Deutsche Trustee Company Ltd vs Tulip Telecom Ltd.

Yogesh Khanna, J

CA No.2171/2015

This application is for directions to the Official Liquidator to issue instructions to Axis Bank to release in favour of the applicant 98.181879% of the

amount received from Madhya Pradesh Excise Department (MPED) lying in Escrow account No.910020037830786 on following grounds:-

a) On 03.09.2009 the applicant had entered into a Teaming agreement with Tulip Telecom Limited for completion of contract floated by MPED by a

tender Bid No.(EC-1/2008) for appointment of agency to provide the teaming key solutions towards commissioning, management and maintenance of

data center including managing wide area network with supply and installation of servers, desktop systems and peripherals for implementation of

integrated computerization at the State Excise Department;

b) the total value of the project was Rs. 20,90,07,000/-, inclusive of all taxes and duties with a warranty of five years. The applicant was entitled to a

share of 97.8469% whereas M/s.Tulip Telecom Limited (respondent company in liquidation) was entitled only to 2.1531% of the aforesaid amount;

c) both the parties agreed to open an Escrow account in Axis Bank; the payments were to be made in it by MPED and then the share of the applicant

to an extent of 97.8469% was to be released within two working days of the receipt of such payments in said escrow account;

d) on 03.11.2009 Government of Madhya Pradesh, through the Excise Commissioner of Madhya Pradesh finally entered into an agreement with the

respondent company and appointed it as an agent for providing teaming key solutions as above;

e) on 30.10.2009, an addendum to the teaming agreement dated 03.09.2009 was entered into wherein the share of applicant was increased to

98.181879% and whereas the share of the respondent company was reduced to 1.181821%. On 25.09.2010 an Escrow Agreement between the

respondent company and the applicant herein was entered into and an escrow account was opened in Axis Bank for deposit of all payments to be

made by MPED and to be shared between the applicant and the respondent in the ratios above;

f) article III of the said agreement read as under:-

“Operation of the Account:

3.1 The Account Holder and the Company jointly hereby irrevocably and unconditionally authorize the Account Bank to receive the

collections into the Escrow Account and transfer the clear credit balance at the end of Business Hours on each Business Day as per the

written instructions given by the authorized signatories of Tulip and Vayam jointly.â€​

g) the applicant has filed the statement of escrow account along with its application showing the amount so received in the Escrow account from

MPED was distributed between the parties in the ratios agreed;

h) the parties have been distributing the money coming to their escrow account in the manner stated above, but in the year 2013, a liquidation petition

came to be filed against the respondent company wherein on 12.02.2015 provisional liquidator seized the assets including the escrow account which

has an amount of Rs. 3,02,32,817/- as on 01.01.2016;

i) the agreement between the MPED and the respondent stood completed and a completion certificate dated 17.07.2015 was issued by the Excise

Commissioner, Madhya Pradesh, Gwalior;

j) a copy of a letter dated 20.11.2014 of the Income Tax Department also notes the modes of distribution of the money lying in Escrow Account;

k) on 09.01.2017 the Official Liquidator rather gave a no objection for release of the share of the applicant in the amount lying in escrow account.

On 22.05.2017 this Court directed to verify if the contract was complete, and since it is now complete the amount lying therein needs to be

apportioned. The applicant in paras 5 and 7 of an affidavit filed in compliance of an order dated 22.05.2017 writes as under:-

“5. That the last withdrawal/disbursement was done till February, 2015 and thereafter, amount of Rs.3,02,82,817/-(Three crores Two

lacs Thirty Two thousands Eight hundred and Seventeen only) has come in the Escrow Account and still lying there. The same could not be

disbursed / released as the provisional liquidator was appointed on 12.02.2015 and the requisite instructions in terms of clause 3.1 of the

Escrow Account Agreement dated 25.09.2010 could not be given.

xxx xxxx

That as on date an amount of Rs.12.05 Crores approximately Rs.8.59 Crores is due to the applicant / Vayam Technologies Ltd from the

