DEPOSITOR PREFERENCE IN RESOLUTION: A DETAILED STUDY OF INDIAN INSOLVENCY LAW AND JUDICIAL PRECEDENTS

1. INTRODUCTION

Depositor preference is an important concept in banking regulation, financial-sector insolvency, and corporate restructuring. It concerns the priority or preferential treatment accorded to depositors when a financial institution becomes unable to repay its deposit liabilities and enters a resolution or liquidation process.

Depositors commonly include individuals, businesses, trusts, and other entities that place money in fixed deposits, recurring deposits, or other deposit products offered by eligible financial institutions. When the institution becomes financially distressed, depositors may seek repayment of their principal and accrued interest.

The central legal question is whether depositors are entitled to receive repayment before other creditors, such as banks, debenture holders, unsecured lenders, trade creditors, and other financial creditors.

In India, the answer depends on the nature of the institution, the applicable regulatory legislation, the Insolvency and Bankruptcy Code, 2016 (IBC), the Deposit Insurance and Credit Guarantee Corporation Act, 1961, and the terms of the relevant resolution or liquidation framework.

A particularly important distinction is between a depositor's contractual right to repayment on maturity and a legal right to priority during insolvency. The fact that a deposit has matured does not necessarily entitle its holder to receive payment ahead of other creditors after a statutory insolvency process has commenced.

The insolvency proceedings involving Dewan Housing Finance Corporation Limited (DHFL), subsequently associated with Piramal Capital and Housing Finance Limited, provide a significant illustration of this issue. The proceedings raised questions about the classification of fixed-deposit holders, their right to full repayment, the effect of the IBC on financial-sector legislation, and the extent to which a resolution plan may determine creditor recoveries.

The Supreme Court's judgment in Piramal Capital and Housing Finance Limited (formerly known as Dewan Housing Finance Corporation Limited) v. 63 Moons Technologies Limited and Others, 2025 INSC 421, is particularly important. It addressed the DHFL resolution proceedings, including challenges concerning the treatment of depositors and the limits of judicial interference with an approved resolution plan.

2. MEANING AND NATURE OF DEPOSITOR PREFERENCE

2.1 Definition

Depositor preference refers to a legal arrangement under which depositors' claims receive priority over certain other claims when the assets of a failed financial institution are distributed or when its liabilities are dealt with through a resolution process.

Depending on the applicable law, depositor preference may take several forms:

1. General depositor preference: Depositors' claims rank ahead of specified classes of unsecured creditors.
2. Insured-deposit preference: The deposit insurer that reimburses depositors receives priority or a corresponding recovery right against the failed institution.
3. Limited depositor preference: Only specified categories or amounts of deposits receive enhanced priority.
4. Resolution-specific treatment: Depositors are treated as a class of creditors under a statutory resolution framework, without necessarily receiving priority over every other class.
5. Contractual repayment rights: A depositor has a contractual claim for repayment under the deposit agreement, but this does not automatically confer statutory insolvency priority.

These forms must not be confused. A jurisdiction may protect insured depositors through a deposit-insurance scheme without granting all uninsured deposits priority over other creditors.

2.2 Difference between repayment rights and priority rights

A deposit agreement ordinarily creates an obligation on the financial institution to repay the deposit in accordance with the applicable terms.

Priority, by contrast, determines the relative order in which claims are paid when the available assets are insufficient to meet all liabilities.

For example, assume a company owes:

• ₹100 crore to fixed-deposit holders;
• ₹200 crore to secured lenders;
• ₹150 crore to unsecured financial creditors; and
• ₹50 crore to trade creditors.

If the company's available assets are insufficient to repay all creditors, a legal framework is needed to determine how the available funds are distributed.

The fact that a fixed deposit has matured does not, by itself, establish that the depositor must be paid before every other creditor. The outcome depends on the applicable insolvency law, security interests, statutory priorities, and the resolution plan.

2.3 Why depositor preference matters

Depositor preference serves several economic and legal objectives.

First, it protects public confidence in the financial system, particularly where individuals and small institutions place savings with financial institutions.

Second, it may reduce the losses suffered by depositors who have limited ability to monitor the financial institution's lending and investment activities.

Third, it can support the stability of the financial system by clarifying how losses will be allocated when an institution fails.

Fourth, it may help determine the distribution of recoveries between insured depositors, uninsured depositors, secured creditors, unsecured creditors, and other stakeholders.

