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2020 (9) TMI 551 - Tri - Insolvency and BankruptcyReversal of disbursements of funds of the Corporate Debtor distributed to the creditors - grant of interim order restraining the liquidator from deductions of salary payable to the employees. Whether the distribution of funds from the working capital and profits derived out of the operation of the CD includes proceeds fall under Regulation 42(2) read with section 53 of the Code, is available for distribution before liquidating the assets? If not whether the act of distribution amounts to violation of the Regulations and directions to the liquidator dated 14.01.2020 as alleged? - HELD THAT - Under Regulation 42 of the IBBI Liquidation Process Regulations, 2016, the Liquidator can commence distribution once the list of stakeholders and asset memorandum, was finalised, subject to Section 53 of the I B Code. This process according to us can only be done after the realization of the assets sale of liquidation assets . Section 36 provides for creation of a liquidation estate that shall include the assets under sub-section 3 of section 36. Section 53 provides for distribution of the proceeds from the sale of the liquidation assets. As per Regulation 42 (2) of the IBBI (Liquidation Process) Regulations, 2016 the liquidator shall distribute the proceeds from realization within ninety days from the receipt of the amount to the stakeholders. The wording of Section 53 and Regulation 42(2) indicates that the stakeholders may be paid out of the proceeds from the sale of assets. The proceeds from the sale of assets'' can only be realized after the sale concludes, which means distribution can also be done only after the conclusion of sale and more so after the liquidator realizes the liquidation value, therefore, in our opinion, the liquidator cannot distribute the funds from working capital and profit to the stakeholders until assets have been liquidated and the liquidator realizes the complete liquidation value - the distribution of working capital and profit to the financial creditors before liquidating the assets is contrary to regulations under Chapter VII of the IBBI (Liquidation Process) Regulations, 2016. Thus, the justification offered for distributing the fund by the liquidator is not just and proper and not in conformity with any of the provisions of the Code and Regulations. Whether the pay cut from the salaries of the employees is arbitrary and without their consent? - HELD THAT - The unilateral decisions of SCC to deduct 20 to 40% from the salary of the employees for the month of April, wherein the factory of the CD is running on profit and gained 9 crore a minimum profit. The submissions that Representatives of executive heads of each department were present at the time of taking decision doesn't indicate that the decision for deduction was with the consent of the majority of the employees. It is also significant to note here that the committee has decided to reverse the amount deducted, to the employees concerned provided they are able to recover dues from the government - The Pandemic has disrupted the entire working of the country be it the government sector, private sector, businesses, educational institutions including judicial work. It is in the said circumstance, here in this matter a steel manufacturing company, is in operation and running on profit. In appreciating their effort to see that the factory was not allowed to shut down for more than one month, they deserve the entire salary for the month of April. The decision for pay cut of the salary of the employees for the month of April is arbitrary and in violation of Ministry of Home Affairs Circular and therefore, not binding on them and they are entitled to get back the same with applicable bank interest till the date of payment. Reliefs and cost - HELD THAT - The disbursement by the liquidator from the working capital and profit kept in the account of the liquidator/CD before liquidating the assets is not in accordance with the provisions of the Code and Regulations - in the case in hand since the CD being in operation and there is enough working capital as submitted by the liquidator (About 40 crores) there is no need to return. However, in the peculiar nature and circumstances brought out in the instant case, it appears that the amounts received by the respective financial creditors shall be kept by them in an Interest bearing account of the CD. The application is allowed.
Issues Involved:
1. Distribution of funds from the working capital and profits before liquidating the assets. 2. Pay cut from the salaries of the employees without their consent. 3. Reliefs and costs. Issue-wise Detailed Analysis: 1. Distribution of Funds from Working Capital and Profits Before Liquidating the Assets: The Employee Welfare Association of the Corporate Debtor (CD) filed an application challenging the liquidator's decision to distribute ?21 Crores and another ?5 Crores to financial creditors, arguing it violated Regulation 42 and Section 53 of the Insolvency and Bankruptcy Code (IBC), 2016. The applicant contended that the liquidator should only distribute proceeds from the sale of liquidation assets, not from working capital or profits. The liquidator defended his actions, stating the funds were distributed to reduce the CD's burden without affecting its operations. However, the tribunal found that the liquidator did not have the authority to distribute funds from working capital and profits before liquidating the assets, as per Regulation 42 and Section 53 of the IBC. The tribunal emphasized that the distribution should only occur after the realization of liquidation assets and finalization of the list of stakeholders and asset memorandum. The tribunal concluded that the liquidator's actions were contrary to the regulations and the order dated 14.01.2020 did not permit such interim distribution. 2. Pay Cut from the Salaries of the Employees Without Their Consent: The tribunal examined the unilateral decision by the Stakeholders Consulting Committee (SCC) to deduct 20% to 40% from the employees' salaries for April 2020. The liquidator claimed the decision was made with the consent of executive heads and was necessary due to the lockdown. However, the tribunal found that the decision was arbitrary and lacked the majority consent of the employees. The tribunal noted that the CD was operating profitably even during the lockdown and the employees had cooperated to keep the factory running. The tribunal deemed the pay cut as a violation of the Ministry of Home Affairs Circular and ruled it was not binding on the employees. The tribunal ordered the liquidator to restore the deducted salaries with applicable bank interest. 3. Reliefs and Costs: The tribunal concluded that the liquidator's disbursement of funds from working capital and profits was not in accordance with the IBC and regulations. It directed the financial creditors who received the funds to keep the amounts in an interest-bearing account of the CD, returnable if needed for operating the CD. The tribunal also ordered the liquidator to repay the deducted salaries to the employees with applicable bank interest. The application was disposed of with these orders, and the registry was directed to send email copies of the order to all parties. Conclusion: The tribunal held that the liquidator's distribution of funds from working capital and profits before liquidating the assets was not justified and violated the IBC regulations. The pay cut from employees' salaries was deemed arbitrary and in violation of government directives. The tribunal ordered the financial creditors to keep the received funds in an interest-bearing account and directed the liquidator to repay the deducted salaries with interest.
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