Secured Creditor Cannot Participate In Liquidation While Keeping Option To Withdraw Assets Later: NCLAT

The National Company Law Appellate Tribunal (NCLAT) has held that a secured creditor cannot participate in the liquidation process while keeping open an option to later withdraw its secured assets from the liquidation estate.

“We further observe that per combined reading of Section 52(2) of the Insolvency and Bankruptcy Code and also Regulations 21A, 31A(2) and 39BA of Liquidation Process Regulations, the Appellant cannot be permitted to simultaneously participate in the liquidation process and preserve an option to withdraw the secured assets at a later stage depending upon the result of the Scheme,” the bench observed.

The bench comprised Judicial Member Justice Sharad Kumar Sharma and Technical Members Arun Baroka and Indevar Pandey.

The ruling came on an appeal by Tata Capital Limited against an April 13, 2026 order of the Mumbai bench of the National Company Law Tribunal. The order rejected its plea to realise security over hypothecated assets outside the liquidation estate.

Tata Capital had sanctioned various credit facilities to the corporate debtor against hypothecation of specific equipment and assets. After defaults, the corporate debtor was admitted into CIRP, and liquidation commenced on August 13, 2024, after rejection of the resolution plan.

Tata Capital filed its claim in Form D as a secured financial creditor. In the form, however, it entered “NIL” against Serial No. 8, which sought details of the security held.

It answered “No” to Serial No. 8A, which asked whether the security interest had been relinquished. The NCLAT agreed with the adjudicating authority that the two entries had to be read together and did not clearly communicate an election to realise the security outside the liquidation estate.

Tata Capital continued to participate in meetings of the Stakeholders' Consultation Committee (SCC). This included consideration of a compromise scheme under Section 230 of the Companies Act, 2013.

The scheme was rejected by an 86% vote on February 4, 2025. Tata Capital, which had a 6.19% voting share, participated in the SCC meetings.

On February 19, 2025, Tata Capital sent an email to the liquidator seeking exclusion of the assets from the liquidation process. It also sought their handover to Tata Capital.

Tata Capital argued before the NCLAT that it had consistently intended not to relinquish its security interest. It said its participation in the SCC was without prejudice to its rights under Section 52.

It also contended that the existence of its security interest was established by the loan and hypothecation documents. According to Tata Capital, any deficiency in Form D could not override its substantive right to realise the security.

Tata Capital further argued that there was no prejudice to the liquidation process because there were no competing claims over the assets.

The liquidator opposed the appeal, arguing that Tata Capital had not made a valid and timely election under Regulation 21A of the Liquidation Process Regulations. The liquidator pointed to the “NIL” entry in Serial No. 8 of Form D and Tata Capital's continued participation and voting in the SCC.

The liquidator also maintained that the February 19 email was the first clear written request for exclusion of the assets. It came more than six months after liquidation commenced and shortly after the compromise scheme failed.

The existence of a security interest, it was argued, was distinct from the timely exercise of the statutory option under Section 52.

The NCLAT accepted the liquidator's core contention that Tata Capital had not made a valid and timely election to realise its security outside the liquidation estate.

The bench noted that there was no dispute that Tata Capital was a secured financial creditor. It also noted that its hypothecation documents recorded a security interest over the assets.

But the existence of that security and the exercise of the statutory option to realise it outside the liquidation estate were “two distinct matters”.

Under Section 52(2) of the IBC, a secured creditor seeking to realise its security must inform the liquidator of the security interest and identify the asset. Regulation 21A, as applicable to the liquidation, required the secured creditor to communicate its decision to relinquish or realise the security within 30 days of the liquidation commencement date. 

The bench found that Tata Capital did not make a clear written request for exclusion and delivery of the hypothecated assets within that period. Its first clear written communication came only on February 19, 2025, after rejection of the Section 230 scheme.

“The subsequent email dated 19.02.2025 cannot retrospectively cure the failure to exercise the statutory option within time,” the bench observed.

The NCLAT also considered Tata Capital's continued participation in the SCC. It noted that Tata Capital remained a member, attended meetings and exercised voting rights.

This was despite Regulation 31A(2), which provides that a secured creditor that has not relinquished its security interest under Section 52 cannot be part of the SCC. The bench considered this conduct along with the Form D entries, the taking of custody and valuation of the assets, and the later email.

The bench rejected Tata Capital's argument that the pendency of the Section 230 scheme kept the liquidation requirements in abeyance.

“The consideration of a Scheme for revival and value maximization does not dispense with the statutory requirement applicable to a secured creditor seeking to realize its security outside the liquidation estate. The Appellant could not retain an uncommunicated option and seek to exercise it after the Scheme had failed,” it observed.

The NCLAT also rejected Tata Capital's argument that no prejudice was caused because there were no competing claims over the assets. It held that the requirement to make the election within the prescribed period did not depend on whether another creditor had asserted a competing security interest.

The bench further observed that permitting the assets to be withdrawn after custody, valuation and other liquidation steps had been undertaken would unsettle the liquidation estate. It held that the liquidator was justified in treating the assets as part of the liquidation estate because Tata Capital had failed to make a timely and valid election.

The NCLAT dismissed the appeal and affirmed the April 13, 2026 order of the Mumbai NCLT. It held that Tata Capital was not entitled to exclude the hypothecated assets from the liquidation estate or realise them outside the liquidation process on the basis of its belated February 19, 2025 communication.