Insertion of New Regulation 21A in the Liquidation Regulation

Previous Concerns:

As per Section 52 of the Insolvency and Bankruptcy Code, 2016 (“Code”), a secured creditor may either (a) Relinquish its security interest to the liquidation estate and receive proceeds from the sale of the assets of the Corporate Debtor by the liquidator thereof or, (b) Realise the security interest so provided in such manner as has been specified in the Code. However, a grey area always existed in this section, leaving us perplexed as to what shall be done, since there is no clarity with respect to the time frame within which the secured creditor shall take its decision to relinquish or realise its security interest. This was hindering with the process of liquidation. One cannot wait for eternity to liquidate a company when the same is supposed to be a time bound process. Without having any timeline to exercise the option of relinquishment or realisation of security interest of the secured creditor, the secured creditor may at its own will jump in the liquidation process and realise its interest, therefore, making the whole process a never ending loop beginning right from preparation of asset memorandum (the total asset available with the corporate debtor can never be comprehended) till the conclusion of liquidation, especially in the case of Going Concern Sale. Ergo, the main crux of dealing with security interest remained unresolved. However, with the insertion of Regulation 21A in the Insolvency and Bankruptcy Board of India (Liquidation Process) (Amendment) Regulations, 2019 (“Amended Liquidation Regulation”), the issue has been normalised and sorted to a vast extent.

Amended Regulation 21A:

Insertion of Regulation 21A makes it clear that a secured creditor shall have to inform the liquidator mandatorily about its decision to relinquish its security interest or to realise the same, as the case may be. Intimation to the liquidator for such decision shall be made in Form C (Proof of Claim by Operational Creditor) or Form D (Proof of Claim by Financial Creditor) of Schedule II as provided in Liquidation Regulation. Form C has been modified accordingly to incorporate such field for relinquishment of security interest: “8A. whether security interest relinquished: Yes/No” Similarly, in Form D, a field has been inserted: “8A. whether security interest relinquished: Yes/No” It has further been emphasised that in case the secured creditor does not intimate the liquidator about its decision, within thirty days of the liquidation commencement date, the asset under security interest shall be deemed to be part of liquidation estate.  The amount payable by the secured creditor in case it relinquishes its security interest shall be as much as that of Section 53 of the Code being: (a)“ the insolvency resolution process costs and the liquidation costs paid in full;  (b) the following debts which shall rank equally between and among the following: 

• workmen’s dues for the period of twenty-four months preceding the liquidation commencement date”

The insertion of this Regulation has been made just after Regulation 21 of the IBBI (Liquidation Process) Regulations, 2016 (“Liquidation Regulation”)i.e., Proving Security Interest which states that a secured creditor shall prove that security interest exists on the basis of the records available with the information utility, or a certificate of registration of charge so issued by the Registrar of Companies or vide proof of registration of charge with Central Registry of Securitisation Asset Reconstruction and Security Interest of India.

Impact of Insertion of Regulation 21A:

With the insertion of Regulation 21A, the following still remains to be resolved: 1. It was considered in the draft regulation that a certain percentage or cut off percentage of the charge holders relinquishing its security interest should be considered and be binding on the other charge holders as well, however, such clause is not adopted in this amendment which is still blurred as to how to proceed with the same. 2. It was also recommended in the Draft Regulation that in Regulation 21, it should be inserted that if a secured creditor, instead of relinquishing his security and proving for his debt, proceeds to realise his security, he shall be liable to pay his share of the expenses incurred by the Liquidator for the preservation of the security before its realisation by the secured creditor. However, no such clause has been inserted in the amendment.   Albeit the aforementioned, liquidator can now catch short breath, since the timeline has now been specified and the secured creditors shall now have to take a decision in a time bound manner as to whether it wants to realise or relinquish its security interest, i.e., the creditor shall now have to mark its own territory in the very beginning and not come in with its ammunition afterwards to claim the whole continent.   Author: Shreya Jain