However, granting depositors absolute priority can shift losses to other creditors and may affect the cost and availability of credit. Depositor preference is therefore a matter of legislative policy rather than an automatic consequence of the moral importance of savings.

3. THE INDIAN LEGAL FRAMEWORK

3.1 Insolvency and Bankruptcy Code, 2016

The IBC is the principal legislation governing the corporate insolvency resolution and liquidation of companies and other corporate persons within its scope.

It aims to facilitate timely resolution, maximise the value of assets, promote entrepreneurship and credit availability, and balance the interests of stakeholders.

Its relevant provisions include Sections 5(8), 14, 21, 30, 31, 36, 52, 53, 60 and 238.

3.1.1 Section 5(8): Financial debt

Section 5(8) defines financial debt. Depending on the legal nature of the transaction and the applicable financial-sector framework, deposit liabilities may qualify as financial debt.

Where a depositor's claim is admitted as financial debt, the depositor may participate in the insolvency process as a financial creditor, subject to the applicable provisions and procedures.

Classification as a financial creditor does not, however, automatically make the depositor a secured creditor or confer a separate right to priority over other financial creditors.

3.1.2 Section 14: Moratorium

Section 14 establishes a moratorium during the corporate insolvency resolution process, subject to the statutory exceptions and applicable special rules.

The moratorium restricts specified proceedings and recovery actions against the corporate debtor. Its purpose is to preserve the corporate debtor's assets and prevent individual creditors from undermining the collective resolution process.

A depositor whose deposit matures during the moratorium cannot ordinarily assume that maturity alone permits immediate repayment outside the insolvency framework.

The precise treatment may depend on the type of institution, the applicable financial-service-provider rules, and the nature of the payment.

3.1.3 Section 21: Committee of Creditors

Section 21 governs the constitution of the Committee of Creditors (CoC).

The CoC generally consists of financial creditors, subject to statutory qualifications and exceptions. Where a large number of creditors belong to a class, the IBC and applicable regulations provide for an authorised representative in specified circumstances.

Depositors who qualify as financial creditors may therefore participate through the applicable class-representation mechanism.

The existence of an authorised representative is important because it allows a large and dispersed group of depositors to participate collectively in a resolution process.

3.1.4 Section 30: Submission and approval of a resolution plan

Section 30 prescribes requirements concerning the submission and examination of resolution plans.

The resolution professional examines whether the plan complies with the applicable statutory requirements, while the CoC considers the plan in accordance with the Code.

Section 30(2), including its requirements concerning payments to operational creditors and dissenting financial creditors, places statutory limits on the treatment of creditor claims.

The precise minimum-payment protections differ according to the category of creditor and the relevant statutory provision. The fact that a creditor has a claim for a larger contractual amount does not necessarily mean that the resolution plan must repay that amount in full.

3.1.5 Section 31: Binding effect of an approved plan

Once a resolution plan is approved by the adjudicating authority under Section 31, it becomes binding on the stakeholders specified by the provision, including the corporate debtor, its employees, members, creditors, relevant governmental authorities, guarantors, and other stakeholders covered by the statutory text.

Accordingly, a depositor whose claim is dealt with by a validly approved plan may be bound by the plan's treatment of that claim, subject to applicable law and the grounds on which the approval may be challenged.

This is a central reason why depositors cannot automatically insist on payment outside the collective insolvency framework.

3.1.6 Section 36: Liquidation estate

Section 36 governs the liquidation estate and identifies assets that form part of it, together with specified exclusions.

The distinction between the debtor's property and property held in trust or otherwise excluded by law may be important where depositors argue that their funds are held in trust rather than forming part of the debtor's general assets.

However, the mere fact that money was deposited with a financial institution does not automatically establish a proprietary trust over an identifiable fund. The claim must be assessed on the facts and under the applicable legal provisions.

3.1.7 Section 52: Secured creditors in liquidation

Section 52 provides specified rights to secured creditors during liquidation, including the statutory option concerning enforcement of security interests.

A depositor does not become a secured creditor merely by holding a deposit receipt. A separate and legally recognised security interest would need to be established where secured status is claimed.

3.1.8 Section 53: Waterfall mechanism

Section 53 establishes the statutory order for distributing proceeds from liquidation assets.

