Asset Deposited By Corporate Debtor As Security Before CIRP Commencement Continues To Be Asset Of Corporate Debtor: Bombay High Court
The Bombay High Court bench of Justices B.P. Colabawalla and Somasekhar Sundaresan has held that monies or any other asset deposited by a corporate debtor in court prior to commencement of CIRP by way of security would continue to be the asset of the corporate debtor.Brief Facts:The Appellant (Corporate Debtor) was directed to pay Rs. 12 lakh as damages along with interest at the rate of 24%...
The Bombay High Court bench of Justices B.P. Colabawalla and Somasekhar Sundaresan has held that monies or any other asset deposited by a corporate debtor in court prior to commencement of CIRP by way of security would continue to be the asset of the corporate debtor.
Brief Facts:
The Appellant (Corporate Debtor) was directed to pay Rs. 12 lakh as damages along with interest at the rate of 24% p.a to the Respondent in a judgment dated 13.06.2016. In an appeal challenging the said judgment, an interim order dated 15.02.2016 was passed. The Appellant was directed to deposit Rs. 20 lakh in the court and secure the balance by giving security.
The amount was deposited in the court on 02.04.2016. For the balance amount, IDBI Bank issued a bank guarantee. The appellant sought leave of the Court to replace the bank guarantee with one issued by either ICICI Bank or HDFC Bank. The court refused to allow either of the aforementioned banks to substitute the bank guarantee, insisting that it come from a nationalized bank. An SLP was filed in the Supreme Court. By an order dated 17.01.2020, the Supreme Court permitted the furnishing of a bank guarantee by either ICICI Bank or HDFC Bank. A bank guarantee from ICICI Bank was provided on 27.01.2020.
By an order dated 22.02.2023, CIRP was initiated, thereby triggering the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC). The Applicant filed an Interim Application before the Supreme Court seeking withdrawal of the SLP because there was no scope for the guarantee to be invoked. After all, section 14 of the IBC prohibits enforcement against any of the assets of a corporate debtor in CIRP. The Applicant gave an undertaking to withdraw the Appeal. The Respondent opposed the aforesaid application and stated that Section 14 only prohibits proceedings against a corporate debtor and has no implication whatsoever for proceedings filed by the corporate debtor. The Respondent argued that the bank guarantee and the amount covered by it are custodia legis and the Appellant has no control over the same, which meant that the bank guarantee is not an asset of the corporate debtor. The Appellant in a rejoinder stated that the bank guarantee furnished by the Appellant was a financial guarantee, which falls within the definition of the term, “security interest” under the IBC. The Supreme Court allowed the interim application seeking withdrawal of the SLP and permitted the revocation of the ICICI guarantee. The Supreme Court dismissed the SLP. The bank guarantee stood revoked.
The Appellant filed the Application to withdraw the appeal and to withdraw Rs. 20 lakh that had been deposited in the Court pursuant to the interim order along with accrued earnings thereon.
Contentions of the Parties:
The Appellant contended that the cash deposited in the Court, being an asset, would form the subject matter of the resolution process. The Appellant stated that despite the decision of the Supreme Court permitting release of the ICICI Guarantee, the cash deposited in the Court does not belong to the corporate debtor. The appellant submitted that in view of the operation of Section 14 of the IBC, the rights of the Respondent in his capacity as the judgement creditor would be subject to the provisions of the IBC.
Counsel for the Respondent submitted that the monies deposited in Court ought not to be released at all. It was contended that such monies deposited in court are not an asset of the corporate debtor. Once a deposit of monies is made in Court, such amount would no longer be an asset of the corporate debtor. Therefore, Section 14 of the IBC is irrelevant. The case of Reliance Communication Limited vs. Rajendra Prasad Bansal (Rajendra Bansal) has held that the moratorium under Section 14 of IBC does not prohibit withdrawal of monies deposited in Court by corporate debtor.
Observations:
At the outset, the court observed that:
“The IBC is a comprehensive and relatively new self-contained code governing insolvency and bankruptcy of, among others, corporate debtors. Even decree holders, who are creditors of the corporate debtor, would be subject to the operation of the IBC's provisions – with the moratorium under Section 14 prohibiting execution and enforcement of the decree; a resolution enabling re-writing the obligation owed to such creditor; and liquidation, enabling distribution and payment from the liquidation estate, including to the decree-holder.”
Section 14 of IBC is relevant; not Section 231 of IBC
The court referred to Rajendra Bansal, which held that the court's jurisdiction over monies deposited with the court was not ousted. It held that since an application for withdrawal of funds concerns monies deposited pursuant to an order of the appellate court (and that too before commencement of the CIRP and as a condition for stay on execution of proceedings), such an application for withdrawal cannot be said to have arisen due to the insolvency of the corporate debtor.
The court opined that the issue of whether Section 231 of the IBC ousts the jurisdiction of the civil court was not relevant to the matter.
The court was considering the effect of the moratorium under Section 14 of the IBC on the monies deposited in court in appellate proceedings, prior to the CIRP. The court held that under Section 14 of the IBC, the jurisdiction of the Court was not ousted, but indeed, the jurisdiction of every Civil Court is restricted. The court observed that under Section 14(1)(a), the moratorium prohibits the continuation of proceedings against the corporate debtor, including execution of any judgement or decree in any court of law.
The court noted that the Respondent did not file an application for withdrawal of monies deposited in court. It observed that Section 14(1)(c) prohibits any action to recover or enforce any “security interest” created by the corporate debtor in respect of its properties. It held that transaction that secures the payment or performance of an obligation, which creates a claim in favour of a secured creditor is a “security interest”. Therefore, every right, title or interest or any claim to any property created in favour of a secured creditor would fall within the meaning of “security interest”.
