2017 (10) TMI 918 - HC - Companies Law

Directions to the Official Liquidator to issue instructions to Axis Bank to release in favour of the applicant 98.181879% of the amount received from Madhya Pradesh Excise Department (MPED) lying in Escrow account - Held that - The circumstances reveal the work was actually completed by the applicant herein and the role of the respondent company was merely to obtain the contract from Madhya Pradesh Government and to hand it over to the applicant. The principal employer recognized the applicant to be responsible for completion of the contract and even the Income Tax Authority did not attach the share of the applicant lying in the escrow account as the respondent could hold on to the money lying in the escrow account only to the extent of its legal title being 1.181821%; the Axis Bank being a trustee was thus obliged to release the balance amount lying in the escrow account in favour of the applicant herein. The liquidation would not come in the way of the applicant to receive the amount to the extent of its share to which it is entitled, per the teaming agreement(s) referred to above. In view of the above observations, the application is disposed of. The amount to the extent of 98.181879% lying in the escrow account be released to the applicant within a period of four weeks from today.

Issues Involved:
1. Directions to the Official Liquidator regarding the release of funds from the Escrow account.
2. Validity and enforceability of the teaming agreement and escrow agreement.
3. Rights of secured creditors versus the applicant's claim.
4. Nature and legal implications of the Escrow account.

Issue-wise Detailed Analysis:

1. Directions to the Official Liquidator regarding the release of funds from the Escrow account:
The applicant sought directions for the Official Liquidator to instruct Axis Bank to release 98.181879% of the amount received from the Madhya Pradesh Excise Department (MPED) lying in the Escrow account. The applicant argued that they were entitled to this share based on the teaming agreement and the subsequent addendum, which increased their share.

2. Validity and enforceability of the teaming agreement and escrow agreement:
The teaming agreement was initially entered into on 03.09.2009 between the applicant and Tulip Telecom Limited for a project with the MPED. The agreement stipulated that the applicant was entitled to a significant share of the project value. An addendum on 30.10.2009 further increased the applicant's share. The agreements were followed by the creation of an Escrow account on 25.09.2010 to manage the payments. The applicant presented evidence, including statements of the Escrow account and correspondence from MPED, supporting the distribution of funds as per the agreed ratios.

3. Rights of secured creditors versus the applicant's claim:
Secured creditors argued that the State Government was not a party to the teaming agreement and that the contract was solely between the MPED and the respondent company. They contended that the applicant, being an unsecured creditor, should not receive priority over the secured creditors. They also challenged the teaming agreement as a fabricated document designed to usurp funds from the Escrow account. However, the court found that the applicant had been recognized by the MPED as responsible for completing the project, and the funds in the Escrow account were distributed according to the agreements until the provisional liquidator was appointed.

4. Nature and legal implications of the Escrow account:
To resolve the controversy, the court examined the nature of the Escrow account, referencing several judgments to explain that funds held in an Escrow account are not part of the debtor's estate. The bank acts as a trustee, and the debtor holds only legal title to the funds, not an equitable interest. The court cited cases such as Homer City Generation, L.P. v. EME Homer City Generation L.P. and Reserve Bank of India v. Bank of Credit and Commerce International to illustrate that funds in an Escrow account are held in trust and are not available for distribution among the debtor's general creditors.

Conclusion:
The court concluded that the applicant was entitled to the funds in the Escrow account based on the teaming agreement and the subsequent conduct of the parties. The applicant had completed the project, and the MPED had recognized their role. Therefore, the court directed the Official Liquidator to release 98.181879% of the funds in the Escrow account to the applicant within four weeks. The liquidation of the respondent company did not affect the applicant's right to their share of the funds. The application was disposed of with no order as to costs.

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