IBC Overrides Decree Claim: Bombay High Court Orders Unconditional Release of Bank Guarantees

The Bombay High Court held that the Insolvency and Bankruptcy Code (IBC) overrides a decree-holder's claim not forming part of an approved resolution plan, and accordingly ordered the unconditional release of the bank guarantees furnished during the appellate proceedings.

The Bombay High Court Single-Judge Bench of Justice Sharmila U. Deshmukh, while adjudicating an interim application in an appeal, held that once a resolution plan is approved under Section 31 of the IBC, all claims not forming part of the plan—including those of decree-holders—stand extinguished, and no proceedings to enforce such claims can be continued. Consequently, bank guarantees furnished to secure such extinguished claims are liable to be released.

The Bombay High Court allowed the interim application filed by the Appellant–original Defendant No. 1 seeking release of bank guarantees furnished pursuant to a conditional stay on execution of a money decree. The Appellant had filed a First Appeal against the decree dated 20 January 2003 and obtained a stay by furnishing bank guarantees worth ₹29 lakhs. While the appeal remained pending, the Corporate Insolvency Resolution Process was initiated against the Appellant in June 2020, and the NCLT approved a resolution plan under Section 31 of the IBC on 1 January 2021. Since the Respondent–original Plaintiff failed to lodge a claim before the Resolution Professional, its claim did not form part of the resolution plan.

The Appellant contended that in view of the settled legal position under the IBC, including the Supreme Court’s rulings in Ghanashyam Mishra and Sons private Limited Through The Authorised Signatory v. Edelweiss Asset Reconstruction Company Limited Through The Director and Others, REEDLAW 2021 SC 04534 and Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Others, REEDLAW 2019 SC 11505, all claims not forming part of a duly approved resolution plan stood extinguished and no recovery proceedings could be initiated or continued thereafter. The Appellant argued that since the Respondent's claim was excluded from the plan due to its own inaction, the decree debt was extinguished and the bank guarantees could no longer be withheld. The Appellant relied on the decision in Siti Networks Ltd. (formerly known as Siticable Network Ltd.) v. Rajiv Suri, Proprietor of Ambika Chitra, REEDLAW 2024 Bom 11545 to assert that assets deposited in court to secure a decree remain the property of the corporate debtor, especially once the decree itself has become non-recoverable under law.

The Respondent argued that the bank guarantees were held in custodia legis and should not be released merely due to procedural failure during CIRP. Relying on Rajendra Prasad Bansal v. Reliance Communication Ltd., it was contended that deposited assets lose their character as debtor’s property and cannot be withdrawn. However, the Court found these decisions distinguishable since in the present case the resolution plan had already been approved and the Respondent’s claim stood extinguished, unlike in those precedents where CIRP was ongoing.

The Court noted that the statutory provisions under the IBC and the authoritative pronouncements of the Supreme Court clearly established that once a resolution plan is approved under Section 31, all claims not forming part of it stand extinguished, and no proceedings in respect thereof can be pursued. As the Respondent’s decree-based claim was not part of the plan, it could not be enforced, and no equity jurisdiction could override this statutory outcome. Accordingly, the Court held that the decree dated 20 January 2003 stood extinguished and directed the release of all bank guarantees in favour of the Appellant.

Mr. Shyam Kapadia, Mr. Shayan Dasgupta and Mr. Surya Ravikumar i/b Khaitan & Co., Advocates, represented the Appellant.

Mr. Aseem Naphade, Ms. Nishtha Malik, Ms. Sonali Kochar, Ms. Bijal Soni, Mr. Tejas Horambe and Ms. Naqqiya Saifee i/b NAS Legal Advocates, appeared for the Respondents.

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