NCLT Bengaluru: Third-Party Attachments Cannot Override IBC, Liquidator Entitled to Recover Seized Assets

NCLT Bengaluru: Third-Party Attachments Cannot Override IBC, Liquidator Entitled to Recover Seized Assets

Introduction

This case concerns an application filed by the liquidator of Welworth Software Pvt. Ltd. seeking directions for recovery of ₹47.98 lakh seized by the CBI during a corruption investigation and subsequently released under a High Court order. The key issue before the National Company Law Tribunal (NCLT), Bengaluru, was whether a liquidator is entitled to assume custody of assets belonging to the corporate debtor even when such assets are under attachment or seizure by third parties, including investigating agencies. The tribunal reaffirmed the primacy of the Insolvency and Bankruptcy Code (IBC), holding that third-party attachment cannot defeat the liquidator’s statutory mandate.

Factual background

In October 2020, the CBI seized ₹47.98 lakh from the residence of erstwhile director Akshaya Kumar Karunam during a probe under the Prevention of Corruption Act involving Karnataka Minister DK Shivkumar. Subsequently, in January 2021, the Karnataka High Court ordered release of the seized amount to the corporate debtor on execution of an indemnity bond and surety. After Welworth Software entered liquidation on 17 November 2022, the liquidator issued a notice in September 2023 directing the erstwhile director to deposit the amount into the liquidation estate. No deposit was made, leading to the present application.

Procedural background

The liquidator moved the NCLT under Sections 35 and 36 of the IBC seeking directions for immediate deposit of the money with accrued interest. The respondent contended that he held the amount as custodian under court orders and expressed willingness to deposit it, subject to release of the indemnity bond and surety executed before the criminal court. The matter was heard by the Bengaluru Bench comprising Judicial Member Sunil Kumar Aggarwal and Technical Member Radhakrishna Sreepada.

Issues

1. Whether a liquidator must take control of assets of the corporate debtor even when such assets are seized or attached by third-party authorities.

2. Whether seizure or attachment under criminal proceedings overrides the IBC or excludes such property from the liquidation estate.

3. Whether the respondent could defer deposit of the amount until the indemnity bond and surety were formally discharged.

Contentions of the parties

Liquidator’s submissions: The liquidator argued that once the High Court determined that the seized funds belonged to the corporate debtor, they automatically formed part of the liquidation estate. Under Sections 35(1)(b) and 36 of the IBC, the liquidator must take custody of all assets, even those under third-party attachment. It was submitted that third-party custody cannot override the IBC’s overriding force under Section 238.

Respondent’s submissions: The respondent contended that he was merely a custodian of the amount under the High Court’s directions and was willing to deposit it, provided the indemnity bond and property documents furnished as surety were returned. He argued that until the criminal court released the surety, he could not deposit the amount unconditionally.

Reasoning and analysis

The Judicial Member Sunil Kumar Aggarwal and Member Technical Radhakrishna Sreepada held that under the IBC, the liquidator is obligated to take custody and control of all assets belonging to the corporate debtor, including those seized or attached by investigating agencies or held under court orders. Seizure does not confer any proprietary right on the custodian, who merely holds the property subject to final judicial determination. Since the Karnataka High Court had already recognised the funds as belonging to the corporate debtor, they must necessarily form part of the liquidation estate. The NCLT emphasised that third-party attachment cannot override or defeat the overriding statutory scheme of the IBC. It further clarified that criminal court directions granting interim custody aim only to preserve property and not to create competing claims. While acknowledging the respondent’s concern regarding the indemnity bond, the tribunal held that such procedural aspects cannot delay transfer of the funds to the liquidation estate, although it permitted both parties to jointly approach the High Court for discharge of the bond.

Implications

This ruling reinforces the supremacy of the IBC over parallel proceedings, particularly regarding liquidation estate formation. It confirms that assets belonging to a corporate debtor cannot be withheld on the pretext of criminal seizure or third-party attachment, ensuring that the liquidation process is not impeded by external custodial orders. By requiring the respondent to deposit the funds while enabling coordinated relief from the High Court, the tribunal balanced the liquidator’s statutory mandate with procedural fairness. Overall, the decision strengthens the principle that liquidation estate assets must be preserved for equitable distribution among stakeholders without interference from collateral proceedings.