The broad order is:

1. Insolvency resolution process costs and liquidation costs, paid in full.
2. Workmen's dues for the prescribed twenty-four-month period and debts owed to secured creditors who relinquish their security, ranking equally within this tier.
3. Wages and unpaid dues owed to employees other than workmen for the prescribed twelve-month period.
4. Financial debts owed to unsecured creditors.
5. Specified government dues for the prescribed two-year period and unpaid amounts owed to secured creditors following enforcement of their security, ranking equally within this tier.
6. Remaining debts and dues.
7. Preference shareholders, if any.
8. Equity shareholders or partners, as applicable.

The detailed application of the waterfall depends on the statutory text, the classification of claims, security rights, and the circumstances of liquidation.

Important: Section 53 is a liquidation distribution provision. It should not be mechanically applied as if it were the complete payment formula for every resolution plan during the corporate insolvency resolution process.

Where a depositor is classified as an unsecured financial creditor, the statutory liquidation waterfall may be relevant to determining the applicable priority and liquidation-value benchmark. The actual distribution under an approved resolution plan is governed by the IBC provisions applicable to resolution, including Sections 30 and 31.

3.1.9 Section 60: Adjudicating authority

Section 60 identifies the National Company Law Tribunal (NCLT) as the adjudicating authority for corporate insolvency matters within its jurisdiction, subject to the statutory framework.

Appeals against relevant NCLT orders are governed by the applicable provisions, including Section 61.

3.1.10 Section 238: Overriding effect

Section 238 provides that the IBC prevails over inconsistent provisions of other laws, subject to the statutory conditions.

Where another law appears to confer a right inconsistent with the insolvency framework, the court must examine the relevant provisions and determine whether a genuine inconsistency exists.

Section 238 does not eliminate every provision of every other statute. The issue is whether the provisions can be read harmoniously or whether the IBC must prevail because the provisions are inconsistent.

This principle was significant in the DHFL depositors' litigation.

3.2 Reserve Bank of India Act, 1934

The Reserve Bank of India Act, 1934, regulates aspects of non-banking financial companies and contains provisions concerning deposits accepted by such institutions.

Section 45-QA addresses the repayment of deposits by specified non-banking financial companies.

However, the existence of a statutory repayment obligation is not identical to a statutory guarantee of full repayment during insolvency. The legal question is whether the provision creates a right to priority or unconditional payment notwithstanding the IBC.

The Supreme Court addressed this issue in the DHFL-related proceedings and concluded that the relevant provisions did not mandate full payment of all deposits in the manner claimed by the depositors.

3.3 National Housing Bank Act, 1987

The National Housing Bank Act, 1987, regulates relevant housing finance institutions under the statutory framework applicable to them.

Section 36A contains provisions concerning deposits accepted by housing finance institutions.

As with the RBI Act, the obligation to repay a deposit in accordance with its terms does not necessarily establish an unconditional right to full repayment outside the applicable insolvency process.

In the DHFL litigation, the Supreme Court examined the relevant provisions of the NHB Act and rejected the argument that they independently guaranteed full repayment of deposit liabilities in the corporate insolvency resolution process.

3.4 Deposit Insurance and Credit Guarantee Corporation Act, 1961

The Deposit Insurance and Credit Guarantee Corporation Act, 1961, establishes a statutory framework for deposit insurance for eligible deposits maintained with insured banks.

Deposit insurance is different from general depositor preference.

It provides protection to eligible depositors within the applicable statutory limit and subject to the Act's requirements. The currently applicable insurance limit is ₹5 lakh per depositor per insured bank, calculated in the manner prescribed by the legislation and the DICGC framework.

The coverage is not ₹5 lakh for every individual account held by the same depositor in the same insured bank. Eligible accounts are aggregated according to the statutory rules.

Deposit insurance should also not be assumed to apply to every deposit placed with an NBFC, housing finance company, corporate borrower, or other non-bank institution. Eligibility depends on the institution and the applicable insurance framework.

The Act also contains provisions governing the rights of the Corporation following payment of insured amounts. Section 21 is relevant to the repayment of amounts due to the Corporation in specified circumstances.

3.5 Financial Service Providers Rules

The Insolvency and Bankruptcy Code (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019, provide a special framework for the insolvency and liquidation of specified financial service providers.

These rules are significant because financial institutions may perform functions different from those of an ordinary commercial company.

The framework provides for the involvement of the appropriate financial-sector regulator and special procedural arrangements, subject to the terms of the Rules and the IBC.

