In a significant reaffirmation of the protective framework under the Insolvency and Bankruptcy Code, 2016 (IBC), the Supreme Court of India has held that once a moratorium is imposed, creditors cannot appropriate or set off pre-CIRP dues from a security deposit furnished earlier by the corporate debtor.
The ruling, delivered by a bench of Justices Sanjay Kumar and K. Vinod Chandran, strengthens the sanctity of the moratorium under Section 14 of the IBC, underscoring that all recovery mechanisms must cease once insolvency proceedings commence.
The dispute arose from a transmission agreement between Central Transmission Utility of India Ltd. (CTUIL) and KSK Mahanadi Power Company Ltd. (KMPCL), a power company undergoing insolvency.
KMPCL had deposited approximately ₹108.44 crore as a cash security deposit in lieu of a Letter of Credit. After insolvency proceedings commenced in October 2019, CTUIL unilaterally appropriated the deposit in March 2020, including ₹23.31 crore towards post-CIRP dues and ₹85.13 crore towards pre-CIRP dues (the disputed portion)
The Resolution Professional challenged this appropriation before the NCLT and NCLAT, both of which held the adjustment illegal, leading to an appeal before the Supreme Court.
Dismissing the appeal, the Supreme Court laid down a clear principle that a security deposit remains the property of the corporate debtor until lawfully adjusted, and cannot be appropriated after the moratorium for pre-CIRP dues.
The Court held that the moratorium under Section 14 creates a complete bar on recovery or adjustment of pre-CIRP claims. Any unilateral appropriation by a creditor violates the insolvency framework. Such adjustment would be legally void and impermissible The Court further clarified that even if the deposit is treated as a form of security, it cannot be invoked or adjusted in contravention of the moratorium.
A central doctrinal outcome of the judgment is that Pre-CIRP claims must be resolved exclusively through the claims process before the Resolution Professional (RP). The Court emphasised that creditors must submit claims in the prescribed format. The RP determines admissibility and quantum. Any attempt to bypass this process through set-off, appropriation, or book adjustment is impermissible
This ensures pari passu treatment of creditors, a core principle of insolvency law.The Court drew a crucial distinction between Pre-CIRP dues cannot be recovered during moratorium and Post-CIRP dues may be adjusted if necessary to keep the company as a going concern
It clarified that the disputed appropriation failed precisely because it targeted pre-insolvency liabilities, which are subject to collective resolution rather than individual recovery. The judgment reiterates that the moratorium is not merely procedural it is a substantive legal shield protecting the corporate debtor’s assets.
Creditors cannot resort to self-help mechanisms such as set-off or appropriation, even where contractual rights exist. By forcing all claims through the RP, the ruling ensures transparency in claims verification, equitable distribution among creditors and prevention of preferential treatment
The decision aligns with earlier insolvency jurisprudence that consistently holds: No recovery proceedings can continue during moratorium. Even administrative or accounting adjustments are barred if they affect pre-CIRP claims The IBC framework overrides contractual rights where necessary to preserve insolvency objectives
Creditors must reassess reliance on security deposits, margin money, or contractual set-off clauses, as these cannot override statutory moratorium protections. The ruling strengthens the role of the Resolution Professional as the central authority for determining liabilities.Creditors must now ensure strict compliance with IBC procedures rather than attempting parallel recovery strategies.
The Supreme Court’s ruling marks a decisive reaffirmation of one of the IBC’s foundational principles. once insolvency begins, individual recovery rights give way to a collective resolution mechanism.
By holding that security deposits cannot be appropriated for pre-CIRP dues during the moratorium, the Court has reinforced the integrity of the insolvency process and prevented erosion of creditor equality.
At a broader level, the judgment strengthens the IBC’s core objective ensuring a fair, orderly, and transparent resolution of corporate distress without unilateral disruption by individual creditors.
