Bombay High Court Clarifies Treatment of Court Deposits Under IBC

The Hon’ble High Court of Bombay in Siti Networks Ltd. v. Rajiv Suri, [2024 SCC OnLine Bom 3550], dated November 13, 2024, has clarified that funds deposited in court by a corporate debtor prior to the initiation of the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC) remain part of the corporate debtor’s assets even if the funds are no longer in its direct possession. The decision unequivocally establishes that such funds, though in the custody of the court, are assets of the corporate debtor and are subject to the collective insolvency resolution framework under the IBC.

This case stemmed from a prolonged dispute between Siti Networks Ltd. (the “Corporate Debtor”) and Rajiv Suri (the “respondent”), when the respondent filed a lawsuit seeking Rs. 15 lakhs in damages from the Corporate Debtor. In 2016, a Single Judge of the Hon’ble High Court of Bombay in Suit No. 2295 of 2002 (“impugned judgement”) ruled in favor of the respondent, directing the Corporate Debtor to pay the damages amounting to Rs. 15 lakhs along with 24% interest. The Corporate Debtor, challenging the judgment of the single judge, filed an appeal, and the Court granted a stay on execution, conditional on the Corporate Debtor depositing Rs. 20 lakhs in court and securing the balance with a bank guarantee, which it complied with in April 2016. 

In February 2023, the Corporate Debtor was admitted into CIRP due to financial distress, triggering a moratorium under Section 14 of the IBC. Subsequently, the Corporate Debtor sought to withdraw its appeal, revoke the bank guarantee, and claim the deposit of Rs. 20 lakh, asserting that the funds were part of its assets and thus subject to CIRP. The respondent opposed the move, contending that once the money was deposited in court, it ceased to be the debtor’s asset. and was beyond the purview of the IBC.

The High Court held that funds deposited in court by a Corporate Debtor remain its assets, notwithstanding their custodial transfer. These deposits are conditional securities intended to secure a stay on execution, and ownership does not pass to the court or the opposing party. The Court underscored that if the Corporate Debtor’s appeal had succeeded, the deposited funds would have reverted to it, affirming that the deposit formed part of the Corporate Debtor’s assets. The Court further emphasized the overriding effect of the IBC in CIRP, stating that under Section 14(1)(a) of the IBC, a moratorium applies to all assets of the corporate debtor, including funds deposited in court. As the Rs. 20 lakh deposit was recorded as part of the Corporate Debtor’ assets in their balance sheet, it was deemed to fall within the scope of CIRP. Further, the Court observed that the Resolution Professional (RP), under Section 18(1)(f) of the IBC, is responsible for taking custody of all assets recorded in the corporate debtor’s balance sheet, irrespective of their physical location. The Court stated that although the respondent’s position is recognised as a judgment creditor with a security interest over the deposited funds, such claims must be adjudicated solely within the collective insolvency process. 

The IBC does not permit individual creditors to enforce claims outside the CIRP or liquidation framework, ensuring equitable treatment of all stakeholders. Additionally, the Court addressed the jurisdictional conflict between civil courts and the National Company Law Tribunal (NCLT). The Court rejected the contention that once funds are deposited in civil court, they are held in custodia legis and no longer under the control of the Corporate Debtor. The Court clarified that civil courts only retain procedural jurisdiction over such deposits; the IBC’s overriding framework mandates their inclusion in the corporate debtor’s insolvency assets, mandating NCLT as the forum for insolvency resolution.

The decision reaffirms the primacy of the IBC in insolvency matters, reinforcing that all assets of the corporate debtor, including court deposits, must be administered within the collective resolution framework.