- 19-Apr-2025
- Healthcare and Medical Malpractice
The Insolvency and Bankruptcy Code (IBC) has a significant impact on the rights of secured creditors when the assets of an insolvent company are sold. The treatment of these creditors during the insolvency resolution process or liquidation is crucial, as it determines their ability to recover debts owed to them from the proceeds of the asset sale. The IBC seeks to balance the interests of secured creditors with those of other stakeholders, but it also imposes specific rules regarding priority and the sale of assets.
Under the IBC, secured creditors have a higher priority for repayment over unsecured creditors in both the resolution process and liquidation. The proceeds from the sale of the company’s assets are primarily used to satisfy the claims of secured creditors first, before addressing the claims of other stakeholders.
Secured creditors have a security interest in specific assets (e.g., property, equipment, etc.), and their claims must be settled before any remaining funds can be distributed to unsecured creditors.
The Committee of Creditors (CoC), which includes secured creditors, plays a pivotal role in the insolvency resolution process. The CoC is responsible for approving the resolution plan, which may involve the sale of the company’s assets.
Secured creditors in the CoC have voting rights, and their consent is necessary for approving the resolution plan, including the terms under which the assets may be sold.
If the company is undergoing insolvency resolution under the IBC, the sale of assets can be part of the approved resolution plan. Secured creditors may agree to sell assets in exchange for a settlement or restructured payment plan.
The sale proceeds are used to pay off secured creditors, but only after paying for the costs of the insolvency resolution process (e.g., insolvency professional fees, administrative costs). If there is a shortfall after the sale of assets, the remaining debts may be subject to a negotiated settlement or may remain unpaid if no further funds are available.
If the company is placed into liquidation, the sale of assets is conducted by the liquidator. In this case, the proceeds from the sale of assets are first used to pay the secured creditors based on their security interests.
After the secured creditors are paid, any remaining proceeds are used to settle the claims of unsecured creditors. If there is insufficient recovery to satisfy the secured creditors' claims, they may have to write off the shortfall.
In insolvency proceedings, secured creditors can realize their security interest by selling the assets pledged as collateral. However, this right is subject to the approval of the resolution professional or the Committee of Creditors (CoC) in the resolution process. In liquidation, the liquidator has the responsibility for realizing the assets and distributing the proceeds to creditors.
Secured creditors may also approach the NCLT (National Company Law Tribunal) if they believe that their rights to recover the secured amount through asset sale are being hindered.
If the sale of assets fails to cover the total debt owed to secured creditors, the remaining debt may be written off, or creditors may have to settle for a lesser amount under the resolution plan. In such cases, the secured creditors may accept a haircut (a reduction in the outstanding debt), but this decision is made collectively by the CoC.
Unsecured creditors receive their share only after the secured creditors' claims have been fully satisfied. Secured creditors, however, cannot claim priority over each other unless specific agreements exist between them.
If secured creditors hold personal guarantees from directors or promoters of the company, they may seek to enforce these guarantees during the insolvency process. The IBC allows them to proceed against the personal assets of the guarantors if the asset sale proceeds are insufficient to cover the company's debts.
The CoC (which includes secured creditors) has a major say in the approval of the resolution plan, which often involves the sale of assets to raise funds. The creditors may agree to terms that include the sale of assets to third parties, with the proceeds used to settle the creditors' dues, including the secured creditors.
In some cases, secured creditors may challenge asset sales if they believe the sale price is too low or if they believe their security interest is being compromised. However, the IBC provides mechanisms for resolving such disputes, including court hearings before the NCLT.
Consider a case where ABC Ltd., a manufacturing company, enters insolvency proceedings. The company owes ₹50 crore to its secured creditors, including a bank that holds property as collateral.
The Committee of Creditors (CoC) agrees to a resolution plan that involves selling the company’s manufacturing facility to a third-party buyer for ₹40 crore. The proceeds are used to repay the secured creditors.
After deducting the costs of the insolvency process, the secured creditors receive a portion of the sale amount, but there remains a shortfall of ₹10 crore.
If the company had been liquidated, the liquidator would sell the manufacturing facility and use the proceeds to pay the secured creditors. The remaining debt would either be written off or resolved through negotiations, and the bank would not be able to recover the full amount.
Under the Insolvency and Bankruptcy Code (IBC), secured creditors are given priority over unsecured creditors when it comes to the sale of assets, both in resolution and liquidation processes. The process involves complex considerations regarding the realization of collateral, the order of priority, and potential haircuts for creditors if sale proceeds are insufficient. Secured creditors have a significant role in approving resolution plans and ensuring that their claims are properly addressed during asset sales.
Answer By Law4u Team
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