TaxTMI 
TaxTMI 
2026 (10) TMI 480
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....o realize its security interest and refusing to exclude the hypothecated assets from the liquidation estate. Submissions of the Appellant / Tata Capital Ltd 2. The Appellant, Tata Capital Limited, had sanctioned various credit facilities in favour of the Corporate Debtor. Pursuant to the same, several loan documents were executed between the parties. On account of the said documents, specific equipment and assets of the Corporate Debtor stood validly and legally hypothecated in favour of the Appellant, which created a secured interest in favour of the Appellant. The Corporate Debtor committed defaults in repayment of the outstanding dues, and its loan accounts were classified as NPA. Due to this, CIRP and subsequent liquidation proceedings were initiated against the Corporate Debtor. Corporate Debtor was placed under liquidation under Section 33(1) of the Code. Mr. Sanjay Ramdas Mahajan was appointed as Liquidator. Accordingly, the Appellant duly filed its claim in Form-D as a secured financial creditor and disclosed the details of the assets and security interest created in its favour. The Appellant had consistently communicated to the liquidator that it had elected not to r....
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....ing Authority failed to properly adjudicate whether a procedural lapse, if any, can override substantive rights under the Code. The Appellant's participation in the Stakeholders' Consultation Committee is not inconsistent with its intention to enforce its security interest. The Liquidator with an alleged intention, never recorded the intention of the Appellants' participation in SCC meetings itself speaks volume. The SCC is merely consultative and does not determine or extinguish the rights of secured creditors. The SCC had not taken any substantive steps since the settlement and compromise arrangement was being considered by the SCC in all the meetings. Only in 5th SCC meeting dated 4th February, 2025 the compromise and arrangement scheme came to be rejected. As the Scheme of compromise and arrangement came to be rejected that Appellant once again vide email dated 19th February, 2025 categorically intimated to the liquidator that the Appellant has not relinquished its rights. An email dated 19th February, 2025 is a valid legal and enforceable correspondence in order to substantiate the rights of Appellant to not relinquish their rights over secured assets. Instead of verifying and....
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....h the Asset was in the custody of Liquidator and the scheme of compromise and arrangement under section 230 of the Companies Act, 2013 was under consideration. 3. The Learned Adjudicating Authority erred in law in holding that the Appellant failed to assert its security interest on account of alleged deficiencies in Form D filed with the liquidator. The Appellant submits that in Form D, at Serial No. 8A, which specifically requires disclosure as to whether the security interest has been relinquished, the Appellant has unequivocally answered "No". This clearly evidences the Appellant's intention not to relinquish its security interest over the hypothecated assets and to instead exercise its rights in terms of Section 52 of the Insolvency and Bankruptcy Code, 2016. The Appellant submits that the Learned Adjudicating Authority gravely erred in placing undue reliance on the entry at Serial No. 8 of Form D, which allegedly indicated that no security was held, without appreciating that such an entry, even if assumed to be incomplete or inadvertent, cannot override the substantive facts and documentary evidence on record. The Adjudicating Authority failed to adopt a holistic and harmon....
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....e Appellant's "continued participation in SCC meetings, without objection to its inclusion, undermines the contention that the Appellant always sought to stand outside the liquidation process to enforce security under Section 52 of the Code." This finding is, with respect, wholly erroneous. The Appellant submits that Section 52 of the Code confers an unequivocal and independent statutory right upon a secured creditor to either relinquish its security interest to the liquidation estate or to realize the same outside the liquidation process. This right is absolute in nature and is not made subject to participation or non-participation in the SCC. The Hon'ble Supreme Court in Action Ispat and Power Private Limited v. Shyam Metalics and Energy Limited [(2021) 2 SCC 641] has, at paragraph 4 of the judgment, expressly held that "the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The Code is thus a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors." This principle, af....
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....on is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The Code is thus a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors. The interests of the corporate debtor have, therefore, been bifurcated and separated from that of its promoters / those who are in management. Thus, the resolution process is not adversarial to the corporate debtor but, in fact, protective of its interests. The moratorium imposed by Section 14 is in the interest of the corporate debtor itself, thereby preserving the assets of the corporate debtor during the resolution process. The timelines within which the resolution process is to take place again protects the corporate debtor's assets from further dilution, and also protects all its creditors and workers by seeing that the resolution process goes through as fast as possible so that another management can, through its entrepreneurial skills, resuscitate the corporate debtor to achieve all these ends." 6. In view of the aforesaid Swiss Ribbons (Supra), the Appellant submit....
