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Distributing Ratio in Liquidation Process

Tulsi Ram Tibrewala

Liquidation

This explains distributing ratio as per Voting rights of Stakeholders and also on basis of secured and unsecured financial creditor, operational creditors as per usual practice but only important point is how to differentiate secured financial creditors with unsecured financial creditors in actual practice field where there are unthinkable irregularities in Hypothecation deeds/Equitable Mortgage/Creation of Charge with ROC etc.

 

Practical Example (Name and figures are changed)

 

In year 2010, ABC Ltd (CD) took loan of Rs.50 Crores from a banker (say SBI) and hypothecated plant machinery, stores/spares and made equitable mortgage for factory land building. As per deeds, 1st charge was created in favor of SBI and specific condition was mentioned in all deeds and sanction letter that for any further charge prior permission will be necessary by SBI. Charge was created at ROC and certificate was obtained from ROC. Here SBI is secured financial creditor.

 

In Year 2015, further loan of Rs.40 Crores was taken from NBFC Ltd and hypothecated plant machinery, stores/spares and made equitable mortgage for

 

Factory land and building without prior permission from Secured Financial Creditor (SBI). However, company and NBFC Ltd signed all documents with clause that 1st charge is created in favor of NBFC Ltd and written in documents that there is no joint charge. At this stage, there is gross negligence on part of company and NBFC Ltd that they signed documents without permission of SBI as company needed funds and perhaps NBFC Ltd was trying to achieving their targets.  Charge was also created at ROC. It is worth to note here that NBFC Ltd even after inspecting financial statements of CD for FY ended 31.3.2011, 31.3.2012, 31.3.2013 and 31.03.2104 where it was clearly mentioned that 1st charge is created to SBI, sanctioned another loan of Rs.40 Crores. Here NBFC Ltd will be treated as Unsecured Financial Creditor and charge is void ab initio.

 

Second charge could be created with prior permission of SBI with rank pari passu clause. If it happens that NBFC Ltd will also be secured financial creditor. In practice, these types of irregularities are occurring often and RP/Liquidator is bound to spend so much time to determine priorities as per section 53 of IBC Code as apparently both FC look like secured creditor but in fact it is not so.

 

Apart from above these two FC, there are CG/Sg dues and operational creditors. Now as per section 53 of IBC Code, Priorities of payment will be as follows-

 

(1)  Liquidation cost paid in full.

(2)  Debts owned to Secured Financial Creditor (here SBI) in the event such secured creditor relinquished security.

(3)  Financial debts owned to unsecured creditor (here NBFC Ltd)

(4)  Following dues shall rank equally between and among the following-

(5)  (i)amount due to central or state Govt

(ii)debt owned to secured creditor for any amount unpaid following the enforcement of security.

(6)  Operational creditors in their debt ratio

 

So from above interpretation  we  can conclude  that   amount  realizable  from  sale  proceeds of  the  assets would be  distributed  to  the ( i ) secured  creditor  ( SBI ) first  till  their  claim  amount  is fully  discharged. There after any remaining amount shall  be  distributed  to ( ii )  financial  unsecured  creditor (NBFC Ltd)  till  the  time  their  debt  will  be  paid  fully .  Thereafter   if any remaining  amount  shall   be (iii)  shared  among  the CT/GST department  and  Income tax department as per their  claim  admission  ratio . And lastly to operational creditors in their debt ratio if surplus remains.

 

 

 

 

 

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