IBC | After Moratorium, Creditor Cannot Appropriate Pre-CIRP Dues From Earlier Security Deposit Made By Corporate Debtor : Supreme Court

The Supreme Court has observed that once a moratorium is imposed, a corporate debtor's pre-CIRP dues cannot be set off against a deposit held by the creditor. The Court held that until such deposit is lawfully adjusted, it continues to remain the property of the corporate debtor, and any appropriation after the moratorium would be impermissible in law.

“The deposit made even if treated as a guarantee for the default in dues remains the property of the CD till it is adjusted towards the defaulted dues and if so adjusted after the moratorium kicks in towards pre-CIRP dues, the adjustment would be rendered illegal.”, observed a bench of Justices Sanjay Kumar and K Vinod Chandran.

The case arose from transmission agreements between Central Transmission Utility of India Limited (CTUIL) and KSK Mahanadi Power Company Ltd. (KMPCL), a power generator undergoing insolvency.

KMPCL had deposited ₹108.44 crore in cash, pursuant to directions of the Central Electricity Regulatory Commission, in place of a Letter of Credit as security for payment of transmission charges.

Following defaults, insolvency proceedings against KMPCL commenced on October 3, 2019. Despite the moratorium under Section 14 of the Insolvency and Bankruptcy Code (IBC), CTUIL appropriated the entire deposit in March 2020, including ₹23.31 crore towards post-CIRP dues, and ₹85.13 crore towards pre-CIRP dues (the disputed component).

The Resolution Professional challenged this appropriation before the adjudicating authorities.

Both the NCLT and NCLAT found the appropriation illegal, holding that the security deposit remained the property of the corporate debtor and that pre-CIRP dues could only be claimed through the RP in accordance with the IBC's claims verification process

Challenging the NCLAT's decision, the CTUIL appealed to the Supreme Court.

Dismissing the appeals, the judgment authored by Justice K. Vinod Chandran emphasized that once the moratorium comes into force, pre-CIRP claims cannot be appropriated by setting off amounts from the corporate debtor's security deposit with the creditor; instead, such claims must be pursued through the prescribed process of submission before the Resolution Professional.

In a nutshell, the Court said that once CIRP begins, all claims must be submitted to the Resolution Professional for verification.

Notably, CTUIL had already filed claims, which were partially admitted. It did not challenge the admitted amount but proceeded to unilaterally appropriate the deposit, an act the Court found impermissible.

“The pre-CIRP dues, whether it be to the appellant or the ISTS licensees, will have to be subjected to the RPs decision first made, on submission of Form B dated 03.01.2020. The CD is continuing its operations during the CIRP period and book adjustments would reverse the apportionment made to pre-CIRP dues so as to satisfy the post-CIRP dues, the pre-CIRP dues being satisfied through the claim allowed by the RP with respect to that.”, the court observed.

“The NCLT and the NCLAT has rightly found the apportionment made by the appellant to be violative of the provisions of the IBC and in derogation of the moratorium under Section 14.”, the court added.

Accordingly, the appeal was dismissed.

Headnote

Insolvency and Bankruptcy Code, 2016; Section 14 — Moratorium — Appropriation of Security Deposit against pre-CIRP dues — Held: The appropriation of a cash security deposit available with a creditor after the initiation of the Corporate Insolvency Resolution Process (CIRP) towards dues that arose prior to the CIRP is impermissible and contrary to the moratorium imposed under Section 14 of the IBC - Such a deposit remains the property of the Corporate Debtor until a valid adjustment is made - While payments for maintaining the supply of goods and services during the moratorium period (post-CIRP) to keep the Corporate Debtor as a going concern are permissible under Section 14(2A), the recovery of pre-CIRP dues must strictly follow the claim procedure envisaged in the IBC.

Insolvency and Bankruptcy Code, 2016 — Set-off in CIRP — Pari Passu Principle — Held - The principle of insolvency set-off as permitted in liquidation regulations cannot be applied to CIRP - Set-off of dues payable by the Corporate Debtor for a period prior to the commencement of the CIRP cannot be made from dues (or assets) payable to or belonging to the Corporate Debtor post the commencement of the CIRP - Allowing such a set-off would mitigate against the pari passu principle essential to the scheme of the IBC. [Relied on Bharti Airtel Ltd. v. Aircel Ltd. & Dishnet Wireless Ltd. (Resolution Professional), (2024) 4 SCC 668; Paras 15-25]

Cause Title: Central Transmission Utility of India Limited Versus Sumit Binani & Ors.

Citation : 2026 LiveLaw (SC) 289

Click here to download judgment

Appearance:

For Appellant(s) : Mr. M.G.Ramachandran, Sr. Adv. Ms. Ranjitha Ramachandran, Adv. Mr. Aneesh Bajaj, Adv. Mr. Somesh Chandra Jha, AOR Mr. Yashvardhan Singh, Adv. Mr. Rishit Vimadalal, Adv. Mr. Animesh Rajoriya, Adv. Mr. Anand Kumar Singh, Adv. Mr. Akash Kishore, Adv.

For Respondent(s) : Mr. S. S. Shroff, AOR Mr. Navin Pahwa, Sr. Adv. Mr. Vaijayant Paliwal, Adv. Ms. Charu Bansal, Adv. Ms. Kirti Gupta, Adv. Ms. Srideepa Bhattachharyya, Adv. Ms. Neha Shivhare, Adv. Mr. Vikash Kumar Jha, Adv. M/S. Cyril Amarchand Mangaldas Aor, AOR