NCLAT (11.12.2019) in JM Financial Asset Reconstruction Company Ltd. Vs. Finquest Financial Solutions Pvt. Ltd.& Ors. [Company Appeal (AT) (Insolvency) No. 593 of 2019] held that;
To enforce the ‘security interest’ under Section 52(1)(b), the Creditor must either have ‘exclusive charge’ or ‘sole first charge’, which would enable it to enforce its ‘security interest’.
Otherwise in normal course, there is no provision to file an application under Section 52 before the Adjudicating Authority for enforcement of any right by ‘Secured Creditor’.
Therefore, it is clear that after enforcement of right under Section 52 by one of the ‘Secured Creditor’, no other ‘Secured Creditor’ can enforce his right subsequently for realization of the amount for the same secured assets, as the excess amount by way of proceeds pursuant to the first enforcement is deposited in the account of the Liquidator.
In view of the above position, we hold that only one ‘Secured Creditor can enforce his right for realization of its debt out of the secured assets as per Section 52.
Excerpts of the order;
A Miscellaneous Application was filed by Finquest Financial Solutions Pvt. Ltd. under Section 60(5) r/w Section 52 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the ‘I&B Code’) and Regulation 37 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 before the Adjudicating Authority (National Company Law Tribunal), Mumbai Bench in the Liquidation proceeding against Reid and Taylor India Limited (‘Corporate Debtor’) with prayer to permit it (Applicant) to sell/ dispose of the secured assets of the ‘Corporate Debtor’, more particularly the assets mentioned in Annexure 1 and 2 therein to realize its ‘security interest’ in accordance with the provisions of the I&B Code.
# 2. The Adjudicating Authority (National Company Law Tribunal), Mumbai Bench by impugned order dated 10th May, 2019 directed the ‘Liquidator’ to handover the symbolic possession of the fixed assets of the ‘Corporate Debtor’ to Finquest Financial Solutions Pvt. Ltd. (Applicant) with observation that the said Applicant is entitled to realize the ‘security interest’ as provided under Section 52(1)(b) r/w Regulation 37 of the IBBI (Liquidation Process) Regulations, 2016.
JM Financial Asset Reconstruction Company Limited, one of the ‘Secured Financial Creditor’ of the same very asset has challenged the impugned order dated 10th May, 2019.
# 3. Learned Counsel for the Appellant submitted that the Adjudicating Authority failed to consider that 1st Respondent sought to exclusively realize its alleged ‘security interest’ under Section 52 of the I&B Code by standing outside the liquidation process to the exclusion of other ‘Secured Creditors’ of the same very asset. It was submitted that the Adjudicating Authority has passed the order without appreciating the fact that 1st Respondent - Finquest Financial Solutions Pvt. Ltd. proceeded on the mistaken belief that it has an exclusive first charge over the secured assets mentioned in Schedule-1 and that it is legally entitled to enforce the alleged ‘security interest’ to the detriment of similarly placed secured ‘Financial Creditors’ of the ‘Corporate Debtor’.
# 4. According to the learned Counsel for the Appellant, the 1st Respondent is not entitled to unilaterally enforce the alleged ‘security interest’ over which other ‘Financial Secured Creditors’ (having more than 75% of the debt of ‘Corporate Debtor’) also have a legally binding first charge over the same secured asset. The fact that the Appellant and the other lenders are first pari-passu charge holders over the property mentioned in Schedule-1 is also admitted by the 1st Respondent.
# 11. Therefore, according to the learned Counsel for the 1st Respondent- Finquest Financial Solutions Pvt. Ltd., Respondent Nos.3 to 8 are holders of ‘Second or Subservient Charges’ over the assets of the ‘Corporate Debtor’. Respondent No.3–Edelweiss Asset Reconstruction Company and Respondent No.4–L&T Finance Limited alleged first charge was subject to NOC from R1- Finquest Financial Solutions Pvt. Ltd.
# 12. Learned Counsel for the Appellant placed reliance on Section 52(1) of the I&B Code, which provides for two routes to realise ‘security interest’ as mentioned in clauses (a) and (b) therein. It was submitted that 1st Respondent–Finquest Financial Solutions Pvt. Ltd. did not relinquish its ‘security interest’ as per Section 53 of the Code, but chose to enforce it under Section 52(1)(b) by filing a Miscellaneous Application. According to him, Section 52(1)(b) provides for a mechanism where a ‘Financial Creditor’ can enforce the ‘security interest’, which is undisputed and is prior/ superior to the claims of other ‘Secured Creditors’ holding charge over the subject assets. To enforce the ‘security interest’ under Section 52(1)(b), the Creditor must either have ‘exclusive charge’ or ‘sole first charge’, which would enable it to enforce its ‘security interest’.
# 13. Reliance has also been placed on Transfer of Property Act, 1881, which recognizes the principle of ‘first charge’. Section 48 of the Transfer of Property Act states that the right to payment of a first charge holder shall prevail over all subsequent or subservient charges created on the same asset.
# 31. Under sub-section (5) of Section 52, if in the course of realization of secured asset, any ‘Secured Creditor’ faces resistance from the ‘Corporate Debtor’ or any person connected therewith in taking possession of, selling or otherwise disposing off the security, the ‘Secured Creditor’ may make an application to the Adjudicating Authority under sub-section (6) of Section 52. Otherwise in normal course, there is no provision to file an application under Section 52 before the Adjudicating Authority for enforcement of any right by ‘Secured Creditor’.
# 34. Therefore, it is clear that after enforcement of right under Section 52 by one of the ‘Secured Creditor’, no other ‘Secured Creditor’ can enforce his right subsequently for realization of the amount for the same secured assets, as the excess amount by way of proceeds pursuant to the first enforcement is deposited in the account of the Liquidator.
# 35. In view of the above position, we hold that only one ‘Secured Creditor can enforce his right for realization of its debt out of the secured assets as per Section 52.
# 36. There is nothing on record to suggest that 1st Respondent has moved before the Liquidator in terms of sub-section (2) of Section 52 for realizing the ‘security interest’. It is also not clear whether the records of such ‘security interest’ has been maintained by an information or utility or in the manner as specified by the Board or verified by the Liquidator.
# 38. In absence of any allegation that there is resistance in recovering the secured assets, the question of entertaining the application by the Adjudicating Authority under sub-section (6) of Section 52 does not arise. Therefore, we hold that except the manner as prescribed under sub-section (2), (3) and (4) of Section 52, if a ‘Secured Creditor’ directly applies before the Adjudicating Authority for allowing it to recover the secured assets under sub-section (6) of Section 52, such application is not maintainable.
# 40. In any case, as the Adjudicating Authority has no jurisdiction to entertain the application under sub-section (6) of Section 52 in absence of any cause of action as per sub-section (5) of Section 52, the application preferred by 1st Respondent is not maintainable.
# 42. The matter is remitted to the Liquidator to proceed in accordance with law, following Section 53 r/w Section 52 of the I&B Code. If one or more ‘Secured Creditors’ have not relinquished the ‘security interest’ and opt to realise their ‘security interest’ against the same very asset in terms of Section 52(1)(b) r/w Section 52(2) & (3), the Liquidator will act in terms of Section 52(3) and find out as to who has the 1st charge (‘security interest’) from the records as maintained by an information utility or as may be specified by the Board and pass an appropriate order. If any dispute is pending before the Court of Law, the question as to who has the exclusive 1st charge, the Liquidator may inform the same to the parties and may proceed as per Section 52(3) of the I&B Code. The Appeal is allowed with the aforesaid observations and directions. No costs.
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