Section 52 IBC: Secured Creditors in Liquidation

A secured creditor in liquidation stands at a fork. It can hand its security over to the liquidator and take its place near the top of the waterfall, or it can keep the security, enforce it itself and step outside the common pool. Section 52 governs this choice. The 2026 Amendment tightened it considerably, with a statutory deadline for the election, a majority rule where security is shared, and clear deductions for costs and workmen's dues. This note explains both options and how a creditor chooses between them.

1. The Two Options, Section 52(1)

• Relinquish. Under section 52(1)(a), the secured creditor may relinquish its security interest to the liquidation estate and receive proceeds from the sale of assets by the liquidator in the manner specified in section 53.
• Realise. Under section 52(1)(b), it may realise its security interest in the manner specified in section 52.
• Why it matters. A relinquishing creditor ranks in clause (b) of the waterfall, equally with workmen's dues for 24 months; a realising creditor recovers from its own security, and any shortfall ranks much lower, in clause (e)(ii) (Topic 57)

Figure 1: The secured creditor's two options

2. The Election and Its Deadline

• Before 2026. Regulation 21A of the Liquidation Process Regulations, inserted in 2020, required a secured creditor to intimate its decision to realise within 30 days of the liquidation commencement date, failing which its security was deemed relinquished.
• Section 52(2), 2026. A secured creditor intending to realise must notify the liquidator and identify the asset within 14 days of the liquidation commencement date; if it does not, its security interest is deemed relinquished to the liquidation estate.
• Shared security. Where several secured creditors hold security over the same asset, realisation requires the agreement of creditors holding not less than 66 per cent of the value of all secured claims over it, preventing a small charge holder from forcing a piecemeal sale.
• Transition. The Explanation provides that the substituted section 52(2) does not apply to liquidations initiated before the amendment came into force.

3. The Realisation Process

Figure 2: Steps when a secured creditor realises

• Verification, section 52(3). Before realisation, the liquidator verifies the security interest and permits realisation only of a security interest proved by the records of an information utility or other specified means.
• Enforcement, section 52(4). The secured creditor may enforce, realise, settle, compromise or deal with the secured assets in accordance with the law applicable to the security interest and to itself, such as the SARFAESI Act, and apply the proceeds to its debt.
• Resistance, section 52(5). If the corporate debtor or any connected person resists, the secured creditor may apply to the NCLT, which may pass orders permitting it to realise the security.
• Surplus. If the proceeds exceed the debt due, the secured creditor must account to the liquidator for the surplus and hand it over to the estate.

4. Deductions and Shortfall

• Section 52(8), 2026. Insolvency resolution process costs, liquidation costs and workmen's dues falling under section 53(1)(a) and (b)(i) are deducted from the realisation proceeds and transferred to the liquidator, within the period and on the conditions specified; earlier, the statute referred only to resolution costs, and the share of workmen's dues was required by Regulation 21A.
• Rationale. A realising creditor should not escape the costs of the process or the claims of workmen that it would have shared had it relinquished its security.
• Section 52(9). Where the proceeds are insufficient, the unpaid part of the debt is paid by the liquidator in the manner specified in section 53(1)(e)(ii), equally with government dues for two years.

5. Relinquishment after 2026

• Value of the security. A new Explanation to section 53(1)(b)(ii) provides that where the value of the relinquished security is less than the debt, the creditor is treated as secured only up to that value, determined as specified, and as unsecured for the balance.
• Effect. Undersecured creditors can no longer use relinquishment to claim clause (b) priority for their whole debt; the balance competes in the lower classes.
• Statutory charges. Since a security interest now arises only by agreement (Explanation to section 3(31)), a government department with only a statutory charge cannot elect to realise under section 52 (Topic 43)

6. Choosing Between the Options

A creditor with a valuable, easily saleable asset and a large exposure may prefer to realise, recovering its debt from the asset alone after the statutory deductions. A creditor whose security forms part of an integrated set of assets, such as one unit of a plant, or whose security is shared, may do better by relinquishing, since the liquidator can sell the assets together, in a slump sale or as a set, often at a higher price, and the creditor ranks near the top of the waterfall. The 2026 changes, especially the value cap on relinquishing creditors and the 66 per cent rule, alter this calculation and make early assessment essential.

7. Frequently Asked Questions

What happens if a secured creditor stays silent after the liquidation order?

After 2026, if it does not notify the liquidator within 14 days, its security interest is deemed relinquished to the estate, and it ranks under section 53(1)(b)(ii).

Can a second charge holder sell a factory on which the first charge holder holds 80 per cent of the secured debt?

Not alone. Realisation of a shared security needs the agreement of creditors holding at least 66 per cent of the value of secured claims over the asset.

A bank realises its security and recovers only half its debt. What about the rest?

The unpaid balance is claimed in the liquidation and ranks under section 53(1)(e)(ii), equally with government dues for two years, under section 52(9).

Can a secured creditor use the SARFAESI Act during liquidation?

Yes, if it has elected to realise. Section 52(4) permits enforcement under the law applicable to the security interest, and the liquidation moratorium is subject to section 52.

8. Related Topics

• Topic 55: Section 36. The liquidation estate.
• Topic 57: Section 53. The waterfall mechanism.
• Topic 86: IBC vs SARFAESI and the RDB Act. Enforcement outside insolvency.