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....is entitled to realize its security interest independently in accordance with Section 52 of the Insolvency and Bankruptcy Code, 2016. 7. The Hon'ble Adjudicating Authority erred in law in denying the Appellant the right to realize its security interest. The Appellant had, at all material times, expressly and consistently asserted its intention to stand outside the liquidation estate and realize its security interest under Section 52 of the Code. Moreover, by participating in the SCC Meetings the Appellant submits that such intention was communicated during SCC meetings as well as through a formal email dated 19th February 2025, which unequivocally invoked its rights over the hypothecated equipment. The Appellant submits that upon such intimation, the Respondent was statutorily bound under Section 52(3) of the Code to verify the security interest and permit the Appellant to realize the same. Instead, the Respondent failed to discharge this obligation and improperly subjected the Appellant's statutory rights to the deliberations of the SCC, which has no jurisdiction in law to decide or approve such rights. There is no requirement under the Code for SCC approval for enforcement of ....
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....romise proposed by suspended board of directors under Section 230 of the Companies Act, 2013 was rejected by 86% vote of SCC. The Appellant was a member of SCC and actively attended all SCC meetings. Its voting share is 6.19%. Annexure AB at page 338. 19.02.2025 Appellant for the first time vide its email intimated to the Respondent/Liquidator that the Appellant holds the exclusive charge on the assets and requested to exclude those from the Liquidation process, and to hand over the same in 30 days. 11. The aforesaid chronology clearly demonstrates that the Appellant had, at all material times, elected to participate in the liquidation process as a stakeholder and acted consistently with such election. 12. The Appellant failed to mention its intention to enforce its security in Form D under Regulation 21A of IBBI Liquidation Process Regulations, 2016. There is material omission in Form D. The Form D at Sr. No.8, as submitted by the Appellant had intimated 'NIL' in response to the details of the security held by it. Thereafter, in Sr. No. 8A, the Appellant had indicated 'No' in response to whether it relinquished its interest. The Ld. Adjudicating Authority rightly obser....
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....sistently assert an intention to stand outside the liquidation estate. No such assertion is borne out from Form D or the contemporaneous minutes of the SCC meetings. The email dated 19.02.2025 was the first clear written demand for exclusion and delivery of the assets and was issued after expiry of the statutory period. 18. Regarding alleged oral intimations of the Appellant in relation to its intention to enforce it security interest, the said contention is a bald and unsupported assertion and finds no mention in the contemporaneous minutes of the SCC meetings. The Appellant admittedly communicated its alleged election in writing for the first time only by its email dated 19.02.2025, after rejection of the Scheme of Compromise on 04.02.2025 and more than six months after the liquidation commencement date. The allegation that the Respondent deliberately failed to record any purported oral intimation is false, baseless and denied. 19. The email dated 19.02.2025 constituted a belated attempt by the Appellant to alter the position adopted by it throughout the liquidation process and could not cure its failure to intimate its decision in the manner and within the period prescribe....
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.... Respondent of its decision within time or that the Respondent deliberately delayed, obstructed or prevented the Appellant from realizing its security interest. The Respondent has acted bona fide and strictly in furtherance of his statutory duties as Liquidator and in the interests of the liquidation process and all stakeholders. 24. Granting the relief sought at this belated stage would not only reward the Appellant's own omissions but would also unsettle the steps already undertaken by the Liquidator. It would grossly delay the liquidation process and prejudice the rights and interests of the other stakeholders who have proceeded on the basis of the Appellant's conduct and the existing composition of the liquidation estate. The Appeal is therefore liable to be dismissed with exemplary costs. 25. The assets were legitimately treated as forming part of the liquidation estate consequent upon the Appellant's failure to intimate its election within the prescribed period and its subsequent conduct throughout the liquidation process. The Appellant is therefore not entitled to seek exclusion or delivery of the assets at this belated stage. The Ld. Adjudicating Authority has rightly....
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....tion of any unjust enrichment of the other stakeholders. 30. The Impugned Order is a reasoned order passed after due consideration of the pleadings, documents, applicable statutory provisions and conduct of the parties. Learned Adjudicating Authority has correctly held that the Appellant failed to duly exercise its option under Section 52 read with Regulation 21A and that its belated attempt to do so could not be accepted. The allegations of patent illegality, non-application of mind and failure to consider material documents are false and misconceived. 31. The Respondent acted in accordance with his statutory duties and treated the assets as part of the liquidation estate on account of the Appellant's failure to validly and timely exercise its option. 32. The timing of the Appellant's assertion was not assigned "undue" significance but was correctly considered in light of the express thirty-day period prescribed under Regulation 21A (unamended) and the Appellant's conduct during the intervening period. Pendency of a Scheme under Section 230 did not place the Liquidation Regulations in abeyance. It is further denied that no prejudice would be caused to the liquidation proc....
