ASREC (India) Ltd. Vs. Divyesh Desai - It cannot be gainsaid that the Appellant, who is a stakeholder in the liquidation process, is entitled to know his share in the distribution matrix and how it has been arrived at.

NCLAT (05.08.2022) in ASREC (India) Ltd. Vs. Divyesh Desai [Company Appeal (AT) (Ins.) No. 303 of 2020] ruled on various issues mainly;

• It cannot be gainsaid that the Appellant, who is a stakeholder in the liquidation process, is entitled to know his share in the distribution matrix and how it has been arrived at.

Excerpts of the order;

# 1. This appeal has been filed under section 61(1) of the Insolvency & Bankruptcy Code, 2016 (hereinafter called “IBC”) by the Appellant, who is aggrieved by the order dated 02.12.2019 (hereinafter called “Impugned Order”) passed in MA 520/2019 in C.P. (IB) 1339 (MB)/2017 by the National Company Law Tribunal, Mumbai Bench (Adjudicating Authority).

 

# 2. The Adjudicating Authority vide Impugned Order has held that the question of the right of second charge holder to claim priority over the first charge holder has been answered in the court and, inter-alia, directed the liquidator 

• ‘to distribute the funds strictly adhering to the ratios as arrived by him for the first charge holder as per the Code. If at all any grievance on the part of the second charge holder, they may approach the competent court but they have no authority to approach this Bench. MA 520/2019 is disposed of accordingly.’

 

# 3. The Appellant has prayed for setting aside the Impugned Order dated 2.12.2019 and for directing the Liquidator to provide to the Appellant bifurcation of the amounts to be distributed to the lenders and follow ‘waterfall mechanism’ as provided under section 53 of the IBC for distribution of funds.

 

# 4. We heard the oral arguments advanced by the Learned Counsels for Appellant and Respondent and also perused the record.

 

# 5. The Learned Counsel for Appellant has argued that three Joint Lenders meetings were held on December 13, 2010, December 15, 2011 and July 7, 2017 and in accordance with the minutes of the meetings, the ratio of sharing of funds between the Term Lenders and Working Capital lenders which was to be obtained from sale proceeds of corporate debtor’s assets, between the first and second charge holders was decided as 70:30 in the meeting dated December 13, 2010, which was later revised to 80:20 in the meeting dated 17.7.2017. He has further argued that he had approached the Adjudicating Authority through MA No. 520/2019 for seeking clarification regarding bifurcation of the amounts to be distributed to the lenders and for adhering to the ‘waterfall mechanism’ as prescribed under section 53 of the IBC for distribution of funds to the lenders. He has also argued that the Impugned Order has neither accepted his prayer nor any bifurcation in distribution of funds has been made clear to him as the Impugned Order is not clear on these points.

 

# 6. The Learned Counsel for Respondent (Liquidator) has argued that the Appellant had filed his claim with delay. He has further argued that the minutes of the meeting of the joint lenders held on July 7, 2017 (attached at Annexure A/8 – pp. 172-173 of the appeal paperbook) only records a point of discussion in relation to distribution of sale proceeds arising out of action under SARFAESI Act, and moreover, the principle of distribution of funds to first and second charge holders in 80:20 ratio, which is claimed by the Appellant to have been decided in the meeting of lenders, was discussed between the Term Lenders and Working Capital Lenders and the Appellant did not agree to this ratio, as is evident from his letters dated July 11, 2017 and July 24, 2017. He has thus claimed that this ratio remained only a point for discussion and there was no agreement between all lenders regarding distribution of sale proceeds in accordance with 80:20 or 70:30 ratio. He has further argued that the liquidator had proposed distribution of sale proceeds derived from sale of assets of the Corporate Debtor according to section 53 of IBC as the proceeding of liquidation was being carried out under the IBC. Later, in view of the objection of the Appellant sent vide email dated January 1, 2019, the liquidator sent an email dated January 5, 2019 to all the lenders seeking their consent on following the 80:20 ratio in distribution of sale proceeds between first and second charge holders. He has pointed out that, in this regard, the representative of Stressed Assets Stabilization Fund (SASF) of IDBI, UTI and LIC of India opined through respective email communications that provisions under IBC should be followed for distribution of sale proceeds, as proceedings in NCLT are taking place under IBC. These communications are attached at pgs. 61, 65 and 69 respectively of the appeal paperbook. The Learned Counsel of the Respondent has also submitted that the proposed distribution structure of the liquidation estate of Precision Fasteners Ltd. (corporate debtor) was communicated to the stakeholders vide email dated December 9, 2019 (attached at pp. 71-74 of the appeal paperbook) wherein the detailed proposed distribution structure, which was in accordance with provisions of section 53 of the IBC) was communicated to the lenders, and therein the claim of ASREC (India) Limited/Appellant was fixed at 18.8%. amongst second charge holders. He has also claimed that the Appellant was communicated about his share through email dated December 9, 2018.

 

# 7. We perused the prayer made by the Appellant in MA 520/2019 (attached at pp. 29-38 of the appeal paperbook), wherein the following prayer is made:-

• “a. That the Liquidator be directed to provide bifurcation of the amounts to be distributed to the lenders;

• b. That, the liquidator be directed to follow waterfall mechanism under section 53 of the Insolvency and Bankruptcy Code for distribution of funds to the lenders;

• c. The liquidator also be directed to consider the consensus took placed amongst the term lenders and working capital and agreed upon between them the sharing pattern of the proceed at 70:30 ratio respectively their by distributing applicant share a sum of Rs. 3.06 crores.”

