Tribunal Orders Restoration of Funds and Imposes Penalties for Compromising Interests of Secured Creditors
In a significant ruling, the National Company Law Tribunal (NCLT) in Ahmedabad has delivered a judgment against the State Bank of India (SBI) and Gujarat Industrial Development Corporation (GIDC) in the case involving Baid Industries Pvt Ltd. The tribunal found the release of security charge by SBI without the consent of Meliora Asset Reconstruction Company (MARC) under a pari-passu arrangement to be improper and detrimental to the interests of the other secured creditor.
The case was brought forward by Mr. Jaykishan R Rathi, the Liquidator of Baid Industries Pvt Ltd, seeking directions against SBI and GIDC for unauthorized actions during the Corporate Insolvency Resolution Process (CIRP). The tribunal, comprising Mrs. Chitra Hankare and Mr. Velamur G Venkata Chalapathy, ruled that the release of charge by SBI, without the mutual consent of all consortium members, violated the principles of consortium lending.
The judgment highlighted that the charge created under joint lending must be respected, and any ceding of charge requires mutual consent. As a consequence, the tribunal ordered the restoration of Rs. 5,14,24,288, being the amount realized from the sale of mortgaged property, to the liquidator with interest at 12% per annum.
Additionally, the tribunal exercised its powers under Rule 11 of the Insolvency and Bankruptcy Code, 2016, to penalize both SBI and GIDC for their actions that compromised the interests of other secured creditors. The tribunal clarified that the actions of SBI and GIDC, carried out during the pendency of CIRP, were prejudicial to the rights of Meliora ARC, which retained exclusive charge over the disputed property.
The tribunal's decision underscores the importance of adhering to consortium lending principles and ensuring that all secured creditors are duly informed and their consent obtained before any release or transfer of charged assets. This ruling serves as a precedent for maintaining the integrity of security interests in insolvency proceedings.
Bottom line:-
Insolvency and Bankruptcy Code - Release of security charge by one consortium lender without the consent of another lender under a pari-passu arrangement is improper and prejudicial to the interests of the other secured creditor.
Statutory provision(s): Insolvency and Bankruptcy Code, 2016 Sections 45, 49, 52, 68, 69, 70, 236; Companies Act, 2013 Sections 77, 78, 79; Rule 11 of NCLT Rules, 2016
