Moratorium Bars Post-CIRP Appropriation of Cash Payment-Security Deposit Towards Pre-CIRP Transmission Dues
1) Introduction
In CENTRAL TRANSMISSION UTILITY OF INDIA LIMITED v. SUMIT BINANI (2026 INSC 284, decided on 23-03-2026),
the Supreme Court addressed whether a transmission utility (CTUIL) could, after commencement of a Corporate Insolvency Resolution Process (CIRP),
appropriate a cash deposit maintained as a payment security mechanism (PSM) against pre-CIRP transmission bills of the corporate debtor
(KSK Mahanadi Power Company Limited, “KMPCL/CD”).
The dispute arose from a cash deposit of Rs.108.44 crores made by KMPCL prior to CIRP as PSM (in lieu of a Letter of Credit contemplated by the TSA/CERC framework).
CTUIL appropriated the deposit on 28.03.2020 against transmission invoices. While Rs.23.31 crores related to post-CIRP bills,
Rs.85.13 crores admittedly related to pre-CIRP dues. The Resolution Professional (RP) objected, invoking the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC).
The principal legal issue before the Supreme Court was narrow: can CTUIL appropriate the cash security deposit after the insolvency commencement date towards pre-CIRP transmission dues?
2) Summary of the Judgment
- The Court affirmed the NCLT and NCLAT orders and dismissed CTUIL’s appeals.
- A cash deposit maintained as PSM remains the property/asset of the corporate debtor until a lawful adjustment is made.
- After the insolvency commencement date, appropriation of such deposit towards pre-CIRP dues is barred by the Section 14 moratorium and is inconsistent with the IBC’s distribution framework.
- The Court rejected the attempt to characterise the deposit as equivalent to an LoC/BG whose invocation would be permissible during moratorium; no LoC/BG existed in fact, and in any event the moratorium controlled.
- The Court emphasised that the remedy for pre-CIRP claims is the IBC claims process (filing and adjudication of claims by the RP), not unilateral appropriation.
- The Court noted that the resolution plan had been approved and implemented, with the deposit reflected as an asset in the Information Memorandum; CTUIL’s post-CIRP appropriation was therefore particularly incompatible with CIRP discipline.
3) Analysis
3.1 Precedents Cited
A) Bharti Airtel Ltd. v. Aircel Ltd. & Dishnet Wireless Ltd. (Resolution Professional) (2024) 4 SCC 668
This was the central authority considered. In Bharti Airtel, the Court examined different species of set-off (statutory/legal, common law, equitable, contractual, and insolvency set-off)
and held that insolvency set-off under liquidation concepts is not generally available in CIRP. Importantly, the decision emphasised that set-off cannot undermine CIRP’s collective process and pari passu discipline.
How it influenced the present decision:
- The Court held CTUIL’s reliance on Bharti Airtel was misplaced because the factual predicate of “mutual dealings” (debts payable both ways) did not exist here.
- In the present case, there was no debt payable by CTUIL to the CD from which a set-off could be made. Rather, there was a security deposit (an asset of the CD) held by CTUIL.
- The Court analogised the deposit to the category in Bharti Airtel where amounts payable to the CD post-CIRP could not be set-off against pre-CIRP liabilities, because such adjustments would cut across the moratorium and CIRP structure.
- The Court reiterated the anti-circumvention theme: permitting such appropriation would “mitigate against the pari passu principle” embodied in the IBC scheme.
Himadri Chemicals concerns the autonomy of bank guarantees/letters of credit and the narrow grounds on which courts may injunct their encashment (fraud or irretrievable injustice).
How it influenced the present decision:
- It was invoked by CTUIL to suggest that an LoC (and, by extension, the cash deposit “in lieu of” LoC) could be invoked irrespective of disputes.
- The Supreme Court distinguished it: here, no LoC/BG existed, and the case concerned IBC moratorium constraints, not injunction standards for bank instruments.
This decision reiterates the independent contractual nature of a bank guarantee and the bank’s obligation to honour an unconditional and irrevocable guarantee.
How it influenced the present decision:
- CTUIL used it to support enforceability akin to an LoC/BG.
- The Supreme Court again distinguished it on the facts (no BG/LoC) and on the governing constraint (Section 14 moratorium for pre-CIRP recovery).
Jaypee Kensington deals with the treatment of security interests and the entitlement of a dissenting secured financial creditor to receive value equivalent to its security interest in a resolution framework.
How it influenced the present decision:
- CTUIL invoked it to argue priority akin to secured creditors.
- The Supreme Court found it inapplicable: CTUIL was neither a financial creditor nor shown to hold a security interest of the kind discussed in Jaypee Kensington.
E) Vistra ITCL (India) Ltd. v. Dinkar Venkatasubramanian (2023) 7 SCC 324
Vistra ITCL concerns pledge of shares by a corporate debtor as security and the status of such pledge-holders.
How it influenced the present decision:
- CTUIL relied on it to argue secured status by analogy.
- The Supreme Court held the analogy fails: there was no pledge or security interest created; the deposit remained CD’s property until lawful adjustment, and post-CIRP appropriation for pre-CIRP dues was impermissible.
DBS Bank clarifies the scope of Jaypee Kensington, emphasising conversion of security interest into monetary value payable to a dissenting secured financial creditor.
How it influenced the present decision:
- The Court used it to underscore that the secured-creditor treatment in those cases was tied to established security interests and financial-creditor status—absent here.
3.2 Legal Reasoning
(i) Nature of the deposit: “asset of the corporate debtor” until lawful adjustment
The Court accepted the NCLAT’s characterisation: a security deposit, until adjusted, remains the property of the depositor (here, KMPCL/CD).
