[Rahul Aggarwal is an Advocate at the Punjab & Haryana High Court, and Anmol Aggarwal is a 4th-year B.A., LL.B. (Hons.) student at Rajiv Gandhi National University of Law]
The Bombay High Court, in Siti Networks Ltd. v. Rajiv Suri (“Siti Networks HC”), clarified the legal position regarding the ownership of the asset of a Corporate Debtor (“CD”) deposited as a security deposit in a civil court prior to the initiation of the Corporate Insolvency Resolution Process (“CIRP”). This judgment is in line with the decision of the Supreme Court in Siticable Network Ltd. (Now Known as Siti Networks Ltd.) v. Rajiv Suri (“Siti Networks SC”). In Siti Networks SC, Siti Networks argued that once the CIRP begins, a bank guarantee or security deposit made in a civil court pre-CIRP has no significance. Based on this argument, the Supreme Court allowed the withdrawal of the appeal and the revocation of the bank guarantee furnished before the CIRP. Siti Networks HC case built upon the Supreme Court decision and held that the CD continues to have ownership of an asset deposited before the CIRP. Such an asset will be subject to the provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”), whether in resolution or liquidation. This post examines Siti Networks HC on whether a pre-CIRP security deposit made by a CD in a civil court remains its asset and subsequently falls within the provisions of the t IBC.
Background of the Case
Bank Guarantee/Monies Deposited Pre-CIRP
The case stems from a dispute in which the Bombay High Court directed Siti Networks to pay Rajiv Suri damages of ₹15,00,000 along with interest at 24% per annum from the date of the institution of the suit. Siti Networks challenged this decision, and the Court required the company to deposit ₹20,00,000 and secure the remaining amount through a bank guarantee. Initially, the guarantee was issued by IDBI Bank but was later substituted with one from ICICI Bank (“ICICI Bank Guarantee”) in 2020, as permitted in Siti Networks SC.
Initiation of CIRP
Meanwhile, the National Company Law Tribunal (“NCLT”), Mumbai, vide its Order dated 22 February 2023, admitted an application filed by the IndusInd Bank, under the provisions of IBC, initiating the CIRP of Siti Networks. In furtherance of the same a moratorium was issued under section 14 of the IBC, and a Resolution Professional (“RP”) was appointed. This moratorium was upheld by the Supreme Court in a later order.
Withdrawal of Appeal in Siti Networks SC
Siti Networks filed an appeal before the Supreme Court (Siti Networks SC) challenging an earlier Order dated 3 January 2020 of the Bombay High Court in Siti Networks HC. During the course of the CIRP, Siti Networks filed an interim application in Siti Networks SC seeking to withdraw that particular appeal and the ICICI Bank Guarantee. The following grounds were presented for the same:
- The bank guarantee is of no significance once the CIRP has been initiated, as the invocation of the same is barred by section 14 of the IBC.
- The RP, in lieu of section 18 of the IBC, is required to secure and conserve the CD’s assets, which shall be distributed among the creditors as per the provisions of the IBC (Resolution or Liquidation).
Rajiv Suri opposed these arguments, stating that the bank guarantee deposited before a court would be custodia legis, and would not constitute an asset of the CD.
The Supreme Court agreed with the arguments of Siti Networks and allowed the withdrawal of both, the Special Leave Petition and the ICICI Bank Guarantee, holding that the judgment creditor could only claim its amount by submitting its claim to the RP under the provisions of IBC.
Findings of the Case
Siti Networks, in the Siti Networks HC case, sought the withdrawal of the present appeal before the Bombay High Court on the same grounds (mentioned above) as in Siti Networks SC case. The Court allowed the withdrawal of the appeal, stating that a pre-CIRP security deposit in a court only takes away the possession and not the ownership from the CD. Thus, a pre-CIRP security deposit would be treated as an asset of the CD and will be a part of the resolution plan or the liquidation estate as the case may be.
Analysis
Applicability of Section 14 IBC
A bare reading of section 14(1)(a) of the IBC will show that once the CIRP commences and a moratorium is triggered, no action can be taken against the CD, including the execution of a court decree by the judgment-creditor.
