Specific Time Period to Realize Assets in Liquidation under IBC: Concept Put in Limbo

[Ruby is a student at Rajiv Gandhi National University of Law.]

The recent ruling of the National Company Law Tribunal (NCLT)-Mumbai Bench in the matter titled Anshul v. Indian Bank has brought out another grey area in law, sparking debates concerning whether the Insolvency and Bankruptcy Code 2016 (IBC) and related regulations provide for a time-bound realization of assets by secured creditors after the secured creditor opts to realize its interest outside the liquidation estate. The matter upheld that the freedom to realize the security interest by the secured creditors on their own without giving up the secured assets to the liquidation estate is given under Section 52 of the IBC. It does not prescribe any specific time limit within which the secured creditor is required to realize its security interest. Effectively, NCLT held that IBC grants unfettered rights to secured creditors to deal with and realize their property as they like. 

This article argues that the interpretation of the NCLT Mumbai Bench ruling, providing an indefinite extension for the realization of assets by a secured creditor, is contradictory to the settled stance taken by various other NCLT Benches. The decision undermines the entire edifice of IBC itself, which is the timely resolution of the proceedings.

Factual Background

Topsgrup Services and Solutions Limited (Topsgrup) was admitted to liquidation on 21 September 2022. Indian Bank, being the secured creditor, intimated its decision to realize its security interest outside liquidation under Section 52 of IBC by submitting Form D. However, despite several reminders from the Liquidator via emails, it failed to realize the secured assets and deposit the sale proceeds of the secured assets within 180 days, as stipulated under Regulation 21A of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations 2016. The Liquidator stated that the assets would now be a part of the liquidation estate of the corporate debtor as per Regulation 21A. 

The Liquidator of Topsgrup filed an Interlocutory Application under Section 60(5) of the IBC seeking a declaration that the mentioned properties form part of the liquidation estate, and restrain Indian Bank from creating third-party rights. Indian Bank argued that it had opted to realize its security interest as per Section 52 of the IBC, which allowed it to realize secured assets without being bound by Regulation 21A’s timeline.

Tribunal’s Decision: The Clash between Section 52 and Regulation 21A

NCLT dismissed the application, stating that Section 52 of the IBC grants secured creditors an unfettered right to realize their security interest outside the liquidation process, without prescribing a time limit. It is a well-settled law that the regulation is procedural, merely acts as an enabling provision, and cannot override substantive rights granted by the parent Act. Hence, the Regulation 21A have to be read in harmony with Section 52. The first proviso to Regulation 21A(2)(b) itself deals with situations where assets are not disposed of within the stipulated period of 180 days, making it clear that there may be situations where the secured creditor may not be able to realize its security interest in the given period. The 180-day timeline in Regulation 21A(2)(b) is not intended to limit the rights of secured creditors by forcing the relinquishment of the asset, but ensures the secured creditor pays the excess amount, if any, to the Liquidator. 

Regulation 21(2)(b) provides that the Liquidator may convey the estimated costs of secured assets to the secured creditor within a stipulated period to enable the secured creditor to pay the requisite amount within 180 days from the liquidation commencement. The Liquidator in above case failed to provide timely valuation estimates as required. The Tribunal hence found no merit in the claim.

Analysis: Opening the Floodgates 

While NCLT reasoning is grounded in plain meanings interpretation of Section 52, read in tandem with Regulation 21 of IBBI regulations, the judgment takes a completely contradictory stance as opposed to the catena of National Company Law Appellate Tribunal (NCLAT) and NCLT settled judgments. NCLAT in matters such as Dhanlaxmi Bank Limited v. Techno Fab Manufacturing Limited and Others reiterated that liquidation is a time-bound process under Section 33(3) of the IBC and any delay in the realization of assets by secured creditors would be antithetical to the legislative scheme. A similar stance has been taken by NCLT Kolkata in the case Pankaj Kumar Kedia v. Axis Bank Limited, NCLT Kochi in matters such as IDBI Bank Limited v. The Liquidator of M/s. Koyenco Autos Private Limited; The Federal Bank Limited v. Ruben George Joseph and Ply Com Private Limited v. Nipon Alloy Limited which notes that Regulation 21A indicates that the assets should be realized within 180 days from the liquidation commencement date, and such regulation is not merely advisory in nature but mandatory as it uses the word ‘shall’.

