Showing posts with label section-53-distribution-of-funds. Show all posts
Showing posts with label section-53-distribution-of-funds. Show all posts

Monday, 19 January 2026

Regional Provident Fund Commissioner-II Vs. Harshavardhan Cotton and Synthetic Mills Pvt. Ltd. and Anr. - a part of ‘all sums due to the workmen/employee’ will be within the meaning of Section 36(4)(a)(iii) and accordingly will have to be treated as a third-party asset under Section 36(4)(a)(iii) to be kept outside the liquidation estate.

  NCLAT (2026.01.13) in Regional Provident Fund Commissioner-II Vs. Harshavardhan Cotton and Synthetic Mills Pvt. Ltd. and Anr. [(2026) ibclaw.in 41 NCLAT, Company Appeal (AT) (CH) (Ins.) No. 455/2023 (IA Nos. 1421 and 1422/2023)] held that; 

  • The implications of the above ratio as propounded are very clear; that is, Section 36(4) of the I & B Code, 2016, will take precedence over Section 53, as far as the distribution of assets of the liquidation estate is concerned.

  • First, the Liquidator will identify the assets of the CD and take charge of them, then he will exclude assets that falls under Section 36(4) of the I & B Code, 2016, including third-party assets falling under Section 36(4)(a) and thereafter, form the liquidation estate which he then proceeds to realise and distribute among the stakeholders as per the formula prescribed under Section 53 of the code. Thus, it is clear that distribution under Section 53 of the I & B Code, 2016, will have to be done subject to Section 36(4) of the code.

  • In view of the above ratios, it has to be accepted that the issue is no more Res Integra and that all sums due from provident fund will include within it the amounts determined under Section 7Q and 14B as well.

  • Thus, if an enterprise has not been permitted to maintain separate provident fund/pension fund/gratuity fund, it has to remit the dues to be paid into the respective funds maintained by EPFO by law and even if it has not done so, which is the case on hand, then the said amount will be deemed to be a part of the said funds and consequently, a part of ‘all sums due to the workmen/employee’ will be within the meaning of Section 36(4)(a)(iii) and accordingly will have to be treated as a third-party asset under Section 36(4)(a)(iii) to be kept outside the liquidation estate.


Blogger’s Comments; Observations of the Hon’ble NCLAT are quite baffling. How come the PFdues (a liability) can be a part of assets under ”Liquidation Estate”. The issue has been clarified by Hon’ble HC Bombay (2025.04.29) in Dalmia Cement (Bharat) Limited & Ors. Vs. The Central Board of Trustees, EPFO, [2025:BHC-NAG:4461-DB, Writ Petition No. 693 /2022] as under;

  • As discussed above the Provident Fund of an employee, which includes both the components (a) employee contribution and (b) employers contribution, cannot be held to be ‘assets’, over which the corporate debtor can be held to have any rights of ownership or  dominion and would, even in case it is not deposited in the Provident Fund account, by the employer would continue to be property owned by the employee, held in trust by the employer, on behalf of the employee for being deposited in the provident fund account and thus would be outside the scope and ambit of the duties of the IRP as specified in sec.18 of the IB Code.

  • Not only this, sec.10, even directs that neither the Official assignee appointed under the Presidency Towns Insolvency Act, nor any received appointed under the Provincial Insolvency Act, shall be entitled to or have any claim on such provident fund amount of an employee, thereby indicating that it is to be preserved sacrosanct, by granting it immunity even in respect of insolvency proceedings, which may be initiated, even against such employee.

  • It would thus be apparent that since the employers provident fund contribution, cannot be included in the definition of ‘assets’, in view of Explanation (a) to Sec.18(1) of the IB Code, there would be no obligation upon the provident fund department to lodge a claim for the dues, in that regard with the IRP and get such claim verified so as to be included in the Resolution Plan.


Excerpts of the Order;

This appeal arises from the Impugned Order dated 17.11.2023, issued by the National Company Law Tribunal, Division Bench-I, Chennai, in IA(IBC)/116(CHE)/2022 in MA/623/2018 as it was preferred in CP/104/IB/2018. The said application, IA(IBC)/116 (CHE) /2022, had been filed invoking Section 54 of the I & B Code, 2016, by the Liquidator of the corporate debtor (CD) M/s. Harshavardhan Cotton and Synthetic Private Limited, seeking an order for dissolution of the CD. The said application was allowed by the Ld. Adjudicating Authority, against which the present appeal has been filed.


Brief facts of the case:-

# 2. The Corporate debtor, M/s Harshavardhan Cotton and Synthetics Pvt. Ltd., is an establishment, which stands covered under the provisions of Employees’ Provident Funds & Miscellaneous Provisions Act, 1952, with Code Numbers MD/MDU/41334 and MD/41334-A. The establishment employed 181 workers. On an application that, was instituted by the Operational Creditor, Bhadresh Trading Corporation, the Ld. Adjudicating Authority, directed commencement of Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor by an order dated 12.03.2018 in CP/104/IB/CB/2018. During this process, the Hon’ble NCLT declared a moratorium and appointed Mr. Raghuram Mani as the Interim Resolution Professional (IRP). Since no resolution plans were received, the committee of creditors (COC) resolved to liquidate the Corporate Debtor during its 3rd meeting on 14.03.2018 and to file an appropriate application to that effect before the Ld. Adjudicating Authority. Consequently, vide the order dated 03.12.2018, the adjudicating authority allowed the said application and ordered liquidation of the CD.


# 3. Following his appointment, the Liquidator made a public announcement on 7th December 2018 inviting claims those the creditors and the stakeholders, verified the claims those were received, prepared the list of stakeholders and filed it before the NCLT on 15.02.2019. Further, the Liquidator admitted claims to the tune of Rs.16,79,16,396.49 and initiated steps for realising the assets of the CD, so as to enable him to settle such claims. There were no left over immovable/movable assets of the CD as they had already been sold even before the commencement of CIRP. As recorded in the impugned order by NCLT, the only asset that was available with the CD were financial assets in form of receivables, which the Liquidator took steps to realise from various debtors, including the related parties of the CD. In the process, he realised a total sum of Rs. 9,20,57,356.00 in the liquidation account. After this, the Liquidator submitted the Asset memorandum before Ld. NCLT and then proceeded to distribute the amount amongst the stakeholders in accordance with Regulation 42 of the liquidation regulations, 2016, to be read with Section 53(1) of the I & B Code, 2016. After the said distribution, the Liquidator filed the dissolution application before the Ld. NCLT, which was allowed by Ld. NCLT vide the impugned order.


# 4. The Appellant herein had also submitted a claim of Rs. 6,34,816/- in the shape of Form-C on 01.01.2019, which consisted of payment of interest and damages on account of default in paying the EPF contributions in time, for the period 2007 to 2015. The Liquidator had admitted the said claims in full, under Section 40(1) I & B Code and communicated the same vide his letter dated 01.02.2019. In the same letter, the Liquidator had also stated that the liquidation proceeds will be distributed as per the provision of Section 53 of the I & B Code, 2016, as and when it is realised from the assets of the CD. The Appellant had insisted through his letter dated 08.01.2020, that priority may be assigned to EPF dues, as they have the first charge over the assets of the establishment as per Section 11(2) of the EPF and MP Act, 1952, and therefore the same may be paid in priority to all other debts. The Liquidator by his letter dated 23.01.2020 informed the Appellant, that the claim of EPFO consists of penal damages and interest, and it has already been included for consideration under Section 53(1)(e) of I & B, Code 2016, for the purpose of distribution of liquidation proceeds.


# 5. The Appellant through his letter dated 27.10.2020 informed the Liquidator, that as per Section 36(4)(a)(iii) of the code, PF dues shall not form the liquidation estate and is bound to be treated as third-party assets in the hands of the Liquidator and therefore the PF dues may be released before initiating the process of distribution of the proceeds in accordance with the waterfall mechanism prescribed under Section 53 of the code. To this, the Liquidator replied on 02.11.2020, thereby contending that only PF contribution of the employee and of the employer are to be treated as the sum due to the workmen / employees from the provident fund, pension fund and gratuity fund and consequently, as third-party assets in the hands of the Liquidator as per provision of Section 36(4)(a)(iii) of the Code and that the claim of the Appellant towards penal damages and interest have been categorised and placed under Section 53(1)(e) of the code and same would be paid depending upon the realisation of the assets of the CD, as per the provisions of the code. The Appellant EPFO sent another detailed letter to the Liquidator on 19.11.2020, contending that the question of according priority to the PF dues, including interest and penal damages payable on it, is the ratio that has been already settled by Hon’ble Apex Court in the matter of Maharashtra State cooperative bank Limited Vs. Kannad Sahakari Sakhar Karkhana Ltd and others, as decided in SLP no. 14772-14773/2010 and Hon’ble High Court of Madras too, in the matters of EPF Commissioner V. Official Liquidator of M/s. ESSKAY Pharmaceutical Ltd and also in CA/899/12 in CP/230/2001 in the matter of Murugan Mills(P) limited, where Hon’ble Supreme Court has held that priority is to be given to EPF dues, and that EPF dues will include within itself not only the amount assessed under Section 7A but also interest under Section 7Q and damages contemplated under Section 14B of the EPF Act. To this, the Liquidator replied on 28.11.2020 that the said judgements pertains to a period prior to enactment of I & B Code 2016 and that, as the Liquidator, is strictly bound to follow the provisions of the Code, which will prevail over any other conflicting laws or instruments in force, including case laws by virtue of the implications of Section 238 of the code. Stating the same, he reiterated his position that he has categorised the claim of EPFO (which consisted of penal damages and interest) as govt. dues under Section 53(1)(e) of the code and will pay the same, depending on the realisation of the assets.


# 6. Accordingly, the Liquidator proceeded to categorise the claim of EPFO to the tune of Rs.6,34,816/- as government dues instead of treating it as a third-party asset and placed the same under Section 53(1)(e) of the code. He went on to realize a total of Rs. 9,20,57,356/- from various stakeholders and related parties towards the liquidation estate and distributed the same in accordance with the provisions of Section 53(1). In the process, EPFO, i.e., the Appellant, got nil amount.


# 7. Thereafter, the Liquidator, on completion of the distribution of liquidation estate among the creditors and stakeholders, filed the application IA/116/2022 before NCLT praying for the dissolution of the Corporate Debtor. NCLT, after observing that since no applications are pending for avoidance, preferential, undervalued, or fraudulent transactions and that the final report & the compliance certificate in the shape of Form-H have been filed, which indicated that the corporate debtor has been completely liquidated, passed the impugned order ordering dissolution of the corporate debtor on 17.11.2023. The Liquidator intimated the same to the Appellant through his letter dated 22.11.2023, enclosing a copy of the impugned order. Aggrieved by the said order, which dissolved the CD, without settling his claim, the Appellant herein has preferred the instant appeal.


Appellant’s submissions:

# 8. It is the case of the Appellant that the Liquidator has incorrectly concluded that only the contribution of the workmen, and the contribution of the employer towards PF will be covered by the provisions of Section 36(4)(a)(iii) of the Code and that the interest computed under 7Q and damages computed under 14B of EPF Act are in the nature of government dues and will come under Section 53(1)(e) instead of Section 36(4)(a)(iii). The Appellant has submitted that, the Liquidator has erred in law by placing the claim of the Appellant under Section 53(1)(e) of the code, in complete disregard of the settled position of law regarding distribution of assets of the CD under liquidation which has been laid down by Hon’ble Supreme Court in its judgement dated 02.05.2023 in the matter of Moser Baer Karamchari Union vs. Union of India and Others reported in (2023)238Compcas 458(SC).


# 9. He has further submitted that the issue; of whether the PF dues is expressly excluded from the assets of the CD as per the provisions of Section 36(4)(a)(iii) of the I & B Code, 2016, has already been dealt with by this Appellate Tribunal in in its judgement dated 19.08.2019 in the matter of SBI versus Moser Baer Karamchari Union and another in company Appeal (AT)(Ins) No. 396/2019 and it has been expressly declared therein that all sums due to workmen and employees from provident fund, the pension fund and the gratuity fund cannot be included in the liquidation estate for the purpose of distribution of assets under Section 53(1) of the code. He has been contended that the said order has attained finality with the dismissal of the appeal filed by SBI in Civil Appeal No. 258/2020 against the said order before the Hon’ble Apex Court. He has further placed reliance on yet another judgment dated 02.11.2022 that was rendered by this Appellate Tribunal in the matter of Assam Tea Employees Provident Fund Organization Vs. Madhur Agrawal, RP of Hail Tea Limited and Others in Company appeal (AT)(Ins) No. 262/2022 to assert that, any amount due from the employer under Section 11(2) of EPF Act also covers the amount that has been determined under Section 14B and that the provident fund dues are not subject to distribution under Section 53(1) of the code and that they are liable to be paid in full in view of the judgement of Hon’ble Supreme Court in Maharashtra State Cooperative Bank Limited Vs. Assistant PF Commissioner and Others. The Appellant has also relied upon the judgement of Hon’ble Supreme Court dated 19.04.2022 in Civil Appeal No. 5910/2020 in the matter of Sunil Kumar Jain and others Vs. Sundaresh Bhatt, which declares that the concerned workmen/employees shall be entitled to the provident fund, gratuity fund, and the pension fund which are specifically kept out of liquidation estate and as per Section 36(4) of the code, they are not to be used for recovery in the liquidation. Finally, the Appellant has cited the decision rendered by this Appellate Tribunal in the matter of Anuj Bajpai Vs. Regional PF Commissioner, Coimbatore to support his argument that Section 53(1) cannot be made applicable to the dues coming under provident fund, pension fund, and gratuity fund and that the PF dues should have been paid before commencing distribution of liquidation proceeds under Section 53(1) of the I & B Code, 2016.

10. The Appellant has further contended that the financial creditor, the City Union Bank, has been the beneficiary of distribution of the assets of the CD and therefore it has to return the amount equivalent to his claim in view of specific provision under Regulation 43 of IBBI (liquidation process) regulations 2016. Accordingly, it was prayed that the impugned order of Ld. NCLT maybe set aside and the Respondent may be directed to re-distribute the claim amount of Rs.6,34,816/- due to EPFO on first priority from and out of the liquidation assets of the CD.


Case of the Respondent

# 11. On the contrary, the Respondent/Liquidator has submitted that, it had discharged its duties as contemplated under the code including publication of the notice, inviting claims, verification and admission of the claims, preparation of the list of stakeholders, preparing and completing the audit of the books of accounts for the entire period, appreciation, and preparation of the asset memorandum, realization of Rs.9,20,57,356/- in the liquidation account from various customers, including related parties, distribution of the same to the stakeholders as per the intention of Section 53 of the code, and preparation of the final report containing the details of liquidation of the assets and that the Liquidator had filed the application in IA No. 116/2022 seeking for an order of dissolution of the CD, which was allowed by Ld. NCLT by the impugned order.