M.P Excise Department.â€​

However, the counsels for the secured creditors argue the State Government was never a part of teaming agreement executed between the

respondent and the applicant herein. It is argued the contract dated 03.11.2009 was executed between the Government of Madhya Pradesh acting

through its Excise Department and the respondent company and it was only the respondent company which was appointed as the agency for providing

key solutions. In any case the State Government was liable to the pay only to respondent company and not to the applicant herein, hence, payments

belong to the respondent company so any internal arrangement viz teaming agreements, between the parties would come in the way of secured

creditors to claim the amount lying in Escrow Account. It was argued the applicant being a unsecured creditors would have to wait and it cannot seek

priority on the basis of internal arrangements. Rather the teaming agreement is challenged by secured creditors to be a fabricated document, created

to usurp major chunk of the money lying in the escrow account.

It is further argued the State Government never consented for an escrow account or such teaming agreements etc and the letter of the Income Tax

Department or a concession by Official Liquidator would not come in the way of rights of the secured creditors.

To decide this controversy one need to know the nature of Escrow Account, for which, one may refer to Homer City Generation, L.P. v. EME

Homer City Generation L.P. decided by United States Bankruptcy Court for the Northern District of Illinois Eastern Division in case No.12-49219

decided on 16.02.2014 wherein the nature of escrow account was discussed:-

“III. Even If EMEHC Holds An Interest In The Surety Cash â€" Which It Does Not â€" The Cash Is Still Not Property Of EMEHC’S

Estate. Even if this Court were to decide that EMEHC held some sort of legal interest in the Surety Cash (a conclusion that HCG strenuously

disputes), EMEHC does not have an equitable interest in the Surety Cash, and thus the Surety Cash is not properly part of EMEHC’s

estate. Section 541(d) of the Bankruptcy Code provides that “property in which the debtor holds, as of the commencement of the case,

only legal title and not an equitable interest… becomes property of the estate… only to the extent of the debtor’s legal title to such

property, but not to the extent of any equitable interest in such property that the debtor does not hold.†11 U.S.C. §541(d) EMEHC

conveyed all of its right, title and interest in the Surety Cash at closing, and retained no equitable interest in the Surety Cash. See, e.g., In re

Bullet Jet Charter, 177 B.R. 593 (Bankr. N.D. Ill. 1995) (where agreement closed pre-petition and debtor held property conveyed by the

agreement post-petition, debtor “held only legal title by reason of its failure to release its bill of sale†but held no “equitable

interestâ€​ under Section 541(d)); In re Brown, 168 B.R. 331 (Bankr. N.D. Ill. 1994).

This principle is well-illustrated by bankruptcy escrow cases. If the conveyance of the Surety Cash was not perfected â€" which HCG

strongly contests â€" it is still not property of the estate because it was held in escrow by third parties. As discussed below, the MTA

transaction created, at a minimum, an escrow agreement for the Surety Cash. Indeed, even EMEHC’s bankruptcy counsel has described

the arrangement here as an “escrow.†5 Funds held in escrow are not part of the debtor’s bankruptcy estate. In re NTA, LLC, 380

F.3d 523, 531 (1st Cir. 2004) (applying Illinois law and citing Section 541(d) of the Code); see also FDIC v. Knostman, 966 F.2d 1133,

1142 (7th Cir. 1992); see also In re Atlantic Gulf Communities Corp., 369 B.R. 156, 164 (Bankr. D. Del. 2007); Cedar Rapids Meats, Inc. v.

Hager (In re Cedar Rapids Meats, Inc.), 121 B.R. 562 (Bankr. N.D. Iowa 1990). Further, putting the funds into escrow (as well as the

execution of the MTA) vested HCG with an equitable interest. Shron v. M & G Promo Service, Ltd. (In re Anthony Sicari, Inc.), 144 B.R.

656, 661-62 (Bankr. S.D.N.Y. 1992) (under New York escrow law “a deposit of property placed in escrow creates in the grantee an

equitable interest in the property…†and thus money held in escrow is not property which vests in the trustee in bankruptcy.†(citations

omitted, emphasis added)).

