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What does recent NCLAT ruling — liquidation of a firm under IBC holds precedence — mean?

In its judgment, the NCLAT set aside an order of Chennai NCLT on the grounds that BHEL’s charge over Surana Power assets were equal to the other 10 financial creditors, and therefore it could not be given precedence.

Written by Aashish Aryan | New Delhi |
June 21, 2020 12:39:14 am
NCLAT, BHEL, Surana Power State-run BHEL, which was also a secured creditor for Surana Power, had won an arbitration award against Surana Power.

The National Company Law Appellate Tribunal (NCLAT) has ruled that liquidation process of a company under the Insolvency and Bankruptcy Code (IBC) holds precedence over outcome of an arbitration proceeding.

A three-member Bench, headed by Justice Venugopal M, ruled that just because Bharat Heavy Electricals Limited had won an arbitration award against Surana Power, which was undergoing liquidation, the process would not be stopped to favour it. The Chennai Bench of National Company Law Tribunal (NCLT) had earlier ruled in favour of BHEL.

What does the NCLAT order mean?

In its judgment, the NCLAT set aside an order of Chennai NCLT on the grounds that BHEL’s charge over Surana Power assets were equal to the other 10 financial creditors, and therefore it could not be given precedence.

BHEL’s claim that it the first right over the assets and properties of Surana Power, was wrong as all other creditors had given the assent to liquidate the corporate debtor, the NCLAT held.

The NCLAT’s judgment essentially holds that if a corporate debtor is being liquidated, a creditor can not claim superiority over other secured creditors in the same band, and that everyone must receive their fair share by following the waterfall mechanism of liquidation.

What is the waterfall mechanism for liquidation?

As the name suggests, the waterfall mechanism under Insolvency and Bankruptcy Code gives priority to secured financial creditors over unsecured financial creditors. The mechanism says that if a company is being liquidated, these secured financial creditors must be first paid the full extent of their admitted claim, before any sale proceedings are distributed to any other unsecured creditor.

Under Section 53 of the IBC, which deals with waterfall mechanism, the top most priority, however, is given to costs related to the liquidation process and dues of workmen of the corporate debtor. The dues of the workmen include all their salaries, provident, pension, retirement and gratuity fund, as well as any other funds maintained for the welfare of the workmen.

Read | Experts explain: Is India ready for the group insolvency?

Why did BHEL object to liquidation of Surana Power?

State-run BHEL, which was also a secured creditor for Surana Power, had won an arbitration award against the company. It gave BHEL complete and undisputed rights over all the assets, equipment, goods lying at the site of the power plant. It also gave BHEL title rights over the finished and unfinished buildings.

BHEL objected to the liquidation process as it held only 26. 24 per cent share by value in the Surana Power, which is being liquidated. Going by the waterfall mechanism, though it would have got the money over other unsecured creditors, its share would come down by a lot.

The arbitration award route would have, on the other hand, given it complete rights over all properties, assets and equipment, while leaving little to nothing for other creditors.

Also read | NCLAT sets aside NCLT order on making MCA party in all IBC cases

Though the NCLT Chennai bench had held that BHEL was right in claiming priority over other creditors, the NCLAT held that in order to claim priority, BHEL should have had at least 60 per cent share value. Since it did not have the same, it would be unfair to stop the liquidation proceedings because of one dissenting creditor.

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