# 12. He has contended that the amount realised by him, will have to be treated as part of the liquidation estate, which will have to be distributed under Section 53 of the code because of the non-obstante clause attached to it and therefore, he has not violated any of the provision of the code. He has further contended that, the true meaning of Section 36(4)(a)(iii) will be that if there are any funds of the corporate debtor that are specifically segregated or classified as provident fund, pension fund, and gratuity fund, the same shall not be used for settling the dues of other creditors in terms of Section 53 of the I & B Code, 2016, and that the same cannot be interpreted to mean that the dues payable towards provident fund, pension, and gratuity shall be paid from the liquidation estate in priority over other classes of creditors or at par with secured financial creditors. He has stated that since the corporate debtor did not have a separate account/fund to pay pension, provident fund and gratuity, no amount could be set apart and kept outside of the liquidation estate as per the provisions of Section 36(4)(a)(iii) of the code. He has relied upon the observations made in paragraph 25.2 of the judgment of the Hon’ble Supreme Court, in the matter of Sunil Kumar Jain Vs. Sundaresh Bhatt (supra) to support his argument that since there are no such dedicated fund, no amount could have been set apart to pay the provident fund dues in priority before commencing distribution of the proceeds of liquidation among the stakeholders / claimants as per the provisions of Section 53 of the Code. Accordingly, he has submitted that the prayer of the Appellant is in contravention to the provisions of Section 53 of the code and therefore it is liable to be dismissed as baseless.


# 13. We have heard the arguments extended by the respective counsels and gone through the submissions and records submitted by both the parties. The wider issues to be decided are threefold;

a) Whether, in the event of process of settlement of claims during liquidation, Section 36(4)(a)(iii) will take precedence over Section 53 of the I & B Code, 2016.

b) Whether ‘all sums due to any workmen or employee from the provident fund, the pension fund and the gratuity fund’ as described in Section 36(4)(a)(iii) of the Code, will also include interest under Section 7Q and damages under Section 14B as determined under the relevant provisions of EPF Act and claimed by EPFO as due from the CD?

c) Whether the sums as described above will have to be held in a dedicated fund in the CD so as qualify to be a third-party asset to remain outside the liquidation estate?


# 14. The first issue has already been conclusively decided by a series of judgements pronounced by Supreme Court and NCLAT. Supreme Court in its judgement dated 02.05.2023 in the matter of Moser Baer Karamchari union versus Union of India and Others reported in (2023)238Compcas458(SC) categorically has held that in case of liquidation of a company under the I & B Code, 2016, the distribution of the assets shall have to be done as per Section 53 of the I & B Code, 2016, subject to Section 36(4) of the I & B Code, 2016. The relevant paragraph is extracted below.

  • “18 …. In case of the liquidation of a company under the IBC, the distribution of the assets shall have to be made as per Section 53 of the IBC subject to Section 36( 4) of the IBC, in case of liquidation of company under IBC.

  • …. 8. For the purpose of the present decision, we are not interpreting Sub-clause (iii) to Clause (a) of SubSection (4) to Section 36 of the Code as this is an issue of some debate and pending consideration in other matters. The legal effect of exclusion is that, the amount of sums due to any workmen or employee from the provident fund, the pension fund or the gratuity fund cannot be made subject matter of reduction or dilution even in a rehabilitation or revival plan. They are excluded from the waterfall mechanism and would not be used in recovery on liquidation, and they cannot be shared …. ”


The implications of the above ratio as propounded are very clear; that is, Section 36(4) of the I & B Code, 2016, will take precedence over Section 53, as far as the distribution of assets of the liquidation estate is concerned. Intuitively too it also, this makes eminent sense. First, the Liquidator will identify the assets of the CD and take charge of them, then he will exclude assets that falls under Section 36(4) of the I & B Code, 2016, including third-party assets falling under Section 36(4)(a) and thereafter, form the liquidation estate which he then proceeds to realise and distribute among the stakeholders as per the formula prescribed under Section 53 of the code. Thus, it is clear that distribution under Section 53 of the I & B Code, 2016, will have to be done subject to Section 36(4) of the code.


# 15. The second issue of, whether amount determined under Section 7Q and 14B of the EPF Act, will come within the meaning of ‘all sums due to workmen/employee from Provident fund’ has also been settled by a series of judgements of this Appellate Tribunal. The Appellant has referred to the judgement dated 10.07.2024 that was rendered in the matters of Anuj Bajpai vs. Employee Provident Fund organisations (2024) to support his contention that the provident fund dues will fall within the meaning of Section 36(4)(a)(iii) of the I & B Code, 2016, will consist of not only the amount determined under Section 7A, but also the amounts to be determined under Section 7Q and Section 14B as well. The relevant paragraphs of the said judgement is extracted below:-

  • “..,51.The Hon’ble Supreme Court laid down that there is no reason to give restrictive meaning of expression ..any amount due from the employer,, and to confine to only amount determined under Section 7A of the EPF Act, The Hon’ble supreme Court further held that interest payable.by the employee under Section 7Q and the damages levied under Section; 148 of the EPF Act will also be covered as dues from the employers for the purpose of Section 11(2) of the EPF Act.

  • 52. we note that in the present appeal the amount which has been claimed by the employer are covered under Section 7A, 7Q and 14B of the EPF Act and therefore are fully governed by the judgement Maharashtra state Cooperative Bank (Supra).

  • 53. In view of this clear judgement of the Hon’ble Supreme Court of India the contention of the Appellant are not tenable and stand rejected.

  • 54. we also note that the Hon’ble supreme court of India in Sunil Kumar Jain v, Sundaresh Bhatt [(2022) 7 SCC 540] held that the dues of the gratuity and pension shall be governed by Section 36(4) of the Code. It is reiterated that Section 36(4)(ii) of the code specifically excludes “all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund”, from the ambit of liquidation estate assets, Therefore, Section 53(l) of the code cannot be made applicable to such dues, which are to be treated outside the liquidation estate assets under the code. Section 36(4) of the code has clearly gives protection to workmen’s dues under provident fund, gratuity fund and pension fund which are not to be treated as liquidation estate assets and the Liquidator cannot claim over such dues,..,”


# 16. We find that this Appellate Tribunal had also delivered a judgement dated 21.10.2022 in the matters of Jet Aircraft Maintenance Engineers Welfare Association vs. Ashish Chhwachharia, RP of Jet Airways (India) Limited and others in which it had deliberated on the same issue in a substantial manner and came to the conclusion that the PF dues will also include within it the amount determined under Section 7Q and 14B. The relevant paragraphs are reproduced here under:

  • “118. Challenge to the Resolution Plan by the Appellant is on the ground that Section 11 of the 1952 Act requires priority over all other dues and further Section 36(4)(a)(iii) excludes provident fund dues from the liquidation estate of the Corporate Debtor. We have already dealt with provisions of Section 36(4)(a)(iii) in foregoing paras of this judgment. Now, we, need to look into Section 11 of 1952 Act. The Section 11 of the 1952 Act provides for priority of payment of contributions over other debts. Learned counsel for the Appellant has relied on judgment of the Hon’ble Supreme Court in “Maharashtra State Cooperative Bank Limited vs. Assistant Provident Fund Commissioner & Others, (2009) 10 SCC 123”. The Hon’ble Supreme Court dealing with Section 11 of 1952 Act laid down following in Para 67:

  • “67. The expression “any amount due from an employer” appearing in sub-Section (2) of Section 11 has to be interpreted keeping in view the object of the Act and other provisions contained therein including sub-Section (1) of Section 11 and Sections 7A, 7Q, 14B and 15(2) which provide for determination of the dues payable by the employer, liability of the employer to pay interest in case the payment of the amount due is delayed and also pay damages, if there is default in making contribution to the Fund. If any amount payable by the employer becomes due and the same is not paid within the stipulated time, then the employer is required to pay interest in terms of the mandate of Section 7Q. Likewise, default on the employer’s part to pay any contribution to the Fund can visit him with the consequence of levy of damages.”