The treatment of public deposit holders in the DHFL proceedings was considered within this financial-service-provider framework.

3.6 Banking regulation and bank resolution

India's legal framework distinguishes between an insured bank, an NBFC, a housing finance company, and an ordinary corporate entity.

Different statutory mechanisms may apply depending on the institution involved.

Therefore, it would be incorrect to assume that all depositors have identical rights under the IBC or that every deposit-taking entity is covered by the same insurance, resolution, and liquidation rules.

The legal status of the institution must be established before determining the depositor's priority.

4. IMPORTANT CASE LAWS ON DEPOSITOR PREFERENCE AND RESOLUTION

CASE LAW 1: Vinay Kumar Mittal and Others v. Dewan Housing Finance Corporation Limited and Others

Court: National Company Law Appellate Tribunal (NCLAT).

Date: 27 January 2022.

Citation: Company Appeal (AT) (Insolvency) Nos. 506, 507 and 516 of 2021.

Facts

Dewan Housing Finance Corporation Limited (DHFL), a housing finance company and non-banking financial company, entered the corporate insolvency resolution process.

Fixed-deposit holders challenged aspects of the approved resolution plan because their deposits were not being repaid in full.

They argued that the obligations imposed under the RBI Act and the NHB Act required repayment according to the terms of their deposits. They also contended that public deposit holders should receive separate or preferential treatment rather than being treated on the same footing as other financial creditors.

Issues

The principal issues included:

1. Whether public fixed-deposit holders were entitled to full repayment under the RBI Act or the NHB Act.
2. Whether those statutes prevailed over the IBC.
3. Whether fixed-deposit holders could claim preferential treatment as a separate class of creditors.
4. Whether matured deposits could be repaid outside the collective resolution process.

Decision and reasoning

The NCLAT rejected the contention that fixed-deposit holders were entitled to automatic full repayment or preferential treatment outside the IBC framework.

It held, in substance, that the depositors' claims were governed by the insolvency process and that the relevant statutory provisions did not confer the special priority asserted by them.

The tribunal also considered the need to preserve the collective nature of the resolution process. Paying selected matured deposits outside that process could confer an advantage on some depositors over other similarly situated creditors, including depositors whose deposits had not matured.

The decision emphasised that claims of public deposit holders in the relevant financial-service-provider insolvency had to be addressed within the statutory framework.

Legal principle

A fixed-deposit holder cannot automatically demand full repayment or a separate priority merely because the deposit has matured or because the institution is subject to financial-sector regulation.

Significance

The decision is a leading tribunal authority concerning the treatment of depositors during the DHFL insolvency process.

However, its legal position must now be read together with the Supreme Court's subsequent judgment in Piramal Capital and Housing Finance Limited v. 63 Moons Technologies Limited and Others, 2025 INSC 421, which addressed the connected appeals and upheld the relevant resolution framework.

CASE LAW 2: Raghu K.S. and Others v. R. Subramaniakumar, Administrator of DHFL

Court: National Company Law Appellate Tribunal.

Date: 7 February 2022.

Citation: Company Appeal (AT) (Insolvency) No. 538 of 2021.

Facts

The appeal concerned fixed-deposit holders of DHFL who sought full repayment of their deposits in the insolvency process.

The depositors relied on the statutory obligations of the institution under the RBI Act and the National Housing Bank legislation. They contended that their deposits should be repaid according to the terms of the deposit agreements and that the insolvency process should not deprive them of full repayment.

Issue

Whether the depositors could claim a right to full repayment or preferential treatment outside the distribution and resolution mechanisms prescribed by the IBC.

Decision and reasoning

The NCLAT held that the statutory provisions relied upon did not create an unconditional entitlement to full payment in the insolvency process.

It emphasised that once the corporate insolvency resolution process had commenced, the rights of creditors had to be determined under the IBC and the applicable rules.

The tribunal also rejected the argument that the RBI Act or NHB Act independently conferred a special payment priority on fixed-deposit holders.

Legal principle

A contractual right to repayment under a deposit agreement does not, without more, create a statutory priority over other creditors in an insolvency proceeding.

Significance

The decision reinforces the distinction between the institution's ordinary repayment obligations and the legal order governing claims when the institution enters insolvency.

It must be read in conjunction with the Supreme Court's subsequent consideration of the DHFL proceedings in 2025.

