2021 (1) TMI 1209 - Tri - Insolvency and Bankruptcy

Tribunal bars bank from redeeming fixed deposits in insolvency case, directs transfer to debtor

Ravindra Loonkar and Ors. Versus Kotak Mahindra Bank Limited and Ors.

The Tribunal ruled in favor of the Resolution Professional, holding that fixed deposits made by the Corporate Debtor could not be redeemed by the ... Application for closure of its Fixed Deposit on the ground that since Corporate Insolvency and Resolution Process has been initiated against the Corporate Debtor - redemption of fixed deposits to the Account of the Corporate Debtor - whatever the assets belonging to the Corporate Debtor have to come under the control and custody of the RP as per I&B Code - whether or not the fixed deposits lying with the Respondent Bank are to be construed on par with Performance Bank Guarantee covered by the proviso to Section 3(31) of the Code? - HELD THAT:- A performance guarantee is issued to one party of a contract as a guarantee against the failure of the other party to perform the obligations specified in the contract, it is usually provided by a Bank to make sure a contract completes designated project, in the case of financial guarantee, it reassures repayment of money in the event of non completion of repayment. We cannot attribute any logic to it, we only can say performance guarantee alone is exempted by the Code, therefore unless the guarantee has attributes of performance guarantee, it cannot be said that it is exempted by the Code. The case of the Respondent Bank is, it falls under the proviso to Section 3(31) of the Code, whereas the RP case is it will not fall under the exemption mentioned above. In the present case, it is nether Performance Guarantee, nor a fixed deposit linked to performance guarantee, it is like any other security given against loan facility availed, under this Code, the security interest covered by loan facility is also hit by section 14 of the Code, therefore the fixed deposit given as security against loan facility cannot be equated with the performance guarantee, and the right of lien or set off ordinarily available to the Respondent Bank is not available during CIRP initiated under the Code. The Respondent Bank is directed to transfer the amount payable (including interest accrued thereon) on closure of Fixed Deposits held by the Corporate Debtor - Application allowed. Issues:1. Whether fixed deposits made by the Corporate Debtor can be redeemed during Corporate Insolvency and Resolution Process.2. Whether the right of lien and set off accrued to the Respondent Bank can be exercised against a company under Insolvency governed by the Code.3. Whether fixed deposits given as security against a loan facility can be equated with a performance guarantee exempted under the Code.Analysis:1. The Resolution Professional (RP) filed an application against the Respondent Bank for the closure of fixed deposits belonging to the Corporate Debtor under the Insolvency and Bankruptcy Code, 2016. The Respondent Bank refused to redeem the fixed deposits, claiming priority over them due to security provided against loan facilities availed by the Corporate Debtor.2. The contention between the Applicant and the Respondent Bank revolved around whether the fixed deposits should be treated on par with Performance Bank Guarantee under the Code. The Respondent Bank argued that the fixed deposits were part of security agreements and could be adjusted against the debt due, while the RP contended that the right of lien and set off cannot be exercised during Corporate Insolvency Resolution Process.3. The Tribunal analyzed the nature of the fixed deposits and concluded that they were not akin to a performance guarantee exempted under the Code. The fixed deposits were made to maintain debt security ratio and were considered as security against the loan facility availed. Therefore, