The National Company Law Appellate Tribunal has clarified that a secured creditor's statutory right to realize its security interest outside liquidation under Section 52 of the Insolvency and Bankruptcy Code is contingent upon strict compliance with procedural obligations under Regulation 21A of the IBBI (Liquidation Process) Regulations, 2016. Failure to meet these requirements results in automatic vesting of the secured asset in the liquidation estate, irrespective of the creditor's assertion of non-relinquishment.
Background & Facts
The Dispute
The dispute arises from the liquidation of IMP Powers Limited, a corporate debtor, following an order dated 19.12.2023 by the National Company Law Tribunal, Ahmedabad. The Appellant, STCI Finance Limited, a Non-Banking Financial Company registered with the Reserve Bank of India, extended a term loan of Rs. 25 crores to the Corporate Debtor in two tranches during November 2017 and August 2018. To secure this loan, STCI and State Bank of India (SBI) were granted a first pari passu charge over the fixed assets of the Corporate Debtor under a supplementary mortgage deed dated 04.08.2018. STCI's admitted claim amounted to Rs. 39,55,34,828, significantly higher than SBI's claim of approximately Rs. 9 crores. A default occurred on 29.02.2020, leading STCI to issue an Event of Default notice on 09.02.2021 and a Recall Notice on 21.05.2021. The Corporate Insolvency Resolution Process was initiated on 29.03.2022, and liquidation was ordered on 19.12.2023.
Key Facts
- The Corporate Debtor had prior secured loans from a consortium of banks including SBI, Karnataka Bank, IDBI Bank, Axis Bank, Bank of India, and Indian Bank, with charges over both fixed and current assets.
- The loan agreement dated 29.11.2017 required STCI to obtain No Objection Certificates (NOCs) from existing secured creditors and execute an inter se agreement to create a first pari passu charge.
- Conditional NOCs were issued by SBI and other consortium lenders on 27.08.2018, subject to two conditions: (i) execution of an inter se agreement among lenders, and (ii) issuance of a reciprocal NOC by STCI in favour of SBI.
- STCI registered the charge with the Registrar of Companies on 15.09.2018 but never executed the inter se agreement or issued a reciprocal NOC to SBI.
- STCI filed its claim on 17.01.2024, explicitly stating it had not relinquished its security interest under Section 52(1)(b) of the IBC.
- The Liquidator admitted the claim on 17.02.2024 but later assumed relinquishment due to non-compliance with Regulation 21A.
- On 21.02.2024, the Liquidator emailed STCI demanding payment of CIRP costs (Rs. 34,11,727) and workmen dues within 90 days from liquidation commencement (19.12.2023), i.e., by 19.03.2024.
- STCI did not pay the dues, did not intimate any proposed realization value, did not initiate SARFAESI proceedings, and did not participate in Stakeholders' Consultation Committee meetings held on 22.02.2024, 01.03.2024, 02.04.2024, and 04.05.2024.
- The Liquidator issued an e-auction notice on 08.03.2024 for sale of the Corporate Debtor as a going concern.
- On 21.05.2024, the auction concluded with a sale consideration of Rs. 78 crores.
- Secured creditors holding 69.15% of the value initially relinquished their security interest; this increased to over 85% after two additional banks relinquished their claims.
- STCI filed an application before the Adjudicating Authority on 18.03.2024 seeking to restrain the auction, which was dismissed on 22.04.2024.
- On 20.08.2024, the Adjudicating Authority directed issuance of the sale certificate to the successful bidder, Rakesh Ramanlal Shah.
- On 05.11.2024, the Adjudicating Authority granted immunities under Section 32A of the IBC to the successful bidder without notice to STCI or other financial creditors.
