secured creditors

Rights and Obligations of Secured Creditors

Once an order for liquidation is passed by the adjudicating authority/Tribunal the liquidator so appointed has to realize the assets of the company and have to make payments to all its Secured Creditors.

Following the corporate insolvency resolution procedure, the secured creditors hold a secured charge over assets of the company. During liquidation or dissolution proceedings of a company, secured creditors can opt for any of the following options to realize there security interest held with the company:

  • By either intimating the liquidator about their security interest in the liquidated estate and receipt of  proceeds from the sale of the assets from the liquidator according to Section 53 of the Insolvency and Bankruptcy Code, 2016 or;
  • By realizing their security interest in the manner specified in Section 52 of the Insolvency and Bankruptcy Code, 2016.

Section 53 of Insolvency and Bankruptcy Code, 201 states that Notwithstanding anything contrary to any other law, the proceeds from the sale of liquidated assets of the company shall be distributed among the secured creditors by following a line of priority  in which ;

  • the insolvency resolution process cost and the liquidation cost will be paid first;
  • then following all essential debts of the company including workmen dues and employees wages for the preceding 24 months of the liquidation proceedings;
  • after this secured creditors will be paid against their proven security interest.

Section 52 of the insolvency and bankruptcy Code, 2016 prescribes that secured creditors during the liquidation proceedings, other than opting for distribution procedures stated in Section 53 can choose for the realization proceeding to be held as per Section 52  where they can realize their security interest with the company by informing about the specific assets they want to realize their debts with the corporate debtors.

Rights of Secured Creditor

Secured creditors can enforce, settle or deal with the liquidator or the liquidation authority for a specific asset or security of the company/corporate debtor for the realization of their claims.

Secured creditors facing resistance from the corporate debtors therewith while taking possession, selling or disposing of the security can make an application to the adjudicating authority to permit the secured creditors to realize their security in accordance with the law.

Where proceeds from realization of secured assets are not adequate to confirm to debts owed by the secured creditors, they can claim the unpaid debts from the liquidator in the manner specified in Insolvency and Bankruptcy Code.

Secured creditors can intimate their decision to the liquidator whether they want to relinquish their security interest under liquidation or out of liquidation an intimation of the same shall have to be done in order to specifically as certain the relinquishment of security interests.

Conditions for Realization of Corporate Debts by Secured Creditors 

The secured creditors opting realization of their security interest through a specific security, have to perform two things :

First, they have to inform the liquidator about realization of their security interest with the specific security;

Second, they have to identify their interest and verify it by confirming the records of their security interest as specified by the board or liquidators.

In case, during realization of their security interest, if the secured creditors receive excess of proceeds of their debts due with the corporate debtor, they have to transmit all the surplus funds to the liquidator.

Secured creditor have to intimate the liquidator with a specific price of the security so that the liquidator can look for some other buyers of the security who can quote a higher price.

As per Section 172, where a secured creditor realizes his security he has to produce a proof of balance due to him it to the liquidator.

As amended recently, secured creditors have to pay excess of the realized value of the asset/security over there admitted claims to the liquidator within 180 days of the liquidation commencement. If the secured creditor fails to pay the excess amount to the liquidator the asset will become a part of the liquidation estate.

Secured creditors cannot sell or transfer any asset which is subject to any security interest of any other person who is not eligible under the code to submit a resolution plan for insolvency resolution of the corporate debtor.

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Also Read: Interest Under Section 50 of CGST is automatic?

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