Secured Creditors Cannot Avoid Liquidation Costs Over Unfinalised Expenses: NCLT Chennai

The National Company Law Tribunal (NCLT) at Chennai has ruled that a secured creditor that chooses to realise its security under Section 52 of the Insolvency and Bankruptcy Code (IBC) cannot avoid its obligation to contribute towards liquidation costs merely because the expenses have not been finally determined.

“Regulation 21A(2) requires a secured creditor who proceeds to realise its security interest to pay to the Liquidator the amount which it would have shared had it relinquished the security interest to the liquidation estate, within the period prescribed therein. Significantly, the proviso to Regulation 21A(2)(a) empowers the Liquidator to estimate the amount payable where the actual amount is not ascertainable on the date on which such payment becomes due. Therefore, the Respondent cannot avoid its statutory obligation merely on the ground that the liquidation expenses were not finally crystallised at the relevant point of time” the tribunal observed.

It noted that Regulation 21A allows the liquidator to estimate the amount payable where the actual amount is not yet ascertainable.

The bench comprising Judicial Member Jyoti Kumar Tripathi and Technical Member Ravichandran Ramasamy made the observations while allowing an application filed by SPP Insolvency Professional LLP, liquidator of Sri Lakshmi Saraswathi Spintex Ltd., against Punjab National Bank (PNB).

PNB had chosen not to relinquish its security interest over a Mercedes-Benz car belonging to the company. It instead sought to realise the security under Section 52 of the IBC.

Section 52 allows a secured creditor to realise its security interest instead of relinquishing it to the liquidation estate. Regulation 21A requires such a creditor to pay the liquidator the amount it would have shared had it relinquished the security.

Where that amount is not certain when payment becomes due, the liquidator can estimate it. Any difference is to be adjusted once the actual amount becomes certain.

The liquidator sought ₹3,75,526 towards PNB's share of CIRP and liquidation expenses. PNB paid ₹50,158 but disputed the basis of the calculation.

PNB argued that its liability should be calculated under Regulation 2A, which deals with contributions towards liquidation costs by financial creditors in specified circumstances. Based on its 1.59% share of the admitted financial debt, it contended that only ₹69,742.75 remained payable after adjusting the amount already paid

The tribunal rejected this argument. It held that Regulation 2A applies to financial creditors in the circumstances covered by that provision, while Regulation 21A specifically governs a secured creditor exercising its right under Section 52.

“The specific provision governing such secured creditor cannot be rendered otiose by invoking the general provision contained in Regulation 2A,” the tribunal observed.

The tribunal also held that the liquidator's claim could not be rejected merely because the amount of liquidation expenses had been estimated. Regulation 21A itself permits the liquidator to estimate the amount where the actual liability cannot be ascertained at the relevant stage.

It further observed that Regulation 21A(3) sets out the consequence of failing to comply with the payment requirement. The secured asset becomes part of the liquidation estate.

Relying on Ganga Foundations Private Limited (In Liquidation) v. IFCI Limited & Ors. and Suraksha Asset Reconstruction Ltd. v. Varsha Bagri, the tribunal noted that Regulation 21A is mandatory and that non-compliance can result in the secured asset becoming part of the liquidation estate.

The tribunal ultimately directed PNB to pay ₹3,25,368 towards the balance liquidation costs. This was after giving credit for the ₹50,158 already paid against the total claim of ₹3,75,526.