Case Note on Siti Networks Ltd. v. Rajiv Suri

Facts:

• Parties Involved:
  • The case involves Siti Networks Ltd. (formerly Siticable Network Ltd.), represented by its Resolution Professional Rohit Ramesh Mehra (Appellant).
  • Rajiv Suri, a businessman (Respondent).
     
• Background:
  • The Appellant is undergoing a Corporate Insolvency Resolution Process (CIRP) initiated on February 22, 2023, under the Insolvency and Bankruptcy Code, 2016 (IBC).
  • In June 2016, the Appellant was ordered to pay Rs. 15,00,000 as damages to the Respondent for breach of contractual obligations by Siti Networks Ltd.
  • The court found the Appellant had failed to fulfill its contractual duties, justifying the imposition of damages along with an interest rate of 24% per annum on the awarded amount, calculated from the date of the institution of the suit until payment realization.
     
• Interim Orders:
  • In Appeal No. 597 of 2016 against the June 2016 judgment, an interim order required the Appellant to deposit Rs. 20,00,000 in court.
  • This amount was deposited by the Appellant in the court.
     
• Bank Guarantee Issues:
  • Due to disputes with nationalized banks, the Appellant faced issues with bank guarantees required to secure the balance.
  • The Supreme Court intervened in January 2020, allowing a guarantee from ICICI Bank.
     
• CIRP and Moratorium:
  • Following the initiation of CIRP in February 2023, a moratorium was placed under Section 14 of the IBC.
  • The moratorium prohibited enforcement actions against the corporate debtor's assets.
     
• Withdrawal Application:
  • The Appellant sought permission to withdraw both the appeal and the deposited amount in light of ongoing CIRP proceedings.
     
• Issue:
  1. Whether the cash deposit made by Siti Networks, undergoing CIRP, constitutes an asset of the corporate debtor or if it is considered separate due to its deposit in court. Section 14 of the IBC imposes a moratorium on the enforcement of claims against a corporate debtor undergoing insolvency.
  2. Contention regarding whether the funds deposited in court should be treated as assets of the corporate debtor. The Respondent argues that once funds are deposited in court, they cease to be assets of the corporate debtor, raising questions about the legal status of such deposits under insolvency laws.
  3. Examination of the rights of judgment creditors in light of ongoing insolvency proceedings. The Respondent contends that despite the moratorium, he retains the right to enforce his judgment against the corporate debtor's assets.

Provisions used

Section 14: Moratorium
14. (1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:—

Section 14: Moratorium

1. The institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;
2. Transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;
3. Any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
4. The recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

Section 18: Duties of Interim Resolution Professional

18. The interim resolution professional shall perform the following duties, namely:—

1. Collect all information relating to the assets, finances and operations of the corporate debtor for determining the financial position of the corporate debtor, including information relating to:
2. Business operations for the previous two years;
3. Financial and operational payments for the previous two years;
4. List of assets and liabilities as on the initiation date;
5. Such other matters as may be specified;
    

Receive and collate all the claims submitted by creditors to him, pursuant to the public announcement made under sections;
 

Constitute a committee of creditors;
 

Monitor the assets of the corporate debtor and manage its operations until a resolution professional is appointed by the committee of creditors;
 

File information collected with the information utility, if necessary;
 

Take control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor, or with information utility or the depository of securities or any other registry that records the ownership of assets including:

1. Assets over which the corporate debtor has ownership rights which may be located in a foreign country;
2. Assets that may or may not be in possession of the corporate debtor;
3. Tangible assets, whether movable or immovable;
4. Intangible assets including intellectual property;
5. Securities including shares held in any subsidiary of the corporate debtor, financial instruments, insurance policies;
6. Assets subject to the determination of ownership by a court or authority;
    

To perform such other duties as may be specified by the Board.
 

Explanation: For the purposes of this section, the term "assets" shall not include the following, namely:

1. Assets owned by a third party in possession of the corporate debtor held under trust or under contractual arrangements including bailment;
2. Assets of any Indian or foreign subsidiary of the corporate debtor;
3. Such other assets as may be notified by the Central Government in consultation with any financial sector regulator.

The Reasoning of the Judgment (Ratio decidendi)

1. Ownership of Deposited Amount: The court determined that while the cash deposited in court is out of possession of the corporate debtor during the appeal process, it remains an asset owned by the debtor. The loss of possession does not negate ownership rights.
    
2. Impact of IBC on Enforcement Actions: The court noted that Section 14 of the IBC prohibits enforcement actions against corporate debtors undergoing CIRP. Therefore, any claims for recovery by creditors must be addressed through the resolution process rather than direct enforcement against assets.
    
3. Supreme Court Precedents: The judgment referenced previous Supreme Court rulings that clarified that assets deposited in court as security should be treated as part of the corporate debtor's estate and subject to IBC provisions.
    
4. Final Decision: The High Court allowed the withdrawal of both the appeal and the cash deposit, affirming that such actions align with IBC principles and do not infringe upon creditor rights as they would still have recourse through the CIRP process.

The judgment concluded that allowing withdrawal facilitates compliance with IBC regulations while ensuring creditors can assert their claims through appropriate channels established by law.

Conclusion
The High Court ruled that a corporate debtor could divest him from the holding of certain properties like deposits, which were made in a court of law, but other vesting ownership in these assets. It sets apart the rights that are central to understanding how assets are preserved and allocated in insolvency proceedings.

Their testimony to the decision of the court to vacate the withdrawal of the appeal and consequently release the deposit strengthens its position regarding consultative counsels to be held in accordance with the principles established by the Insolvency and Bankruptcy Code (IBC). That principle would uphold that creditors would be constrained to sail their claims as prescribed under the IBC, which is concerned with balancing treatment for all stakeholders in the matter of insolvency.

The precedent set by this case would also prove to be vital in determining premises for similar future disputes between corporate debtors and creditors, particularly in matters concerning the interpretation of the ownership/preservation dichotomy. More importantly, it makes explicit the necessity for legal provisions concerning these situations and possible rights of all parties engaged.

Thus, this case not only answered certain legal queries but also fitted within a larger scheme of the application of insolvency law to complex commercial disputes. Very critical will be the lessons learnt to the practitioners and people interested in seeing the trend of the evolving and maturing interpretations and rulings arising out of such cases around the future.

Written By: Abdul Haseeb, Student Dr. Ram Manohar Lohiya National Law University