Introduction
Can an operational creditor, holding a cash security deposit “in lieu of a Letter of Credit,” unilaterally appropriate those funds to settle outstanding debts once a moratorium has been triggered?. This question sits at the center of the Supreme Court of India’s judgment in Central Transmission Utility of India Limited v. Sumit Binani & Ors.1, where the Court reinforced the sanctity of the Insolvency and Bankruptcy Code (IBC) over private contractual security mechanisms. The apex court held that once the Corporate Insolvency Resolution Process (CIRP) commences, the principles of pari passu and the statutory moratorium under Section 14 override any unilateral right to set-off pre-CIRP dues, even if the creditor views the deposit as an unconditional security.
Evolution of the Dispute and the Pre-CIRP Default
The appellant, Central Transmission Utility of India Limited (CTUIL), provided transmission systems to KSK Mahanadi Power Company Limited (KMPCL) under a Transmission Service Agreement (TSA). To secure payments, KMPCL was required to provide a Letter of Credit (LoC), but instead deposited ₹108.44 crores in cash with the appellant’s predecessor, PGCIL, following a directive from the Central Electricity Regulatory Commission (CERC). KMPCL subsequently defaulted on several bills between July and September 2019. On October 3, 2019, the NCLT admitted KMPCL into CIRP, triggering a moratorium. Despite this, on March 28, 2020, CTUIL invoked the Payment Security Mechanism and appropriated the ₹108.44 crores. While ₹23.31 crores were adjusted against post-CIRP dues (permitted to keep the debtor a “going concern”), the remaining ₹85.13 crores were used to satisfy pre-CIRP debts, an action the Resolution Professional challenged as a violation of the Section 14 moratorium.
Judicial Rationale and Precedents
The Supreme Court’s rationale focused on the legal character of the deposit and the timing of the appropriation. The Court observed that the cash deposit remained the property of KMPCL until a valid adjustment was made; because this adjustment occurred after the “Insolvency Commencement Date,” it directly conflicted with the moratorium. The Court dismantled CTUIL’s primary defense that the deposit was equivalent to a Bank Guarantee (BG) or LoC, which are often exempt from moratoriums under Section 14(3)(b). Citing Standard Chartered Bank v. Heavy Engineering Corporation Limited2. The Court noted that while a BG is an independent contract between a bank and a beneficiary, no such third-party contract existed here; it was merely a cash asset of the debtor held by the creditor. Furthermore, even if it were an LoC, Section 14(2)(b) refers to guarantees to a Corporate Debtor, not those used to drain assets from it during insolvency.
A significant portion of the Court’s reasoning relied on Bharti Airtel Ltd. v. Aircel Ltd.3 to clarify the limits of “set-off”. In Bharti Airtel, it was established that while contractual set-off is permissible before CIRP, “insolvency set-off” is generally not recognized during the CIRP phase because it would allow certain creditors to jump the queue, violating the pari passu principle. The Court found that CTUIL had already submitted its claims for these pre-CIRP dues to the Resolution Professional via Form B, thereby submitting to the collective insolvency process. By later unilaterally appropriating the security deposit, CTUIL attempted to bypass the very process it had joined. The Court also dismissed the relevance of DBS Bank Limited Singapore v. Ruchi Soya Industries Ltd.4, noting that CTUIL did not hold the status of a “secured creditor” through a pledge or mortgage that would grant it priority outside the resolution plan.
Conclusion
The judgment serves as a definitive boundary for operational creditors who hold security deposits. The Supreme Court affirmed that a cash deposit is not a “silver bullet” that bypasses insolvency law. By rejecting CTUIL’s appeal, the Court mandated that the ₹85.13 crores be treated as an asset of the Corporate Debtor to be used for post-CIRP operations, while the pre-CIRP dues must be settled through the approved Resolution Plan. This reinforces the core objective of the IBC: to ensure a collective, transparent distribution of assets rather than a “first-come, first-served” grab by creditors holding liquid security.
Expositor(s): Adv. Jahnobi Paul
