NCLAT verdict in Surana Power: Don’t throw spanner in the works of liquidator

When a company is a going concern, it is possible and sometimes inevitable for the inter se priorities of various creditors to be upset. To wit, a beneficiary of an ESCROW account stands to get his dues paid ahead of secured creditors thanks to the dedicated funds coming his way to pay off his dues. Indeed companies may comply even in the absence of an ESCROW account if the creditor supplies key raw materials or machinery the absence of which would bring production to a screeching halt.

But once the liquidation process kicks in, every one has to fall in the queue as per the waterfall mechanism laid down by Section 53 of the Insolvency and Bankruptcy Code, 2015 (IBC). This is the long and short of the salutary ruling of the National Company Law Appellate Tribunal (NCLAT) verdict of June 21, 2020, in the Surana Power case.

The Surana case

On January 20, 2019, the Chennai Bench of National Company Law Tribunal had admitted the insolvency plea against Surana Power. And as no resolution plan was approved, the company was ordered to be liquidated. During the liquidation process, BHEL succeeded in its arbitration case against Surana Power and an award was passed in its favour.

Based on the arbitral award, BHEL had been granted lien over the equipment and goods lying at the site of Surana Power. It had not dawned on the arbitrator that once a liquidator is appointed, his role came to an end. Strangely, BHEL too did not deem it fit to quietly bide its time as per the waterfall mechanism — the order of priority for payment when on liquidation funds are inadequate to pay off every claimant fully. Both allowed the arbitration to go through blissfully unaware or pretending to be unaware of the appointment of the liquidator.

Tribunal’s view

Meanwhile, the liquidator, who was unable to make any headway on account of BHEL’s refusal to relinquish its security interest, approached the NCLT. However, his plea was rejected by the NCLT on November 20, 2019, mainly on the ground that BHEL is a secured creditor, entitled to realise its security interest outside the IBC waterfall mechanism. The NCLT had clearly erred. It was against this miscarriage of justice that the liquidator had moved the NCLAT.

And the Tribunal rightly rejected the claim of exclusivity of BHEL over Surana Power assets. Indeed the arbitration award was untenable as it is the fundamental principle of company law that if and when the liquidation process is rolled out, the liquidator becomes the single window for entertaining the claims and counter-claims of various creditors, secured and unsecured.

Claims settlement

Ten out of eleven secured creditors of Surana Power together — representing 73.76 per cent of the admitted claims — had already relinquished their security interest, hence, it would be prejudicial to stall the liquidation process at the insistence of one single operation creditor BHEL, said the Tribunal. As per the IBC, it takes 60 per cent of the value of the secured assets to sustain the claim of exclusivity and sit outside the waterfall mechanism. BHEL admittedly had only about 26 per cent stake.

BHEL will now have to wait for the liquidator to first pay off his own expenses on liquidation as well as the workmen completely, including their gratuity and other post-employment claims. These two are preferential payments that rank ahead of the claims of the secured creditors. It is only thereafter that pari passu settlement of claims would be made of secured creditors including BHEL.

Arbitration may be a quicker remedy out of the court that inevitably is plagued by delays, adjournments and other dilatory tactics. But it has to yield to the special dispensation of insolvency — that is, when the reins of power over assets for equitable distribution pass on to the liquidator.

The writer is a Chennai-based chartered accountant

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