Money deposited by corporate debtor in court before insolvency remains its asset: Bombay High Court

The Bombay High Court recently ruled that money deposited by a corporate debtor in court as a security deposit before the initiation of insolvency proceedings remains the asset of the debtor, even if it is no longer in their possession [Siti Networks Ltd. v Rajiv Suri].

This ruling came in the context of a long-running legal dispute involving Siti Networks Ltd. (formerly Siticable Network Ltd.), which is undergoing insolvency proceedings under the Insolvency and Bankruptcy Code (IBC).

A Division Bench of Justices BP Colabawalla and Somasekhar Sundaresan, in their order, stated:

“We hold that monies or any other asset deposited by a corporate debtor in court prior to commencement of CIRP by way of security (to protect against execution of any judgement or decree), would not cease to be the asset of the corporate debtor. Consequently, the monies deposited by the Applicant-Appellant in this Court constitute assets owned by the Applicant-Appellant although they are not in possession of the Applicant-Appellant.”

The dispute dates back to 2002, when Rajiv Suri, who is one of the creditors of Siti Networks, filed a suit seeking damages of ₹15 lakh. In 2016, the Bombay High Court ruled in favor of Suri, ordering Siti Networks to pay the damages along with 24 per cent interest.

In response, Siti Networks filed an appeal against the judgment, and the Court issued an interim order in February 2016, directing the company to deposit ₹20 lakh in cash with the Court as security, pending the appeal's outcome. Siti Networks complied with the order and deposited the amount, while also providing a bank guarantee for the remaining sum of damages claimed by Suri.

However, in February 2023, Siti Networks was admitted into the Corporate Insolvency Resolution Process (CIRP) under the IBC due to financial distress. A Resolution Professional (RP) was appointed to manage the company’s affairs, and the company sought permission to withdraw both the appeal and the money deposited in court, arguing that the funds remained its asset despite the insolvency proceedings.

The issue reached the Supreme Court in 2024. However, Siti Networks eventually sought permission to withdraw its special leave petition, which had been filed against the Bombay High Court order dismissing the company’s challenge to the payment.

In addition, the company sought the revocation of a bank guarantee that had been extended as security for the appeal. The Supreme Court allowed Siti Networks to withdraw the special leave petition and permitted it to revoke the bank guarantee.

In its order, the Supreme Court also emphasized that the rights of the judgment creditor, Rajiv Suri, were subject to the ongoing insolvency proceedings, by stating, "The respondent, Rajiv Suri, will be entitled to enforce his rights in accordance with law.”

This ruling effectively allowed Siti Networks to withdraw its appeal and also revoke the bank guarantee, acknowledging that while Suri was entitled to enforce the judgment in his favour (on payment of damages), the matter was now governed by the IBC due to the company’s insolvency status.

Following the decision, Siti approached the High Court seeking release the ₹20 lakh deposit made by it earlier to the Court. The respondent, Rajiv Suri, argued that the deposit should not be released, claiming that once the money was placed in Court, it was no longer an asset of the company. He contended that the deposit should remain under the Court’s control, as the company’s insolvency did not affect the money placed in court.

However, the High Court rejected this argument, pointing out that the deposit was made as security for the outcome of the appeal and that ownership of the funds remained with Siti Networks.

The Court noted,

“Such a deposit is indeed nothing but a security for a potential dismissal of the appeal. If the appeal were to be allowed, all the right, title and interest in the assets so deposited, would be released to the corporate debtor. Conversely, if the appeal were to be dismissed, all such assets would be released to the judgment creditor.”

The Court further explained that while a judgment creditor, like Suri, would typically be considered an unsecured creditor, the money deposited in court gave him a security interest over the funds.

Nevertheless, the ownership of the asset remained with the corporate debtor, Siti Networks, the Court concluded.

"While a judgment creditor, who is entitled to a crystallized sum of money, would ordinarily be an unsecured creditor, upon a cash deposit being made in Court, such judgment creditor would have a security interest over the amount so deposited. However, the asset over which the security interest has been created, would indeed continue to be an asset of its owner — in the instant case, the corporate debtor," the Court observed.

The Court also emphasized that the legal framework of the IBC takes precedence over the traditional concepts of creditor rights. It pointed out that, in the event of insolvency, security interests created over a debtor’s assets, including money deposited in court, must comply with the provisions of the IBC.

The Resolution Professional, who is responsible for managing the assets of the corporate debtor, must identify, secure, and conserve the debtor’s assets. Any release of assets or distribution of funds would depend on the final resolution of the insolvency proceedings, either through an approved resolution plan or liquidation.

In line with this reasoning, the Court ruled that the ₹20 lakh deposit, although held in Court, remained part of the company’s estate.

"The substantive rights of the respondent who is the judgement creditor under the Impugned Judgement shall be subject to the provisions of the IBC," the Court added, clarifying that the final distribution of funds would be determined in accordance with the IBC’s priority scheme for creditor claims.

As a result, the court allowed Siti Networks to withdraw the ₹20 lakh deposit, along with any interest accrued, and permitted the withdrawal of the appeal. The funds were ordered to be released within two weeks, subject to procedural rules.

Advocate Saurabh Bachhawat along with Advocates Mitesh Shah, Nishant Sogani, Rohan Gajaria, Ishaan Wakhloo appeared for applicant, Siti Networks

Advocate Ajit Anekar along with Advocate Siddhant Sawhrey instructed by Auris Legal, appeared for the respondent, Rajiv Suri

[Read Order]