Liquidator's Improper Fund Distribution & Salary Cuts Violate Insolvency Regulations

The tribunal found that the liquidator's distribution of funds from working capital and profits before liquidating the assets violated the Insolvency and Bankruptcy Code regulations. The unilateral pay cut from employees' salaries was deemed arbitrary and against government directives. The tribunal directed financial creditors to keep the received funds in an interest-bearing account and ordered the liquidator to repay the deducted salaries with interest.

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Issues Involved:
1. Distribution of funds from the working capital and profits before liquidating the assets.
2. Pay cut from the salaries of the employees without their consent.
3. Reliefs and costs.

Issue-wise Detailed Analysis:

1. Distribution of Funds from Working Capital and Profits Before Liquidating the Assets:

The Employee Welfare Association of the Corporate Debtor (CD) filed an application challenging the liquidator's decision to distribute Rs. 21 Crores and another Rs. 5 Crores to financial creditors, arguing it violated Regulation 42 and Section 53 of the Insolvency and Bankruptcy Code (IBC), 2016. The applicant contended that the liquidator should only distribute proceeds from the sale of liquidation assets, not from working capital or profits. The liquidator defended his actions, stating the funds were distributed to reduce the CD's burden without affecting its operations. However, the tribunal found that the liquidator did not have the authority to distribute funds from working capital and profits before liquidating the assets, as per Regulation 42 and Section 53 of the IBC. The tribunal emphasized that the distribution should only occur after the realization of liquidation assets and finalization of the list of stakeholders and asset memorandum. The tribunal concluded that the liquidator's actions were contrary to the regulations and the order dated 14.01.2020 did not permit such interim distribution.

2. Pay Cut from the Salaries of the Employees Without Their Consent:

The tribunal examined the unilateral decision by the Stakeholders Consulting Committee (SCC) to deduct 20% to 40% from the employees' salaries for April 2020. The liquidator claimed the decision was made with the consent of executive heads and was necessary due to the lockdown. However, the tribunal found that the decision was arbitrary and lacked the majority consent of the employees. The tribunal noted that the CD was operating profitably even during the lockdown and the employees had cooperated to keep the factory running. The tribunal deemed the pay cut as a violation of the Ministry of Home Affairs Circular and ruled it was not binding on the employees. The tribunal ordered the liquidator to restore the deducted salaries with applicable bank interest.

3. Reliefs and Costs:

The tribunal concluded that the liquidator's disbursement of funds from working capital and profits was not in accordance with the IBC and regulations. It directed the financial creditors who received the funds to keep the amounts in an interest-bearing account of the CD, returnable if needed for operating the CD. The tribunal also ordered the liquidator to repay the deducted salaries to the employees with applicable bank interest. The application was disposed of with these orders, and the registry was directed to send email copies of the order to all parties.

Conclusion:

The tribunal held that the liquidator's distribution of funds from working capital and profits before liquidating the assets was not justified and violated the IBC regulations. The pay cut from employees' salaries was deemed arbitrary and in violation of government directives. The tribunal ordered the financial creditors to keep the received funds in an interest-bearing account and directed the liquidator to repay the deducted salaries with interest.

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