Author: Anshika Bhagat, a student at University of Calcutta
To the Point
The Supreme Court in ICICI Bank Ltd. v. Official Liquidator of APS Star Industries Ltd. (2010) clarified the bank’s right of set-off and lien during corporate liquidation. It held that while banks have a contractual right to appropriate the debtor’s funds to recover dues, such rights are curtailed once winding-up proceedings begin, and the Official Liquidator assumes charge. The core issue was whether ICICI Bank could unilaterally adjust the funds in a company’s account after a winding-up petition had been admitted. The judgment illustrates the interplay between contract law (banking relationship) and corporate law (insolvency framework). It emphasizes that banks are not above corporate liquidation law, even if they are secured creditors. The ruling also protects the pari passu principle, ensuring all creditors are treated equally under court supervision.
Use of Legal Jargon
- Pari Passu: Equal treatment of creditors without preference.
- Set-off: The legal right of a creditor to balance mutual debts with a debtor.
- Lien: The right to retain possession of a debtor’s property until a debt is paid.
- Winding-up: A legal process where assets are liquidated to pay debts.
- Official Liquidator: A court-appointed authority who manages the assets and liabilities of a company under liquidation.
- Insolvency: Financial condition where liabilities exceed assets.
- Preferential treatment: Unlawful advantage given to certain creditors over others during insolvency.
The Proof
- Companies Act, 1956 (now replaced by Companies Act, 2013): Section 441(2) Once a winding-up order is made, it operates retrospectively from the date of petition presentation. Section 536(2): Any disposition of property or transfer of shares after the commencement of winding up is void without court sanction. Its principle is to begin the proceedings after liquidation, creditors (including banks) cannot unilaterally appropriate or set off funds from the debtor company’s account.
- The Insolvency and Bankruptcy Code (IBC), 2016, though not directly applicable in 2010, is relevant for contextual evolution. Section 14 states a moratorium on proceedings and recovery.
- Reserve Bank of India (RBI) Guidelines: On asset classification and provisioning, showing regulatory control over bank conduct. It highlights how Sections 531 and 535 of the Companies Act also restrict fraudulent preferences and ensure court-regulated distributions. It also mentions the Supreme Court’s constitutional duty under Article 141—the law declared is binding.
Abstract
In the landmark 2010 ruling, the apex court emphasized creditor equality in liquidation. The Court held this was void ab initio under Section 536(2) of the Companies Act, 1956, as the bank failed to obtain prior court approval. This decision reiterates that no secured or unsecured creditor may bypass liquidation norms, regardless of contractual rights. The case reaffirms the primacy of statutory mechanisms over private rights in financial restructuring.
Case Laws
1.ICICI Bank Ltd. v. Official Liquidator of APS Star Industries Ltd.
Facts:
APS Star Industries Ltd. maintained an account with ICICI Bank. While a winding-up petition against APS Star was pending, ICICI Bank appropriated funds from the company’s account to recover its dues without the permission of the court. The Official Liquidator challenged this action, claiming it violated company law provisions.
Legal Issue:
Whether a bank can unilaterally exercise its right of set-off and adjust money from a company’s account after a winding-up petition is filed, but before a formal winding-up order is passed.
Held:
The Supreme Court held that once a winding-up petition is filed, any disposition of a company’s assets without the court’s leave is void under Section 536(2) of the Companies Act, 1956. ICICI Bank’s action was declared invalid, and the money had to be restored to the company’s account for equitable distribution among all creditors.
Key Legal Principle:
Even secured creditors cannot appropriate company funds unilaterally during insolvency proceedings. The Official Liquidator’s role is central, and judicial oversight is mandatory to prevent preferential treatment.
2.Kotak Mahindra Bank Ltd. v. Hindustan National Glass & Industries Ltd.
Facts:
As HNGIL defaulted, the bank attempted to invoke its right of set-off against the company’s bank accounts. Meanwhile, winding-up proceedings had been initiated against HNGIL. The question arose whether the bank could adjust or appropriate funds from HNGIL’s accounts during the pendency of the winding-up petition.
Legal Issue:
Whether a bank can exercise its contractual right of set-off against a company’s funds during the pendency of a winding-up petition, and if such action requires prior court approval.
Held:
The Supreme Court reiterated that no creditor, including a bank, can unilaterally appropriate funds from a company’s account once a winding-up petition is admitted or pending. The Court emphasized the importance of maintaining creditor equality and stated that such set-off amounts to a preferential transaction, which is void under Section 536(2) of the Companies Act, 1956.
Key Legal Principle:
Banks cannot give themselves preferential treatment during insolvency proceedings. All creditors must be treated pari passu (on equal footing), and any transaction affecting the company’s assets requires judicial sanction once winding-up is underway.
3.National Westminster Bank Ltd. v. Halesowen Presswork & Assemblies Ltd.
Facts:
Halesowen Presswork & Assemblies Ltd. had an account with National Westminster Bank. After the company entered into voluntary liquidation, a dispute arose regarding whether the bank could exercise its right of set-off and retain money from the company’s account to cover debts owed to the bank.
Legal Issue:
Can a bank exercise the right of set-off against a company’s funds after a winding-up or liquidation has commenced?
Held:
The House of Lords held that once liquidation proceedings begin, a bank cannot unilaterally set off funds in the account to recover its dues. The bank loses the right of set-off because the company’s assets are now under the control of the liquidator and subject to statutory distribution rules.
Key Legal Principle:
The judgment established that a bank’s right of set-off is suspended upon the commencement of liquidation, to ensure equal treatment of all creditors. Allowing set-off would give the bank preferential treatment, which is contrary to insolvency principles.
4.Swiss Ribbons Pvt. Ltd. v. Union of India (2019) –
Facts:
The petitioners argued that certain provisions of the IBC were arbitrary and discriminatory, particularly the distinction between financial creditors and operational creditors, and the powers of the Resolution Professional (RP).
Legal Issues:
- Whether the classification between financial and operational creditors violates Article 14 of the Constitution (Right to Equality).
- Whether the powers given to the Resolution Professional and Committee of Creditors (CoC) are excessive or unconstitutional.
- Whether the speed and process of insolvency resolution under the IBC compromises the rights of the debtors.
Held:
The Supreme Court upheld the constitutional validity of the IBC, 2016. The Court ruled that:
- The classification between financial and operational creditors is reasonable and based on intelligible differentia.
- The IBC’s time-bound resolution process is in the national economic interest.
- The role of the Resolution Professional is administrative, not adjudicatory, and hence, not unconstitutional.
- The Committee of Creditors’ commercial wisdom is not subject to judicial review, except for limited grounds.
Key Legal Principle:
This case reinforced the IBC’s framework as constitutionally valid, emphasizing the need for speedy, efficient, and creditor-driven resolution of insolvency. It strengthened the legitimacy of the creditor-in-control model and clarified roles under the code.
Conclusion
The ICICI Bank case is pivotal in illustrating how statutory liquidation frameworks override private banking arrangements. The ruling promotes equitable distribution of assets among creditors, curbing banks from preferentially securing recoveries. It underscores the supremacy of insolvency law and judicial oversight in protecting stakeholder interests during liquidation. Banks must act with legal caution, not just commercial expediency, especially in the face of judicially declared insolvency. This ruling marks a shift toward creditor discipline, helping stabilize the broader financial ecosystem.
FAQs
Q1. Can a bank exercise its right of set-off after a winding-up petition is filed?
A1. No. Once a winding-up petition is admitted, the bank must obtain court approval to exercise set-off rights, failing which the action is void.
Q2. What happens to a company’s bank accounts once it is under liquidation?
A2. The Official Liquidator takes charge of all assets, including bank accounts. All transactions post the winding-up date require court sanction.
Q3. What is the difference between a lien and a set-off?
A3. A lien is the right to retain possession of assets until debt is paid, while set-off allows mutual debts to be cancelled out. Both require legal compliance in liquidation.
Q4. Can banks be criminally liable for unauthorised fund appropriation post-liquidation?
A4. While generally civil remedies apply, if fraud or wilful concealment is proven, criminal proceedings under the IPC or banking regulations may ensue.
Q5. How does this ruling impact creditor rights under the IBC, 2016?
A5. It provides foundational support for equitable treatment of creditors, a key principle in modern insolvency law under the IBC.
