Security Deposit Is Not Operational Debt; Non-Refund Cannot Trigger CIRP: NCLT Delhi

The National Company Law Tribunal (NCLT) at Delhi has recently ruled that the non-refund of a contractual security deposit meant only as collateral cannot be treated as operational debt and cannot be used to initiate corporate insolvency proceedings.

A coram of Judicial Member Mahendra Khandelwal and Technical Member Anu Jagmohan Singh said the security deposit paid in this case “as collateral security, held exclusively to ensure performance and execution of delivery obligations in the eventuality of payment default by the Applicant, rather than serving as consideration for goods or services rendered.”

The ruling came on a CIRP plea filed by Unique Tobacco Company, a distributor of cigarettes, against Pelican Tobacco (India) Pvt. Ltd., the manufacturer. Under their 2021 arrangement for manufacturing cigarettes, Unique Tobacco paid Pelican Rs 31 lakh as a security deposit, to be refunded within 15 days after the arrangement ended.

Unique Tobacco alleged that Pelican did not return the deposit and sought to initiate insolvency proceedings on an alleged due of Rs 2.36 crore, which included the deposit, more than Rs 1.78 crore in interest, and Rs 26.64 lakh arising from invoices. Pelican denied the claim and said the petition was an attempt at recovery in the guise of insolvency.

After examining the agreement, the tribunal held that the security deposit had no link to the supply of cigarettes or any related service and therefore could not be treated as operational debt. Once the deposit and interest were excluded, only Rs 26.64 lakh remained far below the Rs 1 crore requirement to initiate corporate insolvency.

The application was dismissed, with the tribunal making it clear that failure to return a security deposit cannot by itself justify triggering CIRP.

Click Here To Read/Download The Order