Secured Creditors Deemed to Relinquish Security for Non-Compliance Under Liquidation Regulations
In a significant ruling, the National Company Law Appellate Tribunal (NCLAT) has upheld the decision of the National Company Law Tribunal (NCLT), directing the return of original bonds and remittance of Fixed Deposit Receipts (FDRs) to the liquidation account of a corporate debtor. This decision came in the case involving the Assistant Commissioner (EPM) as the appellant and Ms. Shruti Gupta, the liquidator, as the respondent.
The case revolved around the liquidation process under the Insolvency and Bankruptcy Code, 2016 (IBC), specifically focusing on the presumption of relinquishment of security interest as per Regulation 21A of the Insolvency and Bankruptcy Board of India (IBBI) (Liquidation Process) Regulations, 2016. The appellant, a secured creditor, failed to intimate its decision regarding the non-relinquishment of its security interest within the stipulated 30 days from the liquidation commencement date, leading to the presumption of relinquishment by operation of law.
The corporate debtor, engaged in research and development activities, had earlier executed Export Promotion Capital Goods (EPCG) bonds with the Customs Department. These bonds were backed by bank guarantees, which were neither invoked nor renewed upon expiry. Consequently, the amounts underlying these guarantees were deemed part of the liquidation estate.
The NCLAT, in its judgment, emphasized that the appellant's failure to act within the prescribed timeline resulted in the security interest being automatically relinquished. The tribunal further clarified that the bank guarantees, although containing clauses for auto-renewal, had expired without invocation, thus reinforcing their status as part of the liquidation estate.
This ruling serves as a crucial reminder for secured creditors to adhere strictly to the timelines and procedural requirements under the liquidation regulations. The tribunal also distinguished the present case from others involving margin money and independent bank guarantees, underscoring the specific legal framework governing the relinquishment of security interests under the IBC.
The judgment has wider implications for financial institutions and government departments involved in insolvency proceedings, highlighting the importance of timely compliance to safeguard security interests.
Bottom Line :
Insolvency and Bankruptcy Code, 2016 - Liquidation - Secured creditor who does not intimate within 30 days its decision to realise security interest is deemed to have relinquished security under Regulation 21A of IBBI (Liquidation Process) Regulations, 2016 - Uninvoked and unrenewed bank guarantees/FDR amounts underlying them can be directed to be remitted to liquidation account and treated as part of liquidation estate.
Statutory provision(s):
Insolvency and Bankruptcy Code, 2016 - Sections 36, 53; IBBI (Liquidation Process) Regulations, 2016 - Regulation 21A
