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Money Deposited in Court Pre-CIRP Remains Corporate Debtor's Asset, Can Be Withdrawn Under Sec 14 IBC: Bombay High Court - 2025-06-23

Subject : Insolvency Law - Insolvency and Bankruptcy Code (IBC)

Money Deposited in Court Pre-CIRP Remains Corporate Debtor's Asset, Can Be Withdrawn Under Sec 14 IBC: Bombay High Court

Supreme Today News Desk

Court Deposits Pre-CIRP Remain Corporate Debtor's Assets, Bombay HC Clarifies

Mumbai: The Bombay High Court, in a significant ruling, has held that money deposited in court by a corporate debtor as security before the commencement of the Corporate Insolvency Resolution Process (CIRP) remains an asset of the corporate debtor. Consequently, such funds can be withdrawn by the Resolution Professional (RP) for the benefit of the insolvency estate, particularly in light of the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC).

The decision was delivered by a Division Bench comprising Justices B.P. Colabawalla and Somasekhar Sundaresan on November 13, 2024, in an application filed by Siti Networks Ltd. (formerly Siticable Network Ltd.), acting through its Resolution Professional, Rohit Ramesh Mehra.

Case Overview

Siti Networks Ltd. ("Applicant-Appellant"), currently undergoing CIRP since February 22, 2023, sought to withdraw its appeal against a 2016 judgment and also requested the withdrawal of Rs. 20,00,000 deposited in court as a condition for an interim stay in that appeal. The original suit (Suit No. 2295 of 2002) had directed Siti Networks to pay Rs. 15,00,000 with 24% annual interest to Rajiv Suri ("Respondent").

The core legal question was whether the amount deposited in court constituted an asset of the corporate debtor, especially after the initiation of CIRP and the imposition of a moratorium under Section 14 of the IBC.

Arguments Presented

Applicant-Appellant ( Siti Networks through RP): Mr. Saurabh Bachhawat, counsel for the applicant, argued that due to the Section 14 IBC moratorium, which prohibits the execution of judgments against the corporate debtor, the deposited amount, being an asset of the corporate debtor, should be released to the RP. He highlighted that the Supreme Court had already permitted the revocation of a bank guarantee furnished by Siti Networks in the same matter, on similar grounds that it was an asset of the corporate debtor and its enforcement was barred by the moratorium. The RP has a duty under Section 18 of the IBC to take control of all assets of the corporate debtor.

Respondent ( Rajiv Suri ): Mr. Ajit Anekar, representing the respondent, contended that monies deposited in court do not belong to the corporate debtor but are held custodia legis (in the custody of the law). He argued that Section 14 of the IBC was irrelevant as the deposit was not an asset of the corporate debtor. He heavily relied on the Bombay High Court's decision in Reliance Communication Limited Vs. Rajendra Prasad Bansal (2023 SCC OnLine Bom. 33) , asserting it laid down an absolute proposition that the moratorium does not prohibit withdrawal of monies deposited in court by a corporate debtor appealing a judgment.

Court's Analysis and Key Findings

The High Court meticulously analyzed the provisions of the IBC and relevant case law, ultimately siding with the applicant.

Effect of Supreme Court's Order: The Court noted that the Supreme Court, in the same dispute between the parties, had already allowed the revocation of a bank guarantee (ICICI Guarantee) provided as security by Siti Networks . This decision, based on pleadings that the guarantee was an asset of the corporate debtor and its invocation was barred by the IBC moratorium, was considered highly pertinent.

Ownership vs. Possession of Deposited Money: The Bench clarified a crucial distinction:

"monies deposited in Court by a corporate debtor are assets that are placed out of the possession of the corporate debtor but by no means would the loss of possession eclipse the ownership of title to the monies so deposited. The assets provided to secure the outcome in the judgement impugned, are indeed assets owned by the party that deposited the security."

The Court found the respondent's error in "extrapolating the loss of possession of the asset... into an absence of ownership of the asset."

Impact of IBC Provisions:

* Section 14 (Moratorium): The Court emphasized that Section 14(1)(a) prohibits the continuation of proceedings against the corporate debtor, including the execution of any judgment. Section 14(1)(c) prohibits action to enforce any "security interest" created by the corporate debtor.

* Definitions: The Court highlighted that under the IBC: * A "claim" (Section 3(6)) includes a right to payment, whether or not reduced to a judgment. * A "creditor" (Section 3(10)) explicitly includes a "decree-holder." * A "debt" (Section 3(11)) is a liability in respect of a claim. * A "security interest" (Section 3(31)) includes any transaction securing payment or performance, covering the court deposit.

* Duties of RP (Section 18): The RP is mandated to take control and custody of any asset over which the corporate debtor has ownership rights, even if not in its possession.

The Court concluded:

"...we have no hesitation in holding that the monies deposited in this Court... would, at the highest only constitute a security interest in respect of the claim of the Respondent and can never be held not to be the property of the corporate debtor."

Distinction from Precedents:

* Rajendra Bansal : The Court respectfully disagreed with the proposition in Rajendra Bansal that monies deposited in court do not belong to the corporate debtor. It stated that the focus should be on the effect of Section 14 IBC, not Section 231 (ouster of civil court jurisdiction), which was not the applicant's argument here. The Court clarified that its ruling in Rajendra Bansal would apply only to the parties in that case and its statement of law has been "overtaken."

* Chowthmull Maganmull (1924): The Court found the century-old Calcutta High Court decision, relied upon in Rajendra Bansal , to be irrelevant in the context of the IBC. Chowthmull dealt with personal insolvency under an old Act and did not involve a corporate debtor under the comprehensive IBC regime. > "With the greatest respect, we are of the view that the provisions of the IBC have made deep interventions into the propositions flowing from Chowthmull..."

* Nahar HDIL Case (2020): The Court interpreted the Division Bench's decision in Nahar HDIL as actually supporting the overriding nature of IBC. In that case, money released to a decree-holder was made subject to the outcome of IBC proceedings.

* P.S.L. Ramanathan Chettiar (1968, Supreme Court): The High Court found Chettiar to be more relevant, quoting: > "On principle, it appears to us that the facts of a judgment-debtor's depositing a sum in court to purchase peace by way of stay of execution of the decree on terms that the decree-holder can draw it out on furnishing security, does not pass title to the money to the decree-holder."

* GLAS Trust Company LLC Vs BYJU Raveendran (2024, Supreme Court): The Court referenced Byju to underscore the IBC's objective of consolidating insolvency laws and ensuring collective distribution, preventing individual creditors from gaining preferential treatment.

Final Decision and Implications

The Bombay High Court allowed Siti Networks ' application, permitting the withdrawal of its appeal and the Rs. 20,00,000 deposit along with accrued interest.

The key conclusions of the Court were: 1. Monies or assets deposited by a corporate debtor in court prior to CIRP as security do not cease to be assets of the corporate debtor. 2. The monies deposited by Siti Networks are owned by it, though not in its possession. 3. The deposit should be released to the Resolution Professional as no meaningful purpose would be served by retaining it, given the CIRP. The respondent's rights as a judgment creditor would be subject to the IBC process (resolution plan or liquidation waterfall).

The Court directed the release of the deposited amounts to Siti Networks within two weeks, subject to procedural compliance.

This judgment reinforces the principle that the IBC aims to preserve the assets of a corporate debtor for a collective resolution process, and pre-CIRP security deposits made in court are considered part of these assets, overriding older legal interpretations where they conflict with the IBC's framework.

#IBC #CorporateInsolvency #Section14Moratorium

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