Bank must pay liquidator's fee despite realizing security interest independently under SARFAESI Act per Regulation 21A

NCLAT dismissed the appeal by a secured creditor bank challenging payment of liquidator's fee under IBC 2016. The bank, having opted to realize security interest independently under SARFAESI Act rather than relinquishing to liquidation estate, argued liquidator's fee was not payable since liquidator didn't directly realize the secured asset. NCLAT held that Regulation 21A of Liquidation Process Regulations mandatorily requires secured creditors to pay their share of liquidation costs within 90 days of intimating intent to realize security interest, regardless of whether liquidator directly handles the asset. The tribunal confirmed liquidator's entitlement to fee under waterfall mechanism provisions and upheld the adjudicating authority's order.

---

---

The appeal before the National Company Law Appellate Tribunal (NCLAT) concerns the payment of liquidator fees in the context of the liquidation process under the Insolvency and Bankruptcy Code, 2016 (IBC). The core issues revolve around whether the liquidator's fee is payable when the liquidator did not directly realize or distribute the secured asset and whether the appellant complied with Regulation 21A of the IBBI (Liquidation Process) Regulations, 2016.

The NCLT, Mumbai, had initiated a Corporate Insolvency Resolution Process (CIRP) against Narendra Solvex Private Limited, which did not result in a resolution, leading to the liquidation order. The appellant, Shikshak Sahakari Bank Ltd., a secured creditor, filed a claim and opted not to relinquish its security interest, choosing instead to realize it through proceedings under the SARFAESI Act, 2002.

The dispute arose when the liquidator demanded fees from the appellant, which the appellant contested on the grounds that the liquidator had not realized or distributed the assets and that the fee claimed was contrary to Regulation 4 of the Liquidation Process Regulations. The NCLT directed the appellant to pay the liquidator's fees as per the regulations, leading to the present appeal.

Issue I: Liquidator's Fee Payment

The primary issue is whether the liquidator's fee is payable even if the liquidator did not directly realize or distribute the secured asset. The appellant argued that the liquidator had no role in realizing the asset, as the appellant had set the recovery process in motion under the SARFAESI Act. The appellant contended that the liquidator is only entitled to a fee under Regulation 4(2)(b) when an amount is realized or distributed by the liquidator.

The Tribunal examined the relevant legal framework, particularly Regulation 21-A of the Liquidation Process Regulations, which mandates that secured creditors must pay their share of liquidation costs within 90 days of the liquidation commencement date. The Tribunal found that the appellant failed to comply with this requirement, as evidenced by the protracted email exchanges and the lapse of the 90-day period without payment of the requisite costs.

The Tribunal also considered the clarification provided in Regulation 4(2)(b), which states that a liquidator is entitled to a fee corresponding to the amount realized or distributed. However, the Tribunal concluded that this clarification does not apply in this case, as the liquidator's role in coordinating the realization of assets through the secured creditor is sufficient to justify the fee.

Issue II: Compliance with Regulation 21A

The second issue concerns whether the appellant complied with Regulation 21A of the Liquidation Process Regulations, 2016. Regulation 21A requires secured creditors to inform the liquidator of their decision to realize their security interest and to pay their share of the liquidation costs within 90 days. The Tribunal found that the appellant did not fulfill these obligations, as the appellant neither paid the full liquidation costs nor demonstrated compliance with Regulation 21A(2).

The Tribunal referenced its judgments in 'State Bank of India Vs. Navjit Singh' and 'Small Industries Development Bank of India (SIDBI) v. Shri Vijender Sharma', which support the liquidator's position that compliance with the regulations is necessary even if the secured creditor proceeds to realize its security interest.

Significant Holdings

The Tribunal upheld the NCLT's decision, affirming that the liquidator's fee is payable as per Regulation 21A, regardless of whether the liquidator directly realized or distributed the secured asset. The Tribunal emphasized the mandatory nature of Regulation 21A and the appellant's failure to comply with its requirements. The Tribunal dismissed the appeal, finding no infirmity in the orders of the Adjudicating Authority.

In conclusion, the Tribunal reinforced the principle that secured creditors must adhere to the liquidation process regulations, including the payment of liquidation costs, to avoid their assets becoming part of the liquidation estate. The appeal was dismissed, with no order as to costs.

---