Liquidator Was Right in Placing Unsecured FC Ahead of Operational Creditor in Distribution of Assets u/s 53 of IBC | NCLAT

Case Details: Times Innovative Media Ltd. v. Pawan Kumar Aggarwal - [2024] 167 taxmann.com 240 (NCLAT-New Delhi)

Judiciary and Counsel Details

• Ashok Bhushan, J.
• Dr. Atul Singh, Adv. for the Appellant.
• Ms Honey Satpal, M.S. Bhardwaj, Yash Dhyani, Ms Nandini Choudha & Yahya Batatawala, Advs. for the Respondent.

Facts of the Case

In the instant case, the CIRP was initiated against the corporate debtor, and thereafter, liquidation was ordered against the corporate debtor. In the liquidation proceeding, the appellant filed an objection claiming priority in payment of its operational debt overpayment to the respondent financial creditor, which the liquidator rejected.

The appellant filed an instant application before the NCLT sought a direction to the liquidator to give priority to operational creditors in the distribution process under section 53 of the IBC over the financial creditor, which was a related party of the corporate debtor.

The NCLT, vide the impugned order, rejected the application filed by the appellant on the ground that the appellant, who was an operational creditor, could not be given any preference over a debt of the unsecured financial creditor.

The NCLT further held that section 53 of the IBC did not envisage any difference between unsecured financial creditor and related party unsecured financial creditor and, therefore, the liquidator was not wrong in placing related party unsecured financial creditor ahead of operational creditors in a waterfall mechanism.

NCLAT Held

The NCLAT held that under the IBBI (Liquidation Process) Regulations 2016, a claim by financial creditors can be filed as per regulation 18. Thus, the scheme of Regulations 2016 does not indicate that the related party is excluded from filing a claim.

Further, the NCLAT held that in order of priority in the distribution of assets in the liquidation process, financial debts owed to unsecured creditors rank higher than the debt of operational creditor and, therefore, an instant application was to be dismissed.

List of Cases Reviewed

•  Order of NCLT(MUMBAI) in IA No.2382 of 2021 in C.P. (IB) No. 220/MB/2017, dated – 24-4-2024 [2024] 167 taxmann.com 198 (NCLT -Mum.) (para 28) affirmed
• Swiss Ribbons Pvt. Ltd. v. Union of India (2019) 4 SCC 17 (para)
• Shailesh Sangani v. Joel Cardoso and Anr 2019 SCC OnLine NCLAT 52 (para 22) followed
• J.R. Agro Industries Pvt. Ltd. v. Swadisht Oils Pvt. Ltd. 2018 SCC OnLine NCLT 22990 (para 20)
• Arun Kumar Jagatramka v. Jindal Steel and Power Ltd. and Anr. (2021) 7 SCC 474 (para 24) distinguished

List of Cases Referred to

• J.R. Agro Industries P. Limited v. Swadisht Oils P. Ltd. 2018 SCC OnLine NCLT 22990 (para 4)
• Arun Kumar Jagatramka v. Jindal Steel and Power Limited & Anr. (2021) 7 SCC 474 (para 4)
• M.K. Rajgopalan v. Dr. Periasamy Palani Gounder & Anr. (2024) 1 SCC 42 (para 4)
• Swiss Ribbons Pvt. Ltd. v. Union of India (2019) 4 SCC 17 (para 5)
• Shailesh Sangani v. Joel Cardoso and Anr 2019 SCC OnLine NCLAT 52 (para 21)
• Arun Kumar Jagatramka v. Jindal Steel and Power Limited and Anr (2021) 7 SCC 474 (para 23)
• Appellant has also referred to “M.K. Rajagopalan v. Dr. Periasamy Palani Gounder and Anr- (2024) 1 SCC 42 (para 26).