Liquidator Must Recover Assets Even If Attached By Third Parties, Attachment Cannot Override IBC: NCLT Bengaluru

The National Company Law Tribunal (NCLT) at Bengaluru has recently held that a liquidator must assume custody and control of all assets of a corporate debtor even when those assets have been seized or attached by third parties including investigating agencies, stating that such seizure cannot override the Insolvency and Bankruptcy Code. The order was passed by Judicial Member Sunil Kumar Aggarwal and Member Technical Radhakrishna Sreepada in an application filed by the liquidator of Welworth Software Pvt. Ltd. seeking directions for deposit of Rs. 47.98 lakh that had been seized during a CBI corruption probe into Karnataka Congress leader DK Shivkumar and later released pursuant to a High Court order. “The Liquidator is duty-bound to take into custody and control all assets and properties of the corporate debtor, including assets which are seized, attached or otherwise held by third parties, and such seizure or attachment cannot defeat the overriding scheme of the Code, subject of course to coordination with the concerned court or authority.” The tribunal underscored that “ Any monies or properties which have been judicially recognised as belonging to the corporate debtor, even if presently lying with a third party or under orders of a criminal court, therefore necessarily fall within the liquidation estate to be placed under the control of the liquidator for equitable treatment of stakeholders under the IBC framework.” The case concerns Rs. 47.98 lakh seized by the CBI in October 2020 from erstwhile director Akshaya Kumar Karunam during a corruption probe under the Prevention of Corruption Act against Karnataka Irrigation Minisiter and Congress leader DK Shivkumar . The High Court of Karnataka in Januray 2021 directed that the seized amount be released to the corporate debtor on execution of an indemnity bond and surety.After the company went into liquidation in November 2022, the liquidator issued a notice in September 2023 seeking deposit of the amount into the liquidation estate. No response was received, prompting the present application. The respondent, an erstwhile director said that he had acted as custodian of the money pursuant to the High Court's order and was willing to deposit the amount with the liquidator, subject to discharge of the indemnity bond and release of the property documents furnished as surety before the criminal court. Allowing the application, the tribunal held that orders of criminal courts granting interim custody “are intended to preserve the property and return it to the person ultimately found entitled, and do not create any proprietary right in favour of the custodian; the custodian holds the property subject to final orders of the Competent Court and subject to underlying civil or insolvency regimes." The tribunal also recorded that the High Court's directions amounted to “an unequivocal judicial determination, at least prima facie, that the beneficial owner of the amount is the Corporate Debtor.” It further stressed that seizure does not take such assets outside the liquidation estate and reiterated that such assets must form part of the liquidation estate, irrespective of whose physical custody it is in. It directed the erstwhile director to deposit Rs 47.98 lakh with accrued interest into the liquidator's bank account and permitted the respondent and the liquidator to jointly approach the Karnataka High Court within 15 days for discharge of the indemnity bond and release of surety. Case Title: Welworth Software Private Limited v. Akshaya Kumar Karunam Case Number: IA No. 693 of 2024 in CB(IB) No. 32/BB/2021For Liquidator: Advocate Narayana KammaClick Here To Read/Download Order

Liquidator Must Recover Assets Even If Attached By Third Parties, Attachment Cannot Override IBC: NCLT Bengaluru

Shivangi Bhardwaj

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