  • 119. The above judgment lays down that any amount due from employer appearing in sub-Section (2) of Section 11 also covers the amount determined under Section 14B and there cannot be any quarrel to the preposition as laid down by the Hon’ble Supreme Court in the above case. The priority for payment of debt under Section 11 of the 1952 Act has to be looked into in view of the mechanism which is specifically provided under Section 53(1) of the Code. We have already dealt the provision of Section 36(4)(a)(iii) of the Code and held that provident fund dues are not subject to distribution under Section 53(1) of the Code. The issue is fully covered by three member bench judgment of this Tribunal in “Tourism Finance Corporation of India Ltd. vs. Rainbow Papers Ltd. & Ors.” (Supra). In view of foregoing discussion, we hold that provident fund dues were entitled to be paid in full. In view of the judgment of Supreme Court in “Maharashtra State Cooperative Bank Limited vs. Assistant Provident Fund Commissioner & Others” (Supra), the claim of Appellant was to be satisfied in full, otherwise breach of provision of Section 30(2)(e) would have occurred. We, thus, are inclined to issue direction to the Successful Resolution Applicant to make payment of the admitted claim of the Appellant towards provident fund dues to save the plan from invalidity.”


# 17. Similar views have also been expressed by other coordinate benches of this Appellate Tribunal in the matters of Truvisory insolvency professionals Private Limited (IPE) versus EPFO in CA(AT)(Ins) No. 580/2023; and also in the matter of SBI versus Moser Baer employees union in Company Appeal (AT) (Insolvency) No. 396 of 2019. All the judgments draw their inspiration from the findings recorded in the judgment of the Honourable Supreme Court in the matter of Maharashtra State Cooperative Bank versus Assistant Provident Fund Commissioner. In view of the above ratios, it has to be accepted that the issue is no more Res Integra and that all sums due from provident fund will include within it the amounts determined under Section 7Q and 14B as well.


# 18. Now we will proceed to answer the third issue framed by us, i.e., whether the sums due to workmen/employee from provident fund, pension fund, and the gratuity fund are to be held in a dedicated fund so as to qualify for being treated as a third party asset, to be kept outside the liquidation estate? The Respondent argues that, as per the ratio laid down in the matter of Sunil Kumar Jain (Supra), there has to be a dedicated fund for such sums, failing which, the said amounts will be included in the liquidation estate. The relevant paragraph which is cited by the Respondent. is extracted below:-

  • “25.2 considering Section 36(4) of IBC and when provident fund, gratuity fund and pension fund are kept out of the liquidation estate assets, the share of the workmen’s dues shall be kept outside the liquidation process and the workmen/employees concerned shall have to be paid the same out of such provident fund, gratuity fund, and pension fund, if any, available and the Liquidator shall not have any claim over such funds.”


# 19. The Respondent relies on a cursory reading of the paragraph as above to contend that workmen/employees will be paid out of the provident fund, gratuity fund, and the pension fund, if any, available and if such funds are not available, then the dues of the employees in form of PF, pension, and gratuity will have to be paid in accordance with the provisions of Section 53 of the code. This is not a correct interpretation which can be assigned to the issue. If the entire judgement is taken into consideration, it will be apparently clear that the provident fund, gratuity fund and the pension fund will have to be kept outside the liquidation estate by treating it as third party asset. It is not material whether this funds are maintained in a dedicated account as long as such amounts are held by the CD. Even if they are not classified in a dedicated account, then too it has to be presumed that, the CD is holding these amounts and will have to pay the said amount to the workmen/employee at an appropriate time. It needs to be mentioned here that certain enterprises have been given the latitude to open their own provident funds/pension funds/gratuity funds by giving exemption under EPF Act, and these enterprises maintain separate funds. The rest of the enterprises who come under EPF Act are mandated to remit the dues to EPFO promptly, failing which they have to pay the same with interest and damages computed under Section 7Q and 14B respectively. Thus, if an enterprise has not been permitted to maintain separate provident fund/pension fund/gratuity fund, it has to remit the dues to be paid into the respective funds maintained by EPFO by law and even if it has not done so, which is the case on hand, then the said amount will be deemed to be a part of the said funds and consequently, a part of ‘all sums due to the workmen/employee’ will be within the meaning of Section 36(4)(a)(iii) and accordingly will have to be treated as a third-party asset under Section 36(4)(a)(iii) to be kept outside the liquidation estate. The third issue is answered accordingly.


# 20. From the above, we come to the conclusion that the Liquidator has erroneously placed the claim of the Appellant EPFO under Section 53(1)(e) of the code instead of treating it as a third-party asset under Section 36(4)(a), that the amount Rs. 6,34,816/-ought to have paid to the Appellant before the distribution under Section 53 was resorted to by the Liquidator and therefore, the said amount should be recovered from the financial creditor City Union Bank Respondent-2 herein under Regulation 43 of IBBI liquidation process regulations 2016 and paid to the Appellant.


# 21. We find that NCLT has already passed the order of dissolution. The right course would have been to set aside the order of dissolution, and to direct the Liquidator. to rectify this error and then to apply for dissolution of the CD. However, in the interest of cutting short the litigation, we are of the view that the interest of justice will be served, in case the financial creditor, Respondent-2, is directed to remit the amount Rs. 6,34,816/-to the Appellant herein within 30 days and report the same to NCLT, which will then direct for making the necessary entries in the liquidation records to the effect.


# 22. The appeal will be closed accordingly. Interlocutory applications, if any, will stand closed.

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Saturday, 12 April 2025

Anil Kohli (Liquidator) V/s Punjab National Bank and Ors. - All assets listed in the Corporate Debtor’s balance sheet are included in the Liquidation Estate under Section 36 of the Insolvency and Bankruptcy Code, 2016. Debt realization during liquidation is permitted only under Sections 52 and 53 of the Code.

 NCLAT (2025.04.02) In Anil Kohli (Liquidator) V/s Punjab National Bank and Ors.  [(2025) ibclaw.in 230 NCLAT, Company Appeal (AT) (Insolvency) No. 865 of 2023 ] held that;

  • That in terms of Section 36 (3) (a) and (g) of the Code, any assets over which the Corporate Debtor has ownership right, including all rights and interest therein as evidenced in the balance sheet of the Corporate Debtor or any asset of the Corporate Debtor in respect of which a secured creditor has relinquished security interest, becomes part of the liquidation estate assets of the Corporate Debtor.

  • All assets listed in the Corporate Debtor’s balance sheet are included in the Liquidation Estate under Section 36 of the Insolvency and Bankruptcy Code, 2016. Debt realization during liquidation is permitted only under Sections 52 and 53 of the Code.

  • Upon liquidation, dues must be distributed strictly according to the waterfall mechanism outlined in Section 53 of the Code.

Blogger’s comments; Here it is quite interesting to note that Liquidator was not in control & custody of the CD, apparently the entries in the books of accounts were done by the erstwhile management i.e. suspended directors, without the knowledge of the Liquidator. Liquidator should have taken charge of the CD when he was appointed IRP at the time of commencement of CIRP. The entire episode reflects on the incompetence of the IRP/Liquidator.


There was no need to pass entries in the books of CD to reflect the payments made by the guarantors to the bank. Bank’s debt upto the extent payments made by guarantors, could have been transferred in the name of guarantors under right of subrogation. Thereafter netting off of mutual debt is permitted under Regulation 29 of Liquidation Regulations.

  • # 29. Mutual credits and set-off.

  • Where there are mutual dealings between the corporate debtor and another party, the sums due from one party shall be set off against the sums due from the other to arrive at the net amount payable to the corporate debtor or to the other party.

