Asset Joins Liquidation Estate If Creditor Fails To Act Within 30 Days Of Liquidation Commencement: NCLT Mumbai

The Mumbai Bench of the National Company Law Tribunal (NCLT) has held that Union Bank of India could not claim exclusive entitlement to Rs 1.83 crore refunded after the wrongful invocation of bank guarantees during the corporate insolvency resolution process of EMI Transmission Ltd, finding that the amount was not covered by the bank's disclosed security and formed part of the liquidation estate.

A coram of Judicial Member Lakshmi Gurung and Technical Member Hariharan Neelakanta Iyer found that Union Bank had neither established that the refunded amount was covered by its security interest nor indicated within the prescribed period after commencement of liquidation that it intended to realise any security interest over the amount.

“It is explicit from the language of the Code that the decision to realise its security interest shall be intimated within 30 days of Liquidation commencement date, or else it shall be presumed to be a part of the Liquidation estate. The Applicant has not intimated its decision within 30 days from the liquidation commencement date to realise the security interest as prescribed under Regulation 21A of the Liquidation Regulations."

Accordingly, the bench held the following:

“Therefore, after expiry of 30 days, the assets of the Corporate Debtor automatically became part of the Liquidation estate.”

EMI Transmission Ltd was admitted into the corporate insolvency resolution process on April 11, 2019. During the process, KEC International Ltd invoked bank guarantees aggregating Rs 2 crore that had been issued by Union Bank of India on behalf of the corporate debtor. Union Bank released the amount to KEC on January 28, 2020.

The company was ordered into liquidation on August 14, 2020, and Shailesh Desai was appointed as liquidator.

The liquidator later approached the Tribunal seeking return of the money paid out under the bank guarantees. During the hearing on September 2, 2021, KEC agreed to refund the amount and subsequently remitted about Rs 1.84 crore to the liquidator.

Once the money was received, the liquidator set aside a portion to meet future liquidation expenses and distributed Rs 1.5 crore among the secured financial creditors, Union Bank of India, Bank of Baroda and Standard Chartered Bank.

Union Bank objected to the distribution. It argued that since it had made the payment when the bank guarantees were invoked, the refunded amount should have been returned entirely to it rather than distributed among creditors through the liquidation process.

The liquidator, however, maintained that the bank had not taken steps to realise any alleged security interest within the stipulated period after the company entered liquidation. According to the liquidator, Union Bank had also not indicated in its claim form that it intended to separately realise any security interest.

The liquidator also pointed out that although the bank had filed its claim in Form D, it had not indicated any decision regarding realisation of security interest.

The Tribunal examined the bank's claim form and found that its primary security consisted of stocks and book debts, while its collateral security comprised plant and machinery and immovable assets such as land and buildings.

It held that the refunded bank guarantee amount could not be treated as stock or book debt and was not covered by the security disclosed by the bank.

“Thus, this Tribunal is unable to agree to the submissions of the Applicant that amount receivable/ received from KEC was a secured asset of the Applicant which was liable to be kept outside liquidation estate”, it held.

The Tribunal further held that the bank had not intimated any decision to realise a security interest within 30 days from the liquidation commencement date and that, upon expiry of that period, the asset became part of the liquidation estate.

Referring to the decisions of the National Company Law Appellate Tribunal in Dhanlaxmi Bank Ltd. v. Techno Fab Manufacturing Ltd. & Ors. and Small Industries Development Bank of India v. Shri Vijender Sharma, the Tribunal noted that compliance with the applicable liquidation regulations is mandatory.

Holding that the liquidator had correctly distributed the refunded amount among secured creditors, the Tribunal dismissed Union Bank of India's application.

For the Applicant: Advocates Deepak Saxena, Shivanjali Mane, Bhardwaj, Malhar Zatakia,  Kaushal Ameta i/b Legal Prism.

For the Respondent No. 1: Adv. Ayush Rajani, Adv. Mitali Bhatt, Adv. Priyank Jadhav i/b ARK Legal.

For the Respondent No. 2: None appeared.

For the Respondent No. 3: Adv. Virgil Braganza, Adv. Shaan Bhatt i/b J. Sagar Associates.