The Law of Separate Islands: Why the NCLAT Forbids Seizing One Company’s Deposit for Another’s Debt

Introduction 

Is a corporate veil thin enough to allow a bank to seize assets belonging to one company to cover the debts of another, simply because they share the same parent group? This question, central to the integrity of corporate separateness and the rights of creditors during insolvency, was recently addressed by the NCLAT¹,Delhi in Industrial and Commercial Bank of China Limited Versus Anish Niranjan Nanavaty & Ors².. The tribunal delivered a significant ruling, asserting unequivocally that a bank cannot retain a fixed deposit belonging to an insolvent company to recover dues from a separate, though related, group entity.

The case involved RCIL³, which had placed a Rs. 27.60 crore fixed deposit with ICBC⁴. When RCIL entered the Corporate Insolvency Resolution Process (CIRP), the bank refused to release the funds, claiming a right of lien to offset foreign currency loans granted to another group company, RITL⁵. This created the core legal contention: Could ICBC legally exercise a lien over RCIL’s assets for a debt owed solely by RITL, based on a broad interpretation of the lien letter and Section 171 of the ICA⁶? The NCLAT, upholding the NCLT⁷ Mumbai Bench’s order, determined that the bank’s action was “unjustified” and legally unsustainable.

This article will delve into the underlying legal principles, particularly concerning the distinct legal personality of companies, the scope of a bank’s general lien, and the implications for corporate insolvency proceedings, that formed the basis of this crucial judgment.

Focusing on can a bank treat a group of related companies as a single entity, allowing it to seize the assets of one company to settle the debts of another, simply because they share the same parent group? This question strikes at the very heart of corporate jurisprudence and the efficacy of a bank’s general lien under Indian law. The fundamental principle that each company possesses a distinct legal personality, separate from its shareholders and fellow group entities, is a bedrock of modern commerce. But when insolvency strikes, and a bank holds a deposit from one group company while having outstanding dues from another, how far does the bank’s power extend?

The anchor of a bank’s authority to retain a customer’s property is the Banker’s Lien, specifically the General Lien, which is codified in Section 171 of the ICA. This section empowers bankers to “retain, as a security for a general balance of account, any goods bailed to them” unless there is a contract to the contrary. In essence, it grants a right to hold property to satisfy a general debt. But whose debt, and whose property, must be linked for this powerful right to be validly exercised?

The jurisprudence surrounding the banker’s general lien unequivocally restricts its application to the customer who owns the property and the balance due from that very customer. Has this distinction not been consistently reinforced by the highest courts? This vital distinction was meticulously examined by the Hon’ble Supreme Court in Syndicate Bank vs. Vijay Kumar and Ors⁸., a landmark case often invoked when discussing the extent of this lien. In Syndicate Bank, the Supreme Court, while recognizing the banker’s general lien over negotiable instruments and FDRs⁹ as an implied pledge rooted in mercantile custom (as noted in Paget’s Law of Banking and Brandao v. Barnett), firmly linked the lien to dues from the customer. The Court held that the Bank had a lien over the FDRs because the customer (the judgment-debtor) had a due date with the Bank and had even executed specific letters creating a general lien in the Bank’s favour. Crucially, the right was to use the proceeds “in reduction of the customer’s debit balance”. Does this not establish that the general lien must be exercised against the account holder for their own general balance of account?

If this is the accepted legal position, then why would a bank attempt to extend this general lien to the assets of a distinct company (Company A) to recover a debt owed solely by a related company (Company B)? Is such an attempt not a fundamental challenge to the ambit of Section 171?

The NCLAT in the current case, after an exhaustive review of precedents, asserted that the Syndicate Bank judgment does not authorize a bank to withhold an FDR opened by a company (CD) when no amount is due from that company (CD), either singly or jointly with others. This position is strongly fortified by consistent rulings from various High Courts, all reinforcing that the lien is confined to the debt of the customer: In Vijaya Bank and Ors. vs. Naveen Mechanised Construction (Private) Limited and Ors¹⁰. , the Karnataka High Court held that Section 171 enables the Bank to retain security only for the repayment of a debt borrowed by the same person who deposited the security. The Kerala High Court, in PNB Vesper Life Science Pvt. Ltd. and Ors. vs. The Registrar of Co-operative Societies and Ors¹¹., echoed this principle. Perhaps the clearest articulation came from the Orissa High Court in Alekha Sahoo vs. Puri Urban Co-operative Bank Ltd. and Ors¹²., which categorically stated that a Bank can exercise general lien over the properties of a customer for the general balance in such customer’s account and not for the general balance of some other customer’s account. Should this not settle the matter definitively, given that the bank failed to demonstrate that the customer had expressly agreed that their properties could be retained as security for the outstanding balance of another customer?

The NCLAT, therefore, correctly concluded that absent an explicit, contractually-defined right empowering the bank to retain the security for debts of a separate group company, the bank had no jurisdiction to retain the security.

Can the mere status of a secured creditor justify the retention of an asset that legally belongs to a separate, albeit related, insolvent company?

