Secured Creditors explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Two NCLAT decisions govern what happens when some secured creditors relinquish their security and others do not. The answer turns entirely on whether the charges rank in a sequence or rank equally.
Ranked charges — JM Financial ARC v. Finquest Financial Solutions
The situation was that the first charge holder relinquished its security interest whereas the second charge holder did not. The NCLAT held that:
- only the first charge-holder — the secured creditor highest in the inter-creditor ranking — is entitled to enforce its right for realisation of its debt out of the secured asset; and
- no other secured creditor can enforce its right subsequently for realisation of the amount from the same secured asset.
Where the proceeds of realisation are higher than the debt owed to the highest ranking creditor, the extra amount is transferred to the liquidation pool rather than passing down to the second charge holder outside the process.
The decision does not wipe out the second charge holder's debt. It stops that creditor pursuing the same secured asset outside the liquidation once the senior charge holder is in the field.
The surplus goes into the liquidation pool, where the second charge holder participates through the section 53 waterfall along with everyone else. Priority as between secured creditors is respected; parallel enforcement against a single asset is not permitted.
Equal charges — Surana Power v. BHEL
In Mr. Srikanth Dwarkanath, Liquidator of Surana Power Ltd. v. Bharat Heavy Electricals Ltd. the position was different: within pari passu charge holders, some relinquished their security interest and others did not.
The NCLAT held that all the secured creditors, including the respondent, are on the same footing regardless of the mode of creation of the charge. For equally footed charge holders it further held that under section 13(9) of the SARFAESI Act, 2002, any steps for the realisation of assets by secured creditors require confirmation from creditors holding at least 60% of the value of the total debt.
Since the respondent held only 26.24% in value of the total debt, it had no option but to relinquish its interest.
The two situations compared
| Ranked charges (JM Financial) | Pari passu charges (Surana Power) | |
|---|---|---|
| Who may enforce | The first charge holder only | Only with 60% by value confirming |
| Basis | Inter-creditor ranking | Section 13(9), SARFAESI Act |
| Effect on a junior or minority holder | Cannot enforce against the same asset | Effectively must relinquish |
| Where the surplus goes | Liquidation pool | Liquidation estate |
The practical lesson for secured creditors is that the decision to relinquish is rarely made alone. A minority pari passu holder that wants to realise its own security needs 60% of the total debt behind it, and a second charge holder cannot realise an asset the first charge holder is pursuing.
Tax on a liquidation sale — Shree Ram Lime Products v. Gee Ispat
In this NCLT Delhi decision of 22 October 2019, three findings were made on capital gains arising during liquidation:
- Government dues, whether tax on income or on the sale of properties, qualify as operational debt. The applicability of section 178 or section 194-IA of the Income-tax Act does not have an overriding effect on the waterfall mechanism under section 53 of the Code, which is a complete code in itself — so no 1% TDS is required to be deducted — and the capital gain is not to be taken into consideration as liquidation cost.
- The assets liquidated are those released by the secured creditors under the Code. A secured creditor is entitled to effect a sale under the SARFAESI Act and appropriate the entire amount towards its dues, without any liability to first pay the capital gain. If capital gain had to be provided for first and then included as liquidation cost, it would create the anomalous situation of the secured creditor receiving a lesser remittance than it could have realised had it not released the security into the common corpus.
- The Tribunal was unable to comprehend what capital gains would accrue when the extremely stressed assets of a corporate debtor are being liquidated, a situation which presumably gives rise to larger capital losses.
Why the anomaly reasoning matters
The second finding is the analytically important one. Relinquishment is voluntary. If a secured creditor that relinquishes into the common pool ended up worse off than one that enforced under SARFAESI — because the tax came off the top of the pooled realisation — no rational secured creditor would ever relinquish, and the liquidation estate would be emptied of exactly the assets that make a going concern sale possible.
Common mistakes
- Allowing a second charge holder to enforce against an asset the first charge holder is realising.
- Assuming a pari passu holder can realise its own security regardless of the value it holds.
- Deducting 1% TDS on a liquidation sale under section 194-IA.
- Treating capital gains tax as a liquidation cost ahead of distribution.