Does the imposition of a moratorium prohibit a financial creditor from appropriating fixed deposits to satisfy pre-insolvency debt?

Introduction

India has seen a sharp rise in IBC¹ insolvency proceedings amid economic pressures, with creditors aggressively attaching properties, from real estate to fixed deposits to realize debts. This prompts a critical question: Does the imposition of a moratorium prohibit a financial creditor from appropriating fixed deposits to satisfy pre-insolvency debt? Post-CIRP² admission, Section 14 of the IBC halts such actions, channeling recoveries through collective resolution.

Section 14 imposes an absolute bar on enforcing security interests, including fixed deposit adjustments via set-off or liens, to protect the insolvency estate for collective resolution. Fixed deposits fall within the ambit of debtor assets under Section 18, thereby vesting control and custody with the Resolution Professional upon commencement of the CIRP. This ensures that individual creditors cannot appropriate assets unilaterally, maintaining the integrity of the moratorium and facilitating equitable treatment among stakeholders as envisioned under the IBC framework. 

This analysis explores Section 14’s framework, judicial interpretations, and implications, arguing for its expansive application to uphold IBC’s resolution-centric ethos. By prohibiting unilateral recoveries, the moratorium ensures equitable creditor outcomes and maximizes going-concern value. The discussion emphasizes how Section 14 safeguards the insolvency estate to facilitate a collective, rather than fragmented, resolution process.

Decoding the Moratorium: Section 14’s Statutory Shield

The statutory moratorium under Section 14 of the IBC stands as the cornerstone of the insolvency resolution process, erecting a protective shield around the corporate debtor’s assets from the date of insolvency application admission. This provision fundamentally rebalances creditor dynamics, subordinating individual pursuits to collective resolution for optimal value preservation.

Section 14(1) requires the Adjudicating Authority to declare a moratorium prohibiting key actions, including initiating or continuing suits and proceedings against the debtor, transferring, encumbering, or alienating assets or rights, foreclosing, recovering, or enforcing security interests including SARFAESI Act³ measures over debtor property, and reclaiming leased property from debtor possession.

Activated on the insolvency commencement date, this shield endures through CIRP completion, resolution plan approval, liquidation order, or application dismissal, granting the IRP⁴ or RP⁵ complete control over all assets including fixed deposits as essential estate components.  Financial creditors, to whom debts like loans accrue, command CoC⁶ influence but relinquish unilateral enforcement, suspending pre-existing security rights to enable coordinated resolution.

This deliberate standstill empowers the RP to develop viable plans, placing asset preservation above piecemeal recoveries. In Bharat Aluminium Company Ltd. v. Kaiser Aluminium Technical Services Inc⁷., though primarily addressing arbitration proceedings, the Supreme Court recognized the moratorium’s comprehensive nature, holding that arbitration proceedings involving the corporate debtor must be stayed during CIRP. This interpretation reinforces that the moratorium operates broadly to prevent any proceedings or actions that could diminish the insolvency estate or interfere with resolution efforts.

Reconsidering Creditor Rights: The Fixed Deposit Conundrum under IBC

Fixed deposits serve as a vital financial tool, enabling corporate entities to place funds with banks or financial institutions for fixed periods at predetermined interest rates, while remaining assets of the debtor on their balance sheets as investments or bank balances. These arrangements incorporate standard banking clauses for premature withdrawals, renewals, and most critically the banker’s right of set-off and lien, rooted in common law and codified under Section 171 of the Contract Act⁸. This provision grants banks authority to retain deposited securities or adjust them against any outstanding dues from the depositor, absent contrary agreements.

Complementing this, the SARFAESI Act,  arms secured creditors with robust, court-bypass enforcement mechanisms, including set-off, to swiftly reclaim pledged fixed deposits against loan defaults, a routine safeguard in everyday commercial lending that protects financial institutions from risk. The Industrial Finance Corporation of India Ltd⁹. further clarified that banks holding deposits cannot claim exemption from moratorium provisions merely because deposits were pledged as security. The NCLT¹⁰ held that all assets of the corporate debtor, including deposits held by creditors, form part of the insolvency estate and must be preserved for resolution purposes, noting that allowing selective creditor appropriation would create arbitrary distinctions among similarly situated creditors, violating equitable distribution principles.

