Liquidation Estate under Section 36: PF, Gratuity, Assets

Before anything can be distributed, the liquidator must decide what belongs to the estate. Section 36 lists what goes in and what stays out. Questions typically present a mix of assets: the debtor's own property, goods belonging to others, employee funds, subsidiaries' assets and recoveries from avoidance claims. The student must sort them and say who gets what. The table below is a quick guide; the four questions apply it.

1. The Law in Brief

• Section 36(1) and (2). The liquidator forms the liquidation estate and holds it as a fiduciary for all creditors.
• Included, section 36(3). Assets the debtor owns, whether or not in its possession and including encumbered assets; tangible and intangible assets; assets whose ownership is under determination; recoveries from avoidance, section 66 and section 47 proceedings; assets on which security is relinquished; other property and liquidation proceeds.
• Excluded, section 36(4). Third party assets in the debtor's possession, including those held in trust or under bailment or right-of-use arrangements; provident fund, pension and gratuity funds; certain financial market collateral; personal assets of shareholders or partners not held through avoidance transactions; assets of subsidiaries; and other notified or specified assets.

Figure 1: Sorting assets into and out of the estate

2. Are PF and Gratuity Funds Part of the Liquidation Estate?

• Issue. Whether provident fund, pension and gratuity funds form part of the liquidation estate, and whether CIRP-period salaries are process costs.
• Law. Section 36(4)(a)(iii) excludes all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund. In Sunil Kumar Jain v Sundaresh Bhatt (2022), the Supreme Court held that these dues are outside the estate and must be paid from the funds, not distributed under section 53. It also held that salaries for the CIRP period are process costs only if the company was actually run as a going concern during that period.
• Application. The ₹12 crore in the funds belongs to the employees and must be paid to them from the funds. The plant was shut during the CIRP.
• Conclusion. The lenders cannot share in the funds. The employees receive the ₹12 crore from the funds; how any shortfall is treated depends on the applicable law and the claims process. CIRP-period salaries are not process costs here, since the business was not run as a going concern, and are claims under section 53.

3. Are Consigned and Leased Goods in the Estate?

• Issue. Whether goods in the debtor's possession but owned by others, or bought on credit, form part of the estate.
• Law. Section 36(4)(a)(i) excludes assets owned by a third party in the debtor's possession, including those held under bailment or other contractual arrangements that do not transfer title and give only a right of use. Section 36(3)(a) includes assets the debtor owns. Once title passes on a sale, an unpaid seller is a creditor unless it retains a security or a right recognised by law.
• Application. EF Ltd retained title to the consigned televisions. GH Leasing owns the leased machinery. JK Ltd sold the goods outright, and title passed to CD Ltd despite non-payment.
• Conclusion. EF Ltd and GH Leasing may recover their goods, which are outside the estate. JK Ltd's goods belong to the estate, and JK Ltd ranks as an operational creditor under section 53 for the price.

4. Are Subsidiary Assets and Promoter Property in the Estate?

• Issue. Whether the assets of a subsidiary, and the personal assets of a shareholder, form part of the liquidation estate.
• Law. Section 36(4)(d) excludes the assets of any Indian or foreign subsidiary of the corporate debtor, since it is a separate legal person, while the shares held by the debtor in the subsidiary are its assets under section 36(3). Section 36(4)(c) excludes the personal assets of any shareholder or partner, unless they are held on account of avoidance transactions.
• Application. The hotel belongs to NO Ltd, not LM Ltd; LM Ltd owns the shares. The flat was bought by the promoter with his own money, not through any transaction with LM Ltd.
• Conclusion. The liquidator cannot sell the hotel directly but may sell LM Ltd's shares in NO Ltd. To reach the hotel itself, a separate insolvency of NO Ltd would be needed. The flat is outside the estate, though the promoter may be pursued personally, for example under a guarantee or section 66.

5. Are Disputed and Recovered Assets in the Estate?

• Issue. Whether disputed assets, avoidance recoveries and assets on which security is relinquished form part of the estate.
• Law. Section 36(3) includes assets subject to determination of ownership by a court or authority; any assets or their value recovered through avoidance proceedings, section 66 or section 47, as widened in 2026; and any asset of the debtor in which a secured creditor has relinquished its security interest.
• Application. The plot is claimed by PQ Ltd and its ownership is under determination. The ₹8 crore came from an avoidance order. The bank relinquished its security over the warehouse.
• Conclusion. All three are in the estate: the plot subject to the High Court's decision, the ₹8 crore for distribution under section 53, and the warehouse, whose proceeds will be distributed with the bank ranking under section 53(1)(b)

6. Frequently Asked Questions

In what capacity does the liquidator hold the estate?

As a fiduciary for all creditors, under section 36(2).

Can a secured creditor keep its security outside the estate?

The encumbered asset is in the estate, but the secured creditor may realise it under section 52 instead of relinquishing it (Topic 56).

Are tax refunds due to the debtor part of the estate?

Yes, as assets or rights owned by the debtor, subject to any lawful set-off.

7. Related Topics

• Topic 55: Section 36. The liquidation estate.
• Topic 34: Workmen and Employees' Dues. PF, gratuity and salaries.
• Topic 127: Secured Creditor in Liquidation. Section 52 choices.