A lender’s OTS with a guarantor does not end liquidation or alter Section 53 distribution.

Swastik Spinners (India) Private Limited entered liquidation after its resolution plan was rejected.

Its promoter and personal guarantor, S.V. Ramasamy, later paid Tamil Nadu Mercantile Bank (TMB) ₹9.50 crore under a one-time settlement (OTS), and the Bank issued an account-closure certificate.

An earlier NCLT order rejecting Ramasamy’s application to withdraw the company from liquidation and directing the liquidator to continue the process had attained finality.

In the liquidation, ₹54.31 lakh deposited as earnest money by an unsuccessful auction bidder, Sivajothi Spinning Mills, had been forfeited; ₹2,03,664 was taken as the liquidator’s fees and the balance was distributed to TMB.

The NCLT subsequently permitted transfer of the corporate debtor’s assets to Ramasamy, directed repayment of the forfeited amount to the liquidation estate, and ordered payment of ₹20 lakh to the erstwhile liquidator, ₹4.5 lakh to the present liquidator, and the balance to an operational creditor under Section 53 of the Insolvency and Bankruptcy Code, 2016 (IBC).

TMB and Ramasamy appealed aspects of that order; the asset-transfer direction itself was not challenged.

1. Whether the OTS between TMB and Ramasamy affected the ongoing liquidation or entitled TMB to retain the forfeited earnest money.

2. Whether the forfeited amount could be applied toward the liquidators’ fees and the operational creditor’s admitted claim, and whether the erstwhile liquidator was entitled to ₹20 lakh.

3. Whether Ramasamy, by paying TMB’s debt, became a financial creditor entitled to claim the liquidation-estate proceeds ahead of the operational creditor.

Under Section 53 of the IBC, liquidation-estate proceeds are distributed according to the statutory waterfall.

The NCLAT treated the earlier, final NCLT order as establishing that the liquidation could not be withdrawn in the circumstances; it could proceed only through a scheme under Section 230 of the Companies Act, 2013, or a sale as a going concern.

It also considered Regulations 33 and 37 of the IBBI (Liquidation Process) Regulations in relation to the NCLT’s treatment of the asset transfer as a private sale.

A guarantor’s payment of a creditor’s debt does not, without assignment or substitution in the liquidation proceedings, make the guarantor a financial creditor entitled to the creditor’s former priority.

The NCLAT held that the OTS between Ramasamy and TMB could not alter the liquidation process because the earlier order directing liquidation to continue had attained finality.

It left the asset transfer undisturbed because that part of the NCLT’s order had not been appealed, while noting that the procedure was not strictly in accordance with the Code and Regulations.

Once TMB had accepted ₹9.50 crore and issued an account-closure certificate, it could not retain the ₹52.27 lakh it had received from the forfeited deposit; that amount had to return to the liquidation estate for distribution.

The NCLAT upheld the erstwhile liquidator’s ₹20 lakh remuneration, noting his work, the prior fixing of his fee, and the reduction of his claim, and accepted the liquidators’ confirmation that the operational creditor’s claim had been submitted and admitted.

Ramasamy had not obtained an assignment of TMB’s debt or sought substitution as a creditor; the NCLAT therefore treated him as a purchaser and promoter, not a financial creditor entitled to the liquidation proceeds ahead of other stakeholders.

TMB could not retain the forfeited amount; the liquidation-estate funds were to be applied toward the liquidators’ fees and distributed to stakeholders, including the operational creditor, in accordance with Section 53.

Ramasamy acquired no creditor priority merely by settling TMB’s debt.