The Insolvency and Bankruptcy Code, 2016 ("IBC") is an Act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders. In common parlance, the terms 'Insolvency' and 'Bankruptcy' are often used interchangeably. However, there is a thin line of difference between these two words. Insolvency is a financial situation, where an entity or an individual is unable to meet the financial obligations due to excess of liabilities over assets, whereas, Bankruptcy is a legal procedure where the court of law passes orders with respect to insolvency of an individual or entity and consequently passes orders for its resolution. Thus, an individual or an entity can be insolvent without being bankrupt and insolvency can lead to bankruptcy if the insolvent individual or entity is unable to overcome the financial catastrophe.

The insolvency resolution process is a process under the IBC, where the National Company Law Tribunal (NCLT) initiates a Corporate Insolvency Resolution Process (CIRP) when a company defaults in making payment to its creditors. A financial creditor, operational creditor or corporate itself can file an application before NCLT for initiating CIRP when default has occurred. The IBC provides for a time-bound process to resolve insolvency of the corporate debtor within a total period of 330 days from date of the order passed by the NCLT. The NCLT appoints an Insolvency Professional as Interim Resolution Professional. The Committee of Creditors (COC) may regularize Interim Resolution Professional as Resolution Professional or appoint another Insolvency Professional as Resolution Professional in the first meeting of the COC. If the insolvency of the Corporate Debtor cannot get resolved, then the liquidation process gets initiated as per Section 33 of the IBC.

Section 53 of the IBC relates to 'distribution of assets' under the Liquidation Process. Clause (b)(ii) of Section 53 relates to debts owed to a secured creditor in the event such secured creditor has relinquished security interest in the manner set out in section 52. The word "Security Interest" is defined in Section 3(31) of the IBC as under:

"3(31) "Security Interest" means right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person, provided that security interest shall not include a performance guarantee;"

The security interest is regarded as "real interest" (right in rem) as opposed to "personal interest" (right in personam) and as such, security interest is the interest in the property itself. Secured lenders may, on default of the personal obligation of the debtor, enforce their rights on the property, and demand the residual debt, if any, from the debtor. This right of the secured debtor is preserved in the situation of winding up/liquidation as well, with the difference being that there is an appropriation of a pari-passu share of workmen's dues. Thus, IBC, like insolvency laws across jurisdictions, allows the secured creditor with an option of either (a) relinquishing security interest and claiming from the liquidation estate, in which case the ranking of such creditor is the highest among claimants, and pari passu with workmen; or (b) enforcing security interest outside liquidation, in which case, the secured creditor's residual claim is in the waterfall under Section 53.

Regulation 37 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (Liquidation Regulation) deals with the provision for realization of security interest by the secured creditor. Therefore, it is clear that for realization of security interest by a secured creditor only two options are available to him. Firstly, he can realize the security interest in accordance with the provision of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), which is provided in Section 13 (9) of the SARFAESI Act. But he can exercise his right to enforce security interest only if it is agreed upon by the secured creditors representing not less than sixty per cent (60%) in value of the amount outstanding as on a record date and then such action shall be binding on all the secured creditors. Section 13(9) of the SARFAESI Act states as under:

Subject to the provisions of the Insolvency and Bankruptcy Code, 2016, in the case of financing of a financial asset by more than one secured creditors or joint financing of a financial asset by secured creditors, no secured creditor shall be entitled to exercise any or all of the rights conferred on him under or pursuant to sub-section (4) unless exercise of such right is agreed upon by the secured creditors representing not less than [sixty per cent] in value of the amount outstanding as on a record date and such action shall be binding on all the secured creditors.Therefore, it is clear that a 'Creditor' in whose favor right of 'security interest' has been created, i.e., right, title or interest or a claim to property, which includes mortgage, charge, hypothecation or assignment from relinquish its 'security interest' or may claim under Section 52 of the Code. Sections 52 and 53(1)(b) of the Code are two alternative routes available to a secured creditor. As regards the submission of claim for the full value of the asset, a secured creditor who wishes to come before the liquidator has to prove his debt and he can prove his debt, either for the whole of his claim, or, if he chooses to stay outside liquidation, for the amount of the remainder after realization from the sale of the asset. A secured creditor may file his claim for the full amount, only if he relinquishes his security for the benefit of the general body of creditors. The creditor cannot, thus, state that while it has filed its claim for the entire amount, the creditor has not relinquished his security and still has the option of realization outside liquidation. Further, on reading of Section 36(3)(g) of the IBC, it is amply clear that in case of assets subject to security interest, only such of the assets become part of the liquidation estate over which the secured creditors have relinquished security interest.

