The case, Times Innovative Media Ltd. v Pawan Kumar Aggarwal & Anr., revolves around the question of whether a related party unsecured financial creditor can retain priority over an operational creditor in the distribution of liquidation assets under Section 53 of the Insolvency and Bankruptcy Code (IBC), 2016. The NCLAT’s decision provides clarity on the treatment of related party financial creditors in liquidation, especially when it comes to their standing in the distribution waterfall.

 

The Corporate Insolvency Resolution Process (CIRP) against Brand Connect Communications (India) Pvt. Ltd. was initiated and eventually led to liquidation. The appellant, an operational creditor, challenged the priority given to Respondent No. 2, an ex-director and an unsecured financial creditor, in the distribution of liquidation assets. The appellant argued that as a related party, Respondent No.2 should not be given priority over operational creditors and should be treated as an equity shareholder instead.

 

The NCLAT dismissed this appeal, holding that the appellant, as an operational creditor, could not claim priority over an unsecured financial creditor, even if that financial creditor was a related party. The Tribunal’s decision was grounded in the interpretation of Section 53 of the IBC, which outlines the order of priority for the distribution of liquidation assets.

 

The Tribunal noted that Section 53(1) clearly places unsecured financial creditors higher in the waterfall mechanism than operational creditors. The NCLAT emphasized that there is no statutory distinction between related and unrelated financial creditors when it comes to their place in the liquidation waterfall.

 

The appellant had argued that related party financial creditors should be treated differently due to their connection with their company. However, the NCLAT pointed out that while related party financial creditors are restricted in certain aspects of the CIRP, these restrictions do not extend to liquidation proceedings. The Tribunal also observed that the Insolvency and Bankruptcy Board of India (Liquidation Process Regulations), 2016, do not exclude related party financial creditors from filing claims during liquidation. Thus, the related party financial creditor in this case retained its status as an unsecured financial creditor, with priority over the operational creditor.

 

This decision resolves a significant legal question, and ensures that related parties, despite facing restrictions in the CIRP, are treated on par with other financial creditors in liquidation.

Authors & Contributors

Associates:

Abhishek Kurian

Debargha Roy