Liquidation Estate under Section 36 of the Insolvency and Bankruptcy Code 2016 (IBC)

Liquidation Process
Liquidation Estate

Liquidation estate under Section 36 of the IBC

(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:—

(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;

Provident Fund Dues, Pension Fund Dues and Gratuity Fund Dues cannot be part of Sec. 53 of the Code-NCLAT

NCLAT in the matter of State Bank of India Vs. Moser Baer Karamchari Union & Anr. 113(IBC)19/2019 held that once the liquidation estate/ assets of the ‘Corporate Debtor’ under Section 36(1) read with Section 36(3), do not include all sum due to any workman and employees from the provident fund, the pension fund and the gratuity fund, for the purpose of distribution of assets under Section 53, the provident fund, the pension fund and the gratuity fund cannot be included. The Adjudicating Authority having come to such finding that the aforesaid funds i.e., the provident fund, the pension fund and the gratuity fund do not come within the meaning of ‘liquidation estate’ for the purpose of distribution of assets under Section 53, we find no ground to interfere with the impugned order dated 19th March, 2019.

In a case, where no statutory  fund is created by a company then the Liquidator cannot be directed to make the payment of gratuity to the employees-NCLAT

NCLAT in the matter of Mr Savan Godiwala(the liquidator of Lanco Infratech Limited) Vs. Mr. Apalla Siva Kumar 98(IBC)67/2020 held that It is the settled position of law, that the provident fund, the pension fund and the gratuity fund, do not come within the purview of liquidation estate for the purpose of distribution of assets under Section 53 of the Code.  Based on this, the only inference which can be drawn is that Pension Fund,  Gratuity  Fund  and  Provident  Fund  can‘t  be  utilised,  attached  or distributed by the liquidator, to satisfy the claim of other creditors. Sec 36(2) of the Code 2016 provides that the Liquidator shall hold the Liquidation Estate in fiduciary for the benefit of all the Creditors. The Liquidator has no domain to deal with any other property of the corporate debtor, which is not the part of the Liquidation Estate. In a case, where no fund is created by a company, in violation of the Statutory provision of the Sec 4 of the Payment of Gratuity Act, 1972, then in that situation also, the Liquidator cannot be directed to make the payment of gratuity to the employees because the Liquidator has no domain to deal with the properties of the Corporate Debtor, which are not part of the liquidation estate.

(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

NCLAT in the matter of The Assistant Provident Fund Commissioner & Recovery Officer Vs. Florind Shoes Pvt. Ltd. (CD) & Ors. 38(IBC)38/2020 has held that as in terms of provisions of Section 36(4)(d) of the Code assets of its subsidiary did not fall within the ambit of liquidation Estate. Learned counsel for the Appellant vehemently tried to stress that under sub-Section 3(a) of section 36 of the Code assets over which the Corporate Debtor has ownership right including all rights and interests herein as evidenced in the balance sheet of the Corporate Debtor or an information utility etc. comprise the liquidation Estate of Corporate Debtor. However, the provision itself has been subjected to the exclusion clause engrafted in sub-Section 4 and assets of subsidiary of the Corporate Debtor are not included in the liquidation Estate.

(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.

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