INTRODUCTION
In Central Transmission Utility of India Ltd. v. Sumit Binani & Ors., 2026 INSC 284, decided on 23 March 2026, the Supreme Court of India, comprising Justice Sanjay Kumar and Justice K. Vinod Chandran, examined the legality of appropriation of security deposits during the Corporate Insolvency Resolution Process (CIRP).
The Court held that adjustment of a security deposit towards pre-CIRP dues after the commencement of moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) is impermissible, reaffirming the primacy of the insolvency framework and the principle of equitable distribution among creditors.
BRIEF FACTS
The Appellant, Central Transmission Utility of India Ltd. (CTUIL), entered into transmission service agreements with KSK Mahanadi Power Company Ltd. (KMPCL), which later underwent insolvency proceedings. As part of the contractual framework, KMPCL had deposited ₹108.44 crores with the Appellant as a Payment Security Mechanism (PSM), in lieu of a Letter of Credit.
Upon initiation of CIRP on 3 October 2019, a Moratorium under Section 14 of the IBC came into effect. Despite this, the Appellant appropriated the deposited amount on 28 March 2020, adjusting it against both pre-CIRP and post-CIRP dues. Out of this, ₹85.13 crores related to pre-CIRP dues, which became the central point of dispute.
The Resolution Professional challenged this appropriation before the National Company Law Tribunal (NCLT), which held the adjustment towards pre-CIRP dues to be illegal. This finding was upheld by the National Company Law Appellate Tribunal (NCLAT), leading to the present Appeal before the Supreme Court.
ISSUES OF LAW
The Court considered whether:
1) The Appellant could adjust a security deposit towards pre-CIRP dues after the commencement of CIRP.
2) Such adjustment could be justified as a form of set-off or enforcement of security.
3) The deposit made in lieu of a Letter of Credit could be treated as an independent financial instrument permitting enforcement despite the moratorium.
ANALYSIS OF THE JUDGMENT
The Supreme Court undertook a detailed examination of the nature of the deposit and the scheme of the IBC. It first clarified that the amount of ₹108.44 Crores deposited by KMPCL was not a bank guarantee or letter of credit, but merely a security deposit, which continued to remain the property of the corporate debtor until validly appropriated.
The Court emphasised that once the CIRP commences, Section 14 imposes a moratorium that prohibits recovery or enforcement of claims relating to pre-CIRP dues outside the insolvency process. Any attempt to bypass this mechanism would defeat the objective of the IBC, which seeks to ensure orderly resolution and equitable treatment of creditors.
The Appellant argued that the deposit was akin to a Letter of Credit and that its appropriation was permissible as a form of set-off or enforcement of security. The Court rejected this contention, holding that there was no mutuality of debts, a necessary condition for set-off. Unlike cases involving reciprocal obligations, the present case involved unilateral dues owed by the corporate debtor, and therefore, the doctrine of set-off was inapplicable.
The Court relied on the principles laid down in Bharti Airtel Ltd. v. Aircel Ltd., where it was held that set-off of pre-CIRP dues against post-CIRP receivables is impermissible under the IBC, as it disrupts the pari passu distribution mechanism among creditors.
Further, the Court observed that even if the deposit was treated as a substitute for a Letter of Credit, its enforcement after the insolvency commencement date would still be barred by the moratorium. The distinction between bank guarantees and security deposits was highlighted, with the Court noting that the latter does not create an independent contractual obligation insulated from the insolvency process.
Importantly, the Court noted that the Appellant had already filed its claims before the Resolution Professional and those claims had been partially admitted. Having submitted to the insolvency process, the Appellant could not simultaneously seek to recover dues independently by appropriating the deposit.
The Court also underscored that permitting such appropriation would violate the pari passu principle, allowing one creditor to secure preferential recovery at the expense of others. The deposit, being reflected as an asset of the corporate debtor in the insolvency process, had to be dealt with in accordance with the resolution mechanism.
Ultimately, the Court upheld the findings of the NCLT and NCLAT, directing that the amount be adjusted only towards post-CIRP dues, while pre-CIRP claims must be resolved through the insolvency process.
CONCLUSION
The Supreme Court dismissed the Appeal and affirmed that creditors cannot unilaterally appropriate security deposits towards pre-CIRP dues once the moratorium under Section 14 of the IBC is in force.
The Judgment reinforces the core principles of insolvency law: collective resolution, creditor equality and strict adherence to the statutory process. By rejecting attempts to circumvent the moratorium through contractual mechanisms, the Court has strengthened the integrity of the IBC framework and ensured that no creditor gains an undue advantage outside the resolution process.
This ruling serves as a crucial reminder that insolvency law overrides individual enforcement rights and once CIRP is triggered, all claims must be channelled through the structured mechanism prescribed under the IBC.
SUSHILA RAM VARMA
Advocate & Chief Consultant
The Indian Lawyer & Allied Services
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