This was reinforced by the fact that the Information Memorandum and balance sheet treated the Rs.108.44 crores as the CD’s asset as on the insolvency commencement date,
and resolution applicants evaluated the CD on that basis.
(ii) Timing is decisive: pre-CIRP default does not justify post-CIRP appropriation
The Court noted that the relevant pre-CIRP invoices were raised between July and September 2019, while CIRP commenced on 03.10.2019.
If CTUIL had appropriated the deposit before the insolvency commencement date, the controversy would not arise in the same way.
However, the appropriation occurred on 28.03.2020—squarely during moratorium.
(iii) Moratorium under Section 14 and the IBC’s “claims-only” discipline for pre-CIRP dues
The Court treated CTUIL’s appropriation towards pre-CIRP dues as a form of recovery/enforcement inconsistent with Section 14’s moratorium and with the IBC’s architecture,
which mandates that pre-CIRP creditors pursue their entitlements by filing claims before the RP and receiving distributions through the resolution (or liquidation) process.
Significantly, CTUIL had already filed its claim (Form B dated 03.01.2020) and the RP admitted it only to a limited extent.
CTUIL did not challenge that limited admission, but later proceeded to unilaterally appropriate the deposit for pre-CIRP invoices—an approach the Court viewed as incompatible with CIRP.
(iv) Rejection of “set-off” framing
The Court held that set-off did not arise on these facts because there were no mutual cross-claims where CTUIL owed money to the CD.
A security deposit is not the same as an independently payable debt from CTUIL to the CD; it is CD’s money held as security, and post-CIRP unilateral adjustment for pre-CIRP liabilities offends the moratorium.
(v) “LoC/BG equivalence” argument rejected
CTUIL argued that since the deposit was in lieu of LoC, it should be treated like an LoC/BG invocation.
The Court rejected this for two reasons:
- Factually: no LoC or BG existed; there was only a cash deposit.
- Legally: even if an LoC existed, recovery of pre-CIRP dues during moratorium would still be controlled by Section 14. The Court also clarified that the guarantee-related carve-outs do not assist CTUIL in treating this as an enforceable third-party guarantee for extracting payment from the CD during CIRP.
(vi) Consequence and mechanics: “book adjustments” rather than disruptive cash movements
CTUIL argued it had already disbursed amounts to ISTS licensees and would suffer out-of-pocket liability if reversal was required.
The Court was unpersuaded, observing that those licensees too are bound by the moratorium framework for pre-CIRP recovery, and that compliance could be effected through book adjustments,
especially since the CD was a running concern.
3.3 Impact
(A) Insolvency law impact: strengthened anti-self-help rule during CIRP
- The decision reinforces that self-help recovery mechanisms (including appropriation of security deposits) cannot be used during moratorium to satisfy pre-CIRP operational dues.
- Operational creditors must rely on claims admission and resolution distributions; unilateral appropriations risk being set aside.
(B) Power sector impact: harmonisation of CERC payment security with IBC supremacy
- Transmission-payment security structures (cash deposits/PSM in lieu of LoC) are common in the sector; this ruling clarifies that such structures do not override IBC moratorium for pre-CIRP dues.
- Even where sectoral regulations contemplate enforcement and replenishment, Section 238 IBC (overriding effect) and the moratorium discipline constrain post-commencement recoveries for past dues.
(C) Transactional impact: documentation and operational responses
- Utilities and counterparties may revisit documentation to clarify what constitutes a security interest versus a deposit, and how enforcement is to occur if insolvency intervenes.
- The timing of enforcement actions becomes critical; delay in invoking remedies before insolvency may foreclose practical recovery outside the IBC process.
4) Complex Concepts Simplified
- CIRP & insolvency commencement date: CIRP begins on the date the NCLT admits the insolvency application; here, 03.10.2019.
- Moratorium (Section 14 IBC): A “freeze” period during CIRP when individual recovery actions for past dues are restricted so the debtor can be kept as a going concern and value can be resolved collectively.
- Pre-CIRP vs post-CIRP dues: Amounts owed for obligations arising before CIRP are “pre-CIRP”; obligations arising during CIRP to keep operations running are “post-CIRP”. The latter are generally expected to be paid during CIRP.
- Security deposit / PSM: Money placed with a counterparty as comfort against payment default. Unless and until lawfully adjusted, it remains the depositor’s money.
- Letter of Credit (LoC) / Bank Guarantee (BG): Bank-issued instruments with an independent payment obligation to the beneficiary. This case held a cash deposit is not automatically treated as an LoC/BG, and moratorium constraints remained central.
- Set-off: Adjusting mutual debts between two parties (A owes B; B owes A). The Court held set-off logic did not apply because CTUIL did not “owe” a debt to the CD; it merely held the CD’s deposit.
- Pari passu principle: Similarly situated creditors should be treated on an equal footing in insolvency; unilateral appropriation risks giving one creditor priority outside the statutory process.
- Information Memorandum (IM): A CIRP document describing assets/liabilities to enable resolution applicants to bid; treating the deposit as an asset affects valuation and plan outcomes.
5) Conclusion
The Supreme Court’s ruling crystallises a practical and sector-significant insolvency principle:
during CIRP, a cash payment-security deposit (even if maintained “in lieu of” an LoC) cannot be unilaterally appropriated towards pre-CIRP operational dues after the insolvency commencement date;
such sums remain an asset of the corporate debtor and pre-CIRP recovery must proceed through the IBC claims and resolution framework.
By anchoring the outcome in the moratorium’s purpose and by carefully distinguishing set-off and bank-instrument precedents,
the Court reinforces the IBC’s core design—collective resolution over individual enforcement—while preserving the ability to service post-CIRP operational requirements through proper accounting and payment discipline.