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CS Professional · Insolvency and Bankruptcy - Law and Practice · Debt Recovery and Securitization

Lakshmi Finance, a secured creditor, took possession of the mortgaged factory of Rao Polymers Ltd and sold it for ₹4.2 crore. Costs of enforcement properly incurred were ₹20 lakh, and the secured dues were ₹4.5 crore. There is no contrary contract. Which statement is correct under section 13?

Proceeds are applied first to costs of ₹20 lakh and then ₹4 crore to the dues, leaving ₹50 lakh unpaid. Under section 13(10) the creditor may apply to the Debts Recovery Tribunal or a competent court to recover this balance from the borrower.

  1. AThe proceeds are applied first to costs of ₹20 lakh, then ₹4 crore goes towards dues, leaving ₹50 lakh of dues; the creditor may apply to the DRT or competent court for the balanceCorrect
  2. BThe entire ₹4.2 crore is applied to dues, leaving ₹30 lakh, and costs are written off
  3. CCosts are applied after dues, so the shortfall is ₹30 lakh
  4. DThe creditor cannot recover any balance because it chose enforcement under SARFAESI

Explanation

Under section 13(7) the money is held in trust and applied firstly to costs, charges and expenses and secondly to the dues. 4.2 crore minus 0.2 crore leaves 4.0 crore against dues of 4.5 crore, so ₹50 lakh remains. Section 13(10) lets the creditor apply to the DRT or competent court for the balance.

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