All the king's horses and all the king's men couldn't put Humpty together again.1
It is globally accepted that inter se priority of the secured creditors should be respected as part of the liquidation waterfall. However, the Indian story has unfolded with multiple twists and turns with an unclear path ahead. This article traces this history as well as the way forward.
The Bankruptcy Law Reforms Committee ("BLRC") a committee set up by the
While the Code sets this in clear terms, complexity in factual matrices in multiple judicial deliberations as well as subsequent statutory amendments has resulted in the inter-se priority amongst secured creditors taking a roller coaster ride over the years.
This paper aims to take its readers along this roller coaster ride with respect to distribution to secured creditors under insolvency and liquidation waterfalls and the road ahead proposed by the
With the evolving private credit and deal environment in
"... If a secured creditor is given the equivalent of a first priority at the time of distribution (or receives directly the proceeds of the sale of collateral), it facilitates the provision of secured credit.3"
Position prior to 2016
The (Indian) Companies Act, 1956 ("1956 Act"),4 recognised the priority of claims of secured creditors, as senior to all other unsecured creditors (subject to pari-passu ranking (only) with identified workmen dues). This recognition of seniority of secured creditors' claims continued under the (Indian) Companies Act, 2013 ("2013 Act").5 It was commonplace that any priority of ranking between secured creditors were respected by the liquidation waterfall both under the 1956 Act as well as the 2013 Act.6 In the case of
Introduction of the code
The Code was enacted in
The BLRC, responsible for conceptualising the Code in its current form, in its BLRC Report, recommended that secured creditors have first ranking priority, at par (only) with capped workmen dues, and junior only to process costs, "in order to bring the practices in
This recommendation was originally incorporated in Section 53 of the Code, which lays down the liquidation waterfall and provides for secured creditors to have superior ranking, pari passu with capped workmen dues and second only to the process costs. However, when this provision was judicially tested and as the coming paragraphs of this article would suggest, it proved to be insufficient in clarifying the inter-se priority of secured creditors.
Jurisprudence under the Code
In a saga of many twists and turns that captured the front pages of all business papers in
In what came as a shock to the entire lending fraternity in
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2. MCA Discussion Paper available on
3. Orderly & Effective Insolvency Procedures,
4. Sections 529, 529A and 530 of the (Indian) Companies Act, 1956
5. Section 326 of the (Indian) Companies Act, 2013.
6. The SC in the matter of
"Merely because section 529 does not specifically provide for the rights of priorities over the mortgaged assets, that, in our opinion, would not mean that the provisions of section 48 of the Transfer of Property Act in relation to a company, which has undergone liquidation, shall stand obliterated."
7. Supra FN 6
8. Company Appeal (AT) (Ins.) No. 242 of 2019
Originally published by International Insolvency & Restructuring Report 2023/24 on the 13th of June, 2023.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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