CASE LAW 3: Piramal Capital and Housing Finance Limited (formerly DHFL) v. 63 Moons Technologies Limited and Others

Court: Supreme Court of India.

Date: 1 April 2025.

Citation: 2025 INSC 421; [2025] 4 S.C.R. 344.

Facts

These connected appeals arose from the DHFL insolvency proceedings and challenges to aspects of the resolution plan approved by the NCLT.

The proceedings involved multiple issues, including the treatment of fixed-deposit holders, claims for full repayment under the RBI Act and the NHB Act, challenges concerning the allocation of recoveries from avoidance and fraudulent-trading applications, and the extent of the NCLAT's power to interfere with an approved resolution plan.

The depositors contended that the relevant financial-sector legislation required full repayment of their deposits and that the resolution framework could not lawfully deprive them of that entitlement.

Issues

The principal issues relevant to depositor preference were:

1. Whether the RBI Act or NHB Act required full repayment of deposits notwithstanding the IBC.
2. Whether fixed-deposit holders could claim a special priority or full recovery outside the approved resolution plan.
3. Whether the resolution plan and the CoC's decisions could be disturbed by the appellate tribunal on the grounds raised.
4. What limits applied to judicial interference with the commercial decisions underlying the resolution plan.

Decision and reasoning

The Supreme Court rejected the argument that the relevant provisions of the RBI Act and NHB Act mandated full payment of all fixed deposits during the insolvency resolution process.

The Court examined the provisions concerning repayment of deposits and concluded that they did not confer the unconditional right to full repayment claimed by the depositors.

The Court also upheld the importance of the statutory insolvency framework and the limits on judicial interference with the CoC's commercial decisions, subject to the grounds and requirements provided by the IBC.

The Court restored the NCLT's approval of the resolution plan after setting aside the NCLAT's interference with the relevant terms of the plan. It also dealt with the allocation of recoveries arising from different categories of avoidance and fraudulent-trading applications.

Legal principle

The relevant provisions of the RBI Act and NHB Act do not, by themselves, guarantee full repayment of deposits in a corporate insolvency resolution process. Depositors' claims remain subject to the applicable IBC framework and a validly approved resolution plan.

Significance

This is a particularly important Supreme Court authority because it addresses the depositors' full-repayment argument at the highest judicial level.

It confirms that the contractual maturity of a deposit and the statutory regulation of the institution do not automatically place the depositor outside the collective insolvency framework.

The judgment must be read carefully: it does not mean that depositors have no rights. They retain rights under the applicable law, including the right to have claims dealt with according to the governing insolvency process. The ruling rejects the asserted automatic entitlement to full repayment and separate priority under the particular statutory provisions considered.

CASE LAW 4: Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta

Court: Supreme Court of India.

Citation: (2020) 8 SCC 531.

Facts

The dispute concerned the resolution plan for Essar Steel India Limited and the distribution of payments among different classes of creditors.

The case raised questions concerning the powers of the CoC, the treatment of financial and operational creditors, the fairness of a resolution plan, and the scope of judicial review by the adjudicating authority and appellate tribunal.

Issue

Whether a resolution plan must distribute payments to every class of creditor in the same proportion and whether the CoC's commercial decisions could be substituted by the adjudicating authority.

Decision and reasoning

The Supreme Court recognised the commercial wisdom of the CoC and held that judicial review of an approved resolution plan is confined to the statutory limits of the IBC.

The Court explained that different classes of creditors may be treated differently where the treatment complies with the Code. The principle of equitable treatment does not require identical payment percentages for every creditor regardless of their legal position.

At the same time, the plan must comply with the mandatory requirements of the IBC.

Legal principle

A resolution plan may provide different treatment to different creditor classes, subject to statutory requirements. Courts and tribunals cannot substitute their own preferred distribution for the CoC's commercial decision merely because another allocation might appear more equitable.

Significance for depositors

Depositors who qualify as financial creditors must establish their rights within the statutory framework. They cannot demand identical treatment with secured creditors or insist on full payment simply because they are members of a financially vulnerable class.

Their claims must be assessed under the applicable provisions, the resolution plan, and the legal standards governing judicial review.

CASE LAW 5: Swiss Ribbons Pvt. Ltd. v. Union of India

Court: Supreme Court of India.

Citation: (2019) 4 SCC 17.

Facts

The case involved constitutional challenges to provisions of the IBC, including the distinction between financial creditors and operational creditors.

