When a company runs out of money and enters insolvency, creditors often scramble to protect their funds. If a supplier is already holding a hefty cash deposit from the debtor, the natural instinct is to adjust that money against old, unpaid bills. But can a creditor legally do that once insolvency proceedings begin?
Under Indian insolvency law, the answer is a firm no. The Supreme Court has clarified that advance deposits do not become the property of the creditor just because the creditor holds the money. Once the corporate insolvency resolution process kicks off, the law locks down the company’s assets to give it a fair chance at revival.
What Is The IBC Moratorium?
When the National Company Law Tribunal admits an insolvency petition against a defaulting corporate debtor, a statutory freeze called a moratorium comes into effect. This moratorium is governed by Section 14 of the Insolvency and Bankruptcy Code (IBC).
A moratorium acts like an emergency brake on all recovery actions. It stops lawsuits, prevents creditors from seizing or selling assets, and halts any action to enforce security interests. The idea is simple: give the resolution professional breathing room to run the business as a going concern and find a buyer or revival plan without creditors tearing the company apart piece by piece.
Section 14(1) makes it clear that the corporate debtor cannot alienate or transfer its assets. At the same time, creditors cannot recover their past debts through self-help measures.
Who Really Owns Advance Deposits During CIRP?
Companies routinely hand over security deposits or advance payments before entering insolvency. For example, a factory might deposit money with a power company to guarantee electricity supply or fulfill a long-term contract.
Although the supplier physically holds the cash in its account, the mere possession of that money does not transfer ownership. The deposit is held as security for contractual obligations. When insolvency begins, does that deposit belong to the supplier or does it belong to the debtor company?
The law establishes that advance deposits remain the property of the corporate debtor. The funds form part of the debtor’s estate. Because the moratorium freezes the debtor’s property, the creditor cannot treat that advance money as its own or absorb it to settle old debts.
Can Creditors Adjust Pre-CIRP Dues Against Deposits?
In insolvency terminology, pre-CIRP dues refer to unpaid debts that arose before the corporate insolvency resolution process started. These include old electricity bills, pending invoices, unpaid vendor fees, or statutory dues.
Creditors often try to set off or adjust the advance deposits they hold against these pre-CIRP dues. However, unilateral set-offs during a moratorium violate the IBC scheme. If every creditor holding a deposit could simply grab the money to clear old bills, it would defeat the entire purpose of collective debt resolution.
Instead, creditors with pre-existing claims must submit their claims in the prescribed form to the resolution professional. These claims will be evaluated and paid out in accordance with an approved resolution plan or through the priority waterfall under Section 53 if the company goes into liquidation.
The Supreme Court Ruling: Central Transmission Utility v. Sumit Binani
This exact legal conflict reached the Supreme Court in the case of Central Transmission Utility of India Ltd. v. Sumit Binani & Ors. (2026 INSC 284).
In this case, the corporate debtor, KSK Mahanadi Power Co. Ltd., had deposited ₹108.44 crore with Central Transmission Utility as a security mechanism before insolvency commenced in October 2019. After insolvency proceedings started, the utility attempted to use the deposit to settle outstanding electricity bills, including ₹85.13 crore of bills that predated the insolvency process.
The resolution professional challenged this adjustment, and both the National Company Law Tribunal and the National Company Law Appellate Tribunal ruled against the utility. The tribunals held that the deposit was held in trust and remained the property of the debtor.
The Supreme Court affirmed these findings. The Court held that adjusting a corporate debtor’s deposit against pre-CIRP debts during a moratorium is entirely contrary to the IBC. The Court ruled that advance deposits remain protected by Section 14, and creditors cannot bypass the statutory process by holding onto deposits for old debts.
Pre-CIRP vs Post-CIRP Dues: The Crucial Difference
While creditors cannot touch deposits to clear old bills, the law treats new bills very differently. This distinction is vital for anyone studying or practicing insolvency law.
- Pre-CIRP Dues: Debts incurred before the insolvency start date. Creditors cannot adjust deposits against these bills. They must submit a claim to the resolution professional and wait for the resolution plan.
- Post-CIRP Dues: Expenses incurred after insolvency begins to keep the business operational. Under Section 14(2A) of the IBC, suppliers of essential or critical goods and services can be paid for ongoing supplies to keep the debtor running. Advance deposits can be utilized to cover these continuing post-commencement costs.
In the Central Transmission Utility case, the utility was permitted to apply the deposit only toward bills raised after the insolvency commencement date, but it was ordered to restore the funds it had wrongly adjusted for old bills.
What The Law Says: Key Provisions Under The IBC
Understanding the interplay between deposits and dues comes down to three crucial parts of the Insolvency and Bankruptcy Code:
- Section 14(1): Imposes a complete moratorium on recovering property, enforcing security interests, or alienating the debtor’s assets during the resolution process.
- Section 14(2A): Ensures that essential supplies and critical operations are maintained during CIRP, allowing payments for post-insolvency services to preserve company value.
- Section 53: Sets out the statutory distribution order (the waterfall mechanism) specifying which creditors get paid first if the company is liquidated.
Why This Matters For Creditors And Businesses
For operational creditors and suppliers, this legal principle serves as an essential warning. You cannot rely on standard contract terms to keep advance deposits once your client enters insolvency. Attempting a unilateral set-off can lead to court orders forcing you to refund the money.
For struggling companies and resolution professionals, the ruling protects company liquidity. By keeping security deposits inside the debtor’s estate, the company retains the resources needed to keep operations alive while seeking a suitable buyer.
The IBC does not eliminate pre-existing debts, but it forces every creditor into a single, fair room. Holding a security deposit gives a creditor security for ongoing operations, but it does not grant a fast-track pass to jump ahead of the queue for past defaults.
Story reported by Supreme Court – High Court – Legal Breaking News | Live Law India. This article is BareLaw’s independent explanation and analysis.
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