If the creditor decides to enforce security interest outside liquidation utilizing the option given in Section 52, it is mandatory under the law for the creditor to notify of such an intent to the liquidator, as is required under Regulation 37(1) of the Liquidation Regulation. The liquidator comes into picture, insofar as the secured asset is concerned, only if and to the extent the security interest has been relinquished, because it is only then that the asset forms a part of liquidation estate. However, the creditor cannot wait for months, and contend that it has not relinquished security interest. The creditor does not have any right to stall liquidation proceedings. Regulation 32 of the Liquidation Regulations prohibits the Liquidator to sell an asset which is subject to security interest, unless the security interest therein has been relinquished to the liquidation estate. Regulation 21A of the Liquidation Regulations provides that where a secured creditor does not intimate its decision within thirty days from the liquidation commencement date, the assets covered under the security interest shall be presumed to be part of the liquidation estate. In terms of Section 36 (3)(g) of the IBC, the liquidation estate of a Corporate Debtor comprises all liquidation estate assets which include any asset of the Corporate Debtor in respect of which a secured creditor has relinquished security interest.

The extant Section 52 of the IBC and the erstwhile Section 529 of the Companies Act, 1956 has been derived from Section 47 of the Provincial Insolvency Act, 1920, which stipulates-

"47. Secured creditors- (1) Where a secured creditor realizes his security, he may prove for the balance due to him, after deducting the net amount realized.

"47. Secured creditors- (1) Where a secured creditor realizes his security, he may prove for the balance due to him, after deducting the net amount realized.

On perusal of the aforesaid provision, it is evident that a right was available to the secured creditor, under Section 47 of the Insolvency Act of 1920, and has a similar option under the present regime to realize the security and to prove for the balance due to him in case on realization of such security he is not able to recover the entire amount due to him. If, however, the secured creditor does not opt to realize his security but relinquishes it for the general benefit of the creditors, then he may prove for his whole debt. The company courts in various rulings have already pointed out the stage at which a secured creditor is required to exercise its options. The stage for relinquishing security arises when a secured creditor seeks to prove the whole of his debt in the course of winding up. If, he elects to prove in the course for winding up the whole of the debt due and owing to him, he has to necessarily surrender his security for the benefit of the general body creditors.

The other option is to follow the procedure given in Regulation 37 of the Liquidation Regulation. It is pertinent to mention that secured creditor has two options only - either to relinquish the security interest or to take action to enforce the same. Thus, it is clear that if a secured creditor wants to realize its security in accordance with Section 13(9) of SARFAESI Act, then it must have sixty percent in the value of the amount as on the record date and in that case, such action shall be binding on all such secured creditors.

The hon'ble National Company Law Appellate Tribunal (NCLAT) in JM Financial Asset Reconstruction Company Ltd. vs. Finquest Financial Solutions Pvt. Ltd. and Ors.1 has held:

28. If Section 52 is read in its totality, then it will be evident that a 'Secured Creditor' as per subsection (2) of Section 52, realizes its 'security interest' under clause (b) of sub-section (1), is required to inform the Liquidator of such 'security interest' and identify the asset subject to such 'security interest' to be realized.

29. As per sub-section (3) of Section 52, before any 'security interest' is realized by the 'Secured Creditor' under Section 52, on receipt of application, the Liquidator is required to verify such 'security interest and permit the 'Secured Creditor' to realize only such 'security interest', the existence of which may be provide either (a) by the records of such 'security interest' maintained by an information utility; or (b) by such other means as may be specified by the Board. Therefore, it is clear that it's the Liquidator, who is to permit the 'Secured Creditor' to realize 'security interest' after proof of the existence of 'security interest' in accordance with clauses (a) and (b) of sub-section (3) of Section 52.


The decision of a secured creditor to relinquish its security interest is connected to its claims from the liquidation estate. Section 52(9) of the IBC provides that where the proceeds of the realization of the secured assets are not adequate to repay debts owed to the secured creditor, the unpaid debts of such secured creditor shall be paid by the liquidator in the manner specified in clause (e) of sub-section (1) of section 53. Section 53(1)(e)(ii) of the IBC Code, 2016, provides for distribution of proceeds from liquidation estate towards debts owed to a secured creditor for any amount unpaid following the enforcement of security interest. Whereas, section 52 (7) of the IBC states that where the enforcement of the security interest under sub-section (4) yields an amount by way of proceeds which is in excess of the debts due to the secured creditor, the secured creditor shall (a) account to the liquidator for such surplus; and (b) tender to the liquidator any surplus funds received from the enforcement of such secured assets.


Judgement passed by the NCLAT vide order dated 11.12.2019, reported as MANU/NL/0618/2019

Originally published May 2020

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