Procedural History
- 29.11.2017: Term loan agreement executed between STCI and IMP Powers Limited
- 04.08.2018: Supplementary mortgage deed creating first pari passu charge in favour of STCI and SBI
- 29.02.2020: Default in repayment
- 09.02.2021: Event of Default notice issued by STCI
- 21.05.2021: Recall Notice issued demanding full repayment
- 29.03.2022: Corporate Insolvency Resolution Process admitted under Section 7 of IBC
- 19.12.2023: Liquidation order passed by NCLT
- 21.12.2023: Liquidator issued public announcement inviting claims
- 17.01.2024: STCI filed claim of Rs. 39,55,34,828, asserting non-relinquishment of security
- 17.02.2024: Liquidator admitted STCI's claim
- 21.02.2024: Liquidator emailed STCI demanding payment of CIRP and liquidation costs within 90 days
- 08.03.2024: Liquidator issued e-auction notice for sale as going concern
- 18.03.2024: STCI filed application before NCLT seeking stay on auction
- 22.04.2024: NCLT dismissed STCI's application; directed no sale certificate or distribution pending further hearing
- 26.06.2024: NCLT permitted Liquidator to proceed with sale certificate issuance
- 20.08.2024: NCLT directed issuance of sale certificate within three days; sale proceeds to be kept in interest-bearing fixed deposit
- 05.11.2024: NCLT granted Section 32A immunities to successful bidder without notice to STCI
- 21.05.2024: First Appeal (CA(AT)(Ins.) No. 1019 of 2024) filed before NCLAT
- 23.08.2024: Second Appeal (CA(AT)(Ins.) No. 1657 of 2024) filed before NCLAT; NCLAT directed sale certificate issuance subject to outcome of appeal
- 24.05.2025: Third Appeal (CA(AT)(Ins.) No. 893 of 2025) filed before NCLAT
The Parties' Positions
Appellant (STCI Finance Limited): Asserted it held a valid first pari passu charge, had not relinquished its security interest, and had complied with Section 52 by filing Form D. Argued that the Liquidator's assumption of relinquishment was illegal, and that Regulation 21A cannot override statutory rights under Section 52. Claimed violation of natural justice and non-participation in SCC meetings.
Respondents (Liquidator and Consortium Banks): Contended that STCI's charge was conditional and unenforceable due to non-execution of inter se agreement and reciprocal NOC. Argued that STCI failed to comply with Regulation 21A(2) by not paying CIRP and liquidation costs within 90 days, triggering automatic vesting under Regulation 21A(3). Asserted that over 85% of secured creditors had relinquished their security, binding STCI under Section 13(9) of SARFAESI Act.
Relief Sought
- Setting aside the impugned orders dated 22.04.2024, 20.08.2024, and 05.11.2024
- Stay on issuance of sale certificate and distribution of proceeds
- Permission to realize secured assets independently under Section 52(1)(b)
- Costs of litigation
- In the Third Appeal: Ex-parte stay of the 05.11.2024 order
The Legal Issue
The central question was whether a secured creditor's statutory right under Section 52 of the Insolvency and Bankruptcy Code to realize its security interest outside the liquidation estate is extinguished by operation of law if it fails to comply with the mandatory payment obligations under Regulation 21A(2) of the IBBI (Liquidation Process) Regulations, 2016, within the prescribed 90-day period.
Arguments Presented
For the Appellant
The Appellant, represented by Mr. Arun Kathpalia, Sr. Advocate, argued that Section 52 grants an absolute right to realize security independently, which cannot be overridden by procedural regulations. It contended that the Liquidator's unilateral assumption of relinquishment was illegal and that Regulation 21A cannot be interpreted to extinguish substantive rights. It relied on Canara Bank v. Rajendran to assert that relinquishment must be voluntary. It further argued that its charge was valid, as it was registered with the Registrar of Companies, and that the failure to execute the inter se agreement was immaterial. It claimed that the Liquidator had not verified the security or handed over possession as required under Section 52(3), thereby preventing enforcement.
For the Respondent/State
The Liquidator and consortium banks, represented by Mr. Krishnendu Datta and Mr. Abhijeet Sinha, Sr. Advocates, argued that the Appellant's charge was conditional and unenforceable due to non-compliance with the NOC conditions. They emphasized that Regulation 21A(2) mandates payment of CIRP and liquidation costs within 90 days of liquidation commencement, and failure under Regulation 21A(3) results in automatic vesting of the asset in the liquidation estate. They relied on Phoenix ARC Pvt. Ltd. v. Kuldeep Verma and HDFC Bank v. Hema Engineering to establish that mere assertion of intent without compliance is insufficient. They further argued that Section 13(9) of SARFAESI Act applied as the "applicable law" under Section 52(4), and that the 85% majority decision to relinquish security was binding on STCI.
The Court's Analysis
The National Company Law Appellate Tribunal undertook a detailed examination of the statutory framework under the Insolvency and Bankruptcy Code and the IBBI (Liquidation Process) Regulations. The Court held that Section 52 does not confer an unfettered right to realize security; rather, it is a qualified right subject to strict compliance with Regulation 21A.