  • Illustration: X owes Rs. 100 to the corporate debtor. The corporate debtor owes Rs. 70 to X. After set off, Rs. 30 is payable by X to the corporate debtor.


Excerpts of the Order;

That the present Appeal is being preferred under Section 61 (1) of the Insolvency and Bankruptcy Code, 2016 (“Code”), against the Impugned Order dated 16.06.2023 passed by the National Company Law Tribunal, Chandigarh Bench, Chandigarh (“Adjudicating Authority”) in IA No. 758 of 2020 in [CP (IB) No. 72/CHD/HRY/2017] filed under Section 9 of the Code.


Brief facts of the case

# 2. On 21.11.2017, the Bank of India filed Company Petition CP (IB) No. 72/CHD/HRY/2017 under Section 7 of the IBC against CD-M/s Vegan Colloids Limited. The petition was admitted by the Adjudicating Authority, initiating CIRP. Mr. Anil Kohli (Appellant) was appointed as the Interim Resolution Professional (IRP) on 04.12.2017 and later confirmed as the Resolution Professional. On 10.10.2018, the CD - M/s Vegan Colloids Limited was directed to undergo liquidation, and the Appellant was appointed as the Liquidator.


# 3. During liquidation, Respondent No. 1- PNB filed a claim of Rs.18,17,55,581/- on 17.12.2018, which was admitted by the Liquidator. Respondent No. 1- PNB relinquished its security interest to the Liquidation Estate, agreeing to receive proceeds from the asset sale. The Appellant initiated statutory audits for FY 2018-19 and obtained the audited financials on 08.01.2020. Discrepancies in financials prompted the Appellant to seek clarifications from Personal Guarantors – Respondents No. 2 and 3, and the late Mr. Bajrang Dass Aggarwal, who provided explanations on 25.02.2020.


# 4. The Appellant-Liquidator claimed that Rs.4,50,44,500/- deposited with the Respondent No. 1-PNB formed part of the Liquidation Estate and requested its refund on 26.02.2020 with a reminder on 06.03.2020. As the Respondent No. 1-PNB did not comply, the Appellant filed an application (IA No. 758/2020) before the AA on 26.06.2020, seeking directions to refund Rs.4,50,44,500/- to the liquidation account, arguing that the amount was part of the Corporate Debtor’s assets. On 16.06.2023, the Adjudicating Authority dismissed the Application, holding that the amount had been deposited by guarantors and was not an asset of the Corporate Debtor, which led the Appellant to file the present appeal on 06.07.2023, challenging the decision.


Submissions of the Appellant-Liquidator of CD-M/s Vegan Colloids Limited

# 5. The Adjudicating Authority overlooked significant discrepancies in the Corporate Debtor’s balance sheet, which mainly included:

  • Reduction in Short-Term Borrowings by Rs.4,50,44,500/-.

  • Reduction in Trade Receivables by Rs.2,15,88,181/-, compared to Rs.26,01,427/- in the earlier balance sheet.

The reduction in short-term borrowings indicates recovery by the creditor, Respondent No. 1- PNB, rather than payment by the guarantors.


# 6. Perusal of the Statutory Audit of the Corporate Debtor for the period starting from 01.04.2018 till 10.10.2018 [i.e. liquidation commencement date] and the balance sheet for the period starting from 01.04.2018 till 31.03.2019, it is evident that there are certain changes. Payments have been received by the Company-M/s Vegan Colloids Ltd in liquidation and the same has been paid by the Respondent Nos. 2 and 3 to the Respondent No. 1-PNB. The same being asset of the Corporate Debtor was required to be part of the Liquidation Estate. The said amount being recovered from debtors of the Company in liquidation by the Respondent Nos. 2 and 3 and the payment made to Punjab National Bank being Respondent No.1 – PNB is admittedly an asset over which the Corporate Debtor has ownership rights as evidenced in the balance sheet of the Corporate Debtor and the same is required to be handed over to the Liquidator so that the same can be part of the Liquidation Estate. All assets reflected in the Corporate Debtor’s balance sheet form part of the Liquidation Estate under Section 36 of the IBC Code, 2016. Realization of debts during the liquidation process is permissible only under Sections 52 and 53 of the IBC Code.


# 7. There has been a decrease in the balance of trade receivable and an amount of Rs. 4,50,44,500/- has been reduced from the short-term borrowing in the balance sheet of the Corporate Debtor. In the event, any amount, if believed to be correct as contented and relied by the Adjudicating Authority was paid by Respondent Nos 2 and 3 as guarantors, then no such reduction in the short-term borrowing was required to be made in the balance sheet of the Corporate Debtor.


3 8. During the liquidation process no creditor can realise any amount towards its debt satisfaction from the account of the Corporate Debtor. The only mechanism under which a creditor can realise its security interest is either through Sections 52 or 53 of the Code. Since the Respondent No. 1- PNB had relinquished its security interest to the Liquidation Estate and, therefore, any realisation which Respondent No. 1 could have done towards its debt from the loan account of the Corporate Debtor can only be as per waterfall priority provided under Section 53 of the Code.


# 9. The Adjudicating Authority negated to consider the treatment in the balance sheet of FY 2018-19 whereby the short-term borrowings were reduced will be debt satisfaction qua the creditor from the account of the Corporate Debtor. Respondent No. 1 did not file any document to corroborate that there were any OTS with the guarantors and the amount has been paid by the guarantors from their account. The Adjudicating Authority ignored the material on record, i.e. letter dated 25.02.2020, whereby the suspended board of director confirmed that the short-term borrowing reflected in the balance sheet is the amount paid to Punjab National Bank in the loan account. Admittedly, none of the Respondents refuted or denied this fact. Further, Respondent Nos 2 and 3 neither appeared before the Adjudicating Authority nor bothered to contest the application or file their response, which demonstrate that without any corroborative evidence the said contention has been believed to be correct by the Adjudicating Authority.


# 10. Merely on the contention of the Bank that the amount has been received from guarantors AA gave a finding that the amount does not fall under the assets of the Corporate Debtor. The Respondent No.1 bank did not file any document to substantiate the said contention or to demonstrate that such amount has been received from the guarantors.


# 11. Thus, the finding of the Adjudicating Authority that the said amount is recovered from the guarantors is full of infirmities and therefore, the Impugned Order deserves to be set aside.


Submissions made by the Respondent No.1 – PNB

# 12. The Corporate Debtor had availed financial facilities from the Respondent Bank, with Respondent Nos 1 to 2 and Sh B D Agarwal standing as guarantors by executing guarantee agreements. Under the law, the liability of guarantors is co-extensive with that of the principal borrower, making them jointly and severally liable for repayment. The loan account reflects dues payable by the Corporate Debtor or its guarantors.


# 13. Respondents No. 1-PNB contends that vide letter dated 22.01.2019 Shri B. D Aggarwal/Guarantor had proposed OTS settlement for liquidation of Personal Guarantee and release of some mortgaged properties. And in pursuance to the OTS settlement, they received the amount into the loan account of the corporate debtor is as under:

  • “a. Rs. 1,00,00,000/- (Rupees one crore only) received from M/S Vikas Chemical Gums (India) Corporate Guarantor on 05.01.2019.

  • b. Rs. 1,00,00,000/- (Rupees one crore only) received from M/s Vikas Chemical Gums (India)/ Corporate Guarantor on 19.03.2019.

  • c. Rs. 44,500/- (Rupees Forty four lakhs five hundred only) received from M/S Vikas Chemical Gums (India) Corporate Guarantor on 19.03.2019.

  • d. Rs. 2,50,00,000/- (Rupees two crore fifty lakhs only received from M/s True Value Traders on 05.01.2019.”


