Understanding

Secured Creditors

Liya Fathima
in Company
Liquidation
Introduction
The Insolvency and Bankruptcy Code of 2016
was regarded as the cornerstone of India’s
financial restructuring. Enacted in May 2016,
the IBC marks a transformative milestone,
providing a comprehensive framework for
managing insolvency and bankruptcy cases
across the nation. Today, we explore the a few
fundamentalprinciples and pivotal role of the
IBC in reshaping India's economic landscape.
 Liquidation and
Liquidator
-The IBC does not provide a specific definition but in simple terms, liquidation is
the process of closing down a business's financial operations.
-Triggered by insolvency, where a company can't pay its debts, leading to the
conversion of assets into cash to repay obligations.
- The Insolvency and Bankruptcy Code (IBC) empowers a liquidator with specific
duties to efficiently manage the winding-up process of a corporate debtor.
- Responsibilities include acting in the best interests of creditors and
shareholders, exercising care and diligence, and submitting a comprehensive
report to the court.
-Liquidation is akin to hitting the financial reset button, distributing assets
among creditors for a fresh start while ensuring fair compensation.
 Responsibilities of
Liquidator
- Efficiently - Right to seize - Identify and
manage the assets, investigate collect company
winding-up financial affairs, assets.
process. and make - Settle
- Act in the best payments to
interests of
outstanding
creditors.
creditors and debts.
- Section 37 of the
shareholders. - Distribute
IBC grants the
- Exercise care and remaining funds
liquidator the right
diligence in to creditors and
to access crucial
proceedings. shareholders.
information.
- Submit a detailed
report of the
liquidation process
to the court.

-
 Secured Creditor
Secured creditors have limited rights during corporate insolvency resolution
under IBC Section 14 but regain control after liquidation starts under Section 33.
They can relinquish security to the estate (Section 52(1)(a)) and get second
priority in payment (Section 53) or realize their security interest outside the
estate with restrictions (Section 52(1)(b)). If proceeds from realized security fall
short, the remainder is fifth priority (Section 53). Excess proceeds must be
reported (Section 52(9)). Realizing creditors must pay resolution and liquidation
costs (Regulation 21A(2)) and transfer excess value within 180 days or the asset
becomes part of the estate (Regulation 21(3)).
 Waterfall
Mechanism
The process of the payment of proceeds during liquidation and the order of priority in which the
proceeds shall be distributed is called Liquidation Waterfall Mechanism as provided under Section 53 of
the code. It also establishes the position of secured and unsecured creditors. During the process of
liquidation, the secured creditors are prioritized and are paid first, who is then followed by preferential
creditors, unsecured creditors and then the shareholders. They have priority over unsecured creditors
when it comes to recovering debt owed by an insolvent company or person because of their prior
ranking status. As they typically hold security over some or all of the company assets, secured creditors
are paid first.
 Waterfall
Mechanism
 Srikanth Dwarakanath v.
Bharat Heavy Electricals
Limited (BHEL), 2020.
1. Case involved NCLT Chennai order granting BHEL exclusive rights over Surana
Power assets
2. NCLAT overruled NCLT order as violating Liquidation Waterfall under IBC
Section 53
3. BHEL held security interest of only 26.24% in Surana Power assets
4. Other secured creditors holding 73.76% had relinquished their interests
What happened?
Surana Power entered liquidation after failed CIRP resolution plan
BHEL objected to liquidator selling assets, citing arbitration award
Liquidator appealed NCLT order blocking asset sale
NCLAT ruled BHEL had only two options under IBC:
Relinquish security interest
Enforce security interest under SARFAESI Act Section 13(9)
BHEL wanted to enforce arbitration award for exclusive control of assets
This approach advantageous for BHEL given small ownership stake
NCLAT: Irrespective of origin, rights of secured creditors equal in liquidation
As minority stakeholder, BHEL must abide by majority relinquishing security
interests
Limits BHEL's influence and control over Surana Power asset liquidation
 Conclusion

The IBC provides a structured approach to insolvency resolution, balancing rights of secured creditors
like BHEL with fair distribution of assets. Secured creditors have limited rights during CIRP under
Section 14 but regain control after liquidation starts under Section 33. The Liquidation Waterfall
Mechanism (Section 53) prioritizes secured creditors while mandating compliance with regulations.
The BHEL case affirmed majoritarianism, limiting minority secured creditors from impeding the
collective. Overall, the evolving IBC jurisprudence underscores adherence to prescribed mechanisms
for fair and efficient insolvency resolution.
Thank you
very much