Secured Creditors' Priorities Upheld in Liquidation Proceeds Distribution

The Tribunal held that inter-se priorities among secured creditors should be upheld in the distribution of liquidation proceeds. The Applicant's claim challenging the distribution by the liquidator was deemed not maintainable, and the application was disposed of with no order as to costs.

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Issues Involved:

1. Whether the distribution of liquidation proceeds by the liquidator was in accordance with the Insolvency and Bankruptcy Code, 2016 (IB Code).
2. Whether the inter-se priorities between secured creditors should be considered in the distribution of liquidation proceeds.
3. Whether the Applicant is entitled to a pro-rata share of the liquidation proceeds.
4. Whether the liquidator should retrieve and redistribute the liquidation proceeds.
5. Whether the Applicant is entitled to interest on the delayed distribution of liquidation proceeds.

Issue-wise Detailed Analysis:

1. Distribution of Liquidation Proceeds by the Liquidator:

The Applicant, a secured creditor with a 14.54% voting share, claimed that the liquidator distributed the sale proceeds to other creditors without considering the Applicant's claim. The Applicant argued that this distribution was arbitrary and not in consonance with the IB Code. The liquidator, however, contended that the distribution was made in accordance with Section 53 of the IB Code, based on the interpretation provided in the Insolvency Law Committee Report dated 26th March 2018.

2. Inter-se Priorities Between Secured Creditors:

The core dispute was whether the inter-se priorities between the first charge holder and the second charge holder should be considered during the distribution of liquidation proceeds. The liquidator argued that the first charge holder should receive the sale proceeds in priority, followed by the second charge holders. The Applicant, however, contended that all secured creditors should rank equally (pari passu) once they relinquish their security interest under Section 53 of the IB Code.

3. Entitlement to Pro-rata Share of Liquidation Proceeds:

The Applicant asserted that being a secured creditor with an admitted claim, they were entitled to a pro-rata share of the liquidation proceeds, which amounted to Rs. 1,62,70,647/-. The liquidator, however, had distributed the proceeds based on the first and second charge holders' priority, which the Applicant challenged.

4. Retrieval and Redistribution of Liquidation Proceeds:

The Applicant requested the Tribunal to direct the liquidator to retrieve the distributed proceeds from the other creditors and redistribute them on a pro-rata basis. The liquidator maintained that the distribution was done correctly as per the IB Code and relevant judicial interpretations.

5. Interest on Delayed Distribution:

The Applicant sought interest at 18% per annum on their share of the liquidation proceeds from the date of the alleged arbitrary distribution by the liquidator. The liquidator did not specifically address this claim for interest in the response.

Findings:

The Tribunal observed that the Applicant had a second charge only on movable properties, not on immovable properties. The Tribunal emphasized that upon relinquishment of security interest, all secured creditors should rank equally (pari passu) under Section 53 of the IB Code. However, the Tribunal also noted that the concept of inter-se priorities among secured creditors remains valid and should be considered during the distribution of assets in liquidation. The Tribunal referred to the Supreme Court's judgment in ICICI Bank Ltd Vs. Sidco Leathers Ltd., which upheld the ranking of secured creditors even in liquidation proceedings.

Conclusion:

The Tribunal concluded that the inter-se priorities among secured creditors should be maintained in the distribution of liquidation proceeds. Therefore, the application by the Applicant was not maintainable, and the Tribunal disposed of IA 514/2019 in CP(IB) 04/2017 with no order as to costs.

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