[Keshav is a student at Gujarat National Law University.]
The National Company Law Tribunal (NCLT) Chennai directed the liquidation of Surana Power Limited by an order dated 28 January 2019. The dispute arose over certain equipment and goods (Secured Assets) which were hypothecated to secured creditors amounting to 73.76% of the outstanding debt by a hypothecated deed dated 24 September 2010. Additionally, the respondent i.e. Bharat Heavy Electricals Limited (BHEL), by an arbitral award dated 24 January 2018, was granted lien over the secured assets on account of being an unpaid seller. The secured creditors amounting to 73.76% had relinquished their security interest in the secured assets to the liquidation estate.
However, instead of relinquishing its security interest, BHEL expressed its intention to realize it outside the liquidation process. This resulted in a deadlock where the liquidator could not proceed with the sale of the secured assets. The liquidator, therefore, applied to the NCLT to direct the sale of the assets. The NCLT dismissed the application on the ground that BHEL’s charge of lien is superior to the charge of hypothecation. The NCLT held that the right of a secured creditor to realize its security interest under Section 52 of the Insolvency and Bankruptcy Code 2016 (Code) cannot be whittled down. Therefore, the liquidator challenged the order in appeal which was set aside by the National Company Law Appellate Tribunal (NCLAT).
Brief summary of the order
The NCLAT bases its decisions on two primary grounds. First, under Section 52(4) of the Code, a secured creditor can realize its security interest in accordance with the applicable law. The NCLAT has relied on Section 13 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI Act) as the applicable law to resolve the deadlock. Section 13(4) of the SARFAESI Act grants a secured creditor the right to realize the secured asset in case of non-repayment of debt. Section 13(9) creates an exception for financial assets financed by more than one lender - where the rights under sub-sections 3 and 4 can only be exercised with an agreement of creditors amounting to 60% of the debt.
The NCLAT relied on this sub-section 9 to hold that BHEL does not have the requisite consent to realize the secured assets. Second, the NCLAT observed that the liquidation proceedings cannot be stalled at the instance of a single creditor as all secured creditors stand at an equal footing. Accordingly the NCLAT set aside the NCLT’s order and directed the liquidator to complete the liquidation process.
Applicability of SARFAESI Act
In this part, I will argue on two grounds that the SARFAESI Act is not applicable to the facts of the case and the same has been erroneously applied by the NCLAT. First, the Orissa High Court in the case of Sarthak Builders v O.R.D.C held that only ‘secured creditors’ within the meaning of Section 2(1)(zd) can invoke the provisions of the SARFAESI Act. The Supreme Court (SC) in the case of Suzuki Parasrampuria Suitings Limited v Official Liquidator of Mahendra Petrochemicals Limited affirmed that only a bank, a financial institution, or an asset reconstruction company is a secured creditor within the meaning of Section 2(1)(zd). Consequently, since BHEL is not a bank or a financial institution, it fails to meet the definition of ‘secured creditor’ for the purposes of SARFAESI Act. Therefore, BHEL is neither governed by the provisions of SARFAESI Act nor can it invoke its provisions to enforce its security interest.
Second, Section 31 of the SARFAESI Act clearly stipulates that the provisions of the statute shall not apply to any lien over goods or the rights of an unpaid seller under the Sale of Goods Act 1930. The NCLT and the NCLAT have acknowledged that BHEL has been granted lien over the secured assets on account of being an unpaid seller. Further, under Section 2(1)(zd), a ‘secured creditor’ must have a ‘security interest’ in its favour to be classified as a ‘secured creditor’. Since Section 2(1)(zh) defines a ‘security interest’ as any right, title or interest other than those specified in Section 31, it is clear that lien holders cannot be interpreted as secured creditors for the purposes of SARFAESI Act. Therefore, BHEL, being a statutory lien holder, is not bound by the decision of the 60% majority and is not required to take their consent before realizing the secured assets.
Inter-se equality between secured creditors
Section 53 of the Code provides for a waterfall mechanism to be followed in distribution of assets. Section 53(1)(b) places the dues of the workmen and those of the secured creditors on equal footing. The NCLAT without giving any substantial reasons, held all secured creditors, irrespective of the mode of creation of charge, to be on equal footing. The SC in ICICI Bank Ltd. v SIDCO Leathers observed, while interpreting Sections 529 and 529-A of the Companies Act 1956, that inter-se ranking of secured creditors cannot be discredited only because secured creditors and workmen are treated pari passu. In my opinion, this interpretation is also maintained under the Code, as Section 53(2) of the Code only negates subordination agreements made between equal ranking recipients under sub-section 1(b).
Moreover, the SC in the case of Board of Trustees, Port of Mumbai v Indian Oil Corporation gave supremacy to the statutory lien of a harbour authority under Section 64 of the Major Port Trusts Act 1963. The SC held that the exercise of lien by the harbour authority on account of unpaid port trust charges is paramount to all other claims of secured creditors in the process of winding up. The SC observed that such right of the harbour authority cannot be transferred or extinguished by the Court without its consent. Consequently, I believe that the NCLAT should have addressed the NCLT’s decision that a lien holder holds preference over a charge of hypothecation in more detail.
Even assuming that Section 53(1)(b) envisages an equal treatment to all secured creditors, it does so only in the event such secured creditors have relinquished their security interest. In the present case, there is a clear stipulation by BHEL to not relinquish its security interest. Thus, it cannot be subjected to the same treatment as those secured creditors who have relinquished their security interest to the liquidation estate. Further, the NCLAT in JM Financial Asset Reconstruction Company v Finquest Financial Solutions Private Limited observed that the determination of first or exclusive charge is necessary only in the event more than one secured creditor opts to realize their security interest on the same asset under Section 52. Therefore, NCLAT’s opinion that BHEL does not have an exclusive charge over the secured assets becomes irrelevant the moment all other secured creditors have relinquished their security interest in the assets.
Concluding remarks
Since BHEL is not bound by the provisions of the SARFAESI Act, it does not require the consent of the 60% majority to realize its security interest. It can refuse to relinquish its security interest irrespective of the decision of the majority of the secured creditors. The NCLT Mumbai in the matter of Yogi Industries Limited observed that secured assets in which the security interest has not been relinquished cannot form part of the liquidation estate. Further, the moment a secured creditor refuses to relinquish its security interest, the proviso to Regulation 32 of the IBBI (Liquidation Process) Regulations 2016 gets invoked which bars the sale of any asset in respect of which the security interest is not relinquished.
Accordingly, by allowing the liquidator to cause the sale of the secured assets, the NCLAT has encroached upon the rights of BHEL. The NCLAT cannot deny a secured creditor to exercise its rights merely on the grounds that same may cause prejudice to other secured creditors. The NCLAT in the case of Anuj Bajpai v State Bank of India held that a secured creditor is entitled to stand outside the liquidation process; without or without causing prejudice to others. The NCLAT cannot impede upon the right of the secured creditor to take its collateral and sell it on its own. The rights of a secured creditor must be respected, for it is settled that what is allowed by law cannot be interfered with.