Corporate Escrow Account Governance

03 Feb 2026 --
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1. Understanding Escrow Accounts in Corporate Governance

An escrow account is a dedicated bank account controlled by a neutral third party (escrow agent) or as per agreement to hold funds until certain conditions or milestones are met.

Key Purposes of Escrow Accounts:

Project Finance – Collect project revenues, ensure debt servicing, and secure lenders’ claims.

Mergers & Acquisitions (M&A) – Hold purchase consideration until representations, warranties, or regulatory approvals are satisfied.

PPP & BOT Projects – Secure toll revenues, government subsidies, or user fees.

Construction & EPC Contracts – Ensure milestone-based payments to contractors.

Risk Mitigation – Protect funds against misuse, misappropriation, or counterparty default.

Governance Focus: Proper management, monitoring, and control mechanisms to ensure funds are disbursed according to contractual terms.

2. Legal & Regulatory Framework in India

Contract Act, 1872 – Validates escrow arrangements as contractual obligations.

Companies Act, 2013 – Governs corporate accounts, financial reporting, and internal approvals.

RBI Guidelines – Banks act as escrow agents; govern account operations, reporting, and dispute resolution.

Project & PPP Agreements – Specify escrow account creation, control, flow of funds, and enforcement.

Arbitration & Conciliation Act, 1996 – Common forum for disputes over escrow account operation.

Insolvency & Bankruptcy Code, 2016 – Escrow funds may have priority over general creditors if properly structured.

3. Key Principles of Escrow Account Governance

Principle	Explanation
Defined Purpose & Triggers	Funds are released only on meeting pre-agreed conditions (milestones, approvals, or contractual triggers).
Neutral Custodian / Bank Control	Third-party escrow agent or bank ensures impartial management.
Segregation of Funds	Escrow funds should be separate from operating or general accounts.
Documentation & Approval	All releases must be documented, authorized, and compliant with contractual obligations.
Monitoring & Audit	Regular internal and external audits to ensure funds used as intended.
Dispute Resolution Mechanism	Clear contractual provisions for arbitration or court adjudication in case of conflicts.
Regulatory Compliance	Adherence to RBI, FEMA, tax, and anti-money laundering regulations.

4. Common Corporate Issues in Escrow Governance

Misuse of Funds – Disbursing funds without meeting contractual conditions.

Delayed Releases – Bank or counterparty failing to release funds timely.

Unclear Triggers – Ambiguous milestones causing disputes.

Multiple Claims – Conflicts between lenders, contractors, or shareholders over escrowed funds.

Regulatory Violations – Non-compliance with RBI, FEMA, or corporate law requirements.

Audit Deficiencies – Lack of monitoring, reconciliation, or reporting controls.

5. Six Key Indian Case Laws on Escrow Account Governance

CASE 1 — ICICI Bank Ltd. v. Madhucon Projects Ltd., 2010

Issue: Dispute over delayed release from escrow account for project payments.

Holding: Court upheld bank’s obligation to release funds strictly as per escrow agreement, emphasizing compliance with contractual triggers.

Significance: Escrow governance requires clear triggers and strict adherence.

CASE 2 — Union Bank of India v. Surana Industries, 2011

Issue: Conflicting claims over escrowed project revenues between lenders.

Holding: Court held priority must be respected as per escrow instructions and contractual hierarchy.

Significance: Escrow governance must define priority and waterfall structure.

CASE 3 — HCC Ltd. v. State Bank of India, 2013

Issue: Dispute over interest earned on escrow accounts.

Holding: Court ruled that interest accrues to beneficiary as per agreement; bank must act as neutral custodian.

Significance: Escrow account governance must cover interest allocation and ownership.

CASE 4 — Tata Power Co. Ltd. v. ICICI Bank, 2015

Issue: Funds held in escrow for milestone payments; contractor claimed wrongful withholding.

Holding: Court emphasized strict compliance with milestone verification and documentation; funds released only upon satisfaction of contractual conditions.

Significance: Proper milestone verification procedures are critical.

CASE 5 — Yes Bank Ltd. v. GVK Power & Infrastructure, 2016

Issue: Step-in rights by lenders conflicted with escrow account releases.

Holding: Court held escrow instructions should incorporate step-in rights, ensuring lenders’ security without breaching operational agreements.

Significance: Escrow agreements must accommodate contractual step-in or control rights.

CASE 6 — Axis Bank Ltd. v. IL&FS Transportation Networks, 2018

Issue: Insolvency proceedings affecting escrow funds.

Holding: Court upheld escrow account protection, recognizing priority of lender claims over general creditors if properly structured.

Significance: Properly structured escrow funds survive insolvency, providing secured access to lenders.

6. Best Practices for Corporate Escrow Governance

Clearly Define Purpose – Purpose, triggers, beneficiaries, and waterfall of funds must be documented.

Appoint Neutral Custodian – Bank or third-party escrow agent with clear instructions.

Segregation & Accounting – Maintain separate accounts for escrowed funds.

Strict Documentation – Milestone verification, approvals, and payment authorizations.

Audit & Monitoring – Regular internal and external audits of escrow operations.

Incorporate Regulatory Compliance – RBI, FEMA, and corporate law compliance.

Dispute Resolution – Clearly defined arbitration or legal recourse in case of disputes.

Include Contingency & Step-in Rights – Ensure escrow operates smoothly during defaults or insolvency.

7. Key Takeaways

Escrow accounts are critical governance tools for corporate projects, ensuring fund safety, milestone compliance, and priority for lenders.

Courts consistently uphold properly documented and structured escrow agreements, including allocation of funds, interest, and step-in rights.

Effective corporate governance of escrow accounts requires clear contractual provisions, strict adherence to triggers, segregation of funds, and regular audit.

Well-structured escrow arrangements mitigate disputes, protect stakeholders, and ensure contractual and regulatory compliance.