Context: In a recent judgement, the NCLAT set aside an order of Chennai NCLT on the grounds that BHEL’s charge over Surana Power assets were equal to the other 10 financial creditors, and therefore it could not be given precedence.
More on news:
- The National Company Law Appellate Tribunal (NCLAT) has ruled that the liquidation process of a company under the Insolvency and Bankruptcy Code (IBC) holds precedence over the outcome of an arbitration proceeding.
What does the NCLAT order mean?
- The NCLAT’s judgment essentially holds that if a corporate debtor is being liquidated, a creditor can not claim superiority over other secured creditors in the same band, and that everyone must receive their fair share by following the waterfall mechanism of liquidation.
What is the waterfall mechanism for liquidation?
- The waterfall mechanism under Insolvency and Bankruptcy Code gives priority to secured financial creditors over unsecured financial creditors.
- The mechanism says that if a company is being liquidated, these secured financial creditors must be first paid the full extent of their admitted claim, before any sale proceedings are distributed to any other unsecured creditor.
- Under Section 53 of the IBC, which deals with waterfall mechanism, the top most priority, however, is given to costs related to the liquidation process and dues of workmen of the corporate debtor.
Salient features of IBC
- It applies to both individuals and companies.
- Earlier it provided for a 180-270 days period to resolve insolvency but now the deadline of 330 days has been set for completion of the corporate insolvency resolution process (CIRP), including litigation and other judicial processes.
- It provides immunity to the debtors from claims of resolution by creditors during this period of resolution.
- It provides for a common platform of debtors and creditors of all classes to resolve insolvency.
- The Code gives the highest priority to those who have brought interim finance to meet the costs of resolution or liquidation, followed by dues to workers for the past two years and dues to secured creditors in equal priority.
- Employees other than workmen, and unsecured creditors and operational creditors are further down the line in the priority of receiving resolution or liquidation proceeds.
Source: https://indianexpress.com/article/explained/what-does-recent-nclat-ruling-liquidation-of-a-firm-under-ibc-holds-precedence-mean-6468623/#:~:text=The mechanism says that if,to any other unsecured creditor.
Image Source: nclat.nic.in