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..... A secured creditor is required to make a clear statutory election. The consequences of such election, including its eligibility to participate in the SCC, are expressly provided by law. The alleged difficulty arises only because the Appellant seeks to simultaneously enjoy the benefits of participation in the liquidation process and preserve an option to withdraw its security at a later stage depending upon the outcome of the Scheme. 40. The Appellant is not entitled to any declaration that its participation in the SCC was without consequence or to any direction permitting realisation of the assets outside the liquidation estate. The said declaration, in any event being contrary to law, is untenable. 41. The obligation under Section 52(3) cannot be invoked without a valid election under Section 52 read with Regulation 21A. The Respondent was not required to permit realisation of security on the basis of an untimely and legally ineffective communication. It is denied that the Appellant's rights were made subject to approval of the SCC. 42. Ld. Adjudicating Authority did not impose any requirement of SCC approval. The Appellant's application was dismissed because it had fai....
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....Section 52 of the Code read with Regulation 21A of the IBBI (Liquidation Process) Regulations, 2016. The liquidation commenced on 13.08.2024, whereas the Appellant submitted Form D on 01.10.2024 and did not communicate within the prescribed period its decision to realize the security outside the liquidation estate. In Form D, Serial No. 8 was stated as 'NIL', while Serial No. 8A stated 'No' to relinquishment, which, according to the Respondent, did not constitute a clear election to stand outside the liquidation estate. The Appellant thereafter participated in the SCC meetings and exercised its voting rights, including in relation to the Scheme of Compromise under Section 230 of the Companies Act, 2013. The Respondent submits that the first clear written request for exclusion and delivery of the assets was made only by email dated 19.02.2025, after the Scheme had failed on 04.02.2025 and more than six months after commencement of liquidation. The Respondent therefore contends that the belated email could not cure the statutory non-compliance. It is further submitted that the existence of a security interest is distinct from the timely exercise of the statutory optio....
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....n commencement date, the assets covered under the security interest shall be deemed to be relinquished to the liquidation estate." [Prior to latest amendments of 2026] Regulation 31A: Stakeholders' consultation committee. (1) XXX (2) The voting share of a member of the consultation committee shall be in proportion to his admitted claim in the total admitted claim: Provided a secured creditor who has not relinquished his security interest under section 52 shall not be part of the consultation committee; Provided that the promoters, directors, partners or their representatives may attend the meeting of the consultation committee, but shall not have any right to vote. Provided further that a financial creditor or his representative, if he is a related party of the corporate debtor, shall not have right to vote. (3) ...." "Regulation 39BA: Assessment of Compromise or Arrangement. 39BA. (1) While deciding to liquidate the corporate debtor under section 33, the committee shall examine whether to explore compromise or arrangement as referred to under sub -regulation (1) of regulation 2B of the Insolvency a....
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....ings and exercised its voting rights - to further confirm that it has relinquished its security interest else would not have been part of SCC per Regulation 31A. The Appellant was aware of the taking of custody of the assets and the valuation process. It did not, during the relevant period, take the position in a manner and within the time prescribed by Regulation 21A that the assets were to be excluded from the liquidation estate for independent realization. The conduct of the Appellant, therefore, has to be considered along with the entries made in Form D and the belated email dated 19.02.2025. 55. We are unable to accept the submission that the pendency of the Scheme under Section 230 of the Companies Act, 2013 kept the statutory requirements of the liquidation process in abeyance. The consideration of a Scheme for revival and value maximization does not dispense with the statutory requirement applicable to a secured creditor seeking to realize its security outside the liquidation estate. The Appellant could not retain an uncommunicated option and seek to exercise it after the Scheme had failed. 56. The judgments relied upon by the Appellant, including Action Ispat and Pow....
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....nt (39BA) doesn't grant extension of time for Appellant with the security interest to stand out of the liquidation estate at a later point in time. Such a course would unsettle the liquidation estate after custody and valuation of the assets and after other steps in the liquidation process had been undertaken. The Liquidator was justified in treating the assets as part of the liquidation estate in view of the Appellant's failure to make a timely and valid election. 60. The distinction between the existence of a security interest and the exercise of the statutory option is material. The loan documents may establish the existence of the security, but they do not by themselves establish compliance with the separate requirement of communicating the election contemplated by Regulation 21A. The Adjudicating Authority has correctly applied this distinction. 61. On an overall consideration of the record, we are satisfied that the Appellant did not validly exercise its option to stand outside the liquidation estate within the prescribed thirty days. The Appellant waited until after the Scheme of Compromise had failed and thereafter sought to assert its right by email dated 19.02.2....