In a significant ruling, the Bombay High Court determined that funds deposited in court by a corporate debtor before insolvency proceedings retain their status as the debtor’s assets, regardless of physical possession. This decision arose in the case of Siti Networks Ltd., a company embroiled in a protracted legal and financial saga.
The judgment, delivered by a Bench comprising Justices BP Colabawalla and Somasekhar Sundaresan, clarified that security deposits made in court are not stripped of ownership simply because they change hands. This principle has now guided the release of ₹20 lakh to Siti Networks, marking a crucial victory for the debt-laden company.
A Decades-Long Dispute Comes to a Head
The case traces its origins back to 2002, when creditor Rajiv Suri initiated a lawsuit seeking ₹15 lakh in damages from Siti Networks. In 2016, the court ruled in Suri’s favor, ordering the company to pay damages with a staggering 24% interest. During an appeal, the court directed Siti Networks to deposit ₹20 lakh as security and provide a bank guarantee for additional claims.
By 2023, financial troubles forced the company into insolvency under the Corporate Insolvency Resolution Process (CIRP), adding a fresh layer of complexity to the case. Siti Networks sought to withdraw the court deposit, arguing it remained its asset despite its insolvency status.
Supreme Court’s Nod and High Court’s Ruling
The matter briefly reached the Supreme Court, where Siti Networks successfully sought withdrawal of a special leave petition and a bank guarantee related to the case. Following this, the company requested the release of its ₹20 lakh deposit in the Bombay High Court.
Suri, opposing the release, claimed the deposit no longer belonged to the debtor and should remain under the court’s jurisdiction. The High Court rejected this, reaffirming that the deposit served solely as security for appeal outcomes and that ownership lay with the debtor.
IBC Supersedes Traditional Creditor Rights
The court underscored the Insolvency and Bankruptcy Code’s (IBC) primacy, emphasizing that even in cases of insolvency, assets deposited in court adhere to the IBC’s framework for prioritizing claims. The judgment creditor, while holding a security interest over the deposit, remains subject to the IBC’s hierarchy of claims.
“The substantive rights of the judgment creditor under the impugned judgment shall be subject to the provisions of the IBC,” the court noted, ensuring the equitable distribution of funds in line with insolvency law.
Resolution and Release
Concluding the case, the court ordered the ₹20 lakh deposit, along with accrued interest, to be released to Siti Networks within two weeks. This decision not only provided immediate relief to the company but also reinforced the principles governing corporate insolvency in India.
The ruling reiterates that pre-insolvency security deposits are integral assets of corporate debtors, a precedent that could influence similar disputes in the future.
