NCLAT on insolvency asset distribution: A dissenting financial creditor would receive payment as per their entitlement, Read Judgment

The National Company Law Appellate Tribunal (NCLAT) recently observed, “a dissenting financial creditor would receive payment as per their entitlement... this entitlement could also be satisfied by allowing the enforcement of the security interest, up to the value receivable.”

This statement underlines the Tribunal's position on how creditors are to be paid during liquidation proceedings, emphasizing that the distribution of assets should be aligned with admitted claims rather than security interests. This important judgment follows a challenge from IDBI Bank over the asset distribution methodology adopted by the Liquidator in the case of ESS DEE Aluminium Limited, which had been admitted to the Corporate Insolvency Resolution Process (hereinafter referred to as “CIRP”) in 2020 and later ordered for liquidation in 2021.

ESS DEE Aluminium Limited was admitted to the Corporate Insolvency Resolution Process (CIRP) on 14.02.2020, following an application by SBI. As no Resolution Plan was approved, the company was ordered for liquidation on 08.10.2021. IDBI Bank submitted a claim of ₹146.12 crores, and the Liquidator declared Shakambhari Ispat & Power Limited as the successful bidder on 30.08.2022. IDBI opposed the proposed asset distribution method, requesting pro-rata distribution based on admitted claims. Despite objections, the Liquidator decided to distribute proceeds based on security interests. IDBI filed an objection, and on 20.12.2023, the Adjudicating Authority ruled that the distribution should be made in proportion to the secured creditors' admitted claims under Section 53(1) of the Insolvency and Bankruptcy Code (hereinafter referred to as “IBC”). SBI and IFCI Limited have appealed the decision.

The Appellant argued that the Liquidator's distribution was incorrect, relying on a judgment from NCLT Ahmedabad that upheld priority among secured creditors, which was later stayed by the Supreme Court. The Appellant contended that the Supreme Court’s stay makes the NCLT decision applicable and disputes reliance on the Amit Metaliks case, citing a conflicting ruling in DBS Bank Ltd. v. Ruchi Soya Industries. The Appellant also referred to the ICICI Bank Ltd. v. Sidco Leathers Ltd. case, which affirmed secured creditors' priority, and the Insolvency Law Committee’s 2019 report supporting this priority in distribution. The Appellant sought continuation of the interim arrangement until the law is clarified by the Supreme Court.

Contentions of the Respondent:

The Respondent argued that the Supreme Court's ruling in India Resurgence Arc Pvt. Ltd. v. Amit Metaliks Ltd. & Anr. is binding until the Court addresses the reference in DBS Bank Ltd. Singapore. The Respondent cited Tribunal rulings that uphold this principle, stating that asset distribution should be based on admitted claims, not security interests. They contended the Adjudicating Authority correctly applied Section 53(1) and that any undertaking given is irrelevant if it contradicts clear law. The Respondent was willing to refund any excess amount if the Supreme Court rules differently.

The Tribunal reviewed the submissions and the case record. The primary issue raised in I.A. 1694/KB/2022 by IDBI Bank was the challenge to the Liquidator’s distribution methodology. IDBI Bank sought the following reliefs: (a) to set aside the methodology adopted by the Respondent, (b) to recover amounts from secured creditors who received more than their entitled share under Section 53, and (c) to ensure the Applicant receives payment in the same proportion as other secured creditors.

The Liquidator defended the distribution methodology, emphasizing that it was based on the security interests of the secured creditors, referencing the NCLT Ahmedabad order in Technology Development Board of India v. Anil Goel, Liquidator of M/s. Gujarat Oleo Chem Ltd. & Ors., which stated that distribution should align with the charge of each bank. The Liquidator also cited the Supreme Court’s stay of the NCLAT’s order on 29.06.2021: “In the meantime, there shall be stay of the operation of the impugned judgment and Order passed by the National Company Law Appellate Tribunal.”

The NCLAT observed that the determination of payments to creditor classes falls within the commercial discretion of the Committee of Creditors, and a dissenting secured creditor cannot claim a higher share based on the value of their security interest. The Supreme Court in Amit Metaliks Ltd. & Anr. had already rejected such an argument. The Court also referred to Jaypee Kensington Boulevard Apartments Welfare Assn. v. NBCC (India) Ltd., where it clarified: “a dissenting financial creditor would receive payment as per their entitlement... this entitlement could also be satisfied by allowing the enforcement of the security interest, up to the value receivable.”

The Adjudicating Authority explained that “the word ‘between’ integrates the two different classes… the word ‘among’ signifies equality within a group of secured creditors,” emphasizing that distribution must be proportional to the admitted claims of secured creditors.

The Tribunal upheld the Adjudicating Authority's decision to distribute the sale proceeds pro-rata according to admitted claims, in line with the law established by the Supreme Court in Amit Metaliks Limited.

The Tribunal dismissed both Appeals, affirming the Impugned Order and directing the re-distribution amount to be paid to the Secured Creditors, including IDBI Bank Ltd., with interest. The distribution remains subject to any Supreme Court orders. Parties were to bear their own costs.

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