Personal guarantor settlements do not confer financial creditor priority or interrupt statutory liquidation estate distributions.
One-time settlement by a personal guarantor with the sole financial creditor does not terminate or alter liquidation absent a recognised statutory route, and does not make the guarantor a financial creditor without debt assignment or substitution. After the financial creditor's claim is satisfied, forfeited earnest money deposit forms part of the liquidation estate and must be restored for statutory distribution. Approved remuneration for an erstwhile liquidator's claim-processing, auction and related work may be paid from the estate. An admitted operational creditor participates in the statutory waterfall, while the guarantor, including as asset purchaser or promoter, has no priority and may receive only any surplus after statutory claims.
Issues: (i) Whether an OTS between a personal guarantor and the sole financial creditor can bring the corporate debtor out of liquidation; (ii) Whether forfeited earnest money deposit previously received by the financial creditor must revert to the liquidation estate after its debt is settled; (iii) Whether payment of remuneration to the erstwhile liquidator from the liquidation estate is valid; and (iv) Whether the admitted operational creditor is entitled to distribution and the personal guarantor can claim priority as a financial creditor.
Issue (i): Whether an OTS between a personal guarantor and the sole financial creditor can bring the corporate debtor out of liquidation.
Analysis: A bilateral settlement with a financial creditor does not displace the statutory liquidation process. Exit from liquidation is available only through the legally recognised routes, including a scheme under Section 230 of the Companies Act, 2013, or sale of the corporate debtor as a going concern. The separately ratified transfer of assets, treated as a private sale after unsuccessful auctions and on value-maximisation considerations, was left undisturbed.
Conclusion: The OTS did not terminate or alter the liquidation process, and no interference was warranted with the ratified asset transfer.
Issue (ii): Whether forfeited earnest money deposit previously received by the financial creditor must revert to the liquidation estate after its debt is settled.
Analysis: The forfeited earnest money deposit constituted an asset of the liquidation estate. Once the financial creditor accepted the OTS amount and issued an account-closure certificate, its claim stood satisfied and it retained no entitlement to the forfeited amount. The amount was consequently required to be restored to the liquidation estate for distribution under Section 53 of the Insolvency and Bankruptcy Code, 2016.
Conclusion: The forfeited earnest money deposit was required to be returned to the liquidation estate and could not be retained by the financial creditor.
Issue (iii): Whether payment of remuneration to the erstwhile liquidator from the liquidation estate is valid.
Analysis: The erstwhile liquidator had undertaken claim processing, conducted auctions, pursued applications, and represented the corporate debtor in connected proceedings. The monthly remuneration had been fixed during the insolvency process and continued during liquidation; the reduced amount allowed was supported by the unchallenged computation and work performed.
Conclusion: Payment of the approved remuneration to the erstwhile liquidator from the liquidation estate was valid.
Issue (iv): Whether the admitted operational creditor is entitled to distribution and the personal guarantor can claim priority as a financial creditor.
Analysis: The operational creditor's claim had been lodged during the insolvency process, updated after liquidation commenced, admitted by the liquidator, and reported to the relevant authorities. Payment by the personal guarantor to settle the financial creditor's dues did not effect an assignment of debt or substitute the guarantor as a financial creditor. As purchaser of assets or promoter, the guarantor had no priority claim over the liquidation estate and could receive any surplus only after statutory claims were satisfied under Section 53 of the Insolvency and Bankruptcy Code, 2016.
Conclusion: The admitted operational creditor was entitled to distribution under the statutory waterfall, and the personal guarantor had no priority entitlement as a financial creditor.
Final Conclusion: The liquidation estate, including forfeited earnest money deposit, remains available for settlement of liquidation costs and admitted stakeholder claims in accordance with the statutory waterfall.
Ratio Decidendi: A personal guarantor who settles the corporate debtor's financial debt under an OTS does not, absent assignment or substitution, become a financial creditor entitled to liquidation-estate proceeds, which must be distributed under the statutory waterfall after the financial creditor's claim is satisfied.