The landscape shifts abruptly upon CIRP commencement, where Section 14(1)(c) of the IBC interposes an absolute bar on “enforcement of security interests,” reclassifying deposit adjustments, whether via lien, pledge, or set-off as impermissible actions against protected estate property. This ensures fixed deposits stay intact for collective resolution, averting preferential recoveries that could undermine creditor parity and erode going-concern value. By temporarily eclipsing contractual prerogatives, the moratorium channels creditor efforts into coordinated CoC-driven outcomes, prioritizing holistic revival over isolated grabs.

The NCLAT¹¹ judgment in Indian Overseas Bank v. Dinkar Venkatasubramaniam¹² (Amtek Auto) provides the most authoritative pronouncement on this issue. The NCLAT held that once the moratorium is declared, banks cannot retain fixed deposits or exercise set-off rights against debts owed by the corporate debtor, as such actions constitute prohibited enforcement of security interests. In Amtek Auto, the financial creditor argued that fixed deposits held as security could be appropriated against outstanding loans pursuant to loan agreements executed pre-insolvency. The NCLAT rejected this contention, reasoning that Section 14(1)(c) creates an absolute bar against enforcing security interests during CIRP, irrespective of contractual provisions or the nature of security, emphasizing that permitting such appropriation would defeat the moratorium’s purpose of preserving assets for collective resolution and would grant unwarranted preference to certain creditors over others¹³.

Conclusion

The ban on banks appropriating fixed deposits during moratorium reflects the Insolvency and Bankruptcy Code’s core policy goals. First, it safeguards the debtor’s assets, ensuring they remain intact to preserve going‑concern value and support a viable resolution. Allowing individual creditors to seize deposits would drain liquidity and disrupt operations, undermining collective recovery. Second, it prevents creditor cherry‑picking. Those holding deposits would otherwise gain full repayment while others receive only proportional shares under the resolution plan. By suspending such unilateral rights, the Code enforces equitable treatment and ensures creditors act collectively rather than pursuing individual remedies.

However, implementation challenges persist. Timing of appropriations presents practical difficulties; banks may execute adjustments in the brief window between default and formal CIRP admission, creating disputes about whether actions occurred pre or post-commencement. The insolvency commencement date, being the date of admission rather than filing, creates this temporal gap wherein creditors might rush to enforce claims.

From this analysis, Section 14’s moratorium emerges as an unyielding bulwark against fixed deposit appropriations, subordinating bank liens to collective equity. The key takeaway, while it masterfully preserves estate value amid CIRP delays, the default-admission window risks preemptive grabs warranting tighter triggers for true resolution primacy. This framework ultimately reorients insolvency practice toward coordinated rehabilitation over adversarial fragmentation.

Citations

1. The Insolvency and Bankruptcy Code, 2016 ↩︎
2. Corporate Insolvency Resolution Process ↩︎
3. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ↩︎
4. Interim Resolution Professiona ↩︎
5. Resolution Professional ↩︎
6. Committee of Creditors ↩︎
7.  Bharat Aluminium Company Vs. Kaiser Aluminium Technical Services Inc. MANU/SC/0090/2016, Supreme Court of India, <Bharat Aluminium Company vs. Kaiser Aluminium Technical Services Inc. (28.01.2016 – SC)> accessed 5 January 2026. ↩︎
8. The Indian Contract Act, 1872 ↩︎
9. Industrial Finance Corporation of India Ltd v Cannanore Spinning and Weaving Mills Ltd and Ors [2002] 5 SCC 54, AIR 2002 SC 1841 (Supreme Court of India, 12 April 2002) ↩︎
10. National Company Law Tribunal ↩︎
11. National Company Law  Appellate Tribunal ↩︎
12.  Indian Overseas Bank v Dinkar Venkatasubramaniam, Resolution Professional for Amtek Auto Ltd [2017] NCLAT, Company Appeal (AT) (Insolvency) No. 267 of 2017 (15 November 2017) ↩︎
13. FE Bureau, ‘Setback for Indian Overseas Bank as NCLAT orders refund of money to Amtek Auto in insolvency case’ Financial Express (New Delhi, 16 November 2017) ↩︎

Expositor(s): Adv. Shreya Mishra, Yuvraj Singh (Intern)