2021 (6) TMI 357 - Tri - Insolvency and Bankruptcy

Tribunal upholds Regulation 21A, requires secured creditors to contribute to liquidation costs

The Tribunal upheld the validity of Regulation 21A of the IBBI (Liquidation Process) Regulations, 2016, emphasizing its interpretive role rather than ... Liquidation Order - Applicant is a Financial Corporation providing financial assistance to the MSME Sectors - Section 60(5) r/w Section 52(5) of the Insolvency & Bankruptcy Code, 2016 - HELD THAT:- It is required to be noted from a reading of Regulation 39B of IRCP Regulations that the Committee of Creditors is required to approve a Plan for contribution for meeting the difference between the two, namely estimated value of the liquid assets if it is less than estimated liquidation costs and the Resolution Professional, the process being prior to Liquidation, shall submit the Plan in relation to sharing of liquidation cost to this Adjudicating Authority both in the case of an application seeking approval of a Resolution Plan or for seeking Liquidation of the Corporate Debtor. At this stage, it is required to be noted that there is no distinction being made between a Financial Creditor having a charge over the assets or not and the term used is 'COC in general. It is quite evident no distinction has been made in relation to contribution to Liquidation Cost as defined under Section 5(16) of IBC, 2016 read with Regulation 2(1)(ea) of Liquidation Process Regulations as framed by IBBI, be that by a secured financial creditor who chooses to exercise its option to realise on its own its security interest or a secured creditor who relinquishes its security to be aggregated to the Liquidation Estate for realisation and distribution by the Liquidator in accordance with Section 53 of the IBC, 2016 and the water fall mechanism provided thereunder or in relation to a financial creditor not secured at all who will also be covered under Section 53 of IBC, 2016. A secured creditor having a security interest over the entire realizable assets of the Corporate Debtor cannot claim that it would not make a contribution to the estimated liquidation costs on the premise that it had opted to realize the security on its own. However, in this regard, it is also required to be noted that the Liquidator cannot demand fanciful sums and any amount claimed, even a single rupee is required to be properly justified with adequate proof or justification being produced in advance to the financial creditors concerned from whom the amounts are demanded as estimated liquidation costs in terms of Regulations 2A particularly read with Regulation 21A of IBBI (Liquidation Process) Regulations, 2016 from a secured creditor envisaged thereunder as a serious consequence follows in view of its non-adherence. No person is to be prejudiced by the actions of the court (in this case the Tribunal) in view of application pending all along before this Tribunal in IA/1205/2020 as filed by the applicant/secured creditor of which the Liquidator was fully aware as demonstrated by the minutes of the 1st SCC meeting held on 17.11.2020, the action of the Liquidator in making the security interest as part of the Liquidation Estate is unjustified - taking into consideration the date of the order of liquidation and the applicant/secured creditor had approached this Tribunal, we deem it fit that a further period of 3 months be granted to the applicant/secured creditor to complete the sale of security interest for which an option had been exercised by it for a sum not less than ₹ 25 crores as intimated at the time of exercising the option by it to realize the security on its own. Application filed by the Liquidator stands dismissed. Issues Involved:1. Validity of Regulation 21A of the IBBI (Liquidation Process) Regulations, 2016.2. Obligation of a secured creditor to contribute to liquidation costs.3. Actions of the Liquidator regarding the inclusion of secured assets in the liquidation estate.4. Timelines and processes for the realization of security interests by secured creditors.Detailed Analysis:1. Validity of Regulation 21A of the IBBI (Liquidation Process) Regulations, 2016:The Applicant sought a declaration that Regulation 21A is ultra vires as it allegedly contravenes Sections 34, 36, 52, 53, and 240 of the Insolvency and Bankruptcy Code (IBC), 2016. The Tribunal, however, ruled that it does not have the power to strike down any statutory provisions or regulations, referencing the Supreme Court's decision in Tamil Nadu Pollution Control Board vs. Sterlite Industries (India) Limited and Others. The Tribunal emphasized that it can only interpret the consistency of regulations with the statute but cannot declare them ultra vires.2. Obligation of a Secured Creditor to Contribute to Liquidation Costs:The Tribunal discussed the definition of 'liquidation cost' under Section 5(16) of IBC, 2016, and Regulation 2(1)(ea) of the Liquidation Process Regulations. It emphasized that the Board (IBBI) has the authority to specify what constitutes liquidation costs. The Tribunal noted that Regulation 2A mandates financial creditors, including secured creditors, to contribute to liquidation costs proportionate to their debts. The Tribunal rejected the Applicant's argument that it should not bear liquidation costs, stating that all financial creditors, regardless of their security status, must share these costs.3. Actions of the Liquidator Regarding the Inclusion of Secured Assets in the Liquidation Estate:The Tribunal found that the Liquidator acted with undue haste in including the Applicant's secured assets in the liquidation estate. The Liquidator's actions, including the publication of a sale notice, were deemed unjustified and were set aside by the Tribunal. The Tribunal directed the Applicant to contribute Rs. 31,07,500 to the liquidation costs within 30 days, failing which the consequences under Regulation 21A would follow. The contributed amount was to be kept in a special escrow account pending the realization of the security interest.4. Timelines and Processes for the Realization of Security Interests by Secured Creditors:The Tribunal granted the Applicant an additional three months to complete the sale of the security interest for not less than Rs. 25 crores, as initially estimated. This extension was provided under Section 52(6) of IBC, 2016. The Tribunal emphasized that upon realization of the security interest, the Applicant must act in accordance with Section 52 and other relevant provisions and regulations.Conclusion:The Tribunal's order provided a balanced approach, ensuring that the secured creditor contributes to the liquidation costs while also protecting its right to realize its security interest. The decision underscores the importance of adhering to statutory provisions and regulations in the liquidation process, ensuring fairness to all stakeholders involved.