2026 (1) TMI 1086 - AT - IBC

Effect of bankruptcy order: unfreezing accounts and release of unclaimed post-commencement funds conditioned on trustee notice and adjudication

Effect of a bankruptcy order bars unilateral release of frozen bank accounts; administration and distribution of the bankrupt's estate vests with the ... Effect of bankruptcy order - estate of the bankrupt - unfreezing of the bank account and permission to utilise the deposited funds without restriction - ‘bankruptcy estate’ or are ‘excluded assets’ within the meaning of Section 79(14)(b) of the IBC - administration and distribution of estate of bankrupt - after-acquired property of bankrupt - vesting of estate of bankrupt in bankruptcy trustee - Bankruptcy Trustee duties and powers - NCLT / Adjudicating Authority - Ejusdem generis - HELD THAT:- There are no material on record with respect to any amount which according to the Appellant was to be kept in trust. There being no material on the record, we are of the view that the present is not a case for applicability of Section 155(2)(b) and Appellant having not established that any amount was held by the bankrupt on trust for any other person no direction could have been passed for release of such amount. The word ‘administration’ which occurring in Section 136 of the IBC provides that bankruptcy trustee shall conduct the administration and distribution of the estate of the bankrupt. Thus, the said provision entrust the administration of the estate of the bankrupt on bankruptcy trustee. It is true that the estate of the bankruptcy trustee is essentially for distribution of the estate of bankrupt in accordance with provision of Chapter V of Part III and the assets are to be distributed amongst the creditors as provided under Section 128(1)(b). The entire estates of the bankrupt having been taken under by the bankruptcy trustee which estate are essentially for distribution amongst the creditors. In the present appeal, the Appellant has filed additional affidavit bringing on record subsequent communication communicating requirement of Rs. 2,50,000/- to discharge past and upcoming liabilities and medical requirements. In the Affidavit, Appellant has also brought on record medical prescriptions and medical bills. However, the said claim was rejected by the bankruptcy trustee. The Appellant further contended that the bankruptcy trustee is charging Rs. 45,000 per month per matter as bankruptcy trustee fee and spending almost Rs. 75,000/- on litigation but has not considered the request of the bankruptcy trustee to release any amount as prayed by bankruptcy trustee. The estate of the bankrupt being under the administration of the bankruptcy trustee and the bankruptcy trustee himself having taken the stand for specific purpose, bankrupt should approach the NCLT for filing an application. We are of the view that it is open for the Appellant to make appropriate application before the NCLT seeking any direction for release of any amount from the estate of the bankruptcy estate which NCLT can consider and decide in accordance with law. Application which has given rise to this Appeal having contained only prayer for defreezing account which prayer was rightly rejected by NCLT, we do not find any ground to interfere with the impugned order. We have noticed above Section 159 of the IBC which clearly provides that assets acquired after bankruptcy commencement date can be claimed by the bankruptcy trustee by giving a notice. The scheme of Section 159 thus, clearly indicates that the assets acquired subsequent to bankruptcy commencement order shall not automatically vest with the bankruptcy trustee. Thus, the amount which has been received in the account of the Corporate Debtor subsequent to 06.11.2024 which has not been claimed by the bankruptcy trustee by giving a notice under Section 159 has to be released in favour of the Appellant. The Adjudicating Authority's order rejecting the prayer to unfreeze the account is upheld; amounts credited to the account after the bankruptcy commencement date which the trustee has not claimed under Section 159(1) are to be released to the bankrupt; and the bankrupt remains entitled to approach the NCLT for directed release of specific amounts for legitimate purposes, to be considered with opportunity to the trustee. Issues: (i) Whether amounts lying in the bankrupt's bank account at the bankruptcy commencement date are part of the bankruptcy estate or excluded assets under Section 79(14)(b) of the IBC; (ii) Whether Section 79(14)(b) obliges the bankruptcy trustee to release funds from the estate to satisfy basic domestic needs of the bankrupt and immediate family; (iii) Whether the trustee's freezing of the bankrupt's bank account was contrary to the IBC and whether the Adjudicating Authority erred in rejecting the application to defreeze the account; (iv) Whether the appellant was entitled to release of any specific amounts lying in the frozen account; (v) Whether the trustee was obliged to release amounts for the appellant's medical necessity from funds in the bank account; (vi) Relief, if any, to which the appellant is entitled.Issue (i): Whether amounts in the bankrupt's bank account at the bankruptcy commencement date are part of the bankruptcy estate or excluded assets under Section 79(14)(b) of the IBC.Analysis: The Code vests the estate of the bankrupt in the bankruptcy trustee on passing of the bankruptcy order (Sections 128, 154, 155). Section 79(14)(b) lists excluded assets including unencumbered furniture, household equipment and 'provisions as are necessary for satisfying the basic domestic needs'; the phrase must be read