NCLAT Upholds Pro-Rata Distribution of Liquidation Proceeds Under Section 53(1) of IBC, Rejects Security Interest-Based Allocation

The NCLAT upheld the pro-rata distribution of liquidation proceeds under Section 53(1) of the Insolvency and Bankruptcy Code (IBC) and rejected the security interest-based allocation.

The National Company Law Appellate Tribunal (NCLAT), Principal Bench, comprising Justice Ashok Bhushan (Chairperson) and Technical Member Mr. Barun Mitra, reviewed a batch of two appeals and held that the distribution of liquidation proceeds must strictly follow the waterfall mechanism under Section 53(1) of the Insolvency and Bankruptcy Code (IBC), mandating pro-rata distribution among secured creditors, and any deviation favoring security interest-based allocation is impermissible unless explicitly upheld by the Supreme Court.

The National Company Law Appellate Tribunal (NCLAT) adjudicated two appeals filed against the order dated 20.12.2023, issued by the National Company Law Tribunal (NCLT), Kolkata Bench, in IA (IB) No.1694/KB/2022 in CP (IB) No.1284/KB/2019. Since both appeals raised identical legal and factual issues, they were heard together and decided by a common judgment. The matter originated from the Corporate Insolvency Resolution Process (CIRP) of ESS DEE Aluminium Limited, which commenced on 14.02.2020 upon an application under Section 7 filed by the State Bank of India (SBI). After the failure to approve a resolution plan, the Adjudicating Authority ordered the liquidation of the Corporate Debtor on 08.10.2021, appointing R-2 as the Liquidator. Subsequently, IDBI Bank submitted a claim of ₹1,46,12,18,998/- and sought clarity on the methodology for asset distribution. The Liquidator, adhering to a security interest-based approach, assigned a 10% share to IDBI Bank, which contested this method, demanding a pro-rata distribution as per Section 53(1) of the Insolvency and Bankruptcy Code (IBC). IDBI Bank accepted ₹1,26,10,109/- under protest and filed IA 1694/2022 challenging the Liquidator’s methodology.

The Liquidator defended the adopted methodology by relying on the ruling of NCLT Ahmedabad in 'Technology Development Board of India' vs. 'Anil Goel, Liquidator of Gujarat Oleo Chem Ltd.' However, since this order was set aside by NCLAT and subsequently stayed by the Hon'ble Supreme Court on 29.06.2021, the matter remained unsettled. The Adjudicating Authority ruled in favor of IDBI Bank, directing the Liquidator to distribute liquidation proceeds proportionally among secured creditors in compliance with Section 53(1). Aggrieved by this decision, SBI and IFCI Limited filed appeals, asserting that the Liquidator’s methodology aligned with the NCLT Ahmedabad precedent and should be maintained until the Supreme Court conclusively determined the issue. The appellants relied on the Supreme Court ruling in ICICI Bank Limited v. Sidco Leathers Limited and Others, REEDLAW 2006 SC 04001 and the Insolvency Law Committee (ILC) Report dated 26.03.2019, which emphasized inter se priority among secured creditors.

Conversely, IDBI Bank contended that the Supreme Court’s ruling in India Resurgence ARC Private Limited v. Amit Metaliks Limited and Another, REEDLAW 2021 SC 05523 was binding and should be followed. IDBI Bank further relied on the NCLAT rulings in Beacon Trusteeship Limited v. Jayesh Sanghrajka and Others, REEDLAW 2024 NCLAT Del 05574 and Paridhi Finvest Private Limited v. Value Infracon Buyers Association and Another, REEDLAW 2024 NCLAT Del 02520, which upheld that asset distribution based on security interest was impermissible. The Liquidator reiterated reliance on the ILC Report of 2018 and the stayed NCLT Ahmedabad ruling. However, the NCLAT emphasized that until the Hon'ble Supreme Court renders a final decision, the precedent set in India Resurgence ARC Private Limited v. Amit Metaliks Limited and Another, REEDLAW 2021 SC 05523, must be followed. The Tribunal reiterated that a dissenting secured creditor could not demand distribution based on a security interest and upheld that liquidation proceeds should be distributed on a pro-rata basis as per Section 53(1).

The Tribunal also considered its ruling in 'Oriental Bank of Commerce v. Anil Anchalia & Anr.' (Comp. App. (AT) (Ins.) No. 547/2022), where an attempt to seek exclusive distribution to a secured creditor was rejected. Further, the Tribunal noted that the reference of India Resurgence ARC Private Limited v. Amit Metaliks Limited and Another, REEDLAW 2021 SC 05523 to a larger bench in DBS Bank Limited Singapore v. Ruchi Soya Industries Limited and Another, REEDLAW 2024 SC 01514 did not affect its binding nature under Article 141 of the Constitution unless the Supreme Court ruled otherwise. The Tribunal also declined to apply the precedent in ICICI Bank Limited v. Sidco Leathers Limited and Others, REEDLAW 2006 SC 04001, as it pertained to pre-IBC provisions under the Companies Act, 1956. The Tribunal rejected reliance on the ILC Report of 2018, affirming that the Supreme Court's ruling in India Resurgence ARC Private Limited v. Amit Metaliks Limited and Another, REEDLAW 2021 SC 05523 prevailed over policy recommendations. Regarding the interim order dated 29.02.2024, the Tribunal clarified that amounts from the redistribution process must be kept in an interest-bearing account pending further orders from the Hon'ble Supreme Court in Civil Appeal Diary No. 11060/2021.

In conclusion, the NCLAT upheld the Adjudicating Authority’s order directing the pro-rata distribution of sale proceeds, affirming that the methodology adopted by the Liquidator was inconsistent with Section 53 of the IBC. Consequently, the appeals were dismissed, and the Liquidator was directed to redistribute funds, including accrued interest, among secured creditors. The Tribunal also ruled that each party would bear its own costs.

Mr. Krishnan Venugopal Sr. Advocate with Mr. Sanjay Kapur, Mr. Devesh Dubey and Mr. Arjun Bhatia, Advocates, represented the Appellant.

For the Respondent/ Defendant: Mr. Abhijeet Sinha, Sr. Advocate, with Ms. Prachi Johri, Ms. Abhipsa Sahu and Mr. Rishi Jhakur, Advocates, appeared for Respondent No. 1.

Mr. Rahul Gupta, Advocate, appeared for Respondent No. 2.

Ms. Deepika B. Prasad, Liquidator, was present in person.

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