Exclusion of Hypothecated Assets from Liquidation Estate Disallowed Where Section 52 Election Is Belated: NCLAT

A pending Scheme of Compromise and Arrangement under Section 230 of the Companies Act, 2013 cannot extend the statutory period available to a secured creditor to elect to realise its security outside the liquidation estate, the National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, has held.

On October 6, 2026, in Tata Capital Limited v. Sanjay Mahajan, Company Appeal (AT) (Insolvency) No. 1067 of 2026, the NCLAT dismissed Tata Capital’s appeal against the NCLT, Mumbai Bench’s refusal to exclude hypothecated assets from the liquidation estate.

The Corporate Debtor entered liquidation on August 13, 2024. Tata Capital, a secured financial creditor, filed its claim in Form D on October 1, 2024. While it entered “NIL” against Serial No. 8, relating to details of security held, it answered “No” against Serial No. 8A, concerning relinquishment of security interest. Tata Capital was a member of the Stakeholders’ Consultation Committee (SCC), having attended its first meeting on September 19, 2024, and participated in its meetings, including in consideration of a Section 230 Scheme proposed by the suspended board. After the SCC rejected the Scheme on February 4, 2025, Tata Capital, by email dated February 19, 2025, sought exclusion and handover of the hypothecated assets.

The NCLAT examined Tata Capital’s claim under Section 52 of the Insolvency and Bankruptcy Code, 2016 (IBC) read with Regulation 21A of the IBBI (Liquidation Process) Regulations, 2016. Section 52 permits a secured creditor either to relinquish its security interest to the liquidation estate and receive proceeds in accordance with Section 53, or to realise the security outside the liquidation estate. Under the regime applicable to the present liquidation, which predates the 2026 amendments to Section 52 and Regulation 21A, Regulation 21A required the creditor to communicate its decision in Form C or Form D within 30 days of commencement of liquidation, failing which the secured assets were deemed relinquished.

The Tribunal held that the existence of a security interest and exercise of the statutory option to realise that security are distinct matters. Tata Capital’s loan and hypothecation documents established its security interest but could not substitute the statutory election. The NCLAT found that the entries in Form D, read together, did not clearly communicate an election to stand outside the liquidation estate. The February 19 email was the first clear written request for exclusion and was therefore beyond the prescribed period; it could not retrospectively cure the failure to exercise the option within time.

The Tribunal also rejected Tata Capital’s contention that the pending Section 230 proceedings justified the delay. It held that consideration of a revival scheme does not keep the statutory requirements of the liquidation process in abeyance. On a combined reading of Section 52(2) and Regulations 21A, 31A(2) and 39BA, it further held that Regulation 39BA, which concerns exploration of compromise or arrangement, does not extend the time available to a secured creditor to elect to stand outside the liquidation estate.

Tata Capital relied on Swiss Ribbons Pvt. Ltd. v. Union of India [W.P. (C) No. 99 of 2018], Action Ispat and Power Pvt. Ltd. v. Shyam Metalics and Energy Ltd. [(2021) 2 SCC 641] and Y. Shivram Prasad v. S. Dhanapal [Company Appeal (AT) (Insolvency) No. 224 of 2018], to contend that participation in the revival process was consistent with the IBC’s objective of revival and value maximisation. The NCLAT held that those principles could not be read as dispensing with the specific statutory requirements governing exercise of the Section 52 option.

Noting that, under the proviso to Regulation 31A(2), a secured creditor that has not relinquished its security interest cannot be part of the SCC, the NCLAT further treated Tata Capital’s continued SCC participation, voting and awareness of the custody and valuation of the assets as relevant circumstances. It held that a secured creditor cannot simultaneously participate in the liquidation process and preserve an uncommunicated option to withdraw its assets depending upon the outcome of the Section 230 Scheme.

Accordingly, the appeal was dismissed and the NCLT order affirmed. Tata Capital was held not entitled to exclude the hypothecated assets from the liquidation estate or realise them outside the liquidation process on the basis of its belated communication.