IBC Section 36: Liquidation estate

Section 36 of Insolvency and Bankruptcy Code, 2016: Liquidation estate

Official Bare Act Text

Override / Mandate Mens Rea (Intent) Actus Reus (Conduct) Punishment Limitation Monetary

(1) For the purposes of liquidation, the liquidator shall form an estate of the assets mentioned in sub-section (3), which will be called the liquidation estate in relation to the corporate debtor.

(2) The liquidator shall hold the liquidation estate as a fiduciary for the benefit of all the creditors.

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

(a) any assets over which the corporate debtor has ownership rights, including all rights and interests therein as evidenced in the balance sheet of the corporate debtor or an information utility or records in the registry or any depository recording securities of the corporate debtor or by any other means as may be specified by the Board, including shares held in any subsidiary of the corporate debtor;

(b) assets that may or may not be in possession of the corporate debtor including but not limited to encumbered assets;

(c) tangible assets, whether movable or immovable;

(d) intangible assets including but not limited to intellectual property, securities (including shares held in a subsidiary of the corporate debtor) and financial instruments, insurance policies, contractual rights;

(e) assets subject to the determination of ownership by the court or authority;

(f) any assets or their value recovered through proceedings for avoidance of transactions in accordance with this Chapter;

(g) any asset of the corporate debtor in respect of which a secured creditor has relinquished security interest;

(h) any other property belonging to or vested in the corporate debtor at the insolvency commencement date; and

(i) all proceeds of liquidation as and when they are realised.

(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;

(ii) bailment contracts;

(iii) all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund;

(iv) other contractual arrangements which do not stipulate transfer of title but only use of the assets; and

(v) such other assets as may be notified by the Central Government in consultation with any financial sector regulator;

(b) assets in security collateral held by financial services providers and are subject to netting and set-off in multi-lateral trading or clearing transactions;

(c) personal assets of any shareholder or partner of a corporate debtor as the case may be provided such assets are not held on account of avoidance transactions that may be avoided under this Chapter;

(d) assets of any Indian or foreign subsidiary of the corporate debtor; or

(e) any other assets as may be specified by the Board, including assets which could be subject to set-off on account of mutual dealings between the corporate debtor and any creditor.

Legal Commentary & Landmark Judgments: Section 36

Section 36 establishes the statutory composition of the 'Liquidation Estate' held by the liquidator as a fiduciary for the benefit of all creditors, while expressly excluding assets held in trust, third-party assets, and worker pension funds.

Fiduciary Formation of Estate: The liquidator shall form an estate to be called the liquidation estate, which shall be held by the liquidator as a fiduciary for the benefit of all the creditors.
Assets Included (Section 36(3)): Encompasses tangible and intangible assets, encumbered and unencumbered properties, contractual rights, and assets recovered through avoidance applications.
Statutory Exclusions (Section 36(4)): Expressly excludes: (a) Assets owned by third parties in possession of debtor; (b) Assets held in trust or under bailment; (c) All sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund.
Inapplicability of Waterfall to Excluded Assets: Provident fund and gratuity dues are not part of the liquidation estate and cannot be distributed under the Section 53 waterfall.

Key Landmark Precedents:

State Bank of India v. Moser Baer Karamchari Union (2020) SCC OnLine SC 945: The Supreme Court held that provident fund, pension fund, and gratuity fund of workmen are completely excluded from the liquidation estate under Section 36(4)(a)(iii); they must be paid to workmen in full before any distribution under Section 53.
Embassy Property Developments Pvt. Ltd. v. State of Karnataka (2020) 13 SCC 308: The Supreme Court held that assets not belonging to the corporate debtor (such as government mining leases) cannot be included in the liquidation estate under Section 36.

Courtroom Practice & Strategic Litigation Guidance:

The liquidator must immediately segregate workmen's PF and gratuity funds from the liquidation estate under Section 36(4). These social welfare funds must never be mixed with general liquidation funds or subjected to haircut under the Section 53 waterfall.