The National Company Law Appellate Tribunal ruled that, under Section 53(1) of the Insolvency and Bankruptcy Code (IBC), 2016, unsecured financial creditors take precedence over operational creditors in the distribution of a corporate debtor's liquidation estate. The tribunal clarified that related-party unsecured financial creditors are treated the same as other unsecured financial creditors.
The Corporate Insolvency Resolution Process (CIRP) for Brand Connect Communications (India) Pvt. Ltd. commenced on March 27, 2018, and the Adjudicating Authority ordered its liquidation on January 28, 2019. The Appellant, an Operational Creditor, and Respondent No. 2, an ex-director and Financial Creditor, submitted claims to the Liquidator, who rejected the Appellant's objections to the distribution of proceeds based on Section 53.
The National Company Law Tribunal (NCLT) in its order had upheld the Liquidator's decision, stating that Section 53 makes no distinction between unsecured financial creditors and related-party unsecured financial creditors. The Appellant cannot be prioritized over an unsecured financial creditor's debt.
The issue before the Appellate Tribunal was to consider whether the Appellant has priority over an Unsecured Financial Creditor. The Hon’ble Appellate tribunal noted that "a straightforward interpretation of Section 53(1) clearly indicates that financial debts owed to unsecured creditors are prioritized over those of operational creditors."
Citing the Hon’ble Supreme Court's ruling in Swiss Ribbons Private Limited v. Union of India, the Appellate Tribunal emphasized the distinction between financial debts (secured or unsecured) and operational debts, which justifies their differential treatment in the waterfall mechanism. The Tribunal clarified that Respondent No. 2 was claiming distribution as an unsecured financial creditor, not as an equity shareholder under Section 53(1)(h). Further, citing its own decision in Shailesh Sangani vs. Joel Cardoso (2019 SCC OnLine NCLAT 52), the Appellate Tribunal concluded that loans from a promoter or director to improve the company's financial health qualify as financial debt, even without interest. Thus, the loan from Respondent No. 2 was deemed a 'financial debt.'
Ultimately, the Appellate Tribunal dismissed the appeal, ruling that the Appellant cannot claim priority in the distribution of the corporate debtor's assets over the unsecured financial creditor.
Times Innovative Media Limited vs Pawan Aggarwal (Liquidator) & Anr.
Company Appeal (AT) (Insolvency) No.1139 of 2024
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