No Fairness among Coequals: Regimen of Secured Creditor under the IBC, 2016



Introduction

Whether senior secured creditors have preeminence over junior or lower-ranking secured creditors in the liquidation process under the Insolvency and Bankruptcy Code, 2016 has been a matter of debate. The Insolvency Law Committee was of the perspective that cogent inter-creditor agreements must be considered in the liquidation process. Hence, that elucidation was added to the Code in this effect. However, the government is required to modify the rules and regulations of IBC and acknowledge the differences between varied classes of creditors; based on priority and value of security interest. In the context of the corporate insolvency resolution process and corporate liquidation process while assuring that the eventual target of the Code is not muddled.


An elucidation in Context of CIRP

In 2019, the government introduced a simplification on the specific treatment of secured creditors based on charge precedence. Although it subsisted solely in the relation of Corporate Insolvency Resolution Process (CIRP), the clarification provided that the security interest of a secured creditor may be contemplated just as a constituent by the committee of creditors while acclaiming distribution of resolution proceeds proposed under a resolution plan. In outturn, a first charge holder could validly be accorded precedence in the appointment of resolution proceeds by a resolution applicant.


Ambivalence Remained in Case of Liquidation

The quizzing concerning whether senior secured creditors authorise some superiority above subordinate charge holders persists in being unsettled in the situation of dispersal of liquidation proceeds in the Corporate Liquidation Process (CLP). Under Section 53 of the Code, the liquidation waterfall postulate provides that all secured creditors will be paid in proportion to their acknowledged claims but does not specify any distinction in the middle of secured creditors based on inter-creditor or subordinate agreements.


The Insolvency Law Committee (ILC), in its 2018 Report, took cognisance of this matter and concluded that "valid inter-creditor and subordinate provisions are required to be respected in the liquidation waterfall under Section 53 of the Code."

All the same, the Insolvency and Bankruptcy Board of India, in its 2019 advisory document on CLP, consulted the 2018 report and perceived that "there was still a debate concerning whether a senior creditor has superior and finer rights than junior creditor in

the waterfall under Section 53". Like before, this uncertainty was consigned by ILC in 2020, whereby it commended that an explanation perchance was provided by inserting an explanation under section 53(2) to sustain the rationality of inter-creditor and subordination agreements.

Routinely, the recommendation by the ILC was not established by the government. Therefore, in 2020, no amendments in this view were initiated in the Code.




National Company Law Appellate Tribunal in the Technology Development Board v Mr Anil Goel judgement held that:

➔ Secured Creditors have the unfettered right to choose whether to enforce their security under applicable law and stay out of the liquidation process or to relinquish their security interest and submit it to the liquidation proceedings where all assets of the corporate debtor are pooled.

➔ Once a security interest has been relinquished, it forms a part of the liquidation estate.

➔ Sale proceeds emanating from the liquidation proceedings will be strictly distributed as per the waterfall provided in Section 53 of the Code.

➔ Under section 53 of the Code, the waterfall does not recognise inter-creditor and subordination agreements and treats all secured creditors on par.


Succeeding Provocation:

➔ The CLP provides for the sale of the corporate debtor as a going concern which will be difficult if vital assets are being sold separately.

➔ There might be a multiplicity of proceedings delaying an ultimate resolution for creditors.

➔ Suppose the CLP concludes before the completion of separate enforcement proceedings. In that case, the legal entity having ownership over the assets will stand dissolved, raising questions on the ability of the creditors to complete the enforcement.

➔ The entire CLP might become toothless with bifurcated mandates and perspectives of different secured creditors.


Conclusion

Article 14 of the Indian Constitution mandates that the "state shall not deny to any person equality before the law or equal protection of the laws within the territory of India." The regime under the Code imbibes the rule of equality as it treats creditors with special rights differently.


We cannot celebrate the mere success of the development of the Code in the debate at the cost of interest of special rights of creditors. There is a dire need for an amendment that would be fair and justifiable, which recognises the difference between various classes of creditors while ensuring that the ultimate object of the Code is not obscure. It is, thus, pertinent to make the legislature more balanced.


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