"The right to realize security under Section 52(1)(b) is not absolute. It is contingent upon compliance with the mandatory conditions laid down in Regulation 21A of the Liquidation Regulations. Failure to pay CIRP and liquidation costs within 90 days results in automatic vesting of the secured asset in the liquidation estate under Regulation 21A(3)."
The Court rejected the Appellant's contention that its charge was valid. It found that the NOCs issued by SBI and other consortium lenders were conditional upon execution of an inter se agreement and reciprocal NOC, which were never fulfilled. Citing Andhra Pradesh State Financial Corporation v. Kotak Mahindra Bank and Avil Menezes v. Hinduja Leyland Finance, the Court held that registration of charge under Section 77 of the Companies Act is a procedural formality and cannot substitute the substantive act of creating a valid security interest. The absence of an inter se agreement rendered the charge legally unenforceable.
The Court further held that the Appellant's failure to pay Rs. 34,11,727 as its share of CIRP costs within the 90-day period (by 19.03.2024) triggered the automatic consequence under Regulation 21A(3). The Appellant did not seek an extension, did not deposit the dues, and did not intimate any proposed realization value as required under Regulation 37. The Court emphasized that the consequence under Regulation 21A(3) is automatic and leaves no discretion to the Liquidator or the Tribunal.
"Mere assertion of intention not to relinquish security, without compliance with Regulation 21A(2), cannot sustain a claim to enforce security outside the liquidation estate. The statutory consequence of non-compliance is not a penalty but a legal vesting of the asset."
The Court also found that Section 13(9) of the SARFAESI Act applied as the "applicable law" under Section 52(4), and that the decision of secured creditors representing over 85% of the value to relinquish security was binding on STCI. The Appellant's non-participation in SCC meetings and its failure to object to the sale price of Rs. 78 crores further undermined its claim.
The Court distinguished Canara Bank v. Rajendran, noting that in that case, the Liquidator had coerced relinquishment, whereas here, the vesting was a statutory consequence of the Appellant's own inaction. The Court also held that ICICI Bank v. SIDCO Leather was inapplicable as it dealt with enforcement under general recovery laws, not the collective insolvency framework of the IBC.
The Verdict
The Appellant's First Appeal was dismissed. The Second Appeal was disposed of with a direction to the Adjudicating Authority to determine the distribution of sale proceeds of Rs. 78 crores among stakeholders in accordance with Section 53(1) of the IBC within four weeks. The Third Appeal was dismissed as barred by limitation, having been filed 171 days after the impugned order dated 05.11.2024, exceeding the statutory 45-day limit under Section 61 of the IBC. There shall be no order as to costs.
What This Means For Similar Cases
Compliance with Regulation 21A Is Mandatory and Non-Negotiable
- Practitioners must ensure that secured creditors file Form D and pay CIRP and liquidation costs within 90 days of liquidation commencement to preserve their right to realize security independently
- Failure to pay even a portion of the dues within the period triggers automatic vesting under Regulation 21A(3), regardless of the creditor's claim size or charge ranking
- No extension of time is permissible unless formally requested and granted before expiry of the 90-day period
Conditional Security Interests Are Unenforceable in Liquidation
- A secured creditor cannot claim priority based on a charge that is subject to conditions (e.g., NOCs, inter se agreements) unless those conditions are fully satisfied
- Registration of charge with the Registrar of Companies does not validate an otherwise defective security interest
- Liquidators must scrutinize the underlying loan agreements and NOCs to determine validity of claims before admitting them
Majority Decision Under SARFAESI Is Binding in Consortium Lending
- Where multiple secured creditors hold joint security, decisions taken by creditors representing more than 60% in value under Section 13(9) of SARFAESI Act are binding on dissenting creditors
- This applies even to first charge holders if the security is shared and the statutory threshold is met
- Liquidators may rely on majority consent to proceed with sale as going concern without individual creditor approval
Limitation Periods Under IBC Are Strictly Enforced
- Appeals under Section 61 must be filed within 30 days, extendable only by 15 days for sufficient cause
- Delay beyond 45 days cannot be condoned, even if the appellant was pursuing related proceedings
- Each order by the Adjudicating Authority gives rise to an independent cause of action; limitation is computed from the date of each order
