Court Deposits Remain Assets for Corporate Debtors in Insolvency!

Abhay Shrotiya. - The recent judgment in Siti Networks vs. Rajiv Suri by the Bombay High Court has significant implications regarding the status of funds deposited by a corporate debtor (CD) in court prior to insolvency proceedings. The court ruled that such deposits remain assets of the corporate debtor, allowing for their withdrawal during the insolvency process.

𝗖𝗮𝘀𝗲 𝗕𝗮𝗰𝗸𝗴𝗿𝗼𝘂𝗻𝗱

The dispute originated in 2002 when creditor Rajiv Suri sought damages from Siti Networks, leading to a judgment in his favor in 2016. As part of the appeal process initiated by the CD, the Bombay High Court mandated a security deposit of ₹20 lakhs to be held until the appeal's resolution. However, in 2023, Siti Networks was admitted into insolvency, prompting the appointment of a resolution professional (RP) to oversee its affairs.

𝗔𝗿𝗴𝘂𝗺𝗲𝗻𝘁𝘀 𝗮𝗻𝗱 𝗖𝗼𝘂𝗿𝘁 𝗣𝗿𝗼𝗰𝗲𝗲𝗱𝗶𝗻𝗴𝘀

Upon entering insolvency, Siti Networks requested permission from the court to withdraw both its appeal and the security deposit, asserting that these funds constituted its assets. This request was initially denied by the Bombay High Court, which argued that the security deposit was no longer an asset of the CD due to its status as a creditor's security interest.

However, upon reaching the Supreme Court in 2024 through a Special Leave Petition (SLP), the CD's position was upheld. The Supreme Court allowed Siti Networks to withdraw its appeal and revoke a related bank guarantee while recognizing the rights of Suri as a judgment creditor within the ongoing insolvency proceedings.

𝗕𝗼𝗺𝗯𝗮𝘆 𝗛𝗶𝗴𝗵 𝗖𝗼𝘂𝗿𝘁'𝘀 𝗥𝗮𝘁𝗶𝗼𝗻𝗮𝗹𝗲

Following the Supreme Court's decision, Siti Networks approached the Bombay High Court again to release the ₹20 lakhs security deposit. The court rejected Suri's argument that this deposit had ceased to be an asset of the CD. It clarified that while Suri held a security interest over these funds, ownership remained with Siti Networks until the appeal's outcome. The court emphasized that under the Insolvency and Bankruptcy Code, 2016 (IBC), such funds are treated as part of the corporate debtor's assets.

𝗞𝗲𝘆 𝗣𝗼𝗶𝗻𝘁𝘀 𝗳𝗿𝗼𝗺 𝘁𝗵𝗲 𝗝𝘂𝗱𝗴𝗺𝗲𝗻𝘁

𝗢𝘄𝗻𝗲𝗿𝘀𝗵𝗶𝗽 𝗼𝗳 𝗗𝗲𝗽𝗼𝘀𝗶𝘁𝘀: The security deposit is considered an asset of the CD despite being held as security for a creditor.

𝗖𝗿𝗲𝗱𝗶𝘁𝗼𝗿 𝗥𝗶𝗴𝗵𝘁𝘀: The creditor’s interest is limited to a claim against these funds contingent upon the appeal's outcome.

𝗜𝗕𝗖 𝗣𝗿𝗲𝗰𝗲𝗱𝗲𝗻𝗰𝗲: The IBC framework supersedes traditional legal principles regarding creditor rights and asset ownership.

𝗥𝗼𝗹𝗲 𝗼𝗳 𝗥𝗲𝘀𝗼𝗹𝘂𝘁𝗶𝗼𝗻 𝗣𝗿𝗼𝗳𝗲𝘀𝘀𝗶𝗼𝗻𝗮𝗹: The RP manages all assets of the CD during insolvency proceedings, and any release of funds is subject to final resolution outcomes.

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