The division bench of the Bombay High Court in Housing Development and Infrastructure Ltd. (HDIL) v. Nahar Builders Ltd. (“Nahar Builders”) explained that the IBC overrides the release of deposits and that even if the deposits in the court are withdrawn, they will still be subject to the provisions of IBC . This implies that even if the deposits are withdrawn, they continue to form part of the resolution plan. Any withdrawal exceeding the amount approved under the resolution plan would need to be refunded for the purposes of CIRP. In Nahar Builders, HDIL had deposited a sum of ₹8 crores under section 9 of the Arbitration and Conciliation Act, 1996. The arbitral award was passed in favor of Nahar Builders, and the amount was held to be released in their favor. Meanwhile, HDIL became insolvent, and was subject to the CIRP, and a moratorium was invoked under section 14 of the IBC. The single judge bench, in Nahar Builders Ltd. v. Housing Development and Infrastructure Ltd. (HDIL), had previously held that there is no bar on the withdrawal of the deposit, and allowed the release of the deposits. This case was appealed, wherein the division bench, in Nahar Builders, held that “the amount received by the Respondents would be subject to orders which may be passed by the NCLT”. The decision was interpreted in the Siti Networks HC to mean that even though the deposit amounts were released, the provisions of IBC would still be applicable to the same.
Nahar Builders offers a broad interpretation of the applicability of the IBC provisions to deposits made by a CD before the CIRP. It held that even if the deposit is withdrawn, it remains subject to IBC provisions. This establishes that the IBC applies to pre-CIRP deposits, regardless of whether they are withdrawn or not.
Deposit is the Property of the CD until Attachment is Ordered by Law
It is a well-settled law that the purpose of deposits made in the court is to put the money outside the possession of the parties until the case is decided. This does not imply that the person making the deposit is not the owner of that property anymore. The deposits made merely take away the possession of an asset from a person, and not the ownership of the same.
The Supreme Court, in Axis Bank v. SBS Organics Private Ltd, held that a pre-deposit in a court is not a bailment with the secured creditor. Further, it explained that the ownership of the deposit remains with the person unless an attachment is ordered by law.
The Supreme Court, in PSL Ramanathan Chettiar v. ORMPRM Ramanathan Chettiar (“Chettiar”), held that a judgment-debtor who deposited a sum in Court to buy peace by staying execution proceedings may withdraw the amount but on furnishing other security. It clarified that such a deposit does not transfer ownership of the money to the decree-holder. This ruling further strengthens the argument that the ownership of the deposit vests with the depositor until the decision is passed against it.
Axis Bank and Chettiar clearly establish that a pre-CIRP deposit made by the CD remains its asset, with only the possession temporarily taken away. The ownership of the asset continues to vest with the CD, making it part of the resolution plan or liquidation estate under the IBC. It is the duty of the Resolution Professional (RP) to include such assets while fulfilling its responsibilities under section 18 of the IBC.
Negating the Contrary Arguments
Rajiv Suri relied on Reliance Communication Limited v. Rajendra Prasad Bansal (“Rajendra Bansal”), to support his argument that the security deposited in the court is not an asset of the CD. The Bombay HC, in Rajendra Bansal, held that section 14 of the IBC does not prohibit the withdrawal of monies deposited in the court, and that the provisions of IBC will not be applicable to a pre-CIRP deposit by the CD.
Siti Networks HC held that Rajendra Bansal dealt with a unique factual matrix that would be applicable only to the parties of that case and not be a binding precedent. It observed that Rajendra Bansal relied on the principles from old judgments like Chowthmull Maganmull v. Calcutta Wheat and Seeds Association, which came much before the enactment of the IBC. In this respect, Siti Networks HC held that the position in such cases, especially regarding the interplay between the rights of a judgment creditor and the implications of insolvency law, would not continue to apply under the IBC regime.
Conclusion
Siti Networks HC makes it clear that the CD would continue to be the owner of the asset deposited by it in a court before the CIRP. This position is further supported by rulings like Nahar Builders, Axis Bank, and Chettiar, which clarify that when a CD makes a deposit, only the possession of that asset is taken away and the ownership remains with it. Consequently, as held by the Supreme Court in Glas Trust Company LLC v. Byju Raveendran, the asset of the CD will be distributed to the judgment creditor in proportion to the amount owed to it, either as outlined in the resolution plan or according to the waterfall mechanism if the case goes into liquidation. Hence, a security deposit made by a CD before the CIRP continues to be an asset of the CD and will be subject to the provisions of the IBC.
– Rahul Aggarwal & Anmol Aggarwal