# 14. Shri B. D Aggarwal/Guarantor acting as a guarantor, had entered into a OTS with the Bank and acknowledged individual liability through a letter dated 22.01.2019. The letter also referenced mortgaged properties not belonging to the Corporate Debtor, which the guarantor sought to release through settlement. The Bank accepted this proposal. Since Banks do not maintain separate accounts for borrowers and guarantors, any payment made by the guarantors is credited to the principal borrower’s account and adjusted against its liability. Consequently, payments made by the guarantors reduced the Corporate Debtor’s liability to the bank.


# 15. Respondents No. 1-PNB claims in its reply that the appellant is not entitled to refund as the amount of Rs. 4,50,44,500/- was deposited towards OTS which was entered into by the Guarantors in their individual capacity and as Corporate Guarantor for release of their properties under Equitable Mortgage. Except for the letter of Shri B.D Aggarwal there exist no evidence to show that the amount was transferred from the account of the Corporate Debtor or the said amount is the property of the Corporate Debtor.


# 16. Respondents No. 1-PNB also claims that the provisions of Section 52 or Section 53 of the Code is not applicable to the facts and circumstances of the instant case. There exist no explanation/documents reflecting that there existed business transaction between True Value. Except for placing reliance on the letter of Shri Bajrang Dass, no other document substantiating the averments have been filed. The Appellant have failed to bring on record the complete balance sheet.


# 17. Respondents No. 1-PNB admits that the amount was received in the loan account being maintained by the answering respondent and against the mortgaged property of the Corporate Guarantors from the Corporate Guarantors. Hence there exist no cause of action for filing of the instant appeal.


# 18. The amount adjusted in towards the liability of the Corporate Debtor was the amount paid by the guarantors personally and or by way of arrangement with sister concern, to settle the liability towards bank being as guarantors. No amount is paid by the Corporate Debtor directly to the Bank, as such, no question arises to hand over the same to the Liquidator to made a part of Liquidation Estate, therefore, entire facts made it clear that amount paid by the guarantors cannot be the part of the Liquidation Estate. Thus the amount deposited/arranged by the guarantors of the Corporate Debtor in the loan account is against the liability arising and standing in their (guarantors) name after the default has been committed by the Corporate Debtor.


# 19. The payment credited/adjusted towards the liability of the Corporate Debtor is the amount paid/arranged by guarantors of the Corporate Debtor, to settle the liability severely standing in their names (being as guarantor) in particular, as the repayment of loan taken by the Corporate Debtor.


# 20. As per the provisions of law, the surety is jointly and severally liable to pay the debt of the principal debtor. The word ‘surety’ is an alternative term for guarantee in the Law Lexicon and is defined as a person who binds himself for the payment of a sum of money or the performance of something else for another who is already bound for the same. The word ‘co-extensive’ is an adjective for the word ‘extent’ and relates to the quantum of the principal debt. It is a settle proposition of law that the discharge of the principal debtor by operation of law does not discharge the surety and suit may also be maintained against the surety for the full payment of the debt where the principal-debtor has been adjudged insolvent or gone into liquidation. Further, as per the provisions of Code, separate proceedings may also be instituted against the personal/corporate guarantor of the Corporate Debtor, which clearly proves that the liability of surety is co-extensive with the borrower and guarantors are equally liable to pay the dues of the Corporate Debtor.


# 21. The guarantors of the loan account of Corporate Debtor entered into compromise with the answering Respondent Bank and amount was deposited/arranged by the guarantors to clear their liabilities being as guarantors, towards Bank. As such amount which was deposited and adjusted towards liability of the Corporate Debtor cannot be part of the Liquidation Estate. It is further stated that the only assets of the Corporate Debtor will become the part of the Liquidation Estate, whereas, in the matter in hand, amount adjusted towards liability of the Corporate Debtor does not belong to the assets of the Corporate Debtor and same was arranged by the guarantors to absolve themselves from their liabilities in the loan account of the Corporate Debtor.


# 22. The guarantors of the loan account of the Corporate Debtor were entered into compromise with the answering Respondent Bank and amount was deposited/arranged by the guarantors to clear their liabilities being as guarantors, towards Bank. As such amount which was deposited and adjusted towards liability of the Corporate Debtor cannot be part of the Liquidation Estate. It is further submitted that the humble answering Respondent No.1 – PNB has not touched any of the assets of the Corporate Debtor Company, which is under liquidation at the current stage. The Bank has not recovered any amount from the asset of the Company, it is the loan liability standing in the name of guarantors of the Corporate Debtor, which has been paid off by the guarantors in the loan account by way of some arrangement. It is also submitted that the loan account was opened in the name of principal borrower only and no separate account has been opened by the Respondent Bank in the name of guarantors of such principal debtor. As such, all amount paid and or arranged by the guarantors is to be adjusted in the liability of the principal borrower (Corporate Debtor) and, accordingly, outstanding amount in the account of the Corporate Debtor will be recalculated.


# 23. The answering Respondent No.1 – PNB submitted its claim to the tune of Rs. 18,17,55,581/- before the Applicant Liquidator. Further, the Respondent No.1 – PNB has relinquished its security interest over the properties as mentioned in the relinquishment letter dated 17.12.2018. The submission of the claim against the Corporate Debtor by the Bank does not mean that the liability of the guarantors has been released in whole. The liability of the surety/guarantors continues till the payment has been made by them against the amount outstanding to be paid in the said account. Therefore, the said amount of Rs.4,50,44,500/- has been paid/arranged by the surety/guarantors of the Corporate Debtor. It is also submitted that the said amount has not been paid/deposited by the Corporate Debtor directly in the loan account nor Bank has received the same from the realisation of assets of the Corporate Debtor.


# 24. The said amount has been paid/arranged by the surety/guarantors of the Corporate Debtor. It is also submitted that the said amount has not been paid/deposited by the Corporate Debtor directly in the loan account nor Bank has received the same from the realisation of assets of the Corporate Debtor. It is further submitted that the liability of the surety/guarantors continues till the payment has been made by them against the amount outstanding to be paid in the loan account of the Corporate Debtor, as such, no question arises to remit the amount paid/arranged by the guarantors and credited/adjusted towards liability of the Corporate Debtor in the loan account standing in the name of the Corporate Debtor, to the Applicant. It is submitted that since no asset in the name of the Corporate Debtor has been touched by the Bank/answering Respondent in such transaction being performed, the demand to refund the credited amount is against the settled preposition of law, as such, Application filed by the Applicant deserves to be dismissed on this count alone, with heavy cost.


# 25. Respondents No. 1-PNB claims that perusal of the letter dated 25.02.2020 from late Sh. Bajrang Dass Aggarwal reveals that it is unjustified/vague/fabricated with the malafide intentions of denying the bank its legal dues. It is also claimed that the appellants have failed to explain that when there is increase in trade payables how can the same be explained from the amount allegedly received from True Value. Nor are the transaction details of True Value reflected in the balance sheet. Hence, the letter is contradictory and cannot be relied upon.


# 26. Respondents No. 1-PNB also contends that the liability of the guarantors is joint and several. Section 128 of contract act specifically states that the liability of the surety is co- extensive with that of the principal debtor, unless it is otherwise provided by the contract.


Appraisal:

# 27. Basis the materials on record, we find that between December 2019 and January 2020, the Appellant got statutory audit of the CD done. The Audit report and Balance Sheet captures the variations in two entries of trade receivables (current assets) and trade payables (current liabilities) which has significant difference between Financial Year ending 31.03.2018 and 31.03.2019. The entries relating to these two financial years are noted as follows:


 

As on 31.03.2018
Rs.

As on 10.10.2018
Rs.

As on 31.03.2019
Rs.

Change from 31.03.2018
Rs.

