Commercial Court Decree Does Not Give Creditor 'Superior Status' In Liquidation Waterfall: NCLT Bengaluru

The National Company Law Tribunal (NCLT), Bengaluru Bench, has held that a decree obtained from a Commercial Court does not confer any superior status on a creditor under the Insolvency and Bankruptcy Code, 2016 (IBC). Such a creditor continues to be governed by its classification under the insolvency framework for the purposes of distribution under Section 53 of the Code.

The tribunal observed,

“A decree obtained during or after the commencement of insolvency proceedings does not confer any superior status upon the decree-holder in the distribution waterfall under Section 53. The Code does not recognize any special category for decree-holders, and such creditors continue to be governed by their respective classification under the insolvency framework.”

The bench of Judicial Member Sunil Kumar Aggarwal and Technical Member Radhakrishna Sreepada dismissed an application filed by ICP (India) Private Limited, an operational creditor of Southern Batteries Private Limited. The operational creditor had challenged the liquidator's rejection of its claim on the ground of delay.

Southern Batteries was admitted into the Corporate Insolvency Resolution Process (CIRP) on February 19, 2020. After the resolution process failed, the company was ordered into liquidation, and a liquidator was appointed.

The operational creditor claimed that about ₹22.96 lakh remained unpaid for goods supplied to the corporate debtor. It had earlier filed a commercial recovery suit before the Commercial Court, Bengaluru.

On December 1, 2021, the Commercial Court passed a decree directing the corporate debtor to pay the outstanding amount along with interest and costs.

According to the operational creditor, it became aware of the liquidation proceedings only during execution of the decree. It thereafter submitted its claim before the liquidator on May 9, 2024.

The liquidator rejected the claim on June 28, 2024, saying it had been lodged nearly 398 days after the deadline prescribed under the Liquidation Process Regulations. By then, the liquidation proceeds had already been distributed.

The Tribunal also found that the operational creditor's appeal under Section 42 of the IBC had been filed beyond the statutory 14-day period. Citing the Supreme Court's ruling in V. Nagarajan v. SKS Ispat and Power Ltd., the Bench underscored that timelines under the IBC are intended to be strictly followed and cannot be relaxed merely on equitable considerations.

The operational creditor's reliance on the commercial court decree found little favour with the Tribunal. It observed that once CIRP is triggered and the moratorium under Section 14 comes into force, claims against the corporate debtor must be pursued through the framework laid down in the Code.

The bench held that a decree-holder does not enjoy any special or preferential position in the liquidation waterfall under Section 53. It said that such a creditor continues to be governed by its classification under the insolvency framework.

The Tribunal further noted that the liquidation process had reached an advanced stage. The assets of the corporate debtor had already been sold, and substantial distributions had been made under Section 53.

The bench held that entertaining such belated claims would unsettle distributions already made. It added that doing so would defeat the objective of time-bound insolvency proceedings.

The Tribunal also found that the operational creditor had failed to show sufficient cause for the delay in submitting its claim before the liquidator. It further found no sufficient cause for the delay in filing the appeal under Section 42 of the IBC.

Accordingly, the Tribunal dismissed the operational creditor's application as barred by limitation. It held that the delays in both filing the appeal and submitting the claim could not be condoned.

For Liquidator: Advocate Darshini