According to a ruling by the National Company Law Appellate Tribunal ( NCLAT ) in New Delhi, liquidation profits cannot be allocated based on the security interests of various secured creditors; rather, they must be allocated in accordance with section 53 of the IBC based on the acknowledged claims of the individual secured creditors.
The State Bank of India filed an application under section 7 of the code, which led to the corporate debtor being admitted into insolvency. The CD was ordered to be liquidated when no plan was approved. According to the list of stakeholders as of 07.12.2021, the IDBI’s share is 10%, the liquidator notified the IDBI. The IDBI Bank objected to the liquidator’s proposal to divide the sale profits according to security interests.IDBI Bank objected, arguing that the proceeds should be allocated pro rata, in accordance with their acknowledged right.
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Despite the IDBI Bank’s opposition, the liquidator agreed to distribute the sale profits based on the charge on each creditor’s security interest during the 10th SCC Meeting, which took place on September 26, 2022. Secured creditors, including IDBI, agreed to promptly return any excess funds they received for distribution in the event that the Tribunal or the Honorable Supreme Court determined they were not entitled to them.
The respondent accepted the under protest. Thereafter an IA was filed questioning the distribution of the liquidator and sought pro-rate allocation based on admitted debt. The liquidator defended its distribution which was not accepted by the Adjudicating Authority and held that distribution of the liquidation proceeds must be as per section 53 of the code. Accordingly, the liquidator was directed to redistribute the assets.
It was also argued that Insolvency Law Committee (ILC) in its Report published on 26.03.2019 opined that priority of charge on the secured assets has to be considered while returning the share of concerned Creditors.
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In contrast, the respondent argued that the adjudicating authority had appropriately implemented Section 53(1) in the contested order and ruled that the distribution must be based on the acknowledged claim and not on the security interests of other secured creditors. further contended that the appellant’s reliance on the undertaking provided before the adjudicating authority is irrelevant in light of the law established by the Supreme Court. Any endeavor cannot excuse an unlawful distribution when the law is clear.
The two member bench of Justice Ashok Bhushan (Judicial Member) and Mr. Barun Mita (Technical Member)observed that there can be no dispute with regard to proceedings which arose out of the Order of the NCLT Ahmedabad in ‘Technology Development Board of India’ Vs. ‘Anil Goel, Liquidator of M/s. Gujarat Oleo Chem Ltd. & Ors.’2017 where it was held that inter se priority amongst the Secured Creditors will remain valid and prevail in the distribution of assets in Liquidation, is pending consideration before the Supreme Court.
The tribunal decided that the Adjudicating Authority had not erred in ordering the distribution of sale profits in accordance with the Financial Creditor’s acknowledged claim on a pro rata basis, and that the directives were in compliance with the law when rejecting the appeal.
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