The petitioners questioned aspects of the classification of creditors and the structure of the insolvency resolution framework.

Issue

Whether the classification of creditors and the structure of the CoC under the IBC were legally valid.

Decision and reasoning

The Supreme Court upheld the constitutional validity of the relevant framework and recognised that financial creditors and operational creditors perform different economic roles.

Financial creditors generally assess the debtor's financial position and are involved in decisions concerning restructuring and the viability of the enterprise. Operational creditors generally provide goods or services and have a different relationship with the debtor.

The Court accepted that these differences could justify distinct treatment under the insolvency framework.

Legal principle

Different classes of creditors may receive different treatment where the classification has a rational basis and is consistent with the IBC.

Significance for depositors

Where depositors qualify as financial creditors, their rights must be determined by the provisions governing that category and any applicable class-representation rules.

The case does not create depositor preference. Instead, it explains the legal framework within which creditor classification and differential treatment are assessed.

CASE LAW 6: Moser Baer Karamchari Union v. Union of India

Court: Supreme Court of India.

Citation: 2023 INSC 479; (2023) 5 SCC 1.

Date: 2 May 2023.

Facts

The petitioners challenged aspects of the IBC's liquidation waterfall, particularly the treatment of workmen's dues under Section 53 and the exclusion of certain statutory employee funds from the liquidation estate.

The case required the Court to examine whether the legislative framework governing liquidation unjustifiably reduced the priority accorded to workmen under earlier company-law provisions.

Issue

Whether the distribution hierarchy established by Section 53 of the IBC was constitutionally invalid because of the treatment of workmen's dues and their ranking alongside specified secured creditors.

Decision and reasoning

The Supreme Court upheld the relevant statutory framework.

It explained that the IBC establishes a structured distribution hierarchy and that altering one part of the waterfall could affect the balance among multiple categories of creditors.

The Court also considered the protections afforded to provident fund, pension fund, and gratuity fund amounts under the statutory framework.

Legal principle

The statutory liquidation waterfall represents a legislative balancing of competing creditor interests. Courts do not ordinarily rearrange that hierarchy merely because another distribution model might appear more favourable to one category of creditor.

Significance for depositors

Although the case concerned workmen and employee funds rather than depositors, it provides an important principle for depositor-preference disputes.

A depositor cannot obtain a higher priority simply by arguing that depositors are deserving of greater protection. The claimed priority must be supported by the applicable legislation or another legally recognised basis.

CASE LAW 7: Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Private Limited

Court: Supreme Court of India.

Citation: 2023 INSC 625; (2023) 10 SCC 60.

Date: 17 July 2023.

Facts

The dispute concerned electricity dues claimed by a public utility against a company undergoing insolvency and liquidation.

The utility argued that statutory and contractual provisions allowed it to recover its dues independently of the liquidation process and ahead of other creditors.

The liquidator contended that the claims had to be dealt with under the IBC's statutory distribution framework.

Issue

Whether a creditor could rely on a separate statutory recovery mechanism or asserted charge to avoid the IBC's collective liquidation process and priority rules.

Decision and reasoning

The Supreme Court examined the relationship between the relevant electricity legislation and the IBC.

The Court explained the importance of the liquidation waterfall and the need to establish a legally recognised security interest rather than assuming that every statutory recovery right automatically creates secured status.

It held that the insolvency framework governs the distribution of liquidation assets where the relevant legal conditions are satisfied.

Legal principle

A creditor cannot avoid the IBC's statutory distribution framework merely by asserting a separate recovery right. The nature of the claim, the existence of a recognised security interest, and the applicable statutory provisions must be examined.

Significance for depositors

The case provides a broader principle applicable to depositor claims: priority must be grounded in law, not merely in the existence of a contractual obligation or a claim that a particular creditor deserves payment first.

It also demonstrates the importance of distinguishing between the right to recover a debt and the priority governing the distribution of assets.

5. COMPARATIVE ANALYSIS OF THE CASE LAWS

The seven decisions establish several connected principles.

First, the existence of a deposit agreement creates a repayment obligation but does not necessarily create priority during insolvency.

Second, the IBC establishes a collective process in which creditors' claims must be addressed according to the applicable statutory provisions and approved resolution plan.

Third, a depositor's status as a financial creditor does not automatically make the depositor a secured creditor or confer a separate right to full repayment.

