Banks cannot exercise lien on fixed deposit after initiation of moratorium under IBC- Knowledge Series by Sumedha Management Solutions Pvt. Ltd

Banks cannot exercise lien on fixed deposit after initiation of moratorium under IBC- Knowledge Series by Sumedha Management Solutions Pvt. Ltd

Introduction:

In Kotak Mahindra Bank Limited vs. Ravindra Loonkar, Resolution Professional of ACIL Ltd., the Hon’ble NCLAT held that banks cannot unilaterally withhold the possession of fixed deposits after the commencement of CIRP. Below we discuss the ruling:

Facts of the case:

  1. On initiation of corporate insolvency resolution process of Corporate Debtor, Appellant Bank submitted its claim with the Interim Resolution Professional, wherein it declared the details of mutual credit, mutual debts, and other mutual dealings with Corporate Debtor which may be set off against its claim. Appellant Bank also claimed that it has exercised general lien over FDRs.

  2. Resolution Professional (RP) directed the Appellant Bank to close the fixed deposits placed by Corporate Debtor with Appellant and transfer the amount (including interest accrued thereon) in another bank to be used for meeting the expenses being borne to run the affairs of the Corporate Debtor as a going concern.

  3. Appellant Bank submitted that fixed deposits are forming part of security of Appellant Bank and that it has priority over redemption of such fixed deposits for adjustment of debt of Corporate Debtor, and therefore, Appellant Bank rejected RP’s request.

  4. Accordingly, an application was filed by the resolution professional under Section 60(5) of IBC, wherein the Adjudicating Authority directed the Appellant Bank to close the fixed deposits and act as per the instructions of RP. Thereafter, the said matter came up for consideration before the NCLAT.

Precedents relied upon:

In Union Bank of India Vs. K.V. Venugopalan1, the Kerala High Court had held that right of lien cannot be exercised over fixed deposits, since money placed in fixed deposit is a debt in the hands of the bank, and therefore, a debt cannot be subjected to lien nor a debtor can exercise such a right.

In Indian Overseas Bank vs. Mr. Dinkar T. Venkatsubramaniam, RP of Amtek Auto Ltd., NCLAT held that once order of moratorium in terms of provisions of Section 14(1)(c) is declared, it creates a bar on enforcement of any security interest in respect of Corporate Debtor, and no recovery action in form of lien or set-off can be exercised by banks in discharge/settlement of their pre-CIRP dues.

Judgment:

The Hon’ble NCLAT upheld the decision of the Adjudicating Authority and dismissed the appeal, reiterating the principle laid down in the case of Indian Overseas Bank (supra).

11990 SCC OnLine Ker 12

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