Amounts Deposited Pursuant To Court Orders Remain Assets Of The Corporate Debtor: Bombay High Court

The Bombay High Court on 6 April held that amounts deposited in Court under judicial orders remain assets of the corporate debtor, even if they arise from encashment of a bank guarantee after the commencement of insolvency proceedings.

A Division Bench of Justices Anil L. Pansare and Nivedita P. Mehta directed the release of the deposited amount to the Resolution Professional of Morarjee Textiles Ltd, rejecting the claim of D.C. Weaving Mills Pvt Ltd, which had sought withdrawal of the amount as a decree-holder. The judges held:

“...the law as it stands today is clear. While it is true that the bank guarantee per se is not the asset of the corporate debtor, its encashment may be depending on facts of each case. If the money deposited by corporate debtor in the Court is in terms of order passed by the Court prior to commencement of CIRP as a condition to consider the issue involved in the matter, then the deposit will be an asset of the corporate debtor. The amount so deposited will not change the status solely because the money was deposited post commencement of CIRP. It will remain asset of the corporate debtor (petitioner – Company).”

The case arose from writ petitions challenging an MSME award dated 20 March 2012 directing payment of about Rs. 13.44 crore.

The High Court had on 5 July 2012 directed the company to deposit 75% of the awarded amount as a condition for stay, which the Supreme Court later modified on 28 September 2012, allowing the company to furnish a bank guarantee instead.

The Supreme Court directed encashment of the bank guarantee and ordered transfer of the amount to the High Court on 13 February 2025. Meanwhile, CIRP commenced against Morarjee Textiles on 9 February 2024, and a Resolution Professional took charge. Both the RP and the award-holder filed applications seeking withdrawal of the deposited amount.

The Court distinguished between a bank guarantee and the amount realised upon its encashment, holding that while a bank guarantee does not constitute an asset of the corporate debtor per se, funds deposited in compliance with Court orders assume the character of the debtor's asset.

Accordingly, the High Court directed the Resolution Professional to release the amount for distribution under the IBC framework.

For Petitioner: Advocate Akshay Doctor

For Respondents: Senior Advocate Simil Purohit