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TMI Blog2020 (9) TMI 551X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rishav Banerjee, Patita Paban Bishwal, Anil Goel, Kanishk Khetan, Advocates, Arun Gupta, FCA, Joy Saha, Sr. Advocate, Gautam Chakraborty, Shaunak Mitra, Saubhik Chakraborty, For the Respondent : Dripto Majumder, Advocates and Akshay Jhunjhunwala ORDER Jinan K.R., Member (J) 1. Employee Welfare Association of The Varrsana Ispat Ltd.,/Corporate Debtor, in liquidation vide order dated 06.08.2019 has filed this unnumbered application praying for reversal of disbursements of funds of the Corporate Debtor distributed to the creditors and for an interim order restraining the liquidator from deductions of salary payable to the employees. 2. The Corporate Debtor though was under order of liquidation, it is functioning as a going concern and running its business on profit. The applicant contends that the Liquidator in violation of the regulations and provisions of the Code and in disobedience of the order of this Adjudicating Authority (AA) dated 14.01.2020, disbursed an amount of ₹ 21 Crores and thereafter another 5 crores to the financial creditors of the Corporate Debtor and also arbitrarily reduced the salary of employees in violation of the Ministry of Home A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amongst stakeholders in equal manner as per provision of section 53 of the Insolvency Bankruptcy Code, 2016, which would include the claims of the employees, if any. 6. Ld. Sr. Counsel for the applicant also highlighted the unilateral decision of Stakeholders Consulting Committee (SCC) decision to deduct 20% to 40% from the salary of the employees for the month of April without their consent and submit that the decision is arbitrary and in violation of the Government circular above referred. Upon the said submission he prays for reversal of the fund back to the CD from the financial creditors and restoration of salary of the employees lifting the conditions imposed on them. 7. The Ld. Resolution Professional appeared in person and submitted that the Liquidator has neither violated any regulation or provisions of the Code nor arbitrarily decided the deduction of the salary from the employees and executives. He would submit that the steps for inviting schemes under section 230 of the Companies Act, 2013 has yet to be taken. He would say that the Corporate Debtor Company is a going concern till now and since the Liquidator has not received any scheme he has to take steps to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no claim from them is pending for consideration. 8. The Ld. Sr. Counsel Mr. Joy Saha, for R4, the Central Bank of India (CBI) submitted that the demand for return of money paid by Liquidator will certainly affect all stakeholders including CBI and that he may be given time to reply to the allegations against the Liquidator in disbursing the funds by the Liquidator. He further submitted that the order dated 14.01.2020 does not restrict the Liquidator from disbursing funds in accordance with Section 53 and therefore there is no violation of regulations as alleged by the applicant. 9. Ld. Counsel Mr. Shaunak Mitra for the R9 submitted that the order dated 14.01.2020 makes it clear that distribution among the stakeholders in equal manner as per provisions of Section 53 of the Insolvency and Bankruptcy Code, 2016 does not mean that the working capital fund kept in the Corporate Debtors account is to be availed for distribution without affecting the cash flow of Corporate Debtor keeping and continuing the company as a going concern. He would further submit that the Liquidator can only distribute the proceeds of the sale and not the working fund. He also referred to section 53(1). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per Regulation 32-A. The liquidator said that the fund was distributed after maintaining requirements to meet working capital so as to reduce the burden of the Corporate Debtor as per provisions of IBC, 2016. According to him, the distribution of the funds to the secured creditors would not affect the working of the Corporate Debtor Company and did not suffer any damage due to loss of funds due to such disbursement of payments in 2020. According to him, as per order dated 14.01.2020, the distribution of funds amongst the stakeholders as per provisions of Section 53 of Insolvency and Bankruptcy Code, 2016 was not prohibited so there was no violation of the order. 12. The Ld. Liquidator was not able to satisfy us as to his right to disburse the funds from the working capital kept for running the company as a going concern. According to him it was done for reducing the burden of the dues of the Corporate Debtor. We are unable to see any such power being vested on the liquidator. Powers and duties of a liquidator is detailed under section 35 of the Code. As per section 35(1)(o) such other function of the liquidator is to be specified by the IBBI. The functions of the liquidator ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets, cannot be distributed. 15. At the outset we are unable to uphold the view of the Ld. Sr. Counsel for the R4. So also we are unable to accept the reason behind the distribution highlighted by the liquidator. Admittedly, list of stakeholders has not been finalised. Admittedly valuation for assessing the liquidation value is also not seen finalised. Assets of the CD have not been liquidated so far. Under S. 230 of the Companies Act, 2013, application for Compromise or Arrangements filed by R9 is pending for consideration. The CD is a going concern. It has two businesses. One is manufacturing steel. The factory of the CD is in operation even in the midst of lockdown and it is running on profit as submitted by the liquidator. A tower transmission business seems to be non operational. In the said background, can the liquidator invoke section 53 and Regulation 42(2) at this stage where admittedly liquidating the assets, chance of revival by way of compromise or arrangement has not been completed. So can profit, working capital kept for uninterrupted cash flow be distributed by the liquidator for the sake of reducing the future burden of the CD? Our answer is in the negative. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 has not prohibited the distribution in accordance with section 53 of the Code. We are afraid of the way the liquidator has attempted to regularise his action by interpreting the order in such a way that this AA allowed him to distribute the funds in accordance with section 53. The order dated 14.01.2020 was passed by the DB of Kolkata Bench wherein my colleague Member (T) was also a member. That order was passed in an application filed by the very same applicant challenging the withholding of 18 lakhs for enabling him to distribute to the creditors. That action was prohibited by the AA with an observations which read as the same may be utilized for the operation of the Corporate Debtor to remain corporate debtor as going concern for distribution amongst stakeholders in equal manner as per provision of section 53 of the Insolvency Bankruptcy Code, 2016, which would include the claims of the employees, if any. 18. The above said order in our considered view never allowed the liquidator to have an interim distribution pending liquidating the assets for the reason that there were no claims from the workmen or employees were pending for distribution. The above said discussions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20. In view of the matter discussed above, and the position of law, we come to a conclusion 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. So also we hold that the pay cut from the salary of the employees of the CD is arbitrary and not just and proper. In the said background a question arises as to whether the financial creditors who had received the fund are to be ordered to refund? In this regard it is good to refer to Regulation 43. Reg. 43 states that the stakeholders shall return the monies after distribution if the stakeholders are found to be not entitled to at the time of distribution. So no doubt the financial creditors are bound to return any monies received during distribution which they were not entitled to receive during distribution. However, 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 appear ..... X X X X Extracts X X X X X X X X Extracts X X X X
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