Introduction
The preservation of a corporate debtor’s assets stands as the unshakeable bedrock of the entire insolvency regime. Without this fundamental principle, the very ‘time of calm’ the smooth, coordinated resolution process would immediately collapse into a chaotic scramble. The protective shield ensures value maximization, delivering crucial, equitable benefit to every competing stakeholder within the legal fray. This principle was recently reinforced in the case of Kotak Mahindra Bank Limited Vs Hybro Foods Private Limited1, heard by the NCLT2, Court-V, Mumbai Bench.
The key legal issue before the Coram, comprising Sh. Mohan Prasad Tiwari, Member (J), and Sh. Charanjeet Singh Gulati, Member (T), was whether an electricity distribution company could adjust a corporate debtor’s security deposit against outstanding energy bills during the period of moratorium imposed under the IBC3. The Tribunal primarily held that such an adjustment is a violation of the moratorium, affirming the overriding effect of the IBC over conflicting provisions of state-level electricity regulations.
The Corporate Debtor was admitted into the CIRP4 on March 3, 2023, and later into liquidation on March 27, 2025. Prior to the CIRP, the Corporate Debtor had deposited certain sums as security deposit with the electricity department. This deposit was subsequently adjusted by the respondent against an outstanding energy bill on September 6, 2023, a date falling squarely within the CIRP moratorium period.
Section 238 Prevails: Security Deposit Must Be Refunded
The Applicant, RP5 contended that the security deposit was an asset of the Corporate Debtor. Its adjustment during the subsistence of the moratorium under Section 14 of the IBC was illegal and void. The RP, therefore, sought a direction for the refund of this amount into the Corporate Debtor’s designated account.
The Respondent contended that the outstanding energy bill was raised on December 6, 2022, and the electricity supply was permanently disconnected on February 15, 2023, prior to the CIRP initiation on March 3, 2023. They argued that the adjustment was only formally effected in the final bill dated September 6, 2023, but the right to adjust accrued earlier. They further claimed the adjustment was appropriate and in accordance with Regulation 13.8 of the Maharashtra Electricity (Supply Code) Regulations6, and that, as a government entity, they were governed by their own rules and the Electricity Act7.
The Applicant relied on the judgment of the NCLAT in Superintending Engineer Vs. Sivrama Prasad Bhamidi8 which held similar facts to be a violation of the moratorium, supporting the direction for a refund of the security deposit.The Tribunal’s analysis centered on the undisputed fact that the adjustment of the security was finally effected on Sept 6, 2023. Since the moratorium under Section 14 of the IBC was in force on this date, the security deposit, being an asset of the Corporate Debtor, could not have been appropriated or adjusted by Respondent.
The Tribunal’s reasoning explicitly addressed the Respondent’s reliance on the state-level regulation by invoking Section 238 of the IBC. This pivotal section provides that the provisions of the IBC shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force, thereby granting the IBC an overriding effect.
The court definitively stated that the security deposit was an asset of the corporate debtor, and its appropriation by the respondent during the moratorium was a clear violation of Section 14 of the IBC. Once the moratorium is declared, the corporate debtor’s property is legally insulated from all conflicting state-level seizures. By applying Section 238 of the IBC, the Tribunal negated the applicability of Regulation on the grounds of inconsistency with the Code. Consequently, the Respondent was directed to refund the amount to the Corporate Debtor’s designated account within one month, thus removing the dichotomy by enforcing the principle that the moratorium under the IBC creates an inviolable legal shield around the Corporate Debtor’s assets.
Conclusion
The order delivered by the NCLT Mumbai Bench in the matter of Kotak Mahindra Bank Limited (Supra) reaffirms the robust framework of the IBC, specifically the inviolability of the moratorium declared under Section 14. It is a critical reminder that once a CIRP is initiated, the debtor’s assets are protected from piecemeal recovery actions by individual creditors, including government entities and public utilities.
This ruling has significant future ramifications as it solidifies the supremacy of the IBC’s non-obstante clause (Section 238) over state-specific regulations and laws. It sends a clear message to government and statutory bodies, such as electricity boards, that they cannot unilaterally adjust security deposits or other assets of a Corporate Debtor once the moratorium is in effect, even if their own regulations permit such action. The judgment strengthens the hands of the RP in consolidating the assets of the Corporate Debtor and preserving their value as a going concern, a core objective of the IBC.
The judgment, however, gives rise to several questions: When does the ‘right to set-off’ by a utility/government department crystallize? Is it at the time the bill is raised (pre-CIRP) or at the time of the actual adjustment (post-CIRP)? Should there be specific, narrow carve-outs in Section 14 for adjustments that are routine, non-discretionary, and based on pre-CIRP debt, where a contract explicitly permits a lien on a security deposit?
Citations
- Kotak Mahindra Bank Limited Vs Hybro Foods Private Limited, C.P. (IB)/295(MB)2022
- National Company Law Tribunal
- Insolvency and Bankruptcy Code, 2016
- Corporate Insolvency Resolution Process
- Resolution Professional
- Maharashtra Electricity Regulatory Commission (Supply Code) Regulations, 2021
- Electricity Act, 2002
- Superintending Engineer Vs. Sivrama Prasad Bhamidi, Company Appeal (AT) (CH)(INS.) No. 104/2023
Expositor(s): Adv. Shreya Mishra
