Credits To Bankrupt's Bank Account Don't Automatically Vest In Bankruptcy Estate: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at New Delhi has ruled that money lying in the bank account of a bankrupt personal guarantor forms part of the bankruptcy estate and can be frozen by the Bankruptcy Trustee.

At the same time, it clarified that amounts credited to the account after the start of bankruptcy cannot automatically be taken over unless the Insolvency and Bankruptcy Code procedure is followed.

A bench of Chairperson Justice Ashok Bhushan and Technical Member Barun Mitra said that while all assets belonging to the bankrupt as of the bankruptcy commencement date vest in the trustee, the law treats assets acquired later differently.

Pointing to Section 159 of the Code, which requires a formal notice to claim such assets, the tribunal observed, “The scheme of Section 159 thus clearly indicates that the assets acquired subsequent to the bankruptcy commencement order shall not automatically vest with the bankruptcy trustee.”

The appeal concerned Subhash Chandra Mishra, a personal guarantor to Niroz Insulations Pvt. Ltd. and Triveni Agrotraders Pvt. Ltd., who had himself moved the tribunal under Section 94 of the Code seeking insolvency resolution.

After creditors rejected his repayment plan, the NCLT initiated bankruptcy proceedings against him on November 6, 2024, and appointed a Bankruptcy Trustee.

Soon after, the trustee directed that Mishra's bank account be frozen. Mishra approached the NCLT Jaipur Bench seeking defreezing of the account, saying the money was needed to meet day-to-day expenses and medical costs and should be treated as “excluded assets” under the Code. The NCLT refused to grant relief, prompting Mishra to move the NCLAT in appeal.

Before the appellate tribunal, Mishra said the money in his account, including amounts sent by family members, was meant to meet household expenses and medical needs and should not form part of the bankruptcy estate.

The trustee opposed the plea, maintaining that bank balances are “property” under the Code and that there was no material to show the money was held in trust for anyone else.

Agreeing with the trustee as far as pre-bankruptcy funds were concerned, the NCLAT said that money lying in a bank account is clearly “property” under the Code and vests in the trustee once bankruptcy begins.

It also turned down the argument that bank balances could be treated as “provisions,” explaining that the term is meant to cover basic household necessities and not liquid cash.

At the same time, the tribunal gave limited relief, directing that amounts credited to the account after the bankruptcy commencement date be released.

It noted that such after-acquired property can be brought into the bankruptcy estate only if the trustee issues a notice under Section 159, something that had not been done in this case.