The New Delhi Principal Bench of the National Company Law Appellate Tribunal (NCLAT) has held that the right of a secured creditor to realise its security interest outside liquidation under Section 52 is a qualified statutory right and can be exercised only upon strict compliance with the Code and the Liquidation Regulations. Mere assertion of an intention not to relinquish security is insufficient.
The NCLAT clarified that if the secured creditor fails to comply with Regulation 21A(2), including payment of the required dues within the prescribed period, and fails to take the necessary steps for realisation of security, Regulation 21A(3) operates automatically and the secured asset becomes part of the liquidation estate.
The Tribunal also held that where the alleged pari passu charge is conditional and the foundational contractual conditions for its creation are not fulfilled, such charge does not become legally enforceable merely because charge documentation exists or charge registration has been made. Further, in a consortium lending structure involving joint security, Section 13(9) of the SARFAESI Act applies as the applicable law under Section 52(4), with the consequence that a decision of secured creditors holding the requisite statutory majority binds the dissenting creditor.
On distribution, the Tribunal held that questions relating to entitlement and inter se distribution of sale proceeds under Section 53 are to be adjudicated by the Adjudicating Authority in the first instance. It accordingly dismissed the first appeal, disposed of the second appeal by remanding the issue of distribution to the Adjudicating Authority, and dismissed the third appeal as barred by limitation.
The Division Bench comprising Justice Ashok Bhushan (Chairperson) and Indevar Pandey (Technical Member) examined, first, whether STCI could validly insist on standing outside liquidation under Section 52, and second, whether the issue of distribution of sale proceeds should be decided at the appellate stage. On the security issue, the Tribunal observed that STCI’s alleged first pari passu charge never became operative in law because the underlying NOCs from existing consortium lenders were conditional, and the essential conditions, particularly execution of an inter se agreement and reciprocal ceding of pari passu charge by STCI, were never fulfilled.
The Tribunal further observed that even assuming STCI was a secured creditor, it did not comply with the mandatory requirements of Regulation 21A(2), since it did not pay CIRP/liquidation-related dues within 90 days, did not intimate any proposed realization value, and did not take concrete steps to enforce security. It also noticed that the majority of secured creditors, first above 69% and later above 85% in value, had relinquished their security interest, and that in a consortium lending structure Section 13(9) of the SARFAESI Act would apply as the “applicable law” for purposes of Section 52(4).
The Tribunal therefore held that the secured assets became part of the liquidation estate by operation of law and the liquidator was justified in proceeding with the e-auction sale of the corporate debtor as a going concern. As regards the second appeal, the Tribunal observed that the sale had substantially progressed and the sale certificate was only consequential, whereas the issue of distribution under Section 53 required first-instance adjudication by the Adjudicating Authority. As regards the third appeal, the Tribunal observed that Section 61 prescribes a strict maximum condonable period of 45 days, and a delay of 171 days was beyond its jurisdiction to condone.
Briefly, STCI Finance Limited, an NBFC and financial creditor of IMP Powers Limited, had extended a term loan of Rs. 25 crores to the corporate debtor in 2017–2018. To secure the facility, loan documents and mortgage deeds were executed, and STCI claimed that, by virtue of a supplementary mortgage dated Aug 04, 2018, a first pari passu charge existed in its favour alongside SBI over the fixed assets of the corporate debtor. After default, STCI issued an event of default notice and recall notice. The corporate debtor was admitted into CIRP on March 29, 2022 and, upon failure of resolution, was ordered into liquidation on Dec 19, 2023.
STCI filed its claim for approximately Rs. 39.55 crores on Jan 17, 2024 and expressly stated that it had not relinquished its security interest under Section 52 of the IBC and sought to realise the secured assets independently. The liquidator, however, proceeded on the basis that STCI’s security formed part of the liquidation estate and issued an e-auction notice dated March 08, 2024 for sale of the corporate debtor as a going concern. This led STCI to file the first appeal against the order dated Apr 22, 2024, the second appeal against the order dated Aug 20, 2024 directing issuance of the sale certificate, and the third appeal against the order dated Nov 05, 2024 granting reliefs and protections to the successful auction purchaser under Section 32A.
