Rulings on Regulation 21A of IBC Liquidation Process, whether period of 180 days is mandatory or directory

Decoding the Code

Rulings on Liquidation Process Regulation 21A, whether period of 180 days is mandatory or directory

Recently, NCLT Kochi Bench¹ comprising of Shri P. Mohan Raj, Member (J) and Shri Satya Ranjan Prasad, Member(T) held that the period of 180 days prescribed under Regulation 21A(2)(b) of IBBI (Liquidation Process) 2016 to is mandatory and cannot be extended.

In this part of the Decoding the Code series, we analysis various cases laws on the time period prescribed under Regulation 21A(2)(b) of IBBI (Liquidation Process) 2016.

Regulation 21A of the IBBI (Liquidation Process) Regulations 2016 provides that a secured creditor is required to intimate its decision of not relinquishing the security interest within 30 days from the liquidation commencement date, failing which, the assets covered under the security interest shall be presumed to be part of the liquidation estate.

Further, the Regulation 21A provides that where a secured creditor does not relinquish security interest and proceeds to realise its security interest, it shall, within 90 days from the liquidation commencement date, pay to the liquidator:

a) Insolvency resolution process costs and liquidation costs in full;

b) Workmen’s dues for the period of twenty-four months preceding the liquidation commencement date, as it would have shared in case it had relinquished the security interest.

Further, Regulation 21A also provides that where a secured creditor proceeds to realise its security interest, it shall pay the excess of the realized value of the asset, which is subject to security interest, over the amount of his claims admitted, to the liquidator within 180 days from the liquidation commencement date. This indicates that the realization of assets needs to be completed within 180 days.

The Regulation 21A was inserted in in IBBI (Liquidation Process) Regulations, 2016 on 25.07.2019 and further it was amended on 06.01.2020 and 28.04.2022. The amended regulation is available here. Relevant portion of the regulation is reproduced here:

“Regulation 21A: Presumption of security interest.

21A. (1)…..

(2) Where a secured creditor proceeds to realise its security interest, it shall pay –

(a) as much towards the amount payable under clause (a) and sub-clause (i) of clause (b) of sub-section (1) of section 53, as it would have shared in case it had relinquished the security interest, to the liquidator within ninety days from the liquidation commencement date; and

(b) the excess of the realised value of the asset, which is subject to security interest, over the amount of his claims admitted, to the liquidator within one hundred and eighty days from the liquidation commencement date:”

Compliance of regulations 21A and Section 52/53 of the IBC are absolutely necessary even if the secured creditor proceeds to realise its security interest².

Hon’ble Supreme Court in Moser Baer Karamchari Union Vs. Union of India and Ors. (2023) ibclaw.in 59 SC held that to protect the interest of the workmen where the secured creditor does not relinquish its security interest to fall under Section 53 of the Code, Regulation 21A of the IBBI (Liquidation Process) Regulations, 2016 has been enacted, and it requires that the secured creditor, who opts to realise its security interest as per section 52 of the Code, has to pay as much towards the amount payable under the clause (a) and sub-clause (i) to clause (b) of sub-section (1) to Section 53 of the Code to the liquidator within the time and the manner stipulated therein.

NCLT Mumbai Bench Yes Bank Ltd. Vs. Mr. Anil Mehta Liquidator & Anr. (2023) ibclaw.in 57 NCLT held that failure to comply with sub- regulation (2) of Regulation 21A of the Liquidation Regulations automatically leads to inclusion of the assets secured with the Secured Creditor to be part of the liquidation estate of the Corporate Debtor in terms of sub regulation (2) and sub-regulation (3) of Regulation 21A of the Liquidation Regulations.

NCLT Kochi Bench in The Federal Bank Ltd. Vs. Ruben George Joseph, Liquidator (2023) ibclaw.in 297 NCLT held that the word “shall” has been used in Regulation 21A(2), apart from this Regulation 21A(3) provides the consequences of non-compliance of direction provided in Regulation 21A(2)(b), accordingly on the expiry of 180 days if the secured creditor failed to realize the amount and paid to the liquidator the secured asset automatically shall vests with the liquidator as part of liquidation estate. Here also the word “shall” have been used. In the scenario it is evident that the period mentioned in Regulation 21A(2)(b) is mandatory, hence the period of 180 days prescribed under Regulation 21A(2)(b) of IBBI (Liquidation Process) 2016 cannot be extended.  The same ruling has been reiterated in IDBI Bank Ltd. Vs. The Liquidator of M/s. Koyenco Autos Pvt. Ltd. (2023) ibclaw.in 444 NCLT.

NCLT Kolkata Bench in Mr. Subodh Kumar Agarwal Liquidator Vs. South India Bank Ltd. (2022) ibclaw.in 341 NCLT observed that Regulation 21A provides that where a secured creditor proceeds to realise its security interest, it shall pay the excess of the realized value of the asset, which is subject to security interest, over the amount of his claims admitted, to the liquidator within 180 days from the liquidation commencement date. This indicates that the realization of assets needs to be completed within 180 days. In the instant application, wherein the liquidation commencement date was 08.12.2020, the realization of assets was to be completed within 06.06.2021. The Bench directed to Secured Creditor to handover the possession of the assets forming part of the security interest that have not been sold within 180 days as per Regulation 21A Liquidation Process Regulations, 2016.

If Secured Creditor does not sell secured asset, Liquidator can ask to return back the assets to the liquidation estate: NCLAT in Dhanlaxmi Bank Ltd. Vs. Techno Fab Manufacturing Ltd. & Ors. (2021) ibclaw.in 460 NCLAT upheld the decision of the adjudicating authority and held that in the present case, the order of liquidation was passed on 05.09.2018, three years has been lapsed and the liquidation proceeding could not be completed and after granting ample opportunity the Appellant has failed to realize its security interest. Therefore, Ld. Adjudicating Authority has rightly directed the Appellant to handover the asset in possession back to the liquidator within 7 days.

Whether the period of dispute between liquidator & secured creditor should be excluded, to calculate of percentage of fees of liquidator, dependent on such period, considering the intent of legislature under regulation 21A of IBBI (Liquidation Process) Regulations, 2016:

In Vijender Sharma, Liquidator Vs. SIDBI (2021) ibclaw.in 954 NCLT, the Liquidator seeks the NCLT’s directions is, whether the period of dispute between liquidator & secured creditor should be excluded, to calculate of percentage of fees of liquidator. NCLT New Delhi Bench Court-VI held that since, the Liquidator successfully listed out the circumstances due to which the delay in completion of Liquidation process has taken place along with the Directions which the Liquidator sought from the Adjudicating Authority in respect to the disputes arisen with the SIDBI hence, the period of dispute between the secured Creditor and the Liquidator is excluded as the applicant successfully shown his bona fide for the delay in completion of Liquidation Process.

The above ruling of NCLT New Delhi Bench Court-VI has been upheld by NCLAT in Small Industries Development Bank of India (SIDBI) Vs. Shri Vijender Sharma, reported SIDBI Vs. Shri Vijender Sharma (2022) ibclaw.in 879 NCLAT.