Fourth, the commercial wisdom of the CoC is afforded significant deference, but the resolution plan must satisfy the mandatory provisions of the IBC.

Fifth, the liquidation waterfall cannot automatically be treated as the payment formula governing every resolution plan.

Finally, where depositors claim priority under another statute, the court must determine whether that statute actually creates the asserted right and whether the relevant provisions are consistent with the IBC.

The Supreme Court's 2025 decision in the DHFL-related proceedings is especially significant because it directly addresses the argument that the RBI Act and NHB Act independently guarantee full repayment of deposits during insolvency resolution.

6. DEPOSITOR PREFERENCE DURING RESOLUTION AND LIQUIDATION

6.1 During resolution

During the corporate insolvency resolution process, the objective is to resolve the financial distress of the corporate debtor, preserve value, and facilitate a legally compliant restructuring.

Claims are dealt with through the statutory process, and creditors participate according to their classification and the applicable voting and representation rules.

A depositor generally cannot demand payment outside that process merely because the deposit has matured. The claim must be submitted, verified, and dealt with under the applicable framework.

A resolution plan may provide different recoveries for different classes of creditors, subject to the mandatory requirements of the IBC.

6.2 During liquidation

If resolution fails and liquidation follows, Section 53 provides the statutory waterfall for distributing liquidation proceeds.

The depositor's place in that waterfall depends on the legal classification of the claim and any relevant security interest or statutory provision.

A depositor whose claim qualifies as unsecured financial debt may fall within the category specified in Section 53(1)(d), subject to the applicable law and facts.

However, the claim should not be classified without examining the transaction and any applicable financial-service-provider rules.

6.3 The significance of deposit insurance

Deposit insurance offers a separate form of protection.

Eligible bank depositors may receive payment up to the applicable statutory limit through the DICGC framework, subject to the conditions governing insured deposits.

This protection is different from a general right to preferential treatment in the insolvency of an NBFC or housing finance company.

It is therefore essential to identify the institution, the applicable insurance status, and the statutory mechanism before advising a depositor about the likely recovery.

7. CHALLENGES AND LIMITATIONS

7.1 No automatic right to full repayment

The most important limitation is that a depositor cannot assume that the entire principal and accrued interest will necessarily be repaid in full once insolvency proceedings begin.

The actual recovery depends on the governing statute, the institution's legal status, the approved plan or liquidation process, and the assets available.

7.2 Confusion between maturity and priority

Deposit maturity determines when payment is contractually due in the ordinary course of business. It does not necessarily determine the order of payment once a statutory insolvency process applies.

Allowing selected matured deposits to be paid outside the process may undermine equal treatment within the relevant creditor class.

7.3 Inconsistent treatment of different institutions

Depositors in insured banks may have access to deposit-insurance protection that is not available to depositors of every other financial institution.

The regulatory framework for banks, NBFCs, housing finance companies, and ordinary companies is not identical.

7.4 Complexity of financial-sector insolvency

Financial institutions may have large numbers of depositors, borrowers, investors, and creditors. Their assets and liabilities can be interconnected, and a resolution may involve regulatory considerations beyond those present in an ordinary corporate insolvency.

These factors make creditor classification and the design of resolution plans particularly important.

7.5 Risks to public confidence

If depositors cannot understand how their claims will be treated during financial distress, public confidence may be weakened.

Clearer disclosures concerning deposit insurance, repayment terms, regulatory safeguards, and insolvency risks would help depositors make informed decisions.

8. RECOMMENDATIONS

8.1 Clarify depositor classification

The legal framework should provide clear guidance concerning the classification of different types of deposits, including public deposits, fixed deposits, secured deposits, and deposits held by trusts or institutional investors.

8.2 Improve disclosure of insolvency risk

Financial institutions should clearly disclose the applicable deposit-insurance protection, regulatory status, repayment conditions, and relevant limitations.

8.3 Strengthen representation of depositors

Where depositors form a class of financial creditors, the authorised-representative mechanism should operate transparently and effectively.

Depositors should receive timely information about voting, proposed recoveries, and the principal terms of the resolution plan.

8.4 Distinguish insured and uninsured deposits

The law and regulatory disclosures should clearly distinguish between insured deposits and amounts exceeding the applicable insurance limit.

This would reduce the risk that depositors mistakenly believe all amounts placed with every regulated financial institution are guaranteed.

