Sub-Contractor's Contractual Share Not Part Of IVRCL's Liquidation Estate: NCLAT Orders Release Of ₹41.76 Lakh

The National Company Law Appellate Tribunal (NCLAT) has recently directed the liquidator of IVRCL Limited to release over Rs 41 lakh to sub-contractor Imperial Coastal Infra, holding that 96% of the project receivables belonged to the sub-contractor, were held by the corporate debtor in a fiduciary capacity, and could not be treated as part of the liquidation estate or as operational debt.

A Chennai Bench comprising Judicial Member Justice Sharad Kumar Sharma and Technical Member Jatindranath Swain set aside an order of the National Company Law Tribunal, Hyderabad, which had upheld the liquidator's decision to treat the withheld amount as pre-insolvency dues to be distributed under the Insolvency and Bankruptcy Code.

The dispute arose from a contract under which IVRCL, after securing a government infrastructure project, passed on the entire execution to Imperial Coastal Infra. Under this arrangement, the sub-contractor undertook the execution of the project, invested funds, and bore all risks, while IVRCL retained only a 4% margin, with the remaining 96% of payments contractually belonging to the appellant.

After the project was foreclosed, the principal employer released Rs 52.24 lakh in December 2021. Although the amount was received in IVRCL's account, the liquidator released only a part of it and retained Rs 41,76,902, contending that it related to work executed prior to the commencement of the corporate insolvency resolution process and had to be dealt with under the waterfall mechanism.

The NCLT accepted this position and directed the appellant to file its claim as an operational creditor.

Reversing this, the appellate tribunal held that the corporate debtor had no beneficial ownership over 96% of the receivables and was merely holding that portion on behalf of the appellant as a third-party asset.

“Whenever a running account bill is submitted by the CD to the client / employer, an asset in the form of receivables is being created, of which 4% is owned by the CD and the remaining 96% is owned by the appellant as per the implication of the B2B contract between the CD and the appellant. Therefore, when a payment is released to the CD by the client / employer, it will have to be construed that 96% of the said amount will remain as an asset of the appellant in the hands of the CD till it is disbursed to the appellant as per the terms of the said contract.”

Rejecting the liquidator's classification of the dues, the tribunal observed, “We are not inclined to agree with the claim of the liquidator that the dues to be paid to the appellant is an operational debt because operational debt arises when there is a claim in respect of the provision of goods and services to the corporate debtor.”

The tribunal further clarified that, in substance, the services were rendered to the principal employer and not to the corporate debtor.

“The value of services provided by Appellant and which are yet to be paid by the principal employer, will be an operational debt to the principal employer and not the CD.”

Significantly, the bench rejected the liquidator's attempt to split the dues into pre- and post-insolvency periods, holding that where an infrastructure project is continued during the insolvency process, it must be treated as a single, ongoing activity.

“If an infrastructure project is decided to be continued after commencement of CIRP and consequent imposition of moratorium, the entire project has to be construed, as if it is an activity taken up during CIRP and the sub-contractor bills will have to be treated as CIRP cost and paid accordingly, without treating them as operational debt to be settled in accordance with the provisions of section 53 of IBC.”

The bench also held that the moratorium would not apply in such circumstances, as the amounts in question were not assets of the corporate debtor.

“Implications of section 14(1)(b) of IBC will not be applicable in this case because the said provision is intended to ensure that the assets of the CD are not frittered away during the CIRP period and that all creditors are given equal treatment, subject to the provisions of IBC.”

Allowing the appeal, the NCLAT held that the sum of Rs. 41,76,902 remained the property of the appellant and stood excluded from the liquidation estate.

While declining the claim for interest at 18% in the absence of a contractual stipulation, the tribunal awarded simple interest at 9% per annum from January 5, 2022 till February 20, 2024