Bank Cannot Retain One Company's Fixed Deposit For Group Company's Loan: NCLAT

The case involved Reliance Communication Infrastructure Limited (RCIL), which had placed a fixed deposit of Rs. 27.60 crore with the Industrial and Commercial Bank of China (ICBC). The bank refused to release the funds during RCIL's insolvency, claiming a lien over the FD to recover foreign currency loans it had granted  to another group company, Reliance Infrastructure Ltd (RITL).

A bench comprising Justice Ashok Bhushan and Members Barun Mitra and Arun Baroka upheld the order of the Mumbai Bench of the National Company Law Tribunal (NCLT), which had directed the bank to lift the lien.

The tribunal found ICBC's action legally unsustainable, observing,

"The action of the Bank in not releasing the FD opened by the CD on 27.03.2017 on the pretext that there are dues on Appellant of another Group Company of the CD, i.e. RITL is unjustified. The letter of lien dated 27.03.2017 as noticed above authorised the Bank to retain securities for any amount due on the CD, either singly or jointly with another or others.", the tribunal held.

"Unless the CD was not part of any facility against which any amount is due, the Bank had no jurisdiction to retain the security. We, thus, are satisfied that Adjudicating Authority has not committed any error in issuing necessary directions to the Appellant to lift/ release/ remove the lien marked on the FD of Rs.27.60 crores and direction to release the fund along with interest, cannot be faulted.", the tribunal added.

The case began when RCIL created the fixed deposit on March 27, 2017, accompanied by a letter asking the bank to mark a lien for any amounts “which may be due from us to you.”

In September 2019, Corporate Insolvency Resolution Process (CIRP) was initiated against RCIL. The appointed Resolution Professional (RP), Anish Niranjan Nanavaty, requested the release of the FD on the grounds that RCIL had never taken any loans from ICBC. The bank, however, refused, claiming it had validly exercised a lien to secure dues owed by RITL, a different Reliance entity. The RP moved the NCLT, which on January 2, 2024, directed the bank to remove the lien and release the funds, a decision ICBC appealed.

ICBC argued that the lien letter allowed it to retain the FD for liabilities owed not only by RCIL but also jointly with others, including group companies. It relied on Section 171 of the Indian Contract Act, 1872, which provides a general lien to banks. The bank also argued that it was under no obligation to release the funds or participate in RCIL's insolvency resolution, as it was acting as a secured creditor.

The NCLAT rejected those arguments, holding that the lien clause could only apply to debts owed by RCIL either directly or jointly and not to debts owed solely by another group company.

It held, “When nothing is due on the CD or CD jointly with another or others, Clause (1), cannot be relied by the Appellant.”

It held that the word "us" used in the letter authorising lien only refers to the corporate entity and not any of its group companies.

"The CD, being a corporate entity it described itself by use of express 'us'. The said use of the expression 'us' cannot be expanded to mean that under the said expression all Group Companies were referred to and any amount due from any Group Companies is also included in the expression 'us'. The letter has to be looked into and interpreted in its plain and normal meaning. When a letter is written by a corporate entity, use of expression 'us' for the entity is both, natural and correct"

Case Title: Industrial and Commercial Bank of China Limited v Anish Niranjan Nanavaty & Ors

Case Number: Company Appeal (AT) (Insolvency) No.69 of 2024

Appearances:

For Appellants: Senior Advocate Abhijeet Sinha with advocates Jinal Shah, Palak Nenwani and Rohit Chopra

For Respondents : Senior Advocate Krishnendu Datta with advocates Anannya Ghosh and Mrinalini Mishra

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