ejusdem generis with surrounding terms. The court examined the nature of 'provisions' and concluded it refers to tangible household provisions (e.g., foodstuffs) within a dwelling and not monetary bank balances vested in the bankrupt at the commencement date.Conclusion: Amounts lying in the bankrupt's bank account at the bankruptcy commencement date are part of the bankruptcy estate and are not excluded assets under Section 79(14)(b).Issue (ii): Whether Section 79(14)(b) imposes an obligation on the bankruptcy trustee to release funds from the estate for satisfying basic domestic needs of the bankrupt and immediate family.Analysis: The IBC contains no provision analogous to historical statutes (Presidency-Towns Insolvency Act, 1909 / Provincial Insolvency Act, 1920) that empowered courts to make allowances to insolvents. The scheme of the IBC entrusts administration and distribution to the trustee for benefit of creditors (Sections 136, 128). The trustee may administer the estate, and any release for specific needs requires appropriate process; there is no automatic statutory duty on the trustee under Section 79(14)(b) to disburse monetary amounts held in the estate for domestic needs.Conclusion: Section 79(14)(b) does not impose an automatic obligation on the bankruptcy trustee to release funds from the bankruptcy estate to satisfy basic domestic needs.Issue (iii): Whether freezing of the bankrupt's bank account by the trustee was not in accordance with the IBC and whether the Adjudicating Authority ought to have allowed the application to defreeze the account.Analysis: Upon vesting, the trustee is charged with custody and control of estate assets (Sections 128, 154, 155, 136). Freezing accounts to preserve the estate falls within the trustee's administration function. The Adjudicating Authority considered the applicant's evidence and found no proof of trust or exclusion; absent such proof, defreezing was not warranted. The tribunal also noted procedural route available to the bankrupt to seek release of funds from the NCLT.Conclusion: The trustee's freezing of the account was within the scope of the IBC and the Adjudicating Authority did not err in rejecting the narrow prayer to defreeze the account.Issue (iv): Whether the appellant was entitled to release of any specific amounts lying in the frozen account.Analysis: Section 159 treats after-acquired property separately and requires the trustee to give notice to claim such property. Amounts credited to the account after the bankruptcy commencement date do not automatically vest in the trustee unless a notice under Section 159(1) is issued. The account statement showed certain credits after the commencement date which were not claimed by the trustee by notice under Section 159.Conclusion: Amounts received in the bankrupt's account subsequent to the bankruptcy commencement date and not claimed by the trustee by issuing notice under Section 159(1) must be released to the appellant.Issue (v): Whether the trustee was obliged to consider release of amounts for the appellant's medical necessity from funds in the bank account.Analysis: The trustee indicated that applications for release of funds for specific purposes must be made to the Adjudicating Authority; the IBC does not provide an express power to the trustee to unilaterally release estate funds for medical needs. The tribunal accepted that the NCLT may, on an appropriate application with supporting evidence, consider such relief, but the trustee's refusal to release funds without NCLT approval was not contrary to the Code.Conclusion: The trustee was not obliged to release funds unilaterally for medical necessity; the appellant may apply to the NCLT for release of amounts for medical needs which the NCLT may decide after hearing the trustee.Issue (vi): Relief, if any, to which the appellant is entitled.Analysis: The tribunal upheld the Adjudicating Authority's rejection of the prayer to defreeze the account in respect of sums vested in the estate at the commencement date. It directed release of amounts credited after the commencement date that were not claimed by notice under Section 159, and granted liberty to approach the NCLT for specific releases (including medical needs) to be decided after giving the trustee opportunity to be heard.Conclusion: (i) The Adjudicating Authority's order rejecting the defreezing prayer is upheld; (ii) amounts credited to the account after 06.11.2024 not claimed by trustee under Section 159(1) shall be released to the appellant; (iii) the appellant is at liberty to approach the NCLT for release of any other specific amounts, including for medical needs.Final Conclusion: The appeal is partly allowed: the tribunal affirms that funds vested in the bankruptcy estate at the commencement date remain under trustee control and the Adjudicating Authority's rejection of the defreeze prayer is upheld, but the tribunal requires release to the bankrupt of unclaimed after-acquired credits received post-commencement date and permits the bankrupt to seek further relief from the NCLT for specific needs.Ratio Decidendi: Funds and property vested in the bankruptcy estate at the bankruptcy commencement date vest in the bankruptcy trustee and are not excluded assets under Section 79(14)(b); however, after-acquired property credited post-commencement does not automatically vest in the trustee and, absent a notice under Section 159(1), such unclaimed after-acquired amounts must be released to the bankrupt, while requests for release of estate funds for specific needs must be determined by the Adjudicating Authority after giving the trustee an opportunity to be heard.