The National Company Law Appellate Tribunal (NCLAT) has issued a significant ruling regarding the treatment of funds in a ‘No Lien Account’ during the Corporate Insolvency Resolution Process (CIRP). The Tribunal held that any amount lying in the ‘No Lien Account’ must be considered an asset of the Corporate Debtor. This decision is a game-changer for financial institutions, corporate debtors and resolution professionals, highlighting the critical importance of meticulous asset classification in CIRP cases.

 

The NCLAT recently delivered a judgment in the case of Bank of India v Naren Sheth, Resolution Professional, Jaybharat Textiles & Real Estate Ltd. The case revolved around a dispute concerning the release of INR 1 Crore held in a “No Lien Account” by the Bank of India (Appellant). The Corporate Insolvency Resolution Process (CIRP) of Jaybharat Textiles & Real Estate Ltd. was initiated on January 03, 2020, and the amount in question was deposited by the Corporate Debtor to demonstrate bona fides for a One Time Settlement (OTS) proposal before the initiation of the CIRP.

 

After the CIRP was initiated, the Resolution Professional (RP) requested the release of Rs. 1 Crore held in a “No Lien Account” by the Appellant for the purpose of CIRP, since it was an asset of the Corporate Debtor. However, the Appellant contended that the amount was not an asset of the Corporate Debtor since it was deposited by a third party, Wellworth Apparels Private Limited. Subsequently, after consistent non-adherence by the Appellant, the Resolution Professional filed an application before the Ld. National Company Law Tribunal for the release of the amount in the “No Lien Account,” by the Appellant, which was allowed by the Adjudicating Authority. Hence, the Appeal was filed before the NCLAT.

 

The NCLT ruled that the disputed amount of INR 1 Crore was paid by the Corporate Debtor to demonstrate bona fides for the OTS must be considered an asset under CIRP. Section 18(f) of the IBC mandates taking control of assets recorded in the balance sheet. The Appellant, being part of the Committee of Creditors (COC), had its claims admitted but failed to show that the OTS amount was excluded. Thus, the Appellant cannot withhold the OTS amount, as it would result in double benefit to the Appellant.

 

Accordingly, the Hon’ble NCLAT determined that INR 1 Crore in the “No Lien Account” is an asset of the Corporate Debtor. The Tribunal emphasized that the amount was paid by the Corporate Debtor to demonstrate bona fides for an OTS proposal. Since the OTS did not materialize and the money was neither adjusted nor encashed by the Bank, it remains an asset of the Corporate Debtor. The decision highlights the IRP/RP’s role in taking control of all assets of the Corporate Debtor and emphasizes the protective measures during the moratorium period, preventing creditors from appropriating assets. It promotes transparency and adherence to the IBC, ensuring assets are preserved for equitable distribution among creditors.

Authors & Contributors

Partner:

Abhishek Swaroop

 

 

Associates:

Bhawana Sharma

Shreya Chandhok

Kirti Talreja

Rounak Doshi

Bharath Krishna