SARFAESI security realisation: secured creditors must share workmen's dues, but not liquidation cost under the Insolvency Code

A secured creditor that realises its security interest under SARFAESI remains bound to account proportionately for workmen's dues under the applicable statutory distribution scheme, even where the liquidation had commenced before Regulation 21A of the Liquidation Process Regulations took effect. The pari passu rule under Section 53 of the Insolvency and Bankruptcy Code does not apply where the secured creditor has not relinquished security into the liquidation estate. However, Section 52(8) cannot support a direction to contribute to liquidation cost, because that provision is confined to insolvency resolution process costs as defined in the Code. The direction on workmen's dues was upheld, while the liquidation-cost direction was set aside.

---

---

Issues: (i) Whether a secured creditor who realised its security interest outside liquidation was liable to contribute proportionately towards workmen's dues under the statutory scheme applicable to SARFAESI realisation and the Insolvency and Bankruptcy Code, 2016; (ii) whether the secured creditor could also be directed to contribute towards liquidation cost under Section 52(8) of the Insolvency and Bankruptcy Code, 2016.

Issue (i): Whether a secured creditor who realised its security interest outside liquidation was liable to contribute proportionately towards workmen's dues under the statutory scheme applicable to SARFAESI realisation and the Insolvency and Bankruptcy Code, 2016.

Analysis: The liquidation had commenced before the insertion of Regulation 21A of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, so that regulation was held inapplicable. The secured creditor had invoked Section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and realised the security interest under that law, which was consistent with Section 52(4) of the Insolvency and Bankruptcy Code, 2016. On that footing, the statutory scheme in Section 13(9) required distribution in accordance with the workmen-protective priority reflected in the Companies Act framework, and the exclusion in Section 327(7) of the Companies Act, 2013 did not displace the obligation arising in the present factual setting. The pari passu principle under Section 53 was not attracted because the secured creditor had not relinquished security into the liquidation estate.

Conclusion: Yes. The secured creditor was liable to contribute proportionately towards workmen's dues, and the direction to that extent was upheld.

Issue (ii): Whether the secured creditor could also be directed to contribute towards liquidation cost under Section 52(8) of the Insolvency and Bankruptcy Code, 2016.

Analysis: Section 52(8) speaks only of insolvency resolution process costs, and that expression is confined by Section 5(13) of the Insolvency and Bankruptcy Code, 2016. Liquidation cost is not included within that definition. Therefore, the statutory source relied upon could not sustain a direction requiring payment of liquidation cost from the realisation proceeds of the secured creditor.

Conclusion: No. The direction to contribute towards liquidation cost was unsustainable and was set aside.

Final Conclusion: The appeal succeeded only in part: the direction concerning workmen's dues remained in force, but the direction concerning liquidation cost was annulled.

Ratio Decidendi: A secured creditor who realises security under SARFAESI remains bound by the applicable statutory requirement to account for workmen's dues, but Section 52(8) of the Insolvency and Bankruptcy Code, 2016 cannot be used to recover liquidation cost because it is limited to insolvency resolution process costs defined in Section 5(13).

---