NCLT Cuttack: Secured Creditors Who Relinquish Security Interest Cannot Claim Priority in Sale Proceeds Distribution
Pranav B Prem
The National Company Law Tribunal (NCLT), Cuttack Bench comprising Justice Deep Chandra Joshi (Judicial Member) and Banwari Lal Meena (Technical Member) has held that once secured creditors relinquish their security interests to the liquidation estate, they cannot claim any priority among other similarly placed secured creditors during the distribution of sale proceeds. The Tribunal directed the liquidator to distribute the remaining sale proceeds among all secured creditors on a pro-rata basis, without distinguishing between first or second charge holders.
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The case arose from an application filed by the liquidator of Monnet Power Company Limited seeking directions for the distribution of ₹30.26 crore from the sale proceeds of the corporate debtor's assets and for an extension of time to complete the distribution under Section 53 of the Insolvency and Bankruptcy Code, 2016 (IBC), read with Regulation 42 of the Liquidation Regulations.
The liquidation followed the failure of the resolution process after Monnet Power was admitted into CIRP by the NCLT Mumbai Bench in February 2018. A liquidation order was passed in October 2019, and the liquidator conducted multiple rounds of e-auction. In the ninth round, Jindal Steel and Power Ltd. emerged as the successful bidder with a bid of ₹410 crore. After deducting liquidation costs, CIRP expenses, and contingency reserves, ₹336 crore was distributed to secured creditors holding a first pari passu charge. However, ₹30.26 crore—representing the share of second charge holders—was held back pending clarity on whether such creditors were entitled to an equal share.
The liquidator sought the Tribunal’s direction due to ongoing legal uncertainty stemming from the Supreme Court's stay in Kotak Mahindra Bank Ltd. v. Technology Development Board [Civil Appeal NO. 11060 of 2021], a case involving the same issue of inter-se priority among secured creditors. Indian Bank, having both first and second charge interests, submitted that second charge holders should be treated equally under Section 53. IFCI Ltd. and IL&FS Financial Services Ltd., both second charge holders, also argued against the liquidator’s withholding of their dues and submitted that Section 53 does not distinguish between first and second charge holders among secured creditors who relinquish their security interest.
The Tribunal referred to multiple precedents, notably the NCLAT’s decision in Technology Development Board v. Anil Goel [2021 SCC Online NCLAT 349], which held that once a secured creditor relinquishes its security, it cannot claim priority and must be treated as part of a common class under Section 53(1)(b)(ii). Although this decision was stayed by the Supreme Court, the Cuttack Bench relied on subsequent judgments including India Resurgence ARC Pvt. Ltd. v. Amit Metaliks [2O2l SCC Online SC 409], which confirmed that dissenting or subordinate secured creditors are entitled to their share in proportion to the resolution or liquidation value, not the value of their security interest.
Further support was drawn from Oriental Bank of Commerce v. Anil Anchalia [2022 SCC Online NCLAT 3456] and Beacon Trusteeship Ltd. v. Jayesh Sanghrajka [2OZ4 SCC Online NCLAT 667], which reiterated that once secured creditors opt to relinquish their security, they must participate in distribution on equal footing, regardless of the nature or rank of their original charge.
Although a contrary view in DBS Bank Ltd. v. Ruchi Soya Industries Ltd [(2024) 3 SCC 752]. has been referred to a larger bench of the Supreme Court, the Tribunal held that the binding precedent remains India Resurgence ARC and that the NCLAT rulings relying on it must be followed unless explicitly overruled.
The Cuttack Bench also clarified that reliance on the Delhi High Court’s ruling in Tata Iron & Steel Co. Ltd. v. Jhalani Tools India Ltd [202U SCC OnLine Del 42LL] was misplaced, as that decision was under the Companies Act, 1956 and not the IBC.
Consequently, the NCLT Cuttack directed the liquidator to:
Recognize the Joint Commissioner of Commercial Taxes & GST, Angul, Odisha, as a secured creditor based on a statutory charge under the Orissa VAT Act.
Update the list of secured creditors to include this claimant.
Distribute the ₹30.26 crore balance amount on a pro-rata basis among all secured creditors, regardless of first or second charge classification.
Complete the distribution within 60 days from the date of the order.
The Tribunal emphasized that secured creditors relinquishing their security interests cannot later claim superiority based on the charge hierarchy. The judgment reinforces the principle that Section 53 of the IBC mandates equitable treatment among similarly placed secured creditors and overrides any contrary arrangements.
Appearance
For Applicant: Saswat K. Acharya, Advocate
For the Respondents: -
IF'CI Limited, IL&FS Financial Services Limited, Indian Bank: Abhinay Sharma, Advocate, Aishwarya Dash, Advocate, Raj Kumar Rout, Advocate, Parul Khurana, Advocate, Deeksha Prakash, Advocate, Pooram Chand Roy, Advocate and Lakshmi Kant Srivastava, Advocate.
For Canara Bank: Supriyo Ranjan Mahapatra, Advocate, Prakash Chandra Mahapatra, Advocate, Binay Kumar Pattajoshi, Advocate and Sarthak Mishra, Advocate
Cause Title: IDFC Bank v. Monnet
Case No: IA (IB) No. 69/CB/2023
Coram: Justice Deep Chandra Joshi [Member (Judicial)], Banwari Lal Meena [Member (Technical)]
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