The Insolvency and Bankruptcy Code (IBC) impose a moratorium upon the initiation of a Corporate Insolvency Resolution Process (CIRP). Section 14(1) of the IBC bars “any action to foreclose, recover or enforce any security interest created by the corporate debtor” and forbids the CD from “transferring, encumbering, alienating or disposing of” its assets. In effect, once insolvency proceedings start, all assets of the CD are frozen. This raises key questions: for example, if the CD had paid an advance or security deposit before insolvency, who actually owns that money during the moratorium? Can creditors adjust such deposits against past dues? This article analyzes these issues with examples, statutes, and case law.

Before examining the legal treatment of an advance or security deposit during CIRP, it is important to understand its nature in the context of insolvency. Such deposits are ordinarily paid by the corporate debtor to secure the performance of a contractual obligation or to facilitate the continued supply of essential goods or services. Although the deposit may be physically held by the counterparty, the mere fact of possession does not necessarily transfer ownership of the money to the recipient. The distinction becomes particularly significant once CIRP commences, because the corporate debtor's assets are brought under the protection of the moratorium and individual creditors are restricted from recovering or appropriating the debtor's property towards pre-CIRP claims. The central question, therefore, is whether the deposit continues to form part of the corporate debtor's assets or can be treated by the recipient as its own money for adjustment against outstanding dues.

An advance deposit (or security deposit) made by the corporate debtor prior to CIRP remains an asset of the debtor during the moratorium. Under Section 14(1)(b)-(c), the CD cannot transfer assets, and creditors cannot enforce any security interest against the CD's property. In practical terms, this means a deposit given by the CD stays with the CD's estate, not with the creditor, until the insolvency process is properly resolved.

Example: Suppose a power company (the corporate debtor) had deposited ₹100 lakh with its electricity supplier as advance security. When the power company enters CIRP, that ₹100 lakh is no longer freely available to the supplier. The deposit continues to belong to the power company's estate (the CD), not the supplier, because of the moratorium. The supplier must file a claim in the CIRP rather than unilaterally using the deposit to offset old bills.

The Supreme Court confirmed this principle in Central Transmission Utility of India Ltd. v. Sumit Binani (2026), Civil Appeal Nos. 2216-2217 of 2025. There, KSK Mahanadi Power Co. Ltd. (KMPCL) had deposited ₹108.44 crore with Central Transmission Utility (the supplier) before CIRP. The NCLT and NCLAT held and the Supreme Court affirmed that this deposit “remains the property of the entity who made the deposit, herein KMPCL” (now the CD). The Court noted the moratorium under Section 14 applies until the CIRP ends, so the deposit is part of the insolvent estate unless the law explicitly allows otherwise.

In short, an advance deposit belongs to the CD's estate during CIRP. The moratorium prevents the creditor from treating it as theirs or using it for past debts. Only obligations arising after CIRP commenced can be met from such deposit (see Section 14(2A)).

Pre-CIRP dues are debts and dues incurred before the insolvency commencement date. Examples include outstanding unpaid bills, loans, or statutory dues that fell due prior to the CIRP start. Under the moratorium, creditors cannot enforce these claims by seizures, set-offs, or unilateral adjustments. Instead, they must lodge a claim with the RP (in Form B) for the CIRP.

Concretely, if a supplier is owed money by the CD for goods delivered before insolvency, the supplier cannot halt supply or attach assets to recover that money. Section 14 explicitly bars such recovery or foreclosure of any security interest for pre-existing debts. The statute provides that all claims by operational creditors become part of the CIRP process. They are paid out according to Section 53's hierarchy after CIRP concludes (or as provided in a resolution plan).

For instance, suppose the CD had defaulted on a ₹1 crore invoice just before CIRP. Once CIRP starts, the supplier cannot set-off the CD's advance deposit or step outside the IBC. Instead, the supplier must file a claim; the RP may provisionally admit it, and the claim will rank in the waterfall (typically after CIRP costs, wages of workers, etc.). No immediate recovery is allowed during moratorium.

This was emphasized by the Supreme Court in Central Transmission Utility v. Sumit Binani 2026 INSC 284. The Court held that adjusting a CD's deposit against pre-CIRP debts during moratorium was “violative of the scheme of the IBC”. KPTCL had tried to apply KMPCL's security deposit to settle pre-insolvency electricity bills, but the Court found this impermissible. It affirmed that any attempt to satisfy pre-CIRP claims outside the statutory process is barred.

In short, pre-CIRP dues must abide by the IBC process. Creditors must file claims and wait for resolution (and will be paid only in accordance with the approved plan or liquidation waterfall). Any seizure, set-off, or appropriation for debts predating the moratorium is prohibited.

Case of Central Transmission Utility v. Sumit Binani & Ors. 2026 INSC 284

This recent Supreme Court case illustrates the above principles. The CD, KSK Mahanadi Power Co. Ltd., had deposited ₹108.44 crore with the Central Transmission Utility (CTU) as a security mechanism before CIRP began on 3 Oct 2019. After insolvency started, CTU attempted to invoke this deposit to offset both pre- and post-CIRP dues. The dispute focused on the ₹85.13 crore of that deposit that related to pre-CIRP electricity bills.

The NCLT and NCLAT found that:

1. The deposit is a security deposit (not a performance guarantee) held in trust and it “remains the property of the entity who made the deposit, herein KMPCL (the CD)”.

2. The moratorium under Section 14 barred appropriation of the deposit for pre-CIRP debts. CTU could only apply it to post-CIRP dues (i.e. bills raised after 3 Oct 2019). This is consistent with Section 14(2A): payments can be made for essential supplies after commencement, but pre-existing dues must go through the IBC claim process.

3. Consequently, using the deposit to pay pre-CIRP bills was “contrary to law” and the NCLT order (which disallowed that adjustment) was upheld. CTU had to restore the portion of deposit that it had wrongly appropriated for old bills, and could use it only for new bills.

The Supreme Court rejected CTU's arguments (e.g. that the deposit was akin to a bank guarantee or that set-off should be allowed). It reaffirmed that once CIRP starts, Section 14's moratorium protects the CD's funds. Any set-off or appropriation for debts incurred before ICD would “vitiate” the insolvency process. The Court held that IRP/RP must manage the funds, and creditors may file claims for their dues.

This judgment now stands as authority that advance deposits or security sums made by the CD cannot be treated as creditor property. It also underscores that only post-CIRP obligations (like continuing supply contracts) can legally draw on such deposits during moratorium. Any pre-CIRP obligations must be paid out of the CD's assets via the resolution plan or liquidation, not by self-help set-off.

In conclusion, the IBC's moratorium fundamentally reorganizes how debts are treated once a company enters CIRP. Advance deposits made by the CD remain part of the CD's estate, and creditors cannot appropriate them for pre-insolvency debts. Post-CIRP dues that are necessary for keeping the business going (like worker salaries, utility bills, rent) are categorized as CIRP costs and paid first. Pre-CIRP debts, by contrast, lose their pre-insolvency enforcement rights and must be dealt with in the insolvency process (by filing claims and adhering to Section 53 priorities).

These rules aim to balance the interests of creditors and the viability of the company. Creditors of pre-CIRP debts remain valid but must await the resolution process, while essential suppliers during CIRP can be paid to preserve value.

Author Sarthak Gupta is a 3rd year B.A., LL.B. student at Institute of Law, Nirma University, Ahmedabad & Aditya Pratap Singh is a 3rd Year, B.B.A. LL.B student at Gujarat National Law University, Gandhinagar. Views are personal.