Trade Receivables
(current assets

60,97,70,435

60,71,69,008

58,81,82,254

-2,15,88,181

Trade Payables
(current liabilities)

3,52,89,513

2,50,37,504

6,03,27,017

+2,50,37,504


From the above, it is clear that:

  • the trade receivables have deceased by an amount of Rs.2,15,88,181/. However, it had come down by Rs.26,01,427/- only on liquidation commencement date.

  • Same way the trade payables have gone up to the extent of Rs.2,50,37,504/-. However, it had come down by an amount of Rs.84,302/- at the time of liquidation commencement date 10.10.2018.


# 28. On noticing above differences in the balance sheet for the F.Y. 2018- 2019 ending 31.03.2019 and the audited financial statement from 01.04.2018 to 10.10.2018 [i.e. liquidation commencement date (LCD)], the Appellant-Liquidator sought clarifications. Also detailed discussion were held on the said difference in the 3rd Meeting of SCC convened on 06.02.2020 which the following was noted:

  • “i. There is a Decrease in Short Term Borrowings by an amount of Rs. 4,50,44,500/- however no such difference was there in Balance Sheet till LCD. There is an increase in trade payables by an amount of Rs. 2,50,37,504/- however in Balance Sheet till LCD the decrease was of Rs. 84,302/- only. There is an increase in Deferred Tax Liabilities by an amount Rs. 2,26,20,676/-.

  • ii. There is a decrease in balance of Trade receivables by an amount of Rs. 2,15,88,181/- however in Balance Sheet till LCD the decrease was of Rs. 26,01,427/- only.

  • iii. It was discussed that since during Corporate Insolvency Resolution Process (CIRP), bank accounts were to be operated by the RP only and debiting by any unauthorized means was discussed to be taken seriously. Also, the concerned bank account where such realized amount was deposited and utilized were found to be unknown.”


# 29. On 25.02.2020 vide a letter by one of the ex-directors of CD-M/s Vegan Colloids Ltd., Sh, Bajrang Dass Aggarwal (now deceased) the Appellant-liquidator got the following clarification: –

  • i. The short terms borrowing difference is 4,50,44,500/- which has been given to Punjab National Bank in the loan account;

  • ii. The increase in trade payable 2,50,37,504/- (Payment of Rs. 2,50,00,000/- received from the firm named True Value paid directly to bank in loan account as mentioned in Point no. 1);

  • iii. Deferred Tax Liabilities of Rs. 2,26,20,676/- increased due to depreciation as per IT Act;

  • iv. Decrease in balance trade receivables in 2,15,88,181/- (Payment of Rs. 2,00,44,500/- is paid to bank in loan account as mentioned in Point No. 1). The balance is paid to labour/legal by the sister concern.[Page No.91 APB]


# 30. Based on above information, vide letter & email dated 26.02.2020, the Appellant-Liquidator requested the Respondent no. 1-PNB bank to refund the amount of Rs.4,50,44,500/- to the credit of the Liquidation account of the Corporate Debtor, which shall form part of the Liquidation Estate under the provisions of the Code. The Appellant-Liquidator vide letter dated 06.03.2020 again requested the respondent no. 1 to refund the amount of Rs.4,50,44,500/- to the credit of the Liquidation account of M/s Vegan Colloids Ltd. which shall form part of the Liquidation Estate under the provisions of Insolvency & Bankruptcy Code, 2016.


# 31. Appellant-Liquidator in his Application I.A. No. 758 of 2020 before the Adjudicating Authority prayed as follows: –

  • “b. Issue appropriate direction to Respondent No. 4 to refund the amount of Rs. 4,50, 44,500/- to the liquidation account of Corporate Debtor as the same being asset of the Corporate Debtor.”


# 32. But the Adjudicating Authority dismissed the above prayer vide impugned order holding that the Rs.4,50,44,500/- deposited with Respondent No. 1-PNB was made by the guarantors under a One-Time Settlement (OTS) proposal. It held that these funds do not form part of the Corporate Debtor’s assets. AA also found that the deposited amount belonged to the guarantors and was used to release their individually owned or mortgaged properties, which are separate from the assets of the Corporate Debtor. The tribunal also observed that the Corporate Debtor’s mortgaged properties with Respondent No. 1-PNB remain unreleased, confirming that the deposit was unrelated to the Corporate Debtor’s assets. The tribunal held that, as per the Hon’ble Supreme Court’s judgment in State Bank of India vs. Ramakrishnan & Anr., Civil Appeal no 3505 of 2018 of 14.05.2018 the moratorium under Section 14 of the IBC applies only to the assets of the Corporate Debtor and does not extend to the assets of guarantors. Further it held that the deposited amount does not form part of the Corporate Debtor’s estate.


# 33. AA held as follows:

  • “7. After hearing the learned counsel and careful perusal of the record carefully, we are of the considered view that the present application for a refund of Rs.4,50,44,500/- against respondent No.3 Bank is misconceived. A perusal of the records shows that the said amount was deposited with respondent No.3 Bank by the guarantors under the OTS proposal. Although, it is contended by learned counsel for the applicant that the said amount has been deposited during the moratorium period and that too from the Bank account of the corporate debtor, therefore, this amount forms the assets of the corporate debtor. However, this contention of learned counsel for the applicant is devoid of legal force because there is only one loan account with the corporate debtor because the said properties are not owned by the corporate debtor but these are the individuals’ property owned by the guarantors/mortgagors. The property of the corporate debtor mortgaged with bank-respondent No.3 has not been released so far. Moreover, in view of the judgment (supra) in the State Bank of India Versus Ramakrishnan & Anr., wherein it has been held that the scope of the moratorium may be restricted to the assets of the corporate debtor only and not against assets of guarantors to the debts of corporate debtor, it can be safely held that amount deposited by guarantors does not form the part of assets of corporate debtor.

  • 8. As a sequel, to the discussion above, the present application is not maintainable and the same is dismissed with no order as to costs.”


# 34. Briefly speaking the argument presented by the Appellant is that any amount in the balance sheet is part of the Liquidation Estate under Section 36 of the Code and that no creditor can recover dues outside the framework of Sections 52 and 53 of the Code, particularly in the situation when the Respondent No.1 -PNB had relinquished its security interest to the Liquidation Estate.


# 35. Before proceeding further, it will be instructive to look into the scheme of liquidation as provided under the Code, which has been relied upon by the Appellant. In terms of Section 35(1)(b) of the Code, the Appellant-Liquidator has the duty and power to take into his custody or control of all the assets, property, effects and actionable claims of the corporate debtor. Further in terms of Section 35(1)(d) of Code it has to take measures to protect and preserve the assets of the Corporate Debtor. Furthermore, Appellant-Liquidator as part of his duties, in terms of Section 36(3) of Code, has to form liquidation estate of the assets mentioned in relation to the Corporate Debtor. The relevant Section 36 is extracted as follows:

  • 36. Liquidation estate

  • (1) For the purposes of liquidation, the liquidator shall form an estate of the assets mentioned in sub-section (3), which will be called the liquidation estate in relation to the corporate debtor.

  • (2) The liquidator shall hold the liquidation estate as a fiduciary for the benefit of all the creditors.

