NCLAT held that Secured creditor can’t sale assets to the person who are ineligible person in terms of Section 29A.
ORDER
The Hon’ble National Company Law Appellate Tribunal (NCLAT) has, by way of its order dated November 18 2019, in the matter of State Bank of India (Appellant) vs Anuj Bajpai, Liquidator (Respondent) in Company Appeal (AT) (Insolvency) No. 509 of 2019 inter-alia held that if during the liquidation process assets cannot be sold to a person who is ineligible under Section 29A, the said provision only applicable to the ‘Liquidator’ but also to the ‘secured creditor’, who opt out of Section 53 to realise the claim in terms of Section 52(1)(b) read with Section 52(4) of the IBC.
BRIEF FACTS
The following facts are noteworthy:
(a) In the Corporate Insolvency Resolution Process (CIRP) of Sanaa Syntex Private Limited (Corporate Debtor), the Liquidator filed an application under Section 60(5)(c) of the Insolvency and Bankruptcy Code, 2016 (IBC) seeking necessary directions of the Adjudicating Authority’s decision of Secured Financial Creditor (State Bank of India or SBI) to keep its mortgaged assets out of liquidation of the Corporate Debtor. The reliefs sought in the said application were as under:
- Directions to SBI that in case they want to opt out of liquidation, no contravention of Section 35(1)(f) takes place.
- The Respondent Bank to give an undertaking to the liquidator that it shall not sell the mortgaged property to any person who is not eligible to be a Resolution Applicant, in case they realise their security interest on their own.
- SBI to ensure all sums due to any workman or employee from the provident fund, pension fund and gratuity fund be paid first out of monies realised from selling mortgaged assets by SBI in terms of Section 36(4)(a)(iii), when SBI exercises its rights u/s 52 of the Code and such dues should not be made a part of the liquidation estate u/s 53.
b) The National Company Law Tribunal (NCLT), Mumbai Bench by impugned order dated April 8 2019 disposed of the application while partly allowed by granting permission to the SBI to opt out of the liquidation process but imposed a bar on the SBI to sell the assets of the Corporate Debtor to disqualified persons under Section 29A.
c) SBI who moved such application for opting out of Section 53 by filing an application under Section 52(1)(b) before the Liquidator, has challenged the impugned order passed by the NCLT.
Submissions by Appellant/SBI before NCLAT
d) Once a secured creditor has opted out of the liquidation process under Section 52(1)(b) of the IBC then such creditor is entitled to realize the security interest in terms of Section 52(4) of the IBC. Section 52(4) in turn states that a secured creditor may enforce, realize, settle, compromise or deal with the secured assets in accordance with such law as applicable to the security interest being realized and to the secured creditor and apply the proceeds to recover the debts due to it, which reads as under:
“52. Secured creditor in liquidation proceedings
4) A secured creditor may enforce, realise, settle, compromise or deal with the secured assets in accordance with such law as applicable to the security interest being realised and to the secured creditor and apply the proceeds to recover the debts due to it.”
e) The Hon’ble Supreme Court in ‘Pegasus Assets Reconstruction Private Ltd. v. Haryana Concast Limited’ – (2016) 4 SCC 47)’ and held that SARFAESI Act leaves no manner of doubt that for enforcement of its security interest, a secured creditor has been not only vested with powers to do so without the intervention of the court or tribunal but details procedure has also been prescribed to take care of various eventualities.
f) In the cases of ‘S. C. Sekaran v. Amit Gupta & Ors.’ and ‘Y. Shivram Prasad v. S. Dhanapal & Ors.’ this Appellate Tribunal by its last judgment dated February 27 2019 left it open to the promoters to enter into a scheme of arrangement or compromise with the creditors. Therefore, according to the counsel for the Appellant the Promoter is permitted even at the stage of liquidation to purchase the assets.
