Liquidation waterfall with relinquished and third-party security
Meridian Textiles Ltd is in liquidation; the liquidation commencement date is 1 November 2025. The liquidation estate contains listed shares of a subsidiary worth ₹12 crore, a plant worth ₹8 crore and cash of ₹2 crore. The shares are pledged to a debenture trustee securing ₹20 crore of NCDs; the trustee elects to relinquish the security. A promoter has pledged his personal shares worth ₹5 crore to North Bank for a ₹15 crore loan to Meridian; North Bank elects to realise that third-party pledge. Claims are: CIRP costs ₹1 crore; workmen’s dues ₹3 crore for the 24 months before liquidation; employee wages ₹1 crore for 12 months; NCD holders ₹20 crore; North Bank ₹15 crore; unsecured financial creditors ₹10 crore; government dues ₹4 crore; operational creditors ₹2 crore. The liquidator must distribute the estate.
1. Compute the distribution under section 53. Show the treatment of the NCD holders and North Bank.
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Liquidation estate = ₹12 crore shares + ₹8 crore plant + ₹2 crore cash = ₹22 crore. The promoter’s ₹5 crore shares are third-party assets and are excluded. Pay CIRP costs ₹1 crore, leaving ₹21 crore. Under section 53(1)(b), workmen’s dues of ₹3 crore and the relinquishing NCD holders’ ₹20 crore rank equally. Total ₹23 crore against ₹21 crore, so pro rata: workmen get 3/23 × 21 = ₹2.739 crore; NCD holders get 20/23 × 21 = ₹18.261 crore. Nothing remains for employees, unsecured financial creditors, government, operational creditors or shareholders. North Bank realises ₹5 crore from the promoter’s shares and proves only the ₹10 crore deficit as an unsecured financial debt; it receives nil from the estate.
2. Would the NCD holders have been better off realising the shares under section 52? Explain.
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If the NCD holders realised the shares, they would retain ₹12 crore and prove the ₹8 crore deficit as unsecured financial debt. The estate would then be plant ₹8 crore + cash ₹2 crore = ₹10 crore. After CIRP costs ₹1 crore, workmen’s ₹3 crore would be paid in full, leaving ₹6 crore; employee wages ₹1 crore would be paid, leaving ₹5 crore. Unsecured financial claims would be NCD deficit ₹8 crore + North Bank deficit ₹10 crore + other unsecured ₹10 crore = ₹28 crore. NCD holders would receive 8/28 × ₹5 crore = ₹1.43 crore, total ₹13.43 crore. That is less than ₹18.26 crore on relinquishment, so relinquishing is better.
3. Can North Bank prove the full ₹15 crore as a secured claim in liquidation? What if the promoter’s shares realise ₹18 crore?
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North Bank cannot prove the full ₹15 crore as a secured claim in the liquidation. It is a secured creditor only to the extent of the third-party shares; it realises them outside the liquidation estate. It can claim the ₹10 crore deficit as an unsecured financial debt. If the shares realise ₹18 crore, North Bank retains ₹15 crore and returns the ₹3 crore surplus to the promoter, not to the liquidator, because the shares never belonged to the corporate debtor. The liquidator should not include the third-party shares or the surplus in the liquidation estate.