Surana Power Liquidation: NCLAT’s Confusing Logic May Hurt Secured Creditors
Emissions billow from smokestacks at a power plant in India. (Photographer: Kuni Takahashi/Bloomberg)

Surana Power Liquidation: NCLAT’s Confusing Logic May Hurt Secured Creditors

In Surana Power’s liquidation proceedings, the National Company Law Appellate Tribunal has come to the right conclusion but by using a principle that may hurt secured creditors. NCLAT has imported the provisions of the Sarfaesi Act for liquidation under the Insolvency and Bankruptcy Code.

Surana Power’s liquidator faced a deadlock after 73.76% of secured creditors relinquished their security interest but BHEL with a 26.24% share refused to. The assets of Surana Power were hypothecated to banks in 2010, while BHEL’s lien was a result of an arbitral award in January 2018. This made BHEL a secured operational creditor.

The liquidator argued that the attempt is to undertake a slump sale of Surana Power, which is not possible if all secured creditors don’t agree to give up their interest. Ten of the 11 secured creditors have relinquished their security interest into the liquidation estate, and it’s only BHEL that’s holding up the sale, the liquidator argued before the NCLAT.

BHEL responded saying that it’s only exercising its ‘unqualified and unbridled’ powers as per Section 52 of the insolvency law. This section provides two alternatives to secured creditors—relinquish interest and receive proceeds as per the specified creditor hierarchy or realise the asset, recover dues and deposit the surplus in the liquidation estate.

But the insolvency law is unclear on what happens in situations where a secured creditor doesn’t have an exclusive charge over the company’s assets—something the liquidator was faced with in Surana Power’s case.

To address this, the NCLAT imported the threshold under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act. It pointed out that realisation of assets under Sarfaesi requires an approval by creditors having at least 60% of the value of total debt. Since BHEL did not have this consent, its refusal to relinquish cannot be upheld, the NCLAT said.

“Since the respondent [BHEL] does not have a requisite 60% value in secured interest, therefore, it does not have right to realise its security interest, because it would be detrimental to the liquidation process and the interest of the remaining 10 secured creditors.” — NCLAT Order

Suharsh Sinha, partner at AZB & Partners, said, the first issue with this order is that BHEL is not a bank or financial institution—so it should not be bound by Sarfaesi principles. The NCLAT ruling is worrisome on account of Sarfaesi principles being brought into the IBC liquidation proceedings to cram down non-Sarfaesi creditors, he said.

Second, the NCLAT should’ve asked the liquidator to determine who had the prior charge. From the facts in the order, it seems like it was banks. A charge prior in time is superior—this principle is enshrined under Section 48 of Transfer of Property Act and has been upheld in liquidation proceedings under the company law. The Supreme Court has laid down in ICICI vs Sidco that even among secured creditors, there can be priority which must be respected in liquidation.
Suharsh Sinha, Partner, AZB & Partners

While the liquidation regulations don’t explicitly prescribe a hierarchy, proceeds under resolution plans have to take into account priority and value of the security interest of secured creditors. The NCLAT should’ve applied principle at the liquidation stage to come to the conclusion it has.

Experts fear that importing Sarfaesi principles can have unintended consequences.

There could be a situation where a secured creditor with a 30% prior, superior charge wants to realise the security but the remaining 70% secured creditors – whose charge is inferior, later in time – do not give their consent.

Sinha said this is what makes the NCLAT’s reasoning problematic as the latter can scuttle the former’s right based on this precedent. "Creditors who are 'out of the money' should not have the right to thwart enforcement by creditors who have priority," he said.

Kumar Saurabh, partner at Khaitan & Co., agreed with the unintended consequences of the NCLAT order, but also said there’s merit in this principle for cases where all secured creditors have an equal charge.

The IBC is silent on how relinquishment would work between the same class of charge holders, and so it’s not a bad proposition to let the 60% decide if relinquishment should prevail over individual realisation by a creditor.
Kumar Saurabh, Partner, Khaitan & Co. 

In this case, the NCLAT has taken the Sarfaesi threshold approach to end the deadlock but perhaps the facts didn’t require it to do so, Saurabh said.

It appears that bank had security which was pre-existing and BHEL got a lien over the property as a result of the arbitral award. Lien is normally always lower than a charge and BHEL’s plea could’ve been dismissed after examining this ground, he said.

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