Secured Creditor Allowed to Opt Out of Liquidation Process with Restrictions on Asset Sale

The tribunal allowed the secured creditor, SBI, to opt out of the liquidation process but imposed a restriction on selling the assets to disqualified persons under Section 29A. The tribunal rejected the liquidator's request to mandate the secured creditor to pay EPF dues from the sale proceeds of secured assets. The tribunal's order was partly allowed, aligning with the legislative intent to prevent defaulters from benefiting under the IBC.

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Issues Involved:
1. Whether SBI, the Financial Creditor, is legally entitled to stay out of liquidation.
2. Whether there is any bar on the Secured Creditor to sell the assets to erstwhile promoters/directors of the Corporate Debtor if the secured creditor opts out of liquidation.
3. Whether the Secured Creditor exercising its right under Section 52(1)(b) of the Code has to make payment of workmen’s dues out of the amount realized from the sale of such secured assets as the EPF/workmen’s dues, which do not form part of the liquidation estate.

Detailed Analysis:

1. Legal Entitlement of SBI to Stay Out of Liquidation:
The tribunal examined Section 52 of the Insolvency and Bankruptcy Code (IBC), which provides secured creditors with the option to either relinquish their security interest to the liquidation estate or realize it on their own. The tribunal noted that SBI had initiated proceedings under the SARFAESI Act, and hence, was not obligated to inform the liquidator of the estimated amount from the sale of secured assets. The tribunal confirmed that the rights of secured financial creditors are protected under Section 52, allowing them to realize their security interest independently. Consequently, the tribunal affirmed that SBI is legally entitled to stay out of the liquidation process.

2. Bar on Secured Creditor Selling Assets to Erstwhile Promoters/Directors:
The tribunal analyzed Section 35(1)(f) of the IBC, which prohibits the liquidator from selling assets to persons not eligible to be resolution applicants, as per Section 29A. The tribunal emphasized that the intent of the legislation is to prevent defaulters from re-acquiring assets through back-door entries. The tribunal extended the scope of Section 29A to include secured creditors exercising their rights under Section 52, thereby disallowing them from selling assets to disqualified persons. This interpretation aligns with the Supreme Court's decision in Swiss Ribbons Pvt. Ltd. & Ors V. Union Of India & Ors, which stated that the provisions of Section 29A apply to both resolution and liquidation processes. Thus, the tribunal imposed a bar on SBI from selling assets to erstwhile promoters/directors.

3. Payment of Workmen’s Dues from Sale Proceeds of Secured Assets:
The tribunal examined Section 53 of the IBC, which provides a waterfall mechanism for the distribution of proceeds from the sale of assets. It clarified that workmen’s dues and EPF dues are prioritized in the waterfall mechanism only if the secured creditor relinquishes security. If the secured creditor opts to realize its security under Section 52, the workmen’s dues do not rank equally with the secured creditor’s debts. The tribunal noted that Section 326 of the Companies Act, which was relied upon by the liquidator, had been substituted by the IBC. Consequently, the tribunal held that the secured creditor is not liable to pay EPF dues out of the sale proceeds of secured assets when exercising their option under Section 52. Thus, this prayer of the liquidator was rejected.

Conclusion:
The tribunal allowed the secured creditor, SBI, to opt out of the liquidation process but imposed a restriction on selling the assets to disqualified persons under Section 29A. The tribunal rejected the liquidator's request to mandate the secured creditor to pay EPF dues from the sale proceeds of secured assets. The tribunal's order was partly allowed, aligning with the legislative intent to prevent defaulters from benefiting under the IBC.

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