EMEHC and HCG created a valid escrow account when they consummated their transaction with the closing of the MTA, with Safeco

and Argo serving as the third-party caretakers of the Surety Cash at issue. Under New York law, “no formal agreement is needed to

create an escrow.†In re Royal Business School, Inc., 157 B.R. 932, 939 (Bankr. E.D. N.Y. 1993). Rather, “mere delivery and retention

by third party until the occurrence of a contingency or performance of a condition is necessary.†In re Anthony Sicari, Inc., 144 B.R. at

Parties entering a contractual agreement must satisfy certain requirements in order to create a valid escrow.“First, the parties must

agree to the terms that govern the use of the particular account.â€​ In re Royal Business School, Inc., 157 B.R. at 939. Second, “the funds

must be delivered to a third party with transfer to the grantee conditioned upon the performance of some act or the occurrence of some

event.†Id. Third, “[i]n order to effectuate the escrow, the agreed-upon conditions must be fulfilled.†Id. Finally, “after the

requisite conditions are satisfied,†an escrow “can be fully transferred to the grantee.†Il. Funds become part of the escrow, and

cease to be property of the debtor, when the debtor deposits funds into the account. See In re Anthony Sicari, Inc., 144 B.R. at 661.â€​

In Reserve Bank of India V. Bank of Credit and Commerce International, Overseas Ltd. and Anr. 1992 SCC Online Bom 528 it was held as

under:-

“33. In my judgment, the following propositions of law clearly emerge from the relevant case-law cited by learned counsel and on a

study of the relevant legal literature with the assistance of learned counsel:

(a) Ordinarily, there is a relationship of debtor and creditor between the bank and its customer in respect of deposits made. Such a

relationship is presumed subject to rebuttal thereof.

(b) If an applicant makes a specific deposit with the bank for a specific purpose and the amount is earmarked or segregated in the business

of commercial sense of the term though not in the physical sense of the term, the presumed relationship of debtor and creditor is rebutted. It

follows that in such cases the bank is the custodian of the amounts entrusted to it in a fiduciary capacity and such amounts are impressed

with trust. In such a case, the relationship constituted between the bank and the customer is that of bailor and bailee, trustee and

beneficiary. In some of the situations, the bank holds the amount merely as a sort of stakeholder. In such cases, the insolvency of the bank,

if any, has no adverse effect on the beneficiary and moneys are refundable to the beneficiary in full. In such a case, such specific amounts

held by the bank do not form part of the general assets of the bank and can never be available to its creditors for rateable distribution in

the event of the company being wound up.

(c) The ratio of three of the judgments of the Supreme Court in the cases listed below must be applied to the facts of each case. No one test

is conclusive or decisive.â€​

In AAA Portfolios Pvt. Ltd. & Ors. vs. The Deputy Commissioner of Income Tax & Ors. ILR (2013) V Delhi 3938 it was held as under:-

“25. A plain reading of the Share Purchase Agreement dated 25.09.2005 and the Escrow Agreement dated 27.09.2005 would indicate

that the conclusion drawn by the Assessing Officer that respondent no. 2 held any money on account of the assessee company is patently

erroneous. Neither the Share Purchase Agreement nor the Escrow Agreement provides for any contingency which would enable the

assessee company or any other party to insist that the funds held by the respondent no. 2 bank in escrow be paid either to the assessee

company or to the Income-tax Department on account of the assessee company.

The reason why the purchaser and the sellers agreed to keep part of the sale consideration paid by the purchaser in escrow with

respondent no. 2 bank is apparent from the terms of the Share Purchase Agreement and the Escrow Agreement. The assessee company

whose shares were being transacted had been converted from a society with whom a charitable society had been merged…â€​

The judgments cited above would reveal the nature of the funds kept in Escrow Account. The bank in such cases only act as a trustee and once the

fund become a part of Escrow the debtor holds on to the money only to the extent of its legal title and not to the extent of any equitable interest in

such property which the debtor does not hold.

