The High Court ruled that assets deposited by a corporate debtor as security before the commencement of the CIRP remain the property of the corporate debtor, thereby reinforcing the supremacy of the Insolvency and Bankruptcy Code.
The Bombay High Court Division Bench of Justice B.P. Colabawalla and Justice Somasekhar Sundaresan reviewed an interim application in an appeal and observed that the monies or assets deposited in court by a corporate debtor prior to the initiation of the Corporate Insolvency Resolution Process (CIRP) remain the debtor's assets under Section 18(1)(f) of the Insolvency and Bankruptcy Code, 2016, and are subject to the IBC's moratorium and resolution framework, overriding conflicting claims or judicial orders. The court held that such deposits, although in judicial custody, must be managed in alignment with CIRP provisions and cannot be treated as belonging to judgment creditors during the moratorium.
The High Court addressed the interplay between judicial proceedings and the Insolvency and Bankruptcy Code, 2016 (IBC) while adjudicating an application for the withdrawal of funds deposited in court. The Appellant, a corporate debtor undergoing the Corporate Insolvency Resolution Process (CIRP) since February 2023, sought to reclaim ₹20,00,000/- deposited under an interim order in appellate proceedings. Acting through the Resolution Professional (RP) under the supervision of the Committee of Creditors (CoC), the Appellant argued that the deposited funds constituted its assets, protected under Section 14 of the IBC's moratorium provisions.
The Court examined the procedural history, noting that the Appellant had deposited the funds to secure a stay on the execution of a judgment directing payment to the Respondent. Disputes over replacing a bank guarantee were earlier addressed by the Supreme Court, which had permitted the Appellant to withdraw the guarantee and the connected Special Leave Petition, citing Section 14's prohibition on enforcement actions against the corporate debtor's assets during CIRP. Following this precedent, the Appellant sought to withdraw the funds, asserting that retaining them served no purpose, given the statutory bar on execution.
Opposing this, the Respondent contended that the deposited funds, once in court custody, ceased being the Appellant’s assets and were outside the purview of the IBC moratorium. Citing the precedent in Reliance Communication Limited v. Rajendra Prasad Bansal, REEDLAW 2023 Bom 01556 the Respondent argued that Section 14 did not preclude withdrawals of court deposits. However, the High Court distinguished the facts of the present case, emphasizing that the deposits remained assets of the corporate debtor under Section 18(1)(f) of the IBC. It clarified that ownership and possession are distinct, with the corporate debtor retaining ownership despite the funds being in judicial custody.
The Court rejected the reliance on outdated precedents, emphasizing that the IBC's provisions overrode conflicting judicial doctrines. It observed that the deposited funds were subject to CIRP processes, aligning with the IBC’s objectives of collective creditor interest and insolvency resolution. The funds' withdrawal was permitted to enable the Resolution Professional to manage the corporate debtor’s assets in accordance with the resolution plan or, if necessary, the liquidation process.
In conclusion, the High Court reaffirmed the supremacy of IBC provisions, directing the release of the deposited funds to the Appellant within two weeks, subject to procedural compliance. It held that amounts deposited in court remained "custodia legis" but were to be adjudicated under the IBC framework, ensuring alignment with the Code’s overriding principles. The appeal was disposed of as withdrawn, along with all related applications, underscoring the IBC's centrality in regulating insolvency proceedings and protecting corporate debtor assets from fragmented claims.
Mr. Saurabh Bachhawat a/w. Mr. Mitesh Shah, Mr. Nishant Sogani, Mr. Rohan Gajaria and
Mr. Ishaan Wakhloo, represented the Applicant.
Mr. Ajit Anekar a/w. Mr. Siddhant Sawhrey i/b Auris Legal, appeared for the Respondent.
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