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 the Insolvency and Bankruptcy Code barred post-commencement recovery actions against the debtor's estate. The deposit remained the corporate debtor's property until lawful adjustment, and the claimed amount had to be pursued through the insolvency claim process. The deposit also could not be treated as an independent bank guarantee or letter of credit, and no mutual cross-claims existed to justify set-off. The unilateral adjustment was therefore inconsistent with the insolvency framework and was disallowed.

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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.

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