The Supreme Court in Sepco Electric Power Construction Corporation vs Power Mech Projects Ltd on 24.08.2021 clarified the scope of moratorium under Sec 14 of IBC. This case is important for every Resolution Professional, operational creditor, and contractor working with companies in CIRP. The Court held that the moment CIRP is admitted, all rights of set-off and adjustment are suspended. The focus shifts to collective resolution, not individual recovery.
FACTS: Security Deposit Taken Before CIRP; Adjustment Claimed During CIRP
Sepco had entered into a works contract with Power Mech. As security, Sepco deposited money with Power Mech. Later Power Mech went into CIRP. During the CIRP period, Sepco performed additional work and raised fresh invoices. Power Mech sought to adjust the old security deposit against these new invoices. Sepco challenged this before NCLT. The argument was that adjustment is a right and moratorium does not apply to it.
ANALYSIS: Asset Must Be Preserved; Sec 14 Prohibits Any Recovery, Adjustment, Or Set-off
The Supreme Court rejected this argument. The Court said the purpose of moratorium is to give breathing space to corporate debtor. If every creditor starts adjusting, the CD will not survive. The deposit is not the property of Sepco anymore once given. It becomes part of CD’s assets. Sec 18 mandates that RP must take control of all such assets. Sec 14(1)(b) specifically prohibits transfer, encumbrance, or alienation of assets.
The Court also noted that IBC is a code that overrides other laws. The right of set-off under Contract Act cannot be exercised during moratorium. The only way to deal with claims is through filing proof of claim and waiting for resolution plan. This ensures equality and transparency. Allowing adjustment would create two classes of creditors, which IBC does not permit.
PRACTICAL NOTE: Compliance Checklist For RP And Legal Teams
Resolution Professionals must immediately freeze all bank accounts and assets. Send communication to all vendors that no adjustment will be allowed. If any adjustment has happened after CIRP date, reverse it and take it back into CD’s account. For creditors, the lesson is simple. File Form B for operational debt. Do not adjust on your own. If you do, RP can file application and you may lose even the right to claim. During CIRP, patience and compliance are key. The resolution plan is the only document that decides how much you get.
CONCLUSION
Sepco v Power Mech dated 24.08.2021 establishes that sec 14 moratorium set off deposit ibc 2021 is strictly barred. Pre-CIRP security deposit cannot be adjusted against CIRP period dues. The Supreme Court has protected the sanctity of CIRP and the asset base of corporate debtor. As the law stands, this judgment will help RPs manage CIRP better and will stop individual creditors from taking law into their own hands. The Sepco ruling is now the authority on asset protection during moratorium.