Decree-holder is a creditor with a 'claim' under IBC
The court held that the term “claim” means a right to payment regardless of whether such right has been reduced to writing in a judgment. The court held that even a decree-holder is but a creditor. Further, it stated, “When a security interest is created to secure the claim of the decree-holder in relation to execution of the decree, the decree-holder would, at the highest, be the creditor secured by the security interest.”
The court observed that under Section 18(1)(f) the Resolution Professional is required to take control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor. Such assets may include assets that may not be in the possession of the corporate debtor.
The court held that with the leave of the Court, any asset deposited as security, in consideration of a stay, can also be replaced, such as with a bank guarantee.
The court also observed that any provision of security to secure the claim of a judgment creditor, leading to loss of possession, would not lead to loss of ownership of the assets. Consequently, Section 14 would not be irrelevant for such assets.
Chowthmull – not relevant under IBC
The court noted the finding in Rajendra Bansal that an asset deposited in Court, not being under the custody and control of the corporate debtor, would not constitute an asset owned by the corporate debtor. It noted that the position stood negated by the Supreme Court having allowed the release of the ICICI Guarantee.
Rajendra Bansal relied on a decision of the Calcutta High Court rendered in 1924, in Chowthmull Maganmull vs. Calcutta Wheat and Seeds Association. Chowthmull had been relied upon in Rajendra Bansal to state that the money deposited in court would cease to belong to the judgement debtor who deposited the funds. The court held that such an extrapolation is unfounded.
The court observed that under Section 14(1), even a decree that pre-exists the commencement of the CIRP cannot be enforced once the moratorium has commenced. Under the IBC, a decree-holder is merely a creditor having a claim. The amounts owed under the decree would be subject to the terms of the resolution plan, which is approved pursuant to the CIRP. The court held that Chowthmull does not represent a precedent for interpretation of the scheme of the law contained in the IBC.
Nahar HDIL Case – IBC overrides release of deposit
The court held that in the case of Nahar Builders Limited Vs. Housing Development and Infrastructure Ltd., relied upon in Rajendra Bansal, it was held once an amount is deposited in Court, it is placed beyond the reach of either party, and that therefore, such amount is not the property of the corporate debtor undergoing CIRP.
The court opined that the decision in the Nahar HDIL Case underlines the overriding nature of the IBC over the claims of a decree-holder who would hold a right to execution. It held that the said case does not support the position that monies deposited in court by a corporate debtor prior to commencement of CIRP would cease to be assets of the corporate debtor.
Chettiar – emphatic declaration
The court stated that the case of P.S.L. Ramanathan Chettiar Vs. O.R.M.P.R.M. Ramanathan Chettiar makes it clear that so long as the money is not withdrawn by the decree-holder by furnishing security, nothing prevents the judgment debtor from replacing such monies with other assets as security if the Court allows him to do so.
The court observed that had such withdrawal been made before the commencement of the CIRP, the corporate debtor would have had to take action against the Respondent to bring the money back. If the Appeal had been disposed of in favour of the corporate debtor, the monies would have been placed back in possession of the corporate debtor. The CIRP would pose no barrier to such proceedings.
The court held that once the IBC came into force, the amounts in the possession of judgement creditor would be subject to the outcome of the IBC proceedings. The court referred to the recent case of GLAS Trust Company LLC Vs BYJU Raveendran & Ors., in which the Supreme Court held that the introduction of the IBC marked a significant departure from the fragmented legislation governing insolvency and bankruptcy, into a new regime in which resolving the corporate debtor under new ownership and management is central to the legislative objective.
The court also referred to Axis Bank vs. SBS Organics Private Limited and Another, which held that a deposit does not constitute a “security interest” or a “secured asset”. It held that the deposit of the amount with the appellate tribunal is not a bailment with the secured creditor. In Axis Bank SBS, the Supreme Court ruled that the pre-deposit not being a bailment must be returned to the borrower unless there is any attachment of the amount under any law.
The court observed that the moratorium on the enforcement of a claim for execution of a decree has commenced, and upon failure of the CIRP, the asset would form part of the liquidation estate. As stated in Byju, the asset is intended to be distributed to creditors in proportion to what is owed to them, and one creditor cannot gain an advantage over the others by being paid out, particularly outside of the CIRP or liquidation.
Conclusion
The court held that security interests over the assets of the corporate debtor to secure amounts due from the corporate debtor under a judgement or decree would give way to the provisions of the IBC. In respect of the ICICI Guarantee, the court held that the monies deposited in the Court are indeed assets under the ownership of the Applicant, with possession being in the hands of the Court. The court held that monies or any other asset deposited by a corporate debtor in court prior to commencement of CIRP by way of security would not cease to be the asset of the corporate debtor. It held that the monies deposited by the Applicant in the Court constitute assets owned by the Applicant although they are not in possession of the Applicant. The court permitted the Appellant to withdraw the Appeal and the amounts deposited in the Court.
Case Title: Siti Networks Ltd. vs. Rajiv Suri
Case Number: INTERIM APPLICATION (LODG.) NO. 31055 OF 2024 IN APPEAL NO. 597 OF 2016 IN SUIT NO. 2295 OF 2002
Appearances: Mr. Saurabh Bachhawat a/w. Mitesh Shah, Nishant Sogani, Rohan Gajaria, Ishaan Wakhloo, for Applicant.
Mr. Ajit Anekar a/w. Mr. Siddhant Sawhrey i/b Auris Legal, for Respondent.
Date of Judgment: 13.11.2024