Western India Regional Council of
The Institute of Chartered Accountants of India

Law Update Details

May 2019 CA. Viral Doshi, CA. Pravin Navandar

Facts of the case

The Miscellaneous Application has been preferred under section 60(5)(c) of IBC by the Liquidator, seeking necessary directions from the Hon’ble Tribunal on decision of Secured Financial Creditor, State Bank of India to keep its mortgaged assets out of liquidation of the Corporate Debtor.

The Liquidator had also sought some relief from the Hon’ble Tribunal:

  1. Directions to SBI that in case they want to opt out of liquidation, no contravention of Section 35(1)(f) takes place.
  2. The Respondent Bank to give an undertaking to the liquidator that it shall not sell the mortgaged property to any person who is not eligible to be a Resolution Applicant, in case they realise their security interest on their own
  3. SBI to ensure all sums due to any workman or employee from the provident fund, pension fund and gratuity fund be paid first out of monies realised from selling mortgaged assets by SBI in terms of Section 36(4)(a)(iii), when SBI exercises its rights U/s. 52 of the Code and such dues should not be made a part of the liquidation estate U/s. 53.

The counsel appeared on behalf of Liquidator made submission before the Tribunal that “the EPF dues do not form part of the liquidation estate, therefore, SBI to undertake that the payment of EPF dues will be made first in terms of provisions of section 36(4)(a)(iii) of the Code from the monies realised by SBI from selling its mortgaged assets of Corporate Debtor”

Three pertinent questions come up for consideration before Tribunal:

  1. Whether SBI, the Financial Creditor is legally entitled to stay out of liquidation?
  2. Whether S. 29A is applicable to liquidation proceedings in a situation when the Secured creditor realises the security interest on its own?
  3. Whether the Secured Creditor exercising his right U/s 52(1)(b) of the Code has to make payment of workmen’s dues out of the amount realised from the sale of such secured assets as the EPF/workmen’s dues, which do not form part of the liquidation estate?

Existing provisions enumerated under IBC:

As per section 52

Realise its security interest in the manner specified in the section.

Where the secured creditor realises security interest under clause (b) of sub-section (1), he shall inform the liquidator of such security interest and identify the asset subject to such security interest to be realised.

Before any security interest is realised by the secured creditor under this section, the liquidator shall verify such security interest and permit the secured creditor to realise only such security interest, the existence of which may be proved either—

  1. by the records of such security interest maintained by an information utility; or
  2. by such other means as may be specified by the Board.

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 proceeds to recover the debts due to it.

On careful reading of the provisions, it is implicit that the rights of a secured financial creditor are protected by giving him an option to take away the assets secured with him out of liquidation. In such a scenario, the secured creditor has a liberty to realise its security interest on its own.

It is important to note that the regulation 37 of shall not apply if the secured creditor enforces his security interest under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002) or the Recovery of Debts and Bankruptcy Act, 1993 (51 of 1993).

In the present case, SBI had already initiated SARFAESI proceedings hence, the Secured Creditor SBI is not even under an obligation to tell the liquidator the estimate of the amount that can be realized from sale of secured assets as per Regulation 37.

Therefore, all SBI has to prove to the liquidator is that there was some property which was secured with itself against the loan granted.

Conclusion by Hon’ble Tribunal:

(a) It is an undisputed assertion that the secured creditor’s rights have to be protected and respected. They must have the choice of taking their collateral and selling it on their own by virtue of section 52 of the IBC

(b) The restriction of disqualification-imposed U/s 29A be applied not only on the liquidator as prescribed under the First Proviso of S. 35(1)(f) but also when a Financial Creditor is exercising its right U/s 52(1)(b) to realise its security interest by dealing with the secured assets, a Co-joint reading of all these sections is required. The above view expressed by this Bench can also be judged in the light of the decision of the Hon’ble Supreme court in Swiss Ribbons Pvt. Ltd. & Ors V. Union Of India & Ors. [W.P. (Civil) 99 of 2018] Order dated 25.01.2019 wherein the Hon’ble Supreme Court has strictly dealt with the defaulters and therefore held that the provisions of S.29A continues to apply not merely to Resolution Applicants but to Liquidation also. S.52, therefore, is not out of Chapter III i.e. Liquidation Process, but within this chapter, hence ought to apply to the secured Financial Creditors if they exercise their option to liquidate an asset independently.

(c) The EPF dues are not being treated as the assets to be covered in the liquidation estate, however, the same are the liability of the Corporate Debtor which has to be paid by the liquidator as per S. 53 of the Code, and not by the secured creditor out of the proceeds from the sale of secured assets if exercised their option U/s 52(1)(b) of the Code.

Key take away:

The defaulters disqualified U/s 29A should not get any benefit under this code. This is a clear message conveyed through S. 29A. A defaulter must not be benefitted by entering into those very assets through side doors, otherwise not permitted to enter from the front doors, for e.g. by submission of resolution plan. Therefore, it is logical as well as legally justifiable to extend the scope of S. 29A while dealing with the liquidation of the assets a debtor company.

The Hon’ble legislatures were very much aware about this attempt of the defaulters to indirectly take control of the stressed assets; therefore, restriction was imposed in the Proviso annexed to sub-section f of S. 35(1). As far as s. 52 is concerned, the scope is limited to grant rights to a Financial Creditor for sale of a property. Naturally, that right should not give permission to a Financial Creditor to sell that property to a defaulter/promoter/director.

Therefore, it is necessary as well as need of the hour to read the rights hallowed U/s 52 along with the proviso of sub-section (f) of S. 35(1) as well as S. 29A of the Code.


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