 

# 8. The Impugned Order mentions that the question regarding the distribution has been answered in the Court, but it does not expand on the actual ‘answer’. Another prayer made by ASREC (India) Ltd./Appellant to the Adjudicating Authority in MA No. 520/2019 was regarding the sharing of sale proceeds in the ratio 70:30 and keeping the Appellant’s share at Rs.3.06 crores. This particular issue has not been dealt with in the Impugned Order, and it therefore remains unclear whether this prayer was at all considered and decided in a well-reasoned and logical manner.

 

# 9. Looking at the reliefs sought by the Appellant in MA No. 520/2019 and those in the present appeal, we are of the view that the Impugned Order, by which MA 520/2019 was disposed of, does not provide any clarity on how the prayers made in MA 520/2019 have been dealt with. It cannot be gainsaid that the Appellant, who is a stakeholder in the liquidation process, is entitled to know his share in the distribution matrix and how it has been arrived at. The Impugned Order falls short of providing a reasoned answers to the Applicant’s (ARSEC (India) Limited) prayers.

 

# 10. The Hon’ble Supreme Court in the matter of M/s Steel Authority of India Ltd vs Sales Tax Officer, Rourkela-I, Circle 2008 (9) SCC 407 held as follows:-

• “10. Reason is the heartbeat of every conclusion. It introduces clarity in an order and without the same it becomes lifeless.

• 11. ………….”Reasons substitute subjectivity by objectivity. The emphasis on recording reasons is that if the decision reveals the “inscrutable face of the sphinx”, it can, by its silence, render it virtually impossible for the courts to perform their appellate function or exercise the power of judicial review in adjudging the validity of the decision. Right to reason is an indispensable part of a sound judicial system; reasons at least sufficient to indicate an application of mind to the matter before court. Another rationale is that the affected party can know why the decision has gone against him. One of the salutary requirements of natural justice is spelling out reasons for the order made; in other words, a speaking-out. The “inscrutable face of the sphinx” is ordinarily incongruous with a judicial or quasi-judicial performance.”

 

# 11. In another matter of Madhya Pradesh Industries Ltd. vs. Union of India [AIR 1966 SC 671], the Hon’ble Supreme Court held as follows:-

• “In the context of a welfare State, administrative tribunals have come to stay. Indeed, they are the necessary concomitants of a Welfare State. But arbitrariness in their functioning destroys the concept of a welfare State itself. Self-discipline and supervision exclude or at any rate minimize arbitrariness. The least a tribunal can do is to disclose its mind. The compulsion of disclosure guarantees consideration. The condition to give reasons introduces clarity and excludes or at any rate minimizes arbitrariness; it gives satisfaction to the party against whom the order is made; and it also enables an appellate or supervisory court to keep the tribunals within bounds, A reasoned order is a desirable condition of judicial disposal.”

 

# 12. On perusing the Impugned Order in the light of the dictum laid down by the Hon’ble Supreme Court in the above-mentioned judgments, we are of the view that the Impugned Order falls short in providing a reasoned basis and clarity to the prayers of the Appellant made in MA 520/2019.

 

# 13. We, therefore, remand the case to the Adjudicating Authority for providing an appropriately reasoned and clear order in the light of prayers made in MA 520/2019 after giving due opportunity of hearing to the parties. Since the corporate debtor is in final stage of liquidation, it is desirable that the Adjudicating Authority may pass such an order as expeditiously as may be possible. With these directions the appeal is disposed of.

 

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Blogger’s comments; Instead of remanding the case to Adjudicating Authority, the Appellate Authority should have decided distribution amongst secured creditors on the basis of ratio decided in Technology Development Board Vs.Anil Goel, Liquidator of Gujarat Oleo Chem Limited.

NCLAT (05.04.2021) in Technology Development Board Vs.Anil Goel, Liquidator of Gujarat Oleo Chem Limited (GOCL) & Ors.  [Company Appeal (AT) (Insolvency) No.731 of 2020] held that;-

• Appellate Tribunal in “J M Financial asset Reconstruction Co. Ltd. vs. Finquest Financial Solutions Pvt. Ltd. & Ors.”, held that only the first charge holder i.e. the Secured Creditor being highest in the inter creditor ranking is entitled to enforce his right for the realization of its debt out the secured asset.

• While it is true that the relinquishment of security interest affects the order of distribution, it is equally true that the Secured Creditor does not lose its status of being a Secured Creditor though he has elected to forego his right of enforcing security interest. Whether the Secured Creditor holds first charge or second charge is material only if the Secured Creditor elects to realise its security interest. 

• The two sets of Secured Creditors, one relinquishing the security interest and the other realising its security interest are treated differently. A creative interpretation has to be given to the provisions to make them workable and stand in harmony. It is significant to note that Section 53 has been given overriding effect and the non-obstante clause contained in the very opening words of the Section leaves no room for doubt that the distribution mechanism provided thereunder applies in disregard of any provision to the contrary contained in any Central or State law in force. 

• Of course first charge holder will have priority in realising its security interest if it elects to realize its security interest and does not relinquish the same. However, once a Secured Creditor opts to relinquish its security interest, the distribution of assets would be governed by the provision engrafted in Section 53(1)(b)(ii) where under all Secured Creditors having relinquished security interest rank equally and in the waterfall mechanism are second only to the insolvency resolution process costs and the liquidation costs.

• We accordingly allow the appeal and set aside the impugned order. I.A. 514 of 2019 in CP(IB) No. 04/2017, is held to be maintainable and we allow the same with direction to the Liquidator to treat the Secured Creditors relinquishing the security interest as one class ranking equally for distribution of assets under Section 53(1)(b)(ii) of I&B Code and distribute the proceeds in accordance therewith.

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