IBC | Operational Creditor Cannot Unilately Adjust Security Deposit Against Pre-CIRP Dues After Moratorium Kicks In: Supreme Court

"A security deposit remains the property of the entity making the deposit until a valid adjustment is made; once the moratorium under Section 14 IBC kicks in, the recovery of pre-CIRP dues must concede to the procedure envisaged in the IBC." Supreme Court of India.

Supreme Court, in a significant ruling, held that an operational creditor cannot unilaterally appropriate a cash security deposit towards dues that accrued prior to the commencement of the Corporate Insolvency Resolution Process (CIRP).

A bench of Justice Sanjay Kumar and Justice K. Vinod Chandran observed that such adjustments made after the insolvency commencement date violate the moratorium imposed under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) and undermine the pari passu principle essential to insolvency resolution. The Court emphasized that once the CIRP is initiated, creditors must submit their claims to the Resolution Professional rather than resorting to self-help measures through the appropriation of assets.

The dispute arose when the Central Transmission Utility of India Limited (CTUIL), the appellant, adjusted a cash security deposit of ₹108.44 crores provided by KSK Mahanadi Power Company Limited (KMPCL) against outstanding bills. While a portion was adjusted for post-CIRP services to keep the company as a going concern, ₹85.13 crores were adjusted against arrears that existed before the CIRP commenced on October 3, 2019. The National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) both held this appropriation to be illegal, leading to the present appeal.

The primary questions before the Court were whether a security deposit held by a creditor remains an asset of the Corporate Debtor after the initiation of CIRP and whether the principles of contractual or equitable set-off allow a creditor to satisfy pre-CIRP debts from assets held for the Corporate Debtor post-moratorium.

The Court began its analysis by clarifying the nature of the security deposit, noting that it was made in lieu of a Letter of Credit (LoC) as a Payment Security Mechanism. The bench observed that the ownership of such a deposit does not automatically transfer to the creditor upon default but remains the property of the entity making the deposit until a valid adjustment is made. Since the adjustment in this case was carried out on March 28, 2020—months after the CIRP had commenced—the Court found that the funds were still an asset of the Corporate Debtor on the insolvency commencement date. The bench noted that the scheme of the IBC provides that a moratorium applies until the completion of the CIRP to protect the assets of the debtor for the benefit of all stakeholders. "The security deposit was also not in the nature of a performance guarantee, and it was held merely as a security against default in payment."

Dealing with the appellant's argument regarding the right to set-off, the Court relied heavily on the precedent set in Bharti Airtel Ltd. v. Aircel Ltd.. The bench explained that while contractual set-off is permissible if it occurs before the CIRP is put in motion, statutory set-off under Order VIII Rule 6 of the Code of Civil Procedure (CPC) or insolvency set-off under Regulation 29 of the Liquidation Regulations does not apply to the CIRP phase. The Court categorically stated that dues payable by the Corporate Debtor for a period prior to the commencement of CIRP cannot be satisfied from assets held for the Corporate Debtor post-commencement. "Set-off of the dues payable by the Corporate Debtor for a period prior to the commencement of the CIRP cannot be made and is not permitted in law from the dues payable to the Corporate Debtor post the commencement of the CIRP."

The Supreme Court also addressed the appellant's contention that the deposit should be treated similarly to a Letter of Credit, which under Section 14(3)(b) of the IBC can sometimes be enforced despite a moratorium. The bench rejected this comparison, clarifying that Section 14(3)(b) refers to a "contract of guarantee to a Corporate Debtor" intended for the benefit of the debtor, not for a creditor to bypass the priority of claims. Even if the deposit were equated to an LoC, its enforcement after the insolvency commencement date would be prohibited. The Court found that the appellant, having already submitted its claim in Form B to the Resolution Professional, was bound by the collective resolution process. "An operational creditor cannot use a security deposit to bypass the priority of claims established under the IBC; the deposit must be reckoned as an asset of the Corporate Debtor for the purposes of the Resolution Plan."

Regarding the practical implications, the Court noted that CTUIL is an operational creditor and its unilateral action would grant it an unfair preference over other creditors. The bench observed that the Information Memorandum (IM) prepared by the Resolution Professional correctly listed the deposit as an asset of the Corporate Debtor. By attempting to settle pre-CIRP dues outside the resolution plan, the appellant violated the pari passu principle, which ensures that all creditors of the same class are treated equally. The Court further noted that the Resolution Plan had already been approved and implemented, and the appellant had not challenged the limited admission of its debt by the Resolution Professional earlier. "As has been found in Bharti Airtel Ltd., set-off would mitigate against the pari passu principle which is apparent from the scheme of the IBC."

In its concluding remarks, the Court affirmed the orders of the NCLT and NCLAT, directing that the appropriated amounts be adjusted toward post-CIRP dues instead of pre-CIRP arrears. The bench emphasized that for the Corporate Debtor to remain a running concern, book adjustments must be carried out to ensure post-CIRP services are paid for while pre-CIRP claims follow the statutory waterfall mechanism. The appeals were dismissed, reinforcing the sanctity of the Section 14 moratorium in preserving the estate of a Corporate Debtor during the resolution process.

Date of Decision: 23 March 2026