2026 (3) TMI 1595 - SC - IBC

Moratorium under insolvency law bars unilateral appropriation of security deposits against pre-CIRP dues, and set-off was unavailable.

A security deposit retained by the corporate debtor could not be unilaterally appropriated after commencement of CIRP towards pre-CIRP dues, because the ... Moratorium under insolvency law - Seeking its adjustment towards post-CIRP dues - cash deposit made with the appellant prior to the CIRP but apportioned and disbursed against the bills raised before and after the CIRP - invoking the Payment Security Mechanism (PSM) - set-off during CIRP - security deposit in lieu of letter of credit - enforceable bank guarantee or letter of credit permitting set-off against pre-CIRP dues. Set-off during CIRP - appropriation of security deposit towards pre-CIRP dues - pari passu principle - HELD THAT: - The Court held that the deposit was made as security for payment of bills and remained the corporate debtor's property until actual adjustment. The appellant had not appropriated the amount before commencement of CIRP, though the underlying bills were pre-CIRP. After commencement, it filed its claim before the resolution professional in respect of those dues, part of which was admitted and not challenged. In that situation, a subsequent unilateral appropriation of the deposit towards pre-CIRP bills violated the moratorium and the scheme of the Code, under which recovery of pre-CIRP dues must proceed through the insolvency process. The principle governing set-off in CIRP did not assist the appellant, as there were no mutual cross-demands of the kind that could justify contractual or equitable adjustment; permitting such appropriation would also run contrary to the pari passu scheme operating in insolvency. [Paras 17, 18, 19, 24, 25] The adjustment of the deposit towards pre-CIRP dues was held illegal, and the amount was liable to be treated in accordance with the insolvency process and adjusted only towards post-CIRP dues. Security deposit in lieu of letter of credit - security interest - status of operational creditor - HELD THAT: - The Court found that there was in fact no bank guarantee or letter of credit issued; there was only a cash deposit said to have been made in lieu of such security. Even treating it as security for payment default, the deposit continued to belong to the corporate debtor until appropriation, and any such appropriation after the moratorium commenced, insofar as it related to pre-CIRP dues, was impermissible. The appellant was not a financial creditor and could not be treated as a secured creditor on the basis of this deposit. The authorities concerning enforcement of bank guarantees, security interests and rights of secured creditors were therefore inapplicable to the present arrangement. [Paras 20, 21, 22, 23, 25] The appellant was treated only as an operational creditor, and the deposit was not enforceable as a security interest against pre-CIRP liabilities during the moratorium. Final Conclusion: The Supreme Court affirmed the orders under challenge and held that the appellant could not, after commencement of CIRP, appropriate the cash deposit towards pre-CIRP transmission dues. The appellant's claim in respect of such dues had to abide by the insolvency process, and the appeals were dismissed. Issues: (i) Whether the appellant could appropriate the security deposit made in lieu of letter of credit after commencement of the corporate insolvency resolution process towards pre-CIRP dues; (ii) Whether the deposit could be treated as a bank guarantee or letter of credit so as to permit set-off or enforcement notwithstanding the moratorium under the Insolvency and Bankruptcy Code, 2016.Issue (i): Whether the appellant could appropriate the security deposit made in lieu of letter of credit after commencement of the corporate insolvency resolution process towards pre-CIRP dues.Analysis: The deposit of Rs. 108.44 crores remained the property of the corporate debtor till a lawful adjustment was made. Once the insolvency commencement date was reached, the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 barred unilateral appropriation of amounts towards dues that had arisen before commencement of the CIRP. The claimed amount had already been part of the insolvency claim process, and the unilateral post-commencement adjustment against pre-CIRP bills was contrary to the scheme of insolvency resolution and the pari passu treatment of claims.Conclusion: The appropriation towards pre-CIRP dues was impermissible and was rightly disallowed.Issue (ii): Whether the deposit could be treated as a bank guarantee or letter of credit so as to permit set-off or enforcement notwithstanding the moratorium under the Insolvency and Bankruptcy Code, 2016.Analysis: The record showed a security deposit made in lieu of a letter of credit, not an independent bank guarantee or a security interest created in favour of the appellant. The authorities on bank guarantees and letters of credit did not assist the appellant because no such enforceable instrument existed in the present form, and even an equivalent enforcement after commencement of CIRP would conflict with the moratorium when directed against the corporate debtor for pre-CIRP liabilities. The appellant's plea of set-off also failed because there were no mutual cross-claims of the kind that justify set-off in insolvency, and the adjustment sought was inconsistent with the statutory scheme.Conclusion: The deposit could not be treated as an enforceable bank guarantee or letter of credit permitting set-off against pre-CIRP dues.Final Conclusion: The impugned orders were affirmed, and the appeal failed on the ground that the unilateral adjustment of the security deposit against pre-CIRP dues was inconsistent with the insolvency moratorium and the resolution process.Ratio Decidendi: A security deposit retained by the corporate debtor cannot be unilaterally appropriated after commencement of CIRP towards pre-CIRP dues, and neither a claimed set-off nor an attempted enforcement of a non-equivalent security arrangement can override the moratorium under the Insolvency and Bankruptcy Code, 2016.