The Bombay High Court ruled that a security deposit made by a corporate debtor in court before the start of the Corporate Insolvency Resolution Process (CIRP) remains an asset of the debtor.
The Bombay High Court has decided that money a corporate debtor puts down as a security deposit in court before insolvency proceedings is still considered the debtor’s asset, even if the money is not physically with them anymore. This ruling clarifies how such deposits are treated under the Insolvency and Bankruptcy Code (IBC). The judgment was delivered by Justice BP Colabawalla and Justice Somasekhar Sundaresan in a long-running case involving Siti Networks Ltd., which is currently in the process of insolvency resolution under the IBC. The Court noted, “We hold that monies or any other asset deposited by a corporate debtor in court prior to commencement of CIRP by way of security… would not cease to be the asset of the corporate debtor.”
The case started in 2002 when Rajiv Suri sued Siti Networks for Rs. 15 lakh in damages. In 2016, the High Court ruled in favor of Suri, ordering Siti Networks to pay the damages plus 24% interest. While the appeal was pending, the Court instructed the company to deposit Rs. 20 lakh as security and provide a bank guarantee. In February 2023, Siti Networks entered the Corporate Insolvency Resolution Process (CIRP) due to financial issues. The company later tried to withdraw its appeal, cancel the bank guarantee, and reclaim the deposit, arguing that the funds were still its asset. Suri opposed this, claiming that once the money was deposited in court, it was no longer the debtor’s asset.
The Court dismissed Suri’s claim, stating that the deposit was made as security for the appeal and that Siti Networks still owned the funds. The Bench explained, “Such a deposit is indeed nothing but a security for a potential dismissal of the appeal. If the appeal were to be allowed, all the right, title, and interest in the assets so deposited would be released to the corporate debtor.”
The Court clarified that although Suri had a security interest in the funds deposited as a judgment creditor, the actual ownership of those funds still belonged to the debtor. “When a cash deposit is made in Court, the judgment creditor gains a security interest in that amount. However, the asset remains the property of its owner — in this case, the corporate debtor,” the Court explained.
The Court emphasized that the rules of the IBC take priority over standard creditor rights. In cases of insolvency, all of the debtor’s assets, including court deposits, are managed by the Resolution Professional (RP). “The rights of the respondent, who is the judgment creditor under the Impugned Judgment, will be governed by the IBC,” the Court stated. As a result, the Court allowed Siti Networks to withdraw the Rs. 20 lakh deposit, along with any interest earned, and permitted the withdrawal of its appeal. It also ordered that the funds be released within two weeks, following the necessary procedures.
Cause Title: Siti Networks Ltd. v. Rajiv Suri [Neutral Citation No. 2024:BHC-OS:18434]
Appearance:
Applicant: Advocates Saurabh Bachhawat, Mitesh Shah, Nishant Sogani, Rohan Gajaria, Ishaan Wakhloo Respondent: Advocates Ajit Anekar, Siddhant Sawhrey
