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 striking down statutory provisions. It ruled that secured creditors are obligated to contribute to liquidation costs and directed a specific amount to be paid within 30 days. The Tribunal also granted an extension for the realization of security interests by the secured creditor, emphasizing compliance with relevant provisions. Overall, the decision aimed to balance the interests of all stakeholders involved in the liquidation process while upholding statutory regulations.

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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.

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