The Supreme Court dismissed appeals by the Central Transmission Utility of India Limited, holding that a security deposit made by a corporate debtor remains its property even after insolvency proceedings begin, and cannot be unilaterally set off against pre-CIRP dues once the moratorium under section 14 of the IBC takes effect. All pre-CIRP claims must be routed through the Resolution Professional.
THE Supreme Court has held that a creditor cannot unilaterally appropriate a corporate debtor’s security deposit towards pre-CIRP dues once a moratorium under section 14 of the Insolvency and Bankruptcy Code, 2016 takes effect.
A Bench of Justices Sanjay Kumar and K Vinod Chandran dismissed the appeals filed by Central Transmission Utility of India Limited (CTUIL), affirming that such deposits continue to remain the property of the corporate debtor and that all pre-CIRP claims must be submitted to the Resolution Professional for verification.
The dispute arose from transmission agreements between CTUIL and KSK Mahanadi Power Company Ltd. (KMPCL), a power generator undergoing insolvency.
KMPCL had deposited ₹108.44 crore in cash with CTUIL, pursuant to directions of the Central Electricity Regulatory Commission, in place of a Letter of Credit as security for payment of transmission charges. After KMPCL defaulted on its obligations, insolvency proceedings were commenced against it on October 3, 2019, and a moratorium came into force.
Despite the moratorium, CTUIL appropriated the entire deposit in March 2020. Of this, ₹23.31 crore was adjusted towards post-CIRP dues, while ₹85.13 crore was directed towards pre-CIRP dues, the component that became the centre of this dispute.
The Resolution Professional challenged this appropriation before the adjudicating authorities, contending that the deposit was the corporate debtor’s property and could not be set off against pre-CIRP liabilities outside the statutory claims process.
Both the NCLT and the NCLAT found the appropriation to be illegal, holding that the security deposit remained the property of the corporate debtor until lawfully adjusted and that pre-CIRP dues could only be claimed through the Resolution Professional in accordance with the IBC’s claims verification process. CTUIL then appealed to the Supreme Court.
Before the Court, CTUIL sought to argue that the deposit functioned as a payment security mechanism akin to a Letter of Credit or a bank guarantee, and that it was therefore entitled to appropriate the amount. CTUIL also contended that it was a secured creditor falling within the carve-outs of section 14(3) of the IBC, which exempts certain secured creditors from the moratorium’s restrictions.
The Court, in its judgment authored by Justice K Vinod Chandran, rejected both contentions. It held that the deposit, even if treated as a guarantee, remained the property of the corporate debtor until lawfully adjusted.
The Court observed that, “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.”
Relying heavily on its earlier decision in Bharti Airtel Ltd. v. Aircel Ltd., the Court reaffirmed that set-off of pre-CIRP dues against post-CIRP entitlements is impermissible during CIRP.
It clarified that statutory set-off under Order VIII Rule 6 of the CPC and insolvency set-off under Regulation 29 of the Liquidation Regulations have no application to the CIRP stage.
The only exception, the Court noted, is a contractual set-off that existed before or on the date the CIRP commenced, since pre-moratorium contractual terms remain binding and unaltered.
The Court further observed that permitting such set-off would undermine the pari passu principle that underpins the entire IBC framework. It noted that CTUIL had already filed its claim for pre-CIRP dues with the Resolution Professional in Form B on January 3, 2020, which was partially admitted. Rather than challenge the admitted amount, CTUIL proceeded to unilaterally appropriate the deposit, an act the Court found wholly impermissible.
Turning to the treatment of the deposit during the CIRP period, the Court observed that, “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 corporate debtor was continuing its operations during the CIRP, the Court noted, and book adjustments would need to reverse the apportionment made towards pre-CIRP dues so as to satisfy the post-CIRP dues first, with pre-CIRP dues being satisfied only through the claim allowed by the Resolution Professional.
The Court also rejected CTUIL’s characterisation of itself as a secured creditor, holding that the deposit did not constitute a security interest falling within the carve-outs of section 14(3).
It distinguished the present case from precedents concerning bank guarantees, observing that even if the deposit were equated with a Letter of Credit, its enforcement after the insolvency commencement date would remain barred by the moratorium.
Affirming the findings of the NCLT and the NCLAT, the Court held that, “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 appeals were accordingly dismissed.
Cause title: Central Transmission Utility of India Limited v. Sumit Binani & Ors. (2026 SC)
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