NCLT Kochi Holds 2026 IBC Amendment Clarifying Liquidation Distribution Applies Retrospectively

The National Company Law Tribunal (NCLT) has ruled that a 2026 clarification to the insolvency law governing the entitlement of secured creditors who relinquish their security interests during liquidation applies to pending proceedings.

The Tribunal held that liquidation proceeds must be distributed with reference to the value of the security interest relinquished by a creditor and not merely the amount of debt admitted in its favour.

“The statutory scheme, as clarified by the amendment, contemplates distribution with reference to the value of the security interest relinquished by the secured creditor, and not merely on the basis of the quantum of debt admitted.”, the tribunal ruled.

A bench of Judicial Member Vinay Goel and Technical Member Ravichandran Ramasamy delivered the ruling while dismissing an application filed by Meenachil East Urban Co-operative Bank in the liquidation of Raihan Healthcare Private Limited.

“Accordingly, we find no merit in the principal contention advanced by the Applicant on this issue.”

The co-operative bank had extended multiple credit facilities to Raihan Healthcare and later filed a claim of about ₹5.25 crore after relinquishing its security interest in favour of the liquidation estate.

The company was ordered into liquidation in 2019. During the liquidation process, the liquidator took possession of its assets and sold the land and building for about ₹31.21 crore. The plant and machinery were sold separately for about ₹5.45 crore.

The bank approached the tribunal after receiving about ₹1.54 crore from the distribution of the sale proceeds. It contended that despite holding an 11.56% voting share in the Stakeholders' Consultation Committee, it received only that amount from the liquidation proceeds.

According to the bank, once secured creditors relinquished their security interests and became entitled to distribution from the liquidation estate, the proceeds ought to have been distributed among them in proportion to their admitted claims. It argued that the liquidator had wrongly adopted the value of the underlying security interests as the basis for distribution.

The liquidator opposed the challenge. He maintained that the distribution was carried out in accordance with the Insolvency and Bankruptcy Code and was based on liquidation values determined by registered valuers. He also pointed out that the methodology had been disclosed and discussed during meetings of the Stakeholders' Consultation Committee.

Union Bank of India, another secured creditor of the company, supported the liquidator's stand. It argued that distribution among secured creditors should be linked to the value of the security interests relinquished by them and not to the amount of debt owed or their voting share.

While examining the dispute, the Tribunal noted that the liquidation sale took place in August 2024. The explanation relied upon by the liquidator was inserted into the Insolvency and Bankruptcy Code only in May 2026. The bench therefore considered whether the amendment was clarificatory in nature and could apply to proceedings that were already pending.

Referring to the explanation inserted in Section 53(1)(b) of the Code, the Tribunal observed,

" A perusal of the Explanation inserted to Section 53(1)(b) of the Insolvency and Bankruptcy Code, 2016 indicates that, for the purpose of distribution under the liquidation waterfall mechanism, the value of the security interest relinquished by a secured creditor assumes relevance in determining its entitlement.”

The Tribunal then turned to the question of retrospective application. It referred to the Madras High Court's decision in Avenue Realty v. Assistant Commissioner Srirangam (GST Circle), which discussed the legal principles governing clarificatory amendments and extracted observations from the Supreme Court's decision in R. Rajagopal Reddy v. Padmini Chandrasekharan.

Relying on those principles, the Tribunal held,

“The Explanation inserted to Section 53(1)(b) of the Insolvency and Bankruptcy Code, 2016 has been introduced "for the removal of doubts" and clarifies the manner in which the entitlement of a secured creditor, who has relinquished its security interest under Section 52 of the Code, is to be determined for the purpose of distribution under the liquidation waterfall. This Adjudicating Authority is, therefore, of the considered view that the said amendment is clarificatory in nature and would apply to pending proceedings as well.”

Having reached that conclusion, the tribunal rejected the bank's contention that distribution should have been based solely on admitted debt claims.

The bench also noted that the bank had been a member of the Stakeholders' Consultation Committee and was aware of the valuation reports relied upon by the liquidator. The record did not show that it had objected to the valuation methodology during the liquidation process.

The tribunal further rejected allegations of corruption, fraud, misconduct, and irregularities leveled against the liquidator. It observed that the allegations were unsupported by any cogent material or documentary evidence.

The bank had also sought adjudication of the liquidation expenses and the liquidator's fees, contending that they were excessive and unjustified. The tribunal declined to interfere. It observed that no material had been produced to show that the expenses were fabricated, fictitious, improperly incurred, or intended to defraud stakeholders.

The application was accordingly dismissed.

For Applicant: Advocate Shinu J Pillai

For Respondents: Advocates A.G Sathyanarayana and Varun Srinivasan