Now, the liquidator was appointed in this case in February, 2015 but whereas the parties have been working since 2009. Though the contract,

undoubtedly, was offered to the respondent company but was to be completed by the applicant as is revealed by the fund sharing agreement. On

3.11.2009 the respondent company had entered into a contract with MP Government, but two months prior thereto on 3.9.2009 it had a teaming

contract with applicant herein and then on 25.09.2010 executed an escrow agreement. Both the parties have been sharing the funds since 2009 as per

the agreement(s). Admittedly, funds lying in the Escrow Account till February, 2015 were disbursed amongst the respondent and the applicant herein

in the manner agreed upon. The company though went in liquidation but the applicant still went ahead to complete the contract and only thereafter the

amount of Rs. 3 Crore approx was released by MP Government on 1.1.2016. It was in fact an amount earned by the applicant though was released in

the Escrow Account by the State Government. The bank being a trustee was obliged to release the amount in the manner agreed upon between the

parties but could not do so because of these proceedings. The correspondence of MP Government do reveal that it had recognized the applicant being

the person responsible for completion of the contract.

An email dated 04.11.2010 from Excise Commissioner to Tuilp reads as under:-

“Dear Shivdeep,

As per the discussion held on 28th October 2010, we are still waiting the status of the hardware distribution at remote locations as

discussed, Certificates related to Data Centre and Progress of the remaining work at Data Centre.

Request you to provide the required at the earliest.

Thanks & Regards

Praveen Vermaâ€​

The relevant portion of letter dated 8.9.2014 of MP Government notes:-

“… 4. Hence you are required to clarify whether the UPS in the Headquarter &: Data Centre are working or not? If no backup is

being given and due to this it is harming the hardware, networking and loss to caused to any other item then both Tulip Telecom Limited and

Vayam Technologies Limited shall be responsible for the same and the recovery shall be made from both.â€​

Further its letter dated 22.09.2014 to Tulip notes:-

“2. On the basis of the aforesaid materials, Vayam Technologies have requested to being recognized as sub-contractors for execution of

the project.

The department has executed a contract with you on 03.11.2009. Hence, you are requested to submit your opinion with regard to

outsourcing of the project and recognition of Vayam Technologies as subcontractor and for disbursal of the remaining payment of the

project to Vayam Technologies.â€​

Further letter dated 15.10.2014 of Tulip to Excise Commissioner, MP notes:-

“…, as desired, we would like to confirm as under;

i. Vayam Technologies Ltd may be formally recognized as the Organization carrying out the entire work under this Project as outsourced

under a Teaming Agreement between Tulip Telecom ltd and Vayam Technologies Ltd dated Sept 3, 2009 (attached).

ii. Accordingly, all the due payments by MPED under this Project may be continued to be made to the Escrow Account as' per this

Agreement according to which Vayam Technologies ltd is entitled to receive its share.â€​

Needless to say vide its letter dated February, 2017 (Annexure AR/2) the MP Government has now awarded the further contract to applicant

herein for 12 months.

The circumstances reveal the work was actually completed by the applicant herein and the role of the respondent company was merely to obtain

the contract from Madhya Pradesh Government and to hand it over to the applicant. The principal employer recognized the applicant to be responsible

for completion of the contract and even the Income Tax Authority did not attach the share of the applicant lying in the escrow account as the

respondent could hold on to the money lying in the escrow account only to the extent of its legal title being 1.181821%; the Axis Bank being a trustee

was thus obliged to release the balance amount lying in the escrow account in favour of the applicant herein. The liquidation would not come in the

way of the applicant to receive the amount to the extent of its share to which it is entitled, per the teaming agreement(s) referred to above.

In view of the above observations, the application is disposed of. The amount to the extent of 98.181879% lying in the escrow account be released

to the applicant within a period of four weeks from today.

No order as to costs.

CO.PET. 329/2013, CA Nos.36/2016, 419/2016, 931/2016, 1622/2016, 2119/2016, 2421/2016, 2423/2016, 3733-3735/2016, 4075/2016,

4623/2016, 38/2017, 1065/2017, 1071/2017, 1456/2017, OLR Nos. 134/2016, 220/2016, 254/2016, 160/2017

List on 19.12.2017.