Security Interest Shall Stand Relinquished If Liquidation Costs Is Not Paid As Per R. 21A(3) Of Liquidation Regulations: NCLAT

Mohd Malik Chauhan

10 Dec 2024 12:24 PM IST

  • Security Interest Shall Stand Relinquished If Liquidation Costs Is Not Paid As Per R. 21A(3) Of Liquidation Regulations: NCLAT

    The NCLAT New Delhi bench of Justice Ashok Bhushan (Judicial Member) and Barun Mitra (Technical Member) has held that if the secured creditor fails to pay the liquidation costs within 90 days after its intention to realise the security interest, the security interest shall stand relinquished under Regulation 21A(3) of the Liquidation Regulations, 2016. Brief Facts The Suraksha...

    The NCLAT New Delhi bench of Justice Ashok Bhushan (Judicial Member) and Barun Mitra (Technical Member) has held that if the secured creditor fails to pay the liquidation costs within 90 days after its intention to realise the security interest, the security interest shall stand relinquished under Regulation 21A(3) of the Liquidation Regulations, 2016.

    Brief Facts

    The Suraksha Asset Reconstruction Ltd. (Appellant) sought to realise its security interest under the SARFAESI Act in the liquidation process of the corporate debtor but the possession of the assets was denied by the liquidator despite an order passed by the Adjudicating Authority by which the possession of the mortgaged assets was directed.

    A notice under the SARFAESI Act was issued seeking symbolic possession of the assets which was refused by the liquidator on the ground that the appellant failed to pay CIRP and liquidation costs. Thereafter, the security interest of the appellant was declared relinquished under under Regulation 21A(2) and (3) of the IBBI (Liquidation Process) Regulations, 2016.

    It is the case of the appellant that Appellant having already intimated intention to realise its security interest vide letter dated 10.01.2020, there is no question of relinquishment of security interest of the Appellant. Appellant has right under Section 52 of the IBC to realise its security interest. Appellant having never refused to pay CIRP/Liquidation costs, there is no question of relinquishment of its security interest.

    It also submitted that Appellant could not proceed to realise its security interest because both the erstwhile liquidator and current liquidator never handed over possession of the mortgaged land and secured assets of the corporate debtor to the Appellant despite clear direction dated 07.01.2021 of the Adjudicating Authority.

    On the other hand, it was contended by the liquidator that the Appellant has not paid the amount of CIRP costs and liquidation costs in spite of e-mail sent by the liquidator on 30.01.2020, 30.06.2020, 27.10.2020 and 16.02.2023. Appellant has admitted its liability to make payment of the estimated liquidation costs but has not made any payment.

    It further argued that the Appellant having agreed for joint sale before the Joint Lenders' Meeting of SCC, it has no right to maintain this Appeal praying that it shall realise its security interest.

    It also contended that the security interest of the Appellant has been subsumed in the liquidation estate under Regulation 21A (2) and 21A (3) and present is not a case of applicability of Regulation 21A(1). When steps for joint sale has been agreed, Appellant cannot be heard in saying that he himself realise its security interest.

    Observations:

    The tribunal noted that Section 52 of the IBC empowers secured creditors to relinquish its security interest to the liquidation estates or to realise its security interest in the manner as specified in Section.

    It further added that Regulations have been framed under the IBC including under Section 52 namely— 'Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations 2016'. Regulation 21A was inserted w.e.f. 25.07.2019. It states that “where a secured creditor proceeds to realise its security interest, it shall pay – (a) as much towards the amount payable under clause (a) and sub-clause (i) of clause (b) of subsection (1) of section 53, as it would have shared in case it had relinquished the security interest, to the liquidator within ninety days from the liquidation commencement date.”

    Clause 3 of the Regulation further states that “Where a secured creditor fails to comply with subregulation (2), the asset, which is subject to security interest, shall become part of the liquidation estate.”

    It noted that there are ample materials to indicate that Appellant has informed the liquidator of its decision to relinquish its security interest. Letter dated 10.01.2020 relied by the Appellant is referred, thus, there is no applicability of Section 21A(1) in the present case.

    The tribunal observed that In the present case, the Appellant after informing the liquidator on 10.01.2020 proceeded to realise its security interest by issuing notice under Section 13(2) on 20.08.2021 which was already intimated to the liquidator on 10.01.2020.

    “Present is a case where liquidator has communicated the Appellant twice for payment of proportionate share of the liquidation costs on 16.02.2023 and 29.05.2023 although communication was sent in response to the said letter by the Appellant but fact remains that no payment was made by the Appellant towards liquidation costs” the tribunal observed.

    It further added that “when Appellant has proceeded to realise its security interest it was required to pay the amount as referred to in Regulation 21A (2)(a). The Adjudicating Authority thus, has rightly referred to and relied on Regulation 21A (2) & (3).”

    Finally, the tribunal observed that the liquidator did not commit any error in communicating decision dated 29.05.2023 to the Appellant that on account of non-payment of liquidation costs, security interest of the Appellant stood relinquished in terms of Regulation 21A (2) &(3) of the Liquidation Regulations. Adjudicating Authority after considering the submissions of the parties has rightly refused to grant any relief to the Appellant in IA No.1069 of 2023.

    Accordingly, the present appeal was dismissed.

    Case Title: Suraksha Asset Reconstruction Ltd. Vs. Varsha Bagri, Liquidator of Bharat NRE Coke Ltd.

    Case Number: Company Appeal (AT) (Insolvency) No. 650 of 2024 & I.A. No. 2325 of 2024

    Judgment Date: 9/12/2024

    Click Here To Read/Download The Order 


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