8.5 Improve resolution transparency

Resolution plans should provide clear information concerning the classification of claims, the proposed treatment of depositor liabilities, and the statutory basis for the proposed distribution.

Such transparency should operate within the confidentiality requirements and procedural limits of the IBC.

8.6 Preserve the integrity of the collective process

Individual creditor rights must be balanced against the need to preserve the corporate debtor's assets and avoid unauthorised preferential payments.

The legal framework should discourage selective repayment that undermines the statutory process while ensuring that legitimate creditor rights are respected.

9. CONCLUSION

Depositor preference is a significant issue in insolvency law because depositors may have limited control over the financial institution's investment and lending decisions while depending on the institution to repay their savings.

However, the legal importance of deposits does not automatically translate into an absolute right to priority or full repayment during insolvency resolution.

India's legal framework is principally governed by the IBC, together with relevant provisions of the RBI Act, the National Housing Bank Act, the Deposit Insurance and Credit Guarantee Corporation Act, and the special rules applicable to financial service providers.

The judicial decisions examined in this paper establish that depositors must exercise their rights within the applicable statutory framework. The decisions in Vinay Kumar Mittal v. DHFL and Raghu K.S. v. R. Subramaniakumar address the treatment of fixed-deposit holders in the DHFL proceedings. The Supreme Court's judgment in Piramal Capital and Housing Finance Limited v. 63 Moons Technologies Limited, 2025 INSC 421, is particularly important because it rejects the argument that the relevant provisions of the RBI Act and NHB Act independently guarantee full repayment of deposits during the insolvency resolution process.

The principles developed in Essar Steel, Swiss Ribbons, Moser Baer Karamchari Union, and Paschimanchal Vidyut Vitran Nigam further demonstrate that creditor classification, the statutory waterfall, and the commercial decisions underlying a resolution plan must be assessed under the IBC.

The central conclusion is that a contractual right to repayment, a right to participate as a creditor, a right to deposit insurance, and a right to preferential insolvency treatment are legally distinct concepts.

Effective depositor protection requires clear legislation, transparent resolution procedures, appropriate insurance mechanisms, and reliable representation of depositors. Any preference in the distribution of insolvency assets must ultimately rest on a legally recognised basis rather than on the assumption that all depositors are automatically entitled to payment ahead of other creditors.

10. REFERENCES AND BIBLIOGRAPHY

A. Indian legislation

1. Insolvency and Bankruptcy Code, 2016, particularly Sections 5(8), 14, 21, 30, 31, 36, 52, 53, 60, 61 and 238.
2. Reserve Bank of India Act, 1934, particularly Section 45-QA and other applicable provisions governing non-banking financial companies.
3. National Housing Bank Act, 1987, particularly Section 36A and other applicable provisions governing housing finance institutions.
4. Deposit Insurance and Credit Guarantee Corporation Act, 1961, including the provisions governing insured deposits and the Corporation's rights following payment.
5. Insolvency and Bankruptcy Code (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019.
6. Applicable Insolvency and Bankruptcy Board of India regulations governing corporate insolvency resolution, creditor representation, and liquidation.

B. Judicial decisions

1. Vinay Kumar Mittal and Others v. Dewan Housing Finance Corporation Limited and Others, NCLAT, Company Appeal (AT) (Insolvency) Nos. 506, 507 and 516 of 2021, decided 27 January 2022.
2. Raghu K.S. and Others v. R. Subramaniakumar, Administrator of DHFL, NCLAT, Company Appeal (AT) (Insolvency) No. 538 of 2021, decided 7 February 2022.
3. Piramal Capital and Housing Finance Limited (formerly known as Dewan Housing Finance Corporation Limited) v. 63 Moons Technologies Limited and Others, Supreme Court of India, 2025 INSC 421, decided 1 April 2025.
4. Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, (2020) 8 SCC 531.
5. Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17.
6. Moser Baer Karamchari Union v. Union of India, 2023 INSC 479; (2023) 5 SCC 1.
7. Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Private Limited, 2023 INSC 625; (2023) 10 SCC 60.

C. Research note

This paper is intended for academic and general legal research. The precise treatment of a deposit depends on the nature of the institution, the legal character of the claim, the applicable financial-sector legislation, the stage of insolvency, and the terms of the relevant resolution plan.

Before using this material in a formal legal opinion, academic submission, pleading, or court filing, the complete judgments, statutory amendments, applicable regulations, and procedural history should be verified against authoritative legal materials.