Liquidation Estate [ Section 36 ] - Insolvency Resolution And Liquidation For Corporate Persons - IBC

Liquidation Estate The primary role of the liquidator is to take into his custody or control all the assets, property, effects, and actionable claims of the CD. Section 36 of the IBC deals with formation of the liquidation estate for the purposes of liquidation. It states that the liquidator shall form an estate of the assets of the CD (as specified) to be called the liquidation estate in relation to the CD. The liquidation estate shall be held by the liquidator as a fiduciary for the benefit (acting in the best interests) of all the creditors. Form an Estate of Assets [ Section 36(1) ] For the purposes of liquidation, the liquidator shall form an estate of the assets mentioned in section 36(3), which will be called the liquidation estate in relation to the corporate debtor. Liquidator to hold Liquidation Estate in Fiduciary [ Section 36(2) ] The liquidator shall hold the liquidation estate as a fiduciary for the benefit of all the creditors. Assets which for Part of Liquidation [ Section 36(3) ] Subject to section 36(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. Regulation 34 of the IBBI (Liquidation Process) Regulations, 2016 provides that on forming the liquidation estate under section 36, the liquidator shall prepare an asset memorandum in accordance with this Regulation within 75 days from the liquidation commencement date. Assets which does not part of Liquidation of Estate [ Section 36(4) ] The following shall not be included in the liquidation estate assets and shall not be used for recovery in the liquidation:- (a) assets owned by a third party which are in possession of the corporate debtor, including- (i) assets held in trust for any third party; (ii) bailment contracts; (iii) all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund; (iv) other contractual arrangements which do not stipulate transfer of title but only use of the assets; and (v) such other assets as may be notified by the Central Government in consultation with any financial sector regulator; (b) assets in security collateral held by financial services providers and are subject to netting and set-off in multi-lateral trading or clearing transactions; (c) personal assets of any shareholder or partner of a corporate debtor as the case may be provided such assets are not held on account of avoidance transactions that may be avoided under this Chapter; (d) assets of any Indian or foreign subsidiary of the corporate debtor; or (e) any other assets as may be specified by the Board, including assets which could be subject to set-off on account of mutual dealings between the corporate debtor and any creditor. Hence, liquidation estate refers to all assets and property of the CD, in whatever form, whether in its possession or not, and includes future proceeds. The assets that are not owned by the CD (such as assets of shareholders or subsidiaries, or assets held in trust) are not included within the estate. It is the liquidation estate that is realized, with the proceeds being distributed to the stakeholders as per section 53 of the IBC. What does not form part of the liquidation estate cannot be appropriated or sold by the liquidator and cannot be distributed to the stakeholders of the CD as per section 53 of the IBC. Relevant Case Laws Leo Edibles Fats Limited Vs. Tax Recovery Officer (Central) - High Court Dated 26.07.2018 The petitioner had purchased an immovable property in the liquidation proceeding of VNR Infrastructures Limited. The sub-registrar refused to register the property in the name of the petitioner at the behest of the Income Tax Department, which claimed a charge over the immovable property pursuant to attachment proceedings against which the writ petition was filed. The High Court held that the tax dues, being an input to the Consolidated Fund of India and of the states, clearly come within the ambit of section 53(1)(e) of the IBC. It further held that the Income Tax Department cannot claim any priority merely because the order of attachment was long prior to the initiation of liquidation proceedings under the IBC against VNR Infrastructures Limited. Further, section 36(3)(b) of the IBC. The said order of attachment, therefore, cannot be taken to be a bar for completion of the sale under a liquidation proceeding under the IBC. The Income Tax Department needs to submit its claim to the liquidator for consideration as and when the distribution of the assets in terms of section 53(1) of the IBC is taken up. State Bank of India Vs. Moser Baer Karamchari Union Another - NCLAT Dated 19.08.2019 , The issue arose as to whether the amount due to workmen of the CD (in liquidation) towards their provident fund, pension fund and gratuity trust fund should be paid to the workers by the liquidator (outside the distribution mechanism) or whether such assets formed part of the liquidation estate under section 53 of the IBC (in which case it would be distributed as per section 53). It was argued by the workmen that these amounts did not form part of the liquidation estate. The AA held that provident fund dues, pension fund dues, and gratuity fund dues cannot be part of the estate as per section 53 of the IBC. An FC filed an appeal against the order of the AA. The NCLAT examined the meaning of liquidation estate under section 36 of the IBC and held that in terms of section 36(4)(a)(iii) , all sums due to any workmen or employees from the provident fund, the pension fund, and the gratuity fund should not be included in the liquidation estate assets and could not be used for recovery in the liquidation. Since they do not form part of the liquidation estate assets of the CD, the question of distribution of the provident fund, pension fund, or gratuity fund does not arise. As the liquidation estate assets of the CD under section 36(1) , read with section 36(3) , do not include any sum due to any workman or employee from the provident fund, the pension fund, or the gratuity fund, for the purpose of distribution of assets, these funds cannot be included. An appeal against the order has been filed by the FC and as of this writing, the matter is pending in the Supreme Court. Mr. Savan Godiawala Vs. Mr. Apalla Siva Kumar - NCLT Dated 11.02.2020 The NCLAT, based on its judgment in the Moser Baer case, observed that in terms of section 36(4)(a)(iii) of the IBC, sums due to any workman or employee from the provident fund, pension fund, or gratuity fund do not form part of the liquidation estate assets of the CD. Therefore, the question of distribution of these funds does not arise. The NCLAT observed that in the impugned order, the AA had held that the liquidator cannot avoid liability to pay gratuity to employees on the grounds that the CD did not maintain separate funds, and that, even if no fund has been maintained, the liquidator must make sufficient provision for payment of gratuity to the appellants according to their eligibility. However, noting that no gratuity fund was created by the CD, the NCLAT held that the liquidator should not have been directed to make provision for the payment of gratuity to the workmen as per their entitlement.