  • (3) Subject to sub-section (4), the liquidation estate shall comprise all liquidation estate assets which shall include the following: —

  • (a) any assets over which the corporate debtor has ownership rights, including all rights and interests therein as evidenced in the balance sheet of the corporate debtor or an information utility or records in the registry or any depository recording securities of the corporate debtor or by any other means as may be specified by the Board, including shares held in any subsidiary of the corporate debtor;

  • (b) assets that may or may not be in possession of the corporate debtor including but not limited to encumbered assets;

  • (c) tangible assets, whether movable or immovable;

  • (d) intangible assets including but not limited to intellectual property, securities (including shares held in a subsidiary of the corporate debtor) and financial instruments, insurance policies, contractual rights;

  • (e) assets subject to the determination of ownership by the court or authority;

  • (f) any assets or their value recovered through proceedings for avoidance of transactions in accordance with this Chapter;

  • (g) any asset of the corporate debtor in respect of which a secured creditor has relinquished security interest;

  • (h) any other property belonging to or vested in the corporate debtor at the insolvency commencement date; and

  • (i) all proceeds of liquidation as and when they are realised.

  • (4) The following shall not be included in the liquidation estate assets and shall not be used for recovery in the liquidation: —

  • ….”


# 36. From the perusal of the balance sheet of the Corporate Debtor and other materials on record, we find that certain payments have been received by the company in liquidation and the same has been paid by Respondent No. 2 and 3 to Respondent No. 1. We also find that the Respondent No. 1 filed its claim for an amount of Rs. 18,17,55,581/- which has been admitted by the Liquidator. Also in terms of Section 52(1) of Code vide letter dated 17.12.2018 Respondent No.1 – PNB has already relinquished its security interest to the liquidation estate. We find that the amount has been realized from the assets under Liquidation estate of the CD in Liquidation and distributed in preference to one of the creditors Respondent No.1 – PNB without intimation to the Liquidator, which should have been distributed by the Liquidator as per Section 53 of the IBC,2016 i.e waterfall mechanism. Further Respondent No.1 – PNB has not placed any evidence or document to demonstrate that the amount which has been reduced in the Balance sheet of the Corporate Debtor is not an asset of the Corporate Debtor and without considering that no document was filed by the Respondent No. 1. We also find from the materials on record that Respondent No.1 Bank in its Reply in paragraph 8 of has admitted to have received Rs. 2,5 crs from one Trade Receivable of the CD which is extracted as under: –

  • “8. That in pursuance to the OTS settlement that the amount received into the loan account of the Corporate Debtor is as under: –

  • d. Rs. 2,50,00,000/- (Rupees two crore fifty lakhs only received from M/s. True Value Traders on 05.01.2019.”


This is an admission by Respondent no.1 bank that an amount of Rs.2,50,00,000/- was received from M/s. True value traders (being the trade receivable) on 05.01.2019 and was adjusted towards OTS entered with the personal guarantor. It is difficult to rely on general statements of the Respondent that the amount adjusted towards the liability of the Corporate Debtor was the amount paid by the guarantors personally and or by way of arrangement with sister concern, to settle the liability towards bank being as guarantors and no amount is paid by the Corporate Debtor directly to the Bank.


# 37. As noted, earlier Section 36 (1) of the Code provides that for the purposes of liquidation, the liquidator shall form an estate of the assets mentioned in sub-section (3) which will be called the liquidation estate in relation to the Corporate Debtor. Further, Section 36 (2) provides that the Liquidator shall hold the liquidation estate as a fiduciary for the benefit of all the creditors. Any amount reflected in the balance sheet of the Corporate Debtor is admittedly an asset of the Corporate Debtor and, therefore, the Adjudicating Authority ought to have considered the balance sheet of the Corporate Debtor which reflects a reduction of short-term borrowing during the Liquidation process. The Adjudicating Authority failed to consider that in terms of Section 36 (3) (a) and (g) of the Code, any assets over which the Corporate Debtor has ownership right, including all rights and interest therein as evidenced in the balance sheet of the Corporate Debtor or any asset of the Corporate Debtor in respect of which a secured creditor has relinquished security interest, becomes part of the liquidation estate assets of the Corporate Debtor. Further Section 53 provides that the proceeds from the sale of the liquidation assets shall be distributed in the order of priority. Therefore, Respondent No. 1 has no right to recover any amount being an asset of the Company in liquidation during the liquidation process as Respondent No.1 – PNB will receive the proceeds from Liquidation Estate in the manner provided under Section 53 of the Code. Respondent No.1 – PNB had already filed its claim for an amount of Rs. 18,17,55,581/-, which has been admitted by the Liquidator and in terms of Section 52 (1) (a) of the Code has vide its letter dated 17.12.2018 already relinquished its security interest to the Liquidation Estate and have agreed to receive the proceeds from the sale of assets by the Liquidator in the manner specified and, therefore, the Respondent No.1 – PNB cannot recover any amount being part of the Liquidation Estate.


# 38. The AA relied on the judgement of Hon’ble Supreme Court’s in State Bank of India vs. Ramakrishnan & Anr. (supra) and held that the moratorium under Section 14 of the IBC applies only to the assets of the Corporate Debtor and does not extend to the assets of guarantors. Further it held that the deposited amount does not form part of the Corporate Debtor’s estate. We note that the conclusions of the judgement of Hon’ble Apex Court are not in dispute. But herein, firstly it has not been established that the payments have been made from independent sources -other than that of CD. Secondly, even if it has been made it has to be made to the account of the Corporate Debtor due to the moratorium existing on the assets of the CD. During the liquidation, it is the Liquidator who is in control of the assets of the CD. Any disturbance in CD’s assets or liabilities has to have the approval of the Liquidator. Herin the trade receivables have come down, but the funds inflow have gone to the Respondent No1-PNB, which is impermissible under the Code. Same way trade payables have gone up at the cost of the CD but benefit has accrued to Respondent No1-PNB. Furthermore, the sum of “Increase in trade payable by Rs. 2,50,37,504/” and “Decrease in balance trade receivables by Rs. 2,15,88,181/-” is Rs. 4,66,25,685/- a very close amount to INR 4,50,44,500/-, which has actually been deposited in the loan account with the Respondents No. 1, which admittedly is the amount that has been realised from the assets under Liquidation estate of the CD in Liquidation and distributed in preference to one of the creditors without intimation to the Liquidator, which should have been distributed by the Liquidator as per law in terms of Section 53 of the IBC, 2016 i.e waterfall mechanism. Respondent No. 1-PNB has not been able to justify that the dues to the tune of INR 4,50,44,500/-, so satisfied are not made out of assets of the Corporate Debtor. We can, therefore, safely conclude that it is none other than Trade Receivables and Trade Payments of the Corporate Debtor which has been used to pay Rs.4,50,44,500/-.


# 39. This has also been noted in the 3rd Meeting of SCC convened on 06.02.2020 which:

“that since during Corporate Insolvency Resolution Process (CIRP), bank accounts were to be operated by the RP only and debiting by any unauthorized means was discussed to be taken seriously. Also, the concerned bank account where such realized amount was deposited and utilized were found to be unknown.”


Conclusions:

# 40. All assets listed in the Corporate Debtor’s balance sheet are included in the Liquidation Estate under Section 36 of the Insolvency and Bankruptcy Code, 2016. Debt realization during liquidation is permitted only under Sections 52 and 53 of the Code. Upon liquidation, dues must be distributed strictly according to the waterfall mechanism outlined in Section 53 of the Code. However, in this case, Respondent No. 1 (PNB) disrupted the Liquidation Estate formed under Section 36 by attempting to override the waterfall mechanism. The amount was realized from assets under liquidation and distributed preferentially to one creditor without informing the Liquidator. As per the Code, such distributions should have been made by the Liquidator in accordance with Section 53, ensuring compliance with the waterfall mechanism. Based on this, it is evident that Respondent No. 1 (PNB) did not comply with Section 36 read with Section 52 while appropriating the amount.


Orders

# 41. Order of the AA in I.A. No. 758 of 2020 in [CP(IB) No.72/CHD/HRY/2017 is set aside for the reasons as noted in this judgement and the Appeal is allowed. No orders as to costs.. 

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