Bombay High Court Rules Court-Ordered Deposits Retain Character As Corporate Debtor Assets Despite Post-CIRP Bank Guarantee Encashment
Introduction
The Bombay High Court, in a significant ruling concerning the interface between insolvency law and court-ordered deposits, held that monies deposited pursuant to judicial directions continue to retain the character of assets of the corporate debtor, even where such amounts arise from encashment of a bank guarantee after the commencement of CIRP. A Division Bench comprising Justice Anil L. Pansare and Justice Nivedita P. Mehta directed that the amount lying deposited before the Court be released to the Resolution Professional of Morarjee Textiles Ltd., rejecting the rival claim of the decree-holder, D.C. Weaving Mills Pvt. Ltd.
Factual Background
The dispute originated from an MSME award dated 20 March 2012, under which Morarjee Textiles Ltd. was directed to pay approximately ₹13.44 crore to D.C. Weaving Mills Pvt. Ltd. Challenging the award, Morarjee instituted writ proceedings before the Bombay High Court. By an order dated 5 July 2012, the High Court granted interim protection subject to deposit of 75% of the awarded amount.
This direction was subsequently modified by the Supreme Court on 28 September 2012, which permitted Morarjee to furnish a bank guarantee in place of cash deposit. In due course, on 13 February 2025, the Supreme Court directed encashment of the bank guarantee and transfer of the realised amount to the High Court.
In the meantime, CIRP had already commenced against Morarjee Textiles on 9 February 2024, and a Resolution Professional had assumed control of the corporate debtor’s assets and affairs.
Procedural Background
Following transfer of the encashed amount to the High Court, competing applications were filed seeking withdrawal of the deposited sum. The Resolution Professional sought release of the amount on the ground that it formed part of the corporate debtor’s estate and therefore had to be dealt with in accordance with the Insolvency and Bankruptcy Code. D.C. Weaving Mills, as decree-holder under the MSME award, contended that it was entitled to withdraw the amount in satisfaction of its award claim. The matter therefore came before the Division Bench to determine the legal character of the deposited amount and whether it should be treated as part of the insolvency estate.
Issues
1. Whether amounts deposited in Court pursuant to judicial orders retain the character of assets of the corporate debtor after commencement of CIRP.
2. Whether encashment of a bank guarantee post-CIRP alters the nature of the deposited amount.
3. Whether the decree-holder could seek direct withdrawal of the amount outside the IBC distribution framework.
Contentions of Parties
The decree-holder argued that since the amount represented proceeds of an encashed bank guarantee, it ceased to be an asset of the corporate debtor and became immediately available for satisfaction of the underlying award. It was contended that the decree-holder’s vested rights as award-holder entitled it to withdraw the amount directly.
The Resolution Professional, however, submitted that the relevant inquiry was not the origin of the money but the purpose and legal character of the deposit. Since the amount stood deposited pursuant to court orders as a condition for stay of the award challenge, it continued to retain the status of an asset of the corporate debtor. Consequently, once CIRP had commenced, the amount necessarily formed part of the insolvency estate and had to be distributed only in accordance with the Code.
Reasoning and Analysis
The High Court drew a clear distinction between the legal status of a bank guarantee and the status of monies deposited in Court following its encashment. The Bench accepted the settled position that a bank guarantee, by itself, is not an asset of the corporate debtor. However, it held that once the guarantee is encashed pursuant to judicial directions and the amount is deposited in Court in compliance with an order governing the rights of parties, such amount acquires the character of a court-ordered deposit linked to the corporate debtor’s challenge.
The Court emphasised that the decisive factor was that the deposit had been directed as a condition precedent for obtaining stay of the MSME award challenge. The amount was therefore intrinsically connected with the corporate debtor’s litigation rights and obligations. Merely because the actual encashment and transfer occurred after commencement of CIRP did not alter its essential legal character.
The Bench held that the status of the deposit as an asset of the corporate debtor cannot change solely on account of the timing of its transfer into Court. Once CIRP commenced, such amounts necessarily became subject to the collective insolvency mechanism and could not be appropriated by an individual decree-holder outside the statutory waterfall.
Decision
The Bombay High Court directed release of the deposited amount to the Resolution Professional of Morarjee Textiles Ltd. for treatment in accordance with the Insolvency and Bankruptcy Code. The claim of D.C. Weaving Mills Pvt. Ltd. to directly withdraw the amount as decree-holder was rejected.
In this case the appellant was represented by Advocate Akshay Doctor. Meanwhile the respondent was represented by Senior Advocate Simil Purohit.