Submissions by Respondent/Liquidator’before NCLAT
g) If a Secured Creditor is allowed to sale the Secured Assets, after opting out of the liquidation process, to any person including a person who is disqualified under Section 29A of the IBC, then the entire purpose of Section 29A of the IBC would get defeated.
h) The objective of the restriction imposed upon the liquidator under the ‘Explanation given below to Section 35(1)(f) are in two-fold:
- (i) firstly, to ensure protection of public interest to keep the not eligible person out of the process to ensure that the assets should not go back to the same management or defaulting parties, who have committed the default and
- (ii) secondly, to prevent the misuse and impose restriction in order to ensure that any cartel that may be formed by the defaulting parties hand in glove with the Financial Creditor, and if allowed will defeat the objective of the IBC of maximization of value of stressed assets which has putting to Liquidation.
Section 35(1)(f), reads as under:
35. Powers and duties of liquidator.−
(1) Subject to the directions of the Adjudicating Authority, the liquidator shall have the following powers and duties, namely: −
(f) subject to section 52, to sell the immovable and moveable property and actionable claims of the corporate debtor in liquidation by public auction or private contract, with power to transfer such property to any person or body corporate, or to sell the same in parcels in such manner as may be specified:
Provided that the liquidator shall not sell the immovable and movable property or actionable claims of the corporate debtor in liquidation to any person who is not eligible to be a resolution applicant;”
From the plain reading of the said provision, it is clear that the Liquidator cannot sell the assets of the Corporate Debtor to the persons who are ineligible in terms of Section
HIGHLIGHTS OF THE ORDER
Some of the key highlights of the order are:
a) In ‘Jindal Steel & Power Limited vs. Arun Kumar Jagatramka & Anr.’ – ‘Company Appeal (AT) (Insolvency) No. 221 of 2018’ this Appellate Tribunal while noticed the decision of ‘S. C. Sekaran v. Amit Gupta & Ors.’ and ‘Y. Shivram Prasad v. S. Dhanapal & Ors.’ held that:
From the aforesaid provision, it is clear that the Promoter, if ineligible under Section 29A cannot make an application for Compromise and Arrangement for taking back the immovable and movable property or actionable claims of the ‘Corporate Debtor’.
Therefore, it is clear that a Member, Shareholder/Promoter whoever is ineligible under Section 29A cannot take over the Corporate Debtor by way of arrangement and scheme under Section 230-232 of the Companies Act.
b) Section 52(1)(b) of the IBC empowers as secured creditor and liquidation proceedings to relates its security interest in the manner as prescribed in the said Section and sub-section (4) of Section 52 a secured creditor may enforce, realise, settle, compromise or deal with the secured assets in accordance with such law as applicable to the security interest being realised and to the secured creditor and apply the proceeds to recover the debts due to it, which is as follows:
“52. Secured creditor in liquidation proceedings. (1) A secured creditor in the liquidation proceedings may-
(4) A secured creditor may enforce, realise, settle, compromise or deal with the secured assets in accordance with such law as applicable to the security interest being realised and to the secured creditor and apply the proceeds to recover the debts due to it.”
From sub-section (4) of Section 52, it is clear that secured creditor is entitled to enforce, realise, settle, compromise or deal with the secured assets in accordance with such law as applicable to the security interest being realised and to the secured creditor and apply the proceeds to recover the debts due to it. In terms of IBC the secured assets and the interest of the secured creditor to recover the proceeds of debts due to it has not been specifically prescribed, it does not make that the procedure prescribed under the SARFAESI Act, 2002 will be applicable to secured creditor to sale the proceeds.
d) Even if Section 52(4) is silent relating to sale of secured assets to one or other persons, the Explanation below Section 35(1)(f) makes it clear that the assets cannot be sold who are ineligible under Section 29A.
e) If during the liquidation process assets cannot be sold to a person who is ineligible under Section 29A, the said provision only applicable to the Liquidator but also to the secured creditor, who opt out of Section 53 to realise the claim in terms of Section 52(1)(b) read with Section 52(4) of the IBC.
#Duties of Secured Creditor and Liquidator under Section 52 of IBC
- Section 52 does not create any right in favour of one or other ‘secured creditor’ to realise its security interest in the manner specified in the said Section where the secured creditor realises security interest under clause (b) of Section 52 is required to inform the liquidator of such security interest and identify the assets subject to such security interest (Section 52(2) of the I&B Code). (Duty of Secured Creditor)
- Before security interest is realised by the secured creditor under Section 52, the Liquidator is required to verify security interest and permit the secured creditor to realise only such security interest, the existence of which may be proved either by the records of such security interest maintained by an information utility or by such other means as may be specified by the Board. If it comes to the notice of the Liquidator that a secured creditor intends to sale the assets, the person who are ineligible person in terms of Section 29A, it is always open to reject the application under Section 52(1)(b) read with Section 52(2) and (3) of the ‘I&B Code’. (Duty of Liquidator)
CONCLUSION
By this order, the Hon’ble NCLAT inter-alia held that if during the liquidation process assets cannot be sold to a person who is ineligible under Section 29A, the said provision only applicable to the ‘Liquidator’ but also to the ‘secured creditor’, who opt out of Section 53 to realise the claim in terms of Section 52(1)(b) read with Section 52(4) of the IBC.
COMMENTS BY AUTHOR
- In the above case the Hon’ble NCLAT inter-alia held that if during the liquidation process assets cannot be sold to a person who is ineligible under Section 29A. #Applicability of Section 29A during Liquidation
- The Hon’ble NCLAT in the matter of Jindal Steel and Power Limited (Appellant) vs Arun Kumar Jagatramka & Ors (Respondents) in Company Appeal (AT) No. 221 of 2018 vide order dated October 24 2019 inter-alia held that the Promoter, if ineligible under Section 29A cannot make an application for Compromise and Arrangement for taking back the immovable and movable property or actionable claims of the Corporate Debtor. The Promoters, who are ineligible under Section 29A, are not entitled to file application for Compromise and Arrangement in their favour under Section 230 to 232 of the Companies Act. #Applicability of 29A during Liquidation
- Whereas the Hon’ble NCLAT in the matter of Shweta Vishwanath Shirke & Ors. (Appellant) vs The Committee of Creditors & Anr (Respondents) in Company Appeal (AT) No. 601 of 2019 vide order dated August 28 2019 inter-alia held that Section 29A is not applicable for entertaining/considering an application under Section 12A as the Applicants are not entitled to file application under Section 29A as resolution applicant. # Applicability of Section 29A under CIRP
- Further as per the proviso to Section 29A(c) of the IBC, the person shall be eligible to submit a resolution plan if such person makes payment of ALL overdue amounts with interest thereon and charges relating to non-performing asset accounts before submission of resolution plan. # Applicability of Section 29A under CIRP
- In view of above judicial orders passed by Hon’ble NCLAT and above provisions of law, it seems that more clarity on the scope of Section 29A during liquidation & CIRP is required from the Hon’ble Apex Court.
Relevant Links:
1) NCLT order dated April 8 2019: https://ibbi.gov.in//webadmin/pdf/order/2019/Apr/8th%20Apr%202019%20in%20the%20matter%20of%20sanaa%20Syntex%20Private%20Limited%20MA%201123-2018%20in%20CP%20No.%20172-IBC-NCLT-MB-MAH-2017_2019-04-22%2017:22:06.pdf
2) NCLAT order dated August 28, 2019:https://nclat.nic.in/Useradmin/upload/6800044965d6e00f2674eb.pdf
3) NCLAT order dated October 24 2019: https://nclat.nic.in/Useradmin/upload/15079343875db2a20803bdc.pdf
4) NCLAT order dated November 18, 2019: https://nclat.nic.in/Useradmin/upload/20572042075dd3e35176572.pdf
Date: November 20, 2019
About the Author: The author (CS Lovkesh Batra) is Company Secretary by profession and works in the area of Insolvency & Bankruptcy Law.
Disclaimer: The entire contents of this document have been prepared on the basis of the information existing at the time of the preparation. The author does not take responsibility of the same and this document cannot used to be quoted before any authority under any law.
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