Bombay High Court: Fixed deposit ordered by Court as ad-interim relief pre-arbitration is not Liquidation Estate under IBC


In Litostroj Power D.O.O vs IVRCL Limited, Comm Arbitration Petition No. 57/2020 decided on 15 January 2020, the Bombay High Court was deciding a petition under Section 9 of the Arbitration & Conciliation Act, 1996 (‘Act’) for post award relief in respect of a Singapore seated ICC Award. In its petition, Litostroj was inter alia seeking directions against the liquidator of IVRCL to deposit the amounts lying in the fixed deposit with SBI Hyderabad to the Bombay High Court in order to secure the amounts awarded in arbitration and to restrain IVRCL from using these deposits.

It all started when IVRCL entered into a construction contract with Government of Maharashtra (‘GOM’) and sub-contracted certain civil works to Litostroj. Later IVRCL went into liquidation. Before liquidation, IVRCL entered into contract with Litostroj subcontracting certain civil works it contracted with GOM. Under the terms of this subcontract, Litostroj obtained two performance bank guarantees (‘Guarantees’) from its bank which were periodically extended. These Guarantees were backed by Counter Bank Guarantees from banks in Slovenia.

Certain disputes arose between IVRCL and GOM as the latter refused to extend the time for completion of the project and the main contract. Resultantly, the GOM encashed the advance bank guarantees that had been furnished by IVRCL in favour of GOM which in turn led IVRCL to partially invoke and encash the Guarantees furnished by Litostroj. Later the Bank of Litostroj made a claim to its counterpart banks in Slovenia for encashment of parts of the Counter Bank Guarantees.

Litostroj filed an arbitration petition under Section 9 of the Act seeking ad-interim relief from the Bombay High Court against this partial invocation of Guarantees by IVRCL which was allowed with the direction against IVRCL not to utilize the monies received by them from encashment of Guarantees.

Later, Litostroj initiated arbitration in Singapore with the ICC. By this time, IVRCL’s financial condition started deteriorating and therefore, IVRCL deposited the amount it received from partial encashment of the Guarantees in a fixed deposit with SBI Hyderabad in the name of the IVRCL.

On one hand, IVRCL began to go into insolvency in proceedings before the NCLT, Hyderabad Bench, while on the other, the arbitration in Singapore concluded. Two days after conclusion of arbitration, the NCLT, Hyderabad Bench passed an order of liquidation of IVRCL.

Later, the arbitral tribunal at Singapore made its final Award and inter alia held that the entire encashment by the IVRCL was wrongful and could not have been made, and that IVRCL had wrongfully partially encashed the two Guarantees. The arbitral tribunal directed a refund or a return of the amount encashed.

In view of the above facts, the question before the Bombay High Court was that since the amount encashed by IVRCL lying with SBI, Hyderabad in a fixed deposit stood in the name of IVRCL prior to its liquidation,  thus, whether IVRCL is entitled to this amount?

The liquidator of IVRCL relied on Section 36(3) of the Insolvency Bankruptcy Code 2016 (‘Code’) to contend that the Fixed Deposit with the SBI, Hyderabad, being a tangible asset, is “an asset over which the company has ownership rights”. The said provision reads as under:

“36. Liquidation estate. –


(3) Subject to sub-section (4), the liquidation estate shall comprise all liquidation estate assets which shall include the following: –


(c) tangible assets, whether movable or immovable;

The Court, however, placed reliance on the sub-section (3) of Section 36 which is made specifically subject to sub-Section (4). Section 36(4) of the Code specifies what is not to be included in the liquidation estate assets and shall not be used for recovery in liquidation. Sub clause (a)(i) specifies that any assets held in trust for any third parties are excluded assets. The general description is of assets owned by a third party which are in possession of the corporate debtor. Section 36(4) of the Code reads as under:-

(4) The following shall not be included in the liquidation estate assets and shall not be used for recovery in the liquidation: –

(a) assets owned by a third party which are in possession of the corporate debtor, including –

(i) assets held in trust for any third party;

Thus, in view of Section 36(4) of the Code, the Court concluded that the fixed deposit is clearly held in trust by IVRCL because that fixed deposit was created pursuant to orders of the Court. The Court noted that the said fixed deposit could not have been created otherwise and it was certainly not created out of any sense of charity or selflessness on the part of IVRCL. Thus, if that amount has been so held, it has been held in abeyance, and it is clearly held in trust or in a manner in the nature of a trust, that is to say partaking of a fiduciary relationship, until the determination of who, between the two parties, is entitled to that amount.

Applying reverse analysis, the Court tested this by reversing a possible result in the arbitration. Had Litostroj failed in that claim in arbitration, and had it been held that the encashment was indeed not wrongful, but was lawful, then of course IVRCL and its liquidator would have been entitled to that amount. But the Court held that it is impossible to accept the contention that the same result would obtain even if the award was against IVRCL, i.e. that the fixed deposit belongs to IVRCL irrespective of the outcome of the arbitration.

The Court further added that the award, being a Foreign Award, will have to run the gauntlet of Sections 47 and 48 of the Act. But since the Fixed Deposit are in the name of IVRCL which is in liquidation, the Court allowed Litostroj’s plea granting it interim relief under Section 9 of the Act and directed the Manager of SBI Hyderabad to transfer those monies from SBI Hyderabad including all accrued interest to the name of the Prothonotary and Senior Master of the Court to secure the awarded amount.

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