NCLAT orders PNB to refund Rs 4.5 crore to liquidator of Vegan Colloids

In a recent judgment, the National Company Law Appellate Tribunal (NCLAT) overturned an order by the National Company Law Tribunal (NCLT), Chandigarh Bench, directing Punjab National Bank (PNB) to refund ₹4.50 crore to the liquidation estate of Vegan Colloids Ltd. The ruling reinforces the primacy of the Insolvency and Bankruptcy Code (IBC), 2016, in ensuring equitable distribution of assets during liquidation.

Case Background

Vegan Colloids Ltd., a corporate debtor, underwent Corporate Insolvency Resolution Process (CIRP) in 2017 after Bank of India filed a petition under Section 7 of the IBC. The process later transitioned to liquidation, with Mr. Anil Kohli appointed as the Liquidator. During liquidation, PNB filed a claim of ₹18.17 crore, which was admitted, and relinquished its security interest over the company’s assets.

Discrepancies emerged in the corporate debtor’s audited financials for FY 2018-19, revealing a reduction in short-term borrowings by ₹4.50 crore and trade receivables by ₹2.15 crore. The Liquidator contended these amounts were recovered from the corporate debtor’s assets and paid to PNB, bypassing the liquidation process.

Legal Battle

The Liquidator sought a refund from PNB, arguing the amount formed part of the liquidation estate under Section 36 of the IBC. However, NCLT dismissed the application, accepting PNB’s claim that the funds were deposited by guarantors under a One-Time Settlement (OTS) and did not belong to the corporate debtor.

NCLAT’s Findings

NCLAT’s bench, comprising Justice Yogesh Khanna and Member (Technical) Arun Baroka, scrutinized the balance sheet and audit reports, noting:

1. Asset Misappropriation: The reduction in trade receivables and short-term borrowings indicated recovery from the corporate debtor’s assets, not guarantor payments.
2. Admission by PNB: The bank acknowledged receiving ₹2.5 crore from “True Value Traders,” a trade receivable of Vegan Colloids, contradicting its claim of guarantor-funded settlements.
3. IBC Violations: PNB’s appropriation of funds disrupted the liquidation estate and violated Sections 36 and 53 of the IBC, which mandate asset distribution via the waterfall mechanism.

The tribunal emphasized that all assets reflected in the balance sheet, including receivables, form part of the liquidation estate. PNB’s unilateral adjustment of dues without Liquidator approval was deemed impermissible.

Judgment

Setting aside NCLT’s order, NCLAT ruled:

• The ₹4.50 crore must be refunded to the liquidation estate for distribution under Section 53.
• PNB failed to prove the funds originated solely from guarantors, lacking documentary evidence.
• The moratorium under Section 14 of the IBC, while not covering guarantor assets, did not permit PNB to bypass the Liquidator’s authority over corporate debtor assets.

The judgment underscores creditors’ obligation to adhere to the IBC’s waterfall mechanism during liquidation. It also highlights the Liquidator’s fiduciary role in safeguarding assets for equitable creditor payouts. Legal experts view this as a precedent against unilateral creditor recoveries that undermine the insolvency process.

NCLAT’s decision reinforces the sanctity of the IBC framework, ensuring corporate debtor assets are distributed transparently and fairly. The ruling marks a victory for insolvency professionals and sets a benchmark for creditor accountability in liquidation proceedings.

Also See: NCLAT allows banks to pursue action against former IL&FS directors not on current board