The National Company Law Appellate Tribunal (NCLAT) confirms liquidation proceedings for Swastik Spinners, dismissing appeals from Tamil Nadu Mercantile Bank and guarantor over forfeited EMD and liquidation expenses.
In a significant ruling, the National Company Law Appellate Tribunal (NCLAT), Chennai Bench, upheld the liquidation proceedings of Swastik Spinners (India) Private Limited, dismissing appeals by Tamil Nadu Mercantile Bank Limited and Mr. S.V. Ramasamy, the personal guarantor and promoter of the corporate debtor. The Tribunal affirmed the decision of the National Company Law Tribunal (NCLT), which had directed the forfeited Earnest Money Deposit (EMD) of Rs. 54.31 lakh to be returned to the liquidation estate and distributed as per the waterfall mechanism under Section 53 of the Insolvency and Bankruptcy Code, 2016.
Tamil Nadu Mercantile Bank (TMB) had contested the NCLT's order to refund Rs. 52.27 lakh from the forfeited EMD, arguing that it was entitled to retain the amount post-settlement with Mr. Ramasamy. However, the NCLAT held that the settlement between the bank and the guarantor, which included a one-time settlement (OTS) of Rs. 9.50 crore, did not affect the liquidation process and that the bank had no further claim over the liquidation estate once its dues were satisfied.
The Tribunal also rejected Mr. Ramasamy's claim that he had stepped into the shoes of the financial creditor by settling the bank's dues, asserting that without a formal assignment of debt, he could not claim precedence over other creditors in the distribution of the liquidation estate. Consequently, the forfeited EMD was to be used to settle liquidation expenses, including the fees of the erstwhile and current liquidators, and the claims of operational creditors.
The NCLAT’s decision reinforces the structured distribution mechanism under the Insolvency and Bankruptcy Code, ensuring equitable treatment of creditors and adherence to statutory processes during liquidation.
Bottom Line :
Insolvency and Bankruptcy Code, 2016 - During liquidation, a private settlement/OTS between the sole financial creditor and personal guarantor does not terminate liquidation proceedings - forfeited EMD forms part of liquidation estate and, after satisfaction of financial creditor through OTS, must be brought back to liquidation account for distribution as per Section 53 - promoter/personal guarantor does not become financial creditor merely by paying bank dues without assignment of debt.
Statutory provision(s):
Insolvency and Bankruptcy Code, 2016 Sections 53, 35, 38, 39; Companies Act, 2013 Section 230; IBBI (Liquidation Process) Regulations, 2016 Regulations 33, 37
