Custodia Legis Compliance Checklist for Insolvency Professionals.

Custodia Legis Compliance Checklist for Insolvency Professionals.

Custodia legis is a Latin term meaning “in the custody of the law.” It refers to property or assets that are under the control, protection, or supervision of a court or legal authority. Once property is in custodia legis, no party can interfere with, seize, or dispose of it without the court’s permission. This status commonly arises during legal proceedings such as bankruptcy, receivership, or litigation involving disputed assets. The principle ensures that the property is preserved, managed fairly, and safeguarded until the court issues a final decision determining its rightful ownership or distribution.

Custodia Legis Compliance refers to adherence to legal rules and procedures governing property or assets that are placed under the custody of the court. When assets are in custodia legis, parties must comply with court-mandated restrictions, meaning they cannot seize, transfer, alter, or interfere with the property without judicial authorization. Compliance ensures preservation, fairness, and proper administration of disputed or protected assets during legal proceedings such as bankruptcy, receivership, or litigation. Violating Custodia Legis Compliance can lead to legal penalties, contempt of court, or invalidation of unauthorized actions. It safeguards the integrity of the judicial process and the rights of all parties involved.

1. Initiation Stage: Onset of Insolvency / Liquidation

A. Identify All Assets Subject to Court Control

• ? Prepare a complete inventory of assets: movable, immovable, financial, digital, and intangible.
• ? Confirm that all such assets are deemed to be in custodia legis from the commencement date of insolvency/liquidation.
• ? Verify whether any assets are under attachment, seizure, or are part of ongoing litigation.

B. Give Statutory Notice

• ? Notify all stakeholders (secured creditors, statutory authorities, employees, promoters) that the estate is now under custodia legis.
• ? Inform them that no independent enforcement action can proceed without court/tribunal approval.

C. Secure the Estate Immediately

• ? Take control of premises, records, inventories, and bank accounts.
• ? Change passwords, access credentials, and digital controls.
• ? Freeze unauthorized transactions through bank instructions.

2. Verification & Valuation Phase

A. Conduct Due Diligence

• ? Verify title documents, registrations, encumbrances, and prior assignments.
• ? Check renewal status of licenses, permits, insurance, and intellectual property.

B. Engage Registered Valuers

• ? Obtain valuations for all classes of assets (plant & machinery, land, financial instruments, intangibles).
• ? Identify perishable assets requiring urgent sale or preservation.

C. Handle Pending Litigation

• ? List all suits involving the debtor.
• ? Ensure property involved in litigation is protected from interference due to its custodia legis status.
• ? Seek tribunal/court directions where necessary.

3. Intellectual Property (IP) Assets

A. Stability and Protection of IP

• ? Identify trademarks, patents, copyrights, software, and domain names.
• ? Check whether renewal is due or has lapsed.
• ? Take immediate steps for renewal to prevent claims of abandonment.

B. Prevention of Unauthorized Use

• ? Issue notices to third parties who may be using the IP without permission.
• ? Document all known licensees or franchisees and verify validity of agreements.

C. If IP is Outdated or Dormant

• ? Evaluate commercial viability.
• ? Maintain the asset if valuable; consider surrender only with tribunal approval.

4. Dealings with Secured and Unsecured Creditors

A. Enforcement Bar

• ? Ensure that no creditor attaches, seizes, or disposes of any asset under custodia legis.
• ? Communicate the moratorium (if under IBC) or court orders clearly.

B. Verification of Claims

• ? Invite, examine, and adjudicate claims as per statutory timelines.
• ? Maintain accurate records of admitted and rejected claims.

C. Coordination with Secured Creditors

• ? Ascertain whether secured creditors intend to relinquish or enforce their security.
• ? Ensure enforcement (if allowed) follows proper permission from court/tribunal.

5. Management of Bank Accounts & Financial Assets

A. Bank Controls

• ? Open insolvency or liquidation-specific bank accounts.
• ? Ensure all receipts are credited only to these accounts.
• ? Prohibit withdrawals except as permitted by law or court orders.

B. Financial Instruments

• ? Secure control over shares, mutual funds, bonds, or pledged instruments.
• ? Prevent unauthorized pledges, transfers, or encumbrances.

C. Ongoing Contracts

• ? Identify executory contracts requiring continuation or termination.
• ? Seek approval for termination where contractual performance is detrimental to the estate.

6. Sale of Assets Under Custodia Legis

A. Pre-Sale Requirements

• ? Obtain court/tribunal approval for sale of any asset.
• ? Ensure proper valuations and public notices.
• ? Use transparent sale methods (auction, e-auction, Swiss challenge, etc.).

B. Sale Process

• ? Avoid private negotiations without approval.
• ? Maintain full documentation of bids, inspections, and communications.
• ? Ensure no conflict of interest involving bidders.

C. Post-Sale Compliance

• ? Deposit sale proceeds into the designated bank account.
• ? Seek confirmation from the court if required.
• ? Ensure clean transfer of title to buyer.

7. Record Keeping & Reporting Obligations

A. Statutory Registers

Maintain updated registers for:

• ? Assets
• ? Claims
• ? Transactions
• ? Litigation
• ? Communications

B. Periodic Reports

• ? Submit required reports to NCLT, Company Court, or Appellate bodies.
• ? Share status updates with the Committee of Creditors (in CIRP) or stakeholders (in liquidation).

C. Audit & Transparency

• ? Facilitate internal and statutory audits.
• ? Maintain evidentiary records to justify each decision made under custodia legis responsibilities.

8. Risk Management and Legal Governance

A. Prevent Breach of Custodia Legis

• ? Ensure no asset is encroached upon, alienated, or interfered with by promoters or third parties.
• ? Seek contempt proceedings where a violation occurs.

B. Insurance

• ? Confirm that assets are insured during liquidation.
• ? Renew insurance policies and update ownership status.

C. Employee and HR Matters

• ? Secure employee records, PF details, salary claims, and gratuity details.
• ? Identify critical personnel required for maintaining assets.

9. Final Distribution and Dissolution

A. Settlement of Claims

• ? Distribute liquidation proceeds as per statutory waterfall.
• ? Maintain proof of payout and stakeholder acknowledgment.

B. Closure of Books

• ? Close bank accounts after distribution.
• ? Prepare final liquidation accounts and auditor confirmation.

C. Application for Dissolution

• ? File dissolution application with the tribunal/court.
• ? Ensure all assets in custodia legis are accounted for, sold, or transferred as directed.
• ? Maintain complete records for post-dissolution queries.

Conclusion

This checklist allows insolvency professionals to ensure that every asset under custodia legis is properly protected, maintained, realized, and distributed in compliance with statutory and judicial requirements. It promotes transparency, minimizes legal risks, and helps maintain the integrity of insolvency proceedings.

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