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NCLAT Upholds Trustee's Claim Against Bankrupt Guarantor Manju Sirohi for Unauthorised Withdrawals
The at New Delhi has firmly ruled that a cannot withdraw or otherwise deal with funds in a bank account after the has vested in the Bankruptcy Trustee. Dismissing an appeal by Manju Sirohi, the personal guarantor of , the bench composed of Judicial Member Justice Mohd Faiz Alam Khan and Technical Member Naresh Salecha held that the money she withdrew—amounting to ₹19,17,500—belonged to the trustee from the date of her bankruptcy declaration, and her subsequent transactions constituted that no longer belonged to her.
The decision clarifies a critical distinction under the (IBC): the under Section 128(1)(c) restrains creditors, not the bankrupt, but the under Section 154 operates automatically, without any conveyance, assignment, or transfer. Once the estate vests, the bankrupt loses all rights to deal with the property, including bank balances.
Background of the Case
The insolvency process against Ms. Sirohi was initiated under Section 95 of the IBC following a default by , for which she had given a personal guarantee. On , the , Delhi, declared her bankrupt under Section 126 and appointed Anup Kumar as the Bankruptcy Trustee. At the commencement date, her savings account with the held a credit balance of approximately ₹19.07 lakh.
Between and , Ms. Sirohi withdrew the entire balance through two self-withdrawals of ₹9.95 lakh and ₹9 lakh, along with six ATM transactions totalling ₹23,500. This left only ₹114.32 in the account. The Bankruptcy Trustee promptly filed an application before the NCLT seeking recovery of the withdrawn amount, contending that the funds formed part of the .
On , the NCLT passed an directing Ms. Sirohi to repay the amount. Her application seeking recall of that order was dismissed on , prompting the appeal before the NCLAT.
The Arguments
Ms. Sirohi advanced several defences. She claimed that the funds in her account comprised proceeds from the sale of her personal jewellery and a transfer from her mother-in-law's account. She argued that these were "" under Sections 79(14) and 155(2) of the IBC and therefore not part of the . She also contended that the NCLT had passed the without giving her a proper opportunity to be heard, as her counsel was present but could not make submissions due to poor internet connectivity. Additionally, she stated that as a senior citizen with no income, she had sold the jewellery to support herself and was unaware of the .
The Bankruptcy Trustee countered that Section 154 of the IBC vests all property of the bankrupt in the trustee from the commencement date, including bank balances, without any need for formal transfer. He argued that the funds in Ms. Sirohi's account had to be distributed among the creditors. Regarding the claim, he pointed out that Section 79(14)(c) protects only unencumbered ornaments up to ₹1 lakh, and the proceeds from the sale of jewellery did not qualify. He also submitted that Ms. Sirohi had received intimation from the trustee on , before her first withdrawal, and had even participated in a meeting of creditors on .
NCLAT's Key Observations
The Appellate Tribunal rejected all of Ms. Sirohi's contentions. The bench observed that the relevant test was not the but the vesting of the . Since Ms. Sirohi's bank balance vested in the trustee on , her subsequent withdrawals amounted to unauthorised dealings with property that no longer belonged to her. The tribunal stated:
"We observe that Section 128(1)(c) of the code restrains creditors from acting against the bankrupt's property; it does not regulate the bankrupt. We need to appreciate that the estate, comprising all property belonging to the bankrupt at the commencement date, vests in the Trustee , ."
The bench also dismissed the claim that the jewellery proceeds of ₹13.25 lakh constituted . It held that Section 79(14) provides a closed list and protects only unencumbered ornaments up to ₹1 lakh, not the cash proceeds from their sale. The tribunal noted:
"We are not in position to accept the pleadings of the appellant because the proceeds are more than thirteen times the cap prescribed in the regulations. Further the exclusion attaches to described assets, not to money."
Ms. Sirohi's plea that she was unaware of the restriction was rejected in light of the trustee's intimation delivered on , well before any withdrawal. Her participation in the creditors' meeting further undermined her claim of ignorance.
Legal Implications
This judgment reinforces the and the trustee's control over it from the moment of the bankruptcy order. It makes clear that the under Section 128(1)(c) is creditor-focused, but the vesting under Section 154 is absolute and automatic—the bankrupt's right to deal with property ceases immediately.
For personal guarantors, the decision is a stark reminder that once bankruptcy is declared, they cannot treat their bank accounts as their own, even if the funds originate from sources that might otherwise be . The ruling strictly interprets the exception for unencumbered ornaments, limiting it to the specified cap and only to the physical articles, not their monetary equivalent.
The NCLAT also underscored the importance of timely intimation by the trustee. The trustee's action in serving notice within weeks of the bankruptcy order proved crucial in defeating the argument of ignorance. Legal practitioners advising bankrupt individuals or trustees should take note: prompt communication and vigilant monitoring of accounts can prevent dissipation of assets.
Impact on Insolvency Practice
The judgment will likely embolden trustees to take swift action against bankrupts who attempt to withdraw funds post-vesting. Banks and financial institutions may also become more cautious—once notified of a bankruptcy declaration, they should freeze accounts to prevent withdrawals that could later be challenged. From a procedural standpoint, the NCLAT's reaffirmation that vesting occurs "" without any conveyance means that no court order is needed for the trustee to assert ownership over bank balances.
For personal guarantors, the decision narrows the scope of , particularly the conversion of protected assets into cash. Those considering selling jewellery or other exempt property before bankruptcy should be aware that the cash proceeds will not enjoy the same protection. The ruling may also prompt a review of the IBC's provisions on , as the cap of ₹1 lakh for ornaments appears outdated given the value of jewellery in many cases.
Conclusion
The NCLAT's dismissal of Manju Sirohi's appeal reaffirms a fundamental principle of bankruptcy law: the estate vests in the trustee immediately upon the bankruptcy order, and the bankrupt loses all authority to deal with it. The decision provides clear guidance on the distinction between and vesting, the strict interpretation of , and the importance of trustee diligence. For the legal community, this is a significant precedent in the evolving jurisprudence under the IBC concerning personal guarantors and the administration of bankruptcy estates.
