Respondent has not yet decided about its requlishment of its security. 


Section 52 of IBC, 2016 deals with the provision of secured creditor in liquidation proceedings. Section 52(4) provides that 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 proceed to recover the debts due to it. 


Thus, it is clear that the secured creditor can realise the security interest in accordance with the law as applicable to the security interest being released.


For realisation of the security interest, law provides two provisions. First option is to deal with the security interest in accordance with the provisions of Section 13 of SARFAESI Act, 2002.


Section 13 (9) of the above Act provides that subject to the provision of IBC, 2016, in case of financing of financial asset by more than one security creditors or joint financing of financial assets by secured creditor, no secured creditor shall be entitled to exercise any or all the rights conferred on him under or pursuant to sub section 4 unless exercise of such right is agreed upon by the secured creditors representing not less that 60% in value of the amount outstanding as on the record date and such action shall be binding on all the secured creditors.


Thus, it is clear that if a secured creditor wants to realises its security in accordance with Section 13(9) of SARFAESI Act, the he must have 60% in the value of the amount as on the record date and in that case, such action shall be binding on all such secured creditors. In the case in hand, admittedly, the Respondent objector does not have 60% in value of the amount outstanding as on the record date. Therefore, under 13(9) of SARFAESI Act, the Respondent secured creditor does not have right to realise the security interest itself.


Other option available to the secured creditor is provided under IBBI (Liquidation Process )Regulations, 2016 Section 37. It provides that a secured creditor who seeks to realise the security interest under Section 52 shall intimate the liquidator of the price at which he proposes to realise its secured assets. Section 37(7) provides that this provision of Regulation shall not apply if the secured creditor enforces its security interest under the SARFAESI Act, 2002. In the case in hand, admittedly Respondent has not taken measure to realise its security interest in accordance with Section 13(9) of the SARFAESI Act, 2002. Therefore, Respondent was having only one option to realise its security interest in accordance with section 37 of the IBBI (Liquidation Process) Regulations, 2016 and this section provides that if a secured creditor wants to realise its security interest under Section 52, he shall intimate the liquidator of the price at which he proposes to realise its secured asset. The secured creditor is also under obligation to take steps for informing the Liquidator about the price at which he proposes to realise its secured assets and after informing the same, liquidator is under obligation to inform the secured creditor within 21 days of receipt of the intimation under sub-regulation, if a person is willing to buy the secured asset before the expiry of 30 days from the date of intimation under Sub Regulation 1 at a price higher than the price intimated under sub-regulation 1. 


In this case, secured creditor has neither exercised his power under Section 37 of the Liquidation Process Regulation, 2016 nor proceeded to realise its security in accordance with Section 13(9) SARFAESI Act, 2002.


In fact, Secured creditor has not taken any decision so far for realisation of the security interest and his indecisiveness has hampered the entire auction process though SARFAESI Act provides that if the secured creditor is having minimum 60% share in the secured asset then only he can enforce his decision to realise security interest out of liquidation on its own. 


Section 34 of Liquidation Process Regulation imposes duty on the Liquidator on forming liquidation estate under Section 36 and under provision, the liquidator is duty bound to prepare asset memorandum in accordance with Regulation within 75 days from the liquidation commencement date. Under Section 34(2) of Liquidation Process Regulations, provides that asset memorandum shall provide value of the asset, valued in accordance with Section 35; value of set of assets or assets in parcels or assets in slump sale as the case may be, valued in accordance with Regulation 35; intended manner of sale in accordance with Regulation 32 and reason for the same, intended mode of sale and reasons for the same in accordance with Regulation 33, expected amount from realisation of the sale.


Since liquidation process Regulation imposes a duty on Liquidator to prepare asset memorandum within 75 days, therefore, if a secured creditor does not want to relinquish its security and he wants to realise its security interest with any other mode, than he has to give information within the stipulated period of 75 days as provided under Section 34 of the Liquidation Process Regulations,2016.


In this case, Respondent Secured Creditor having security interest has neither informed to realise security interest in accordance with Section 13(9) of SARFAESI Act, 2002 not realised the security in accordance with Regulation 37 and on account not taking any decision he has hampered the entire auction proceeding. This act of Respondent is not sustainable in law. Secured Creditor can only exercise auction to realise the secured asset on its own within 75 days from the initiation of liquidation process, i.e. the period provided for preparation of asset memorandum. After expiry of the said period, if a secured creditor having security interest has not either informed to the Liquidator to relinquish its security nor informed about not taking any action to realise the security interest on its own. Therefore, his consent shall be deemed to have been given to the liquidator to relinquish its security in formation of the liquidation estate. It is further directed that during auction proceeding, Liquidator shall form a monitoring committee with inclusion of the Respondent also. However, decision of the monitoring committee shall be taken by the majority vote. However, rule of majority will prevail in decision making process. 


There is no need to clarify rest of the questions which have been framed by the liquidator for getting opinion of the Adjudicating Authority. Liquidator is directed to deal with all those matters in accordance with law.

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Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.


# Regulation 21A. Presumption of security interest.

(1) A secured creditor shall inform the liquidator of its decision to relinquish its security interest to the liquidation estate or realise its security interest, as the case may be, in Form C or Form D of Schedule II:

Provided that, where a secured creditor does not intimate its decision within thirty days from the liquidation commencement date, the assets covered under the security interest shall be presumed to be part of the liquidation estate.

[Inserted by Notification No. IBBI/2019-20/GN/REG047 dated 25th July, 2019 (w.e.f. 25-07-2019).]


# Regulation 31A. Stakeholders’ consultation committee.

(1) The liquidator shall constitute a consultation committee within sixty days from the liquidation commencement date, based on the list of stakeholders prepared under regulation 31, to advise him on the matters relating to sale under regulation 32.

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(9) The consultation committee shall advise the liquidator, by a vote of not less than sixty-six percent of the representatives of the consultation committee, present and voting. 

(10) The advice of the consultation committee shall not be binding on the liquidator: Provided that where the liquidator takes a decision different from the advice given by the consultation committee, he shall record the reasons for the same in writing.

[Inserted by Notification No. IBBI/2019-20/GN/REG047 dated 25th July, 2019 (w.e.f. 25-07-2019).]


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