Bombay High Court Rules Asset Deposited By Corporate Debtor As Security Remains Asset Of Corporate Debtor After CIRP Commencement
Bombay High Court Rules Asset Deposited by Corporate Debtor as Security Remains Asset of Corporate Debtor After CIRP Commencement
The Bombay High Court, in a significant ruling by Justices B.P. Colabawalla and Somasekhar Sundaresan, has held that any monies or assets deposited by a corporate debtor in court before the commencement of the Corporate Insolvency Resolution Process (CIRP) remain the property of the corporate debtor, even if held by the court as security.
In this case, the appellant (the corporate debtor) had been directed to pay Rs. 12 lakhs in damages, along with interest, to the respondent in a 2016 judgment. In order to challenge the judgment on appeal, the appellant deposited Rs. 20 lakhs in court in 2016 and secured the balance through a bank guarantee from IDBI Bank. Over time, the appellant sought permission from the court to replace the IDBI guarantee with one from ICICI Bank or HDFC Bank, which was allowed by the Supreme Court in 2020.
However, in February 2023, CIRP was initiated against the appellant, triggering the moratorium under Section 14 of the Insolvency and Bankruptcy Code (IBC), which restricts enforcement against the corporate debtor’s assets. The appellant filed an application to withdraw the Rs. 20 lakhs deposited in court, but the respondent opposed the request, claiming that the amount was no longer the appellant’s asset due to the deposit being made in court.
The court examined the applicability of Section 14 of the IBC, which imposes a moratorium on the enforcement of claims and actions against a corporate debtor once CIRP is initiated. The appellant contended that the money deposited in the court, being an asset, should be considered part of the corporate debtor's estate under the resolution process. The respondent, however, argued that the money no longer belonged to the corporate debtor once it was deposited in court, and thus, Section 14 of the IBC had no bearing on the matter.
The court referred to previous cases, including the Rajendra Prasad Bansal and Nahar Builders cases, which held that money deposited in court during an appellate process does not lose its character as an asset of the corporate debtor unless specific legal provisions dictate otherwise. The court noted that such deposits are made pursuant to a judicial order and are meant to secure a claim during the appeal process, which predated the commencement of the CIRP.
Further, the court emphasized that while the corporate debtor may not have physical possession of the deposited money, it retains ownership. The court observed that security interests, such as the bank guarantee and court deposit, are designed to secure claims but do not necessarily lead to a loss of ownership. As per IBC, these assets remain part of the corporate debtor's estate, and their treatment during the resolution process will be governed by the terms of the CIRP.
The court also referred to the Chettiar case, which clarified that assets provided as security, such as court deposits, remain under the ownership of the corporate debtor unless explicitly stated otherwise. Additionally, the court distinguished between the withdrawal of funds by a decree-holder and the corporate debtor's right to retain ownership of such assets.
The court concluded that the money deposited in court as security before the commencement of CIRP does not lose its character as the corporate debtor's asset. Even though the funds were held by the court, they remained the property of the corporate debtor. The court ruled that the appellant was entitled to withdraw the deposited money, subject to the resolution process under the IBC.In a landmark decision, the Bombay High Court reaffirmed that assets deposited by a corporate debtor in court before the initiation of CIRP remain under the ownership of the corporate debtor. The court held that such deposits do not lose their status as part of the debtor's estate, and their handling is governed by the IBC. Consequently, the appellant was permitted to withdraw the appeal and the deposited amount from the court. The ruling clarifies the treatment of assets held by the court during insolvency proceedings and reinforces the overriding authority of the IBC in corporate insolvency cases.
