Adjustment of security deposits against pre-CIRP dues after insolvency commencement violates the Section 14 moratorium.

The Corporate Debtor (CD), KSK Mahanadi Power Company Limited (KMPCL), entered into a Transmission Service Agreement (TSA) with the Appellant’s predecessor, PGCIL

Per the orders of the Central Electricity Regulatory Commission (CERC), the CD deposited ₹108.44 crores in cash as a Payment Security Mechanism (PSM) in lieu of a Letter of Credit (LoC)

On 03.10.2019, the NCLT admitted the CD into the Corporate Insolvency Resolution Process (CIRP), triggering a moratorium under Section 14 of the IBC

The Appellant, an operational creditor, filed a claim in Form B for outstanding dues, of which the Resolution Professional (RP) admitted only a portion

On 28.03.2020—after the commencement of CIRP—the Appellant adjusted the ₹108.44 crore deposit against outstanding bills, including ₹85.13 crores for pre-CIRP dues

Both the NCLT and NCLAT held that the adjustment of pre-CIRP dues post-insolvency commencement violated the moratorium

Whether a creditor can adjust or set off a cash security deposit against pre-CIRP dues after the Insolvency Commencement Date in light of the Section 14 moratorium

Whether a cash deposit made in lieu of a Letter of Credit can be treated as a third-party guarantee or a security interest enforceable during the CIRP

Section 14 of the IBC, which imposes a moratorium on the recovery or enforcement of any security interest against the Corporate Debtor upon the commencement of CIRP

Bharti Airtel Ltd. v. Aircel Ltd. (2024) 4 SCC 668, which established that "insolvency set-off" is not recognized during the CIRP stage and that pre-CIRP dues cannot be adjusted from amounts payable to the CD post-commencement

Section 238 of the IBC, the provisions of the Code override any other inconsistent instruments or laws

The Court reasoned that the cash deposit remained the property of the CD until a valid adjustment was made. Since the Appellant attempted to apportion these funds on 28.03.2020 (post-CIRP commencement), the act was a clear violation of the Section 14 moratorium

The Court distinguished between "contractual set-off" (permissible only if completed prior to CIRP) and the present case, where the adjustment was made during the moratorium

Regarding the nature of the deposit, the Court held that a cash deposit is not equivalent to a Bank Guarantee or LoC; even if it were, Section 14(3)(b) protects guarantees to the CD, not enforcement of the CD's own assets held by a creditor

The Appellant had already submitted to the CIRP process by filing Form B for the same dues; having failed to challenge the RP’s limited admission of those claims, the Appellant could not unilaterally "self-satisfy" the debt by appropriating the CD’s asset

The Court directed that the deposit should instead be adjusted against post-CIRP dues to maintain the CD as a going concern, while the pre-CIRP dues must be settled according to the claim process and the approved Resolution Plan

The appeals were rejected