Deposit U/S 34 Arbitration Act By Corporate Debtor Does Not Amount To Payment To Award-Holder; Remains As Its Asset: Delhi High Court
The Court held that deposit in court does not amount to "payment" to decree-holder; directed refund of over Rs. 5.5 crore To McNally Bharat after its resolution plan was approved.
The Delhi High Court has held that money deposited in court by a corporate debtor as a pre-condition for stay of an arbitral award, pending challenge under Section 34 of the Arbitration and Conciliation Act, 1996, does not amount to payment to the award-holder and does not affect ownership of the deposited asset, directing that such amount be refunded where the award-holder failed to lodge its claim during the corporate debtor's insolvency resolution process.
Dismissing the Section 34 petition as infructuous and allowing the corporate debtor's application for refund, the Court held that since the award-holder had not submitted its claim to the Resolution Professional before approval of the Resolution Plan, the claim stood extinguished under Section 31 of the Insolvency and Bankruptcy Code, 2016, rendering the underlying challenge academic, but this did not entitle the award-holder to retain the security deposit, which remained an asset owned by the corporate debtor throughout.
A Single Bench of Justice Avneesh Jhingan observed, “The contention of learned counsel for the respondent that deposit of the amount tantamounts to payment to the decree holder is ill-founded. The deposit in court was a pre-condition for grant of stay with the object of securing the amount due to the decree holder. The amount deposited is subject to the outcome of the challenge to the impugned award. The deposit of the amount in the court does not affect the ownership of the asset”.
“…With the change in circumstances the condition of deposit to secure the amount due can be modified by the court. There is no vested right created in favour of the decree holder for unconditional receipt of the amount deposited in the court. The deposit continues to remain in the form of security”, the Bench noted further.
Senior Advocate Gopal Jain appeared for the petitioner and Advocate Sumant Batra appeared for the respondent.
McNally Bharat Engineering Company Limited (MBECL) had challenged a 2018 arbitral award of over Rs. 5.52 crore in favour of Metso India Pvt. Ltd., arising from a sub-contracting dispute connected to a BHEL tender. As a condition for stay of execution, MBECL deposited the awarded amount as an FDR with the Registrar General in 2021.
MBECL was subsequently admitted to CIRP in 2022, and a Resolution Plan submitted by BTL EPC Limited was approved in December 2023. Metso did not lodge its arbitral claim before the Resolution Professional during this process. MBECL then sought dismissal of its own Section 34 petition as infructuous and refund of the deposited amount, while Metso sought withdrawal of the deposit as its rightful payment.
The Court held that Metso's claim, as defined under Section 3(6) of the IBC, ought to have been submitted to the Resolution Professional, and its failure to do so meant the claim stood extinguished upon approval of the Resolution Plan, applying the Supreme Court's rulings in Ghanashyam Mishra and Sons v. Edelweiss Asset Reconstruction Company and Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, which establish that a successful resolution applicant takes over the corporate debtor on a "clean slate", with all claims not part of the approved plan being extinguished.
On the separate question of the deposited amount, the Court rejected Metso's reliance on Himachal Pradesh Housing and Urban Development Authority & Anr. v. Ranjit Singh Rana 2012 4 SCC 505 and other decisions to argue that deposit in court amounted to "payment," clarifying that those rulings dealt with entitlement to interest under Section 37(1)(b) of the Arbitration Act and were inapplicable here.
Instead, relying on the Division Bench ruling of the Bombay High Court in Siti Networks Limited v. Rajiv Suri 2024 SCC OnLine Bom 3550, which held that money deposited in court by a corporate debtor remains its asset albeit in the court's custody, the Court held that MBECL retained ownership of the deposited sum, and that there was no vested right in Metso to its unconditional receipt.
The Court further held that objections regarding alleged non-compliance with Section 29 of the IBC, or the deposited amount not being reflected in the Information Memorandum or balance sheet, were matters to be raised under IBC proceedings and not in a Section 34 petition.
Accordingly, the Court dismissed the Section 34 petition as infructuous, allowed MBECL's application, and directed the Registry to release the deposited FDR amount along with accrued interest to MBECL.
Cause Title: McNally Bharat Engineering Company Limited v. Metso India Pvt. Ltd (Neutral Citation: 2026:DHC:6218)
Appearances:
Petitioner: Gopal Jain, Senior Advocate, Udian Sharma, Sahil Saraswat, Prabal Pratap Singh, Harsha Sadhwani, Manav Mitra and Kriti Sharma, Advocates.
Respondent: Sumant Batra, Nitin Khare, Abhishek Kumar, Riya Arora, Sarthak Bhandari, Hemlata Rawat, Abhay Singh and Saurabh, Advocates.