Asset Deposited By Corporate Debtor As Security Before CIRP Commencement Continues To Be Asset Of Corporate Debtor: Bombay High Court

The Bombay High Court bench of Justices B.P. Colabawalla and Somasekhar Sundaresan has held that monies or any other asset deposited by a corporate debtor in court prior to commencement of CIRP by way of security would continue to be the asset of the corporate debtor.Brief Facts:The Appellant (Corporate Debtor) was directed to pay Rs. 12 lakh as damages along with interest at the rate of 24% p.a to the Respondent in a judgment dated 13.06.2016. In an appeal challenging the said judgment, an interim order dated 15.02.2016 was passed. The Appellant was directed to deposit Rs. 20 lakh in the court and secure the balance by giving security. The amount was deposited in the court on 02.04.2016. For the balance amount, IDBI Bank issued a bank guarantee. The appellant sought leave of the Court to replace the bank guarantee with one issued by either ICICI Bank or HDFC Bank. The court refused to allow either of the aforementioned banks to substitute the bank guarantee, insisting that it come from a nationalized bank. An SLP was filed in the Supreme Court. By an order dated 17.01.2020, the Supreme Court permitted the furnishing of a bank guarantee by either ICICI Bank or HDFC Bank. A bank guarantee from ICICI Bank was provided on 27.01.2020. By an order dated 22.02.2023, CIRP was initiated, thereby triggering the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC). The Applicant filed an Interim Application before the Supreme Court seeking withdrawal of the SLP because there was no scope for the guarantee to be invoked. After all, section 14 of the IBC prohibits enforcement against any of the assets of a corporate debtor in CIRP. The Applicant gave an undertaking to withdraw the Appeal. The Respondent opposed the aforesaid application and stated that Section 14 only prohibits proceedings against a corporate debtor and has no implication whatsoever for proceedings filed by the corporate debtor. The Respondent argued that the bank guarantee and the amount covered by it are custodia legis and the Appellant has no control over the same, which meant that the bank guarantee is not an asset of the corporate debtor. The Appellant in a rejoinder stated that the bank guarantee furnished by the Appellant was a financial guarantee, which falls within the definition of the term, “security interest” under the IBC. The Supreme Court allowed the interim application seeking withdrawal of the SLP and permitted the revocation of the ICICI guarantee. The Supreme Court dismissed the SLP. The bank guarantee stood revoked. The Appellant filed the Application to withdraw the appeal and to withdraw Rs. 20 lakh that had been deposited in the Court pursuant to the interim order along with accrued earnings thereon.Contentions of the Parties:The Appellant contended that the cash deposited in the Court, being an asset, would form the subject matter of the resolution process. The Appellant stated that despite the decision of the Supreme Court permitting release of the ICICI Guarantee, the cash deposited in the Court does not belong to the corporate debtor. The appellant submitted that in view of the operation of Section 14 of the IBC, the rights of the Respondent in his capacity as the judgement creditor would be subject to the provisions of the IBC.Counsel for the Respondent submitted that the monies deposited in Court ought not to be released at all. It was contended that such monies deposited in court are not an asset of the corporate debtor. Once a deposit of monies is made in Court, such amount would no longer be an asset of the corporate debtor. Therefore, Section 14 of the IBC is irrelevant. The case of Reliance Communication Limited vs. Rajendra Prasad Bansal (Rajendra Bansal) has held that the moratorium under Section 14 of IBC does not prohibit withdrawal of monies deposited in Court by corporate debtor.Observations:At the outset, the court observed that: “The IBC is a comprehensive and relatively new self-contained code governing insolvency and bankruptcy of, among others, corporate debtors. Even decree holders, who are creditors of the corporate debtor, would be subject to the operation of the IBC's provisions – with the moratorium under Section 14 prohibiting execution and enforcement of the decree; a resolution enabling re-writing the obligation owed to such creditor; and liquidation, enabling distribution and payment from the liquidation estate, including to the decree-holder.”Section 14 of IBC is relevant; not Section 231 of IBCThe court referred to Rajendra Bansal, which held that the court's jurisdiction over monies deposited with the court was not ousted. It held that since an application for withdrawal of funds concerns monies deposited pursuant to an order of the appellate court (and that too before commencement of the CIRP and as a condition for stay on execution of proceedings), such an application for withdrawal cannot be said to have arisen due to the insolvency of the corporate debtor.The...

Asset Deposited By Corporate Debtor As Security Before CIRP Commencement Continues To Be Asset Of Corporate Debtor: Bombay High Court

Tazeen Ahmed

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