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POSITION OF SECURED FINANCIAL CREDITORS AND VARIOUS OPTIONS AVAILABLE FOR THEM

        I.            IN CORPORATE INSOLVENCY RESOLUTION PROCESS

If Resolution Plan is assented:

The Financial Creditor, whether secured or unsecured, shall be the member of Committee of Creditors (CoC).  It is CoC, which must approve the Resolution Plan before submission of same to Adjudicating Authority for its final approval.

The settlement to the creditors through Resolution Plan happens by way of mutual agreement of the Resolution Applicant/Investor and the members of CoC.  Hence, position varies as per the terms of the Plan. It could be based on the percentage of admitted claims or some other way, as the CoC and Resolution Applicant mutually agree upon.

The secured financial creditor has no option of enforcing the security interest during CIRP because of applicability of Moratorium (under section 14 of the code). It’s the Resolution Plan which stipulates the position of secured financial creditor, irrespective of the amount of security interest.  One should note that during the CIRP,  it’s the voting power that rules the positioning rather than the amount of security interest with the creditor.

If Resolution Plan is dissented:

In case, financial creditor (whether secured or unsecured) dissents the Resolution Plan and the Resolution Plan gets approved with the required voting, the dissenting financial creditor can enjoy the following:-

         i.            *Liquidation value is to be paid

       ii.            And such value is to be provided before payment to assented financial creditors. It does not mean immediate payment, it means payment should be before the other financial creditors.

*“liquidation value” means the estimated realizable value of the assets of the corporate debtor, if the corporate debtor were to be liquidated on the insolvency commencement date.”

Dissenting is not a good move, if Liquidation value is lower than the settlement amount in the resolution plan.

It may be considered when you are of the opinion that future realisable value as per the Resolution Plan is lesser than the Liquidation value.

        I.            IN LIQUIDATION

Waterfall Mechanism

As per section 53 of Insolvency and Bankruptcy Code the, proceeds from the sale of the liquidation assets shall be distributed in the following order of priority: - 

(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: -

(i)   workmen’s dues for the period of twenty-four months preceding the liquidation

commencement date; and

(ii)  debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52;

(c)  wages and any unpaid dues owed to employees other than workmen for the period of  twelve months preceding the liquidation commencement date; 

(d)  financial debts owed to unsecured creditors;

(e)   the following dues shall rank equally between and among the following: -

(i)  any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date;

(ii)  debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;

(f) any remaining debts and dues; 

(g)  preference shareholders, if any; and

(h)  equity shareholders or partners, as the case may be.

From the above, the position of Secured Creditors is as follows:-

         i.            If security interest is relinquished

2nd position and ranks equally along with workmen’s dues for the period of twenty-four months preceding the liquidation commencement date.

       ii.            If security interest is enforced

5th position and ranks equally along with Government dues, but only to the extent of unpaid following the enforcement of security interest.

Whether to go for the option of enforcing the security interest depends on the value of security interest.

CONCLUSION:

The security interest has no vital role during the CIRP unless the creditor has influencing voting power.  During the Liquidation, its basing on the value of security interest whether to relinquish or enforce it can be decided, hence has vital role.