Home  > Recent Judgements  > IBC MORATORIUM AND SECURITY DEPOSITS: SUPREME COURT CLARIFIES LIMITS ON SET-OFF OF PRE-CIRP DUES

March 25- 2026

IBC MORATORIUM AND SECURITY DEPOSITS: SUPREME COURT CLARIFIES LIMITS ON SET-OFF OF PRE-CIRP DUES

Introduction

In a significant ruling under the Insolvency and Bankruptcy Code, 2016 (IBC), the Supreme Court in CENTRAL TRANSMISSION UTILITY OF INDIA LIMITED V. SUMIT BINANI & ORS. has reaffirmed the sanctity of the moratorium imposed under Section 14. The Court categorically held that a creditor cannot appropriate pre-CIRP dues from a security deposit after the commencement of the Corporate Insolvency Resolution Process (CIRP).

This judgment strengthens the IBC framework by preventing unilateral recoveries and ensuring that all creditors are treated equitably through the resolution process.

Factual Background

The dispute arose from transmission service agreements between Central Transmission Utility of India Limited (CTUIL) and KSK Mahanadi Power Company Limited (KMPCL), a power generation company.

  • KMPCL had deposited ₹108.44 crore as a security deposit in lieu of a Letter of Credit, pursuant to directions of the Central Electricity Regulatory Commission (CERC).
  • The deposit served as a safeguard for payment of transmission charges.

However, financial distress led to defaults by KMPCL, and insolvency proceedings were initiated:

  • CIRP commenced on: October 3, 2019
  • Moratorium under Section 14: Immediately came into effect

Despite this, CTUIL proceeded in March 2020 to appropriate the deposit:

  • ₹23.31 crore → towards post-CIRP dues
  • ₹85.13 crore → towards pre-CIRP dues (disputed portion)

Legal Issue

The core legal question before the Court was:

Can a creditor adjust or appropriate pre-CIRP dues from a security deposit after the moratorium under Section 14 has come into force?

Proceedings Before NCLT and NCLAT

The Resolution Professional (RP) challenged the appropriation.

Both adjudicating authorities ruled against CTUIL:

  • NCLT (National Company Law Tribunal) held:
    • The deposit remained the property of the Corporate Debtor (CD).
    • Adjustment of pre-CIRP dues violated the moratorium.
  • NCLAT (National Company Law Appellate Tribunal) upheld:
    • Pre-CIRP dues must be processed through the claims mechanism under IBC.
    • Unilateral appropriation is impermissible.

Supreme Court’s Analysis and Findings

A bench comprising Justice Sanjay Kumar and Justice K. Vinod Chandran dismissed CTUIL’s appeal and upheld the findings of the NCLT and NCLAT.

  1. Nature of Security Deposit

The Court clarified:

  • Even if a deposit functions as security or guarantee,
  • It continues to remain the property of the Corporate Debtor until lawfully adjusted.
  • Thus, ownership does not transfer automatically to the creditor.
  1. Effect of Moratorium under Section 14

The Court emphasized the wide scope of Section 14:

  • It prohibits:
    • Recovery proceedings
    • Enforcement of security interest
    • Set-off or appropriation of dues

Once the moratorium begins:

Any attempt to recover pre-CIRP dues outside the IBC framework becomes illegal.

  1. Distinction Between Pre-CIRP and Post-CIRP Dues

The Court drew an important distinction:

  • Post-CIRP dues:
    • Can be paid in the ordinary course of business
    • Necessary for keeping the company as a going concern
  • Pre-CIRP dues:
    • Must be submitted to the Resolution Professional
    • Subject to verification and resolution plan

CTUIL’s attempt to adjust pre-CIRP dues bypassed this mechanism.

  1. Impermissibility of Unilateral Set-Off

The Court strongly disapproved unilateral action:

  • CTUIL had already:
    • Filed its claims before the RP
    • Accepted partial admission
  • Yet it:
    • Proceeded to self-adjust the deposit

This was held to be:

A clear violation of the collective insolvency process under IBC

  1. Key Judicial Observation

The Court observed:

“If adjusted after the moratorium towards pre-CIRP dues, the adjustment would be rendered illegal.”

It further clarified that:

  • Book adjustments must prioritize post-CIRP dues
  • Pre-CIRP dues must be settled only through the resolution process

Key Takeaways from the Judgment

Security Deposits Remain CD’s Property –

Until legally adjusted, deposits cannot be treated as creditor-owned funds.

No Set-Off After Moratorium –

Creditors cannot appropriate funds for pre-CIRP dues post-moratorium.

IBC Overrides Contractual Rights –

Even contractual rights of adjustment are subject to IBC provisions.

Claims Must Go Through RP –

All pre-CIRP claims must be:

  • Filed
  • Verified
  • Resolved under the IBC mechanism

No Self-Help Remedies –

Unilateral recovery actions are barred during CIRP.

Broader Implications

For Creditors

  • Must refrain from:
    • Adjusting deposits
    • Invoking set-off clauses post-moratorium
  • Should rely solely on:
    • Claims submission process

For Corporate Debtors

  • Ensures:
    • Protection of assets during CIRP
    • Fair treatment among creditors

For Insolvency Framework

  • Reinforces:
    • Collective resolution approach
    • Priority structure under IBC
  • Prevents:
    • Preferential recoveries

Comparative Legal Context

This ruling aligns with earlier Supreme Court jurisprudence emphasizing:

  • Primacy of IBC over other laws
  • Strict interpretation of moratorium provisions
  • Protection of debtor’s asset pool

It also reinforces the principle that:

IBC is a complete code, and deviations from its mechanism cannot be permitted.

Role of Resolution Professional in Safeguarding Corporate Debtor’s Assets

The judgment underscores the pivotal role of the Resolution Professional (RP) in preserving the assets of the Corporate Debtor during CIRP. The RP acts as a custodian and is responsible for ensuring that no creditor gains an unfair advantage by bypassing the statutory process.

In this case, the RP rightly intervened to challenge the unilateral appropriation by CTUIL. The Court reaffirmed that:

  • The RP is the sole authority to examine and verify claims
  • Any adjustment impacting the asset pool must go through the RP
  • Creditors cannot independently enforce recovery mechanisms

This reinforces the RP’s central role in maintaining transparency and fairness in insolvency proceedings.

Conclusion

The Supreme Court’s ruling in Central Transmission Utility of India Limited v. Sumit Binani & Ors. is a crucial addition to IBC jurisprudence. By disallowing the appropriation of pre-CIRP dues from a security deposit post-moratorium, the Court has upheld the integrity of the insolvency resolution process.

This judgment sends a clear message:

No creditor can bypass the IBC framework through unilateral adjustments, even where security deposits are involved.

The decision not only strengthens creditor discipline but also ensures fairness, transparency, and uniformity in insolvency proceedings.