The bank’s attempt to justify its retention by claiming the rights of a secured creditor within the CIRP¹³ was also rejected. The Supreme Court judgment in Vistra ITCL (India) Ltd. Ors. vs. Dinkar Venkatasubramanian and Ors¹⁴. was distinguished. Did Vistra not pertain to a creditor retaining their security for a debt due to them from the Corporate Debtor? In contrast, the NCLAT noted that the bank in the present case never filed any claim in the CIRP of the company that owned the FDR (CD). Furthermore, as established in Edelweiss Asset Reconstruction Company Ltd. vs. Mr. Anuj Jain, Resolution Professional of Ballarpur Industries Ltd. and Ors¹⁵., the right to retain security is inherently linked to the existence of a debt due from the corporate debtor itself.

The NCLAT’s ultimate finding reinforces a critical implication for corporate insolvency proceedings: Should a bank be allowed to bypass the mandatory mechanism of the IBC¹⁶ by claiming a lien that legally does not exist? The bank’s right to retain the FDR only applies if the debt is due from the Corporate Debtor who opened the FDR. Since the debt belonged to a separate group company, the fundamental principle of distinct legal personality remained intact, and the bank’s action was rightly deemed “unjustified.” The retention of the security was, therefore, an unlawful exercise of power, particularly since the bank had never become a creditor (secured or otherwise) of the corporate debtor itself. In view of these consistent discussions and conclusions, is the NCLAT’s direction to lift the lien and release the fund, along with interest, not the only legally sound outcome?

Conclusion

The NCLAT’s ruling serves as a powerful judicial endorsement of the principle of corporate personality, reminding financial institutions that the ‘group’ concept, for the purpose of debt recovery, dissolves entirely upon the onset of insolvency. By unequivocally rejecting the attempt to invoke Section 171 of the Indian Contract Act for a debt owed by a completely separate entity, the tribunal ensured the integrity of the Corporate Insolvency Resolution Process (CIRP). This verdict confirms that a general lien is not a master key that can unlock the treasury of an entire corporate conglomerate; it must remain tethered exclusively to the specific debtor who owns the asset and owes the corresponding debt. The decision essentially prevents secured creditors from bypassing the mechanism of the Insolvency and Bankruptcy Code (IBC) by leveraging ambiguous lien clauses to cherry-pick assets belonging to legally distinct corporate debtors.

The immediate and most critical implication of this judgment is a mandatory recalibration of risk assessment and documentation for financial institutions. Banks extending credit facilities to complex corporate groups will now be compelled to seek explicit, ironclad, and meticulously drafted cross-collateralization and guarantee agreements that name all group companies specifically as co-borrowers or guarantors, leaving no room for a general lien clause to cover liabilities by implication. For Resolution Professionals, this ruling provides a clear and crucial judicial mandate to aggressively challenge and retrieve non-corporate debtor assets wrongfully held by lenders, thereby maximizing the value of the insolvent company’s estate. It introduces a welcome measure of predictability and legal certainty regarding the true scope of the Banker’s Lien during the turbulent initial stages of insolvency.

While the NCLAT has drawn a bright line in this specific scenario, the legal landscape is dynamic, and future disputes are inevitable. This ruling now poses new questions for interpretation: Will we see banks aggressively litigate the ‘jointly with others’ clause in future lien letters, attempting to prove an implied co-borrower status even without formal loan documentation? Furthermore, does this verdict signal a judicial tightening against all forms of cross-guarantees where the underlying debt is not inextricably linked to the financial viability of the corporate debtor?The decision stands as a formidable shield protecting the assets of the corporate debtor from overzealous creditors, emphasizing that in the eyes of the law, every corporate entity is an island. It is a powerful affirmation that the spirit of the IBC—the revival and value maximization of the debtor—must ultimately prevail over the expansive interpretations of historical banking customs.

Citations

1. National Company Law Appellant Tribunal
2. Reliance Communication Infrastructure Limited
3. Industrial and Commercial Bank of China 
4. Reliance Infrastructure Ltd
5. Indian Contract Act, 1872
6. National Company Law Tribunal
7. Syndicate Bank vs. Vijay Kumar and Ors.(1992) 2 SCC 330)
8. Fixed Deposit Receipts
9. Vijaya Bank and Ors. vs. Naveen Mechanised Construction (Private) Limited and Ors.(ILR 2004 KHC 993)
10. PNB Vesper Life Science Pvt. Ltd. and Ors. vs. The Registrar of Co-operative Societies and Ors. (2023) SCC OnLine Ker 2178)
11. Alekha Sahoo vs. Puri Urban Co-operative Bank Ltd. and Ors.(2004) SCC OnLine Ori 25)
12. Corporate Insolvency Resolution Process
13. Vistra ITCL (India) Ltd. Ors. vs. Dinkar Venkatasubramanian and Ors. (2023) 7 SCC 324)
14. Edelweiss Asset Reconstruction Company Ltd. vs. Mr. Anuj Jain, Resolution Professional of Ballarpur Industries Ltd. and Ors.Company Appeal (AT) (Ins.) No.517-518 of 2023
15.  Insolvency and Bankruptcy Code 
16. Industrial and Commercial Bank of China Limited Versus Anish Niranjan Nanavaty & Ors.Company Appeal (AT) (Insolvency) No.69 of 2024

Expositor(s): Adv. Anuja Pandit