The Supreme Court in Sepco Electric Power Construction Corporation vs Power Mech Projects Ltd on 24.08.2021 delivered a critical ruling on how assets are protected during CIRP. The main question was whether an operational creditor can adjust a security deposit given before CIRP against new dues that arise during CIRP. The 2-Judge Bench led by Justice L. Nageswara Rao gave a clear answer. No. Once CIRP starts, Sec 14 moratorium comes into force and the entire asset of the corporate debtor must be preserved for resolution. Allowing adjustment would defeat the very purpose of IBC which is to treat all creditors equally and maximize value.
FACTS: Work Contract With Security Deposit; CIRP Initiated; Operational Creditor Tried Set-off
Power Mech Projects Ltd awarded a work contract to Sepco Electric Power Construction Corporation. As per standard industry practice, Sepco deposited a security amount with Power Mech before starting work. This deposit was meant to secure performance of the contract. Later, Power Mech defaulted on its payments and a CIRP application was admitted against it. Once CIRP started, Sepco continued to do work and raised invoices for the CIRP period. When payment was not made, Power Mech tried to adjust the pre-CIRP security deposit against these new invoices. Sepco objected and said you cannot touch the deposit. The matter went to NCLT and then to NCLAT. Both forums held that adjustment was not permissible. Aggrieved, the issue reached Supreme Court. The core legal question was whether Sec 14 moratorium bars set-off of pre-CIRP deposit against CIRP dues.
ANALYSIS: Moratorium Under Sec 14 Bars Any Adjustment; Deposit Is Asset Of Corporate Debtor Under Sec 18
The Supreme Court examined the scheme of IBC in detail. The Court held that Sec 14 moratorium is one of the most important features of IBC. From the date of admission of CIRP, there is a complete freeze. No creditor can recover, enforce, or adjust any dues. The objective is to keep the corporate debtor as a going concern and to prevent any depletion of assets.
The Court further held that a security deposit given before CIRP is an asset of the corporate debtor. Under Sec 18, the Resolution Professional is duty bound to take control and custody of all assets. Under Sec 20, the RP must manage the operations and preserve value. If we allow operational creditors to adjust old deposits against new dues, the asset pool will shrink. This will prejudice financial creditors and other operational creditors who are waiting for resolution plan. The Court also distinguished between pre-CIRP dues and CIRP dues. Both are different periods and different claims. Set-off is not automatic under IBC. It has to happen through the resolution plan. Any unilateral adjustment during moratorium is illegal and void. This ruling ensures discipline and prevents cherry picking by individual creditors.
PRACTICAL NOTE: What Resolution Professionals And Creditors Must Do Immediately
For Resolution Professionals, this judgment is a clear mandate. The moment CIRP starts, issue notice to all creditors that no adjustment or set-off is permitted. Take control of all security deposits, bank guarantees, and retention money. If any creditor has already adjusted, file application before Adjudicating Authority to reverse it. Maintain a separate ledger for CIRP period dues.For Operational Creditors like Sepco, do not assume you can adjust old deposit. File your claim for both pre-CIRP and CIRP dues with the RP. Participate in CoC meetings. Your recovery will depend on the resolution plan. Trying to adjust on your own will be struck down and may attract costs.
CONCLUSION
Sepco Electric Power Construction v Power Mech Projects Ltd dated 24.08.2021 establishes that pre-cirp deposit adjustment ibc 2021 supreme court is not permissible. Moratorium under Sec 14 bars any set-off or adjustment. Security deposit is an asset of corporate debtor and must be protected for distribution under resolution plan.
As the law stands today, the integrity of CIRP process is paramount. The Supreme Court’s ruling in Sepco ensures that no creditor can jump the queue. It strengthens asset protection and gives confidence to resolution applicants that the asset base will not be eroded during CIRP.