Regulation 21A(3) itself provides consequences of non-compliance with the direction provided in Regulation 21(2)(b), which states that if the secured creditor fails to realize the amount and pay to the liquidator, the secured asset automatically shall vest with the liquidator as part of the liquidation estate. The same has been held by the NCLT-New Delhi bench in the case of Manohar Lal Vij v. Union Bank of India. Moreover, IBBI’s Discussion Paper on Corporate Liquidation Process dated 3 November 2019 discusses the non-compliance of the time period as an issue in itself. Hence, this only proves the need to adhere to a strict mandate for the time-bound realization of secured assets by the secured creditors. 

The NCLT Mumbai Bench ruling in the Anshul case runs counter to the precedents, fracturing judicial consistency and creating an uncertain position in law. It overrides express regulatory architecture and intent grounded in legislative committee recommendations, including suggestions in the Report of the Insolvency Law Committee dated February 2020. It raises significant concerns such as forum shopping, erosion of confidence of creditors in the system, strategic delays in liquidation proceedings, and the biggest risk of erosion of asset value during the continuance of liquidation proceedings. The question remains in abeyance until resolved by appellate clarification.

The ruling, though, aligns with the literal interpretation of law but reflects a narrow construction of the code at the same time, overlooking the purposive construction of the fact that a procedural regulation under delegated legislation, providing a specific time-period, would only serve to optimally operationalize the substantive provisions of the parent statute. Additionally, the regulation should not be seen as limiting the rights of secured creditors, but should be interpreted to condition those rights in view of the objective of the IBC to maximize the value of assets and complete insolvency proceedings in a time-bound manner. The ruling, allowing an indefinite time period to secured creditors for realization of the assets, seems to run highly counter-intuitive to the code’s cardinal objective of timely and speedy redressal, and more so when the liquidation process has to be completed within a specific period of a year.

The timelines and procedures are fundamental to the operation of IBC, as noted by the Apex Court in Swiss Ribbons v. Union of India. The main purpose of the IBBI regulations is to conduct the liquidation process in a time-bound manner, keeping the interests of all the stakeholders in mind as observed by the NCLT Chennai Bench in Ramakrishnan v. ICIC Bank Limited and the NCLT Mumbai itself in Small Industries Development Bank of India v. Amit Gupta. Thus, dismissing a regulation providing specific timelines as merely procedural undermines the delicate balance the legislature and IBBI sought to create. While defining the rights of secured creditors, it also becomes imperative to provide a particular timeframe for secured creditors to exercise such rights. 

Further, it undermines and sidelines the Liquidator’s statutory custodian role, control, and the integrity of the liquidation proceedings. If secured creditors are allowed to extend timelines and take forcible possession, it could lead to asset mismanagement and diminished ability of the Liquidator to meet liquidation costs. It additionally incentivizes secured creditors to delay enforcement to exercise unfettered rights in the absence of any strict penalty clause. If the decision is left uncontested, this ruling threatens the entire edifice IBC based on prompt, equitable, and coordinated resolution of insolvency proceedings. 

Conclusion

NCLT Mumbai ruling in the Anshul case, while deviating from settled precedents, has exacerbated uncertainty of whether the secured creditors can be given unfettered rights to realize the assets, specifically when they choose to opt out of the liquidation proceedings under Section 52 of the IBC. Section 52, though, does not specifically place any particular time limit on such realization of an interest. However, conditioning the rights of the secured creditors to be time-bound in accordance with Regulation 21A of the IBBI regulations would be justified as the focus of the code is swift and speedy resolution in a coordinated manner. This interpretation will not only be purposive and harmonious in nature but also uphold the Liquidator’s supervisory role as provided by the code. Hence, appellate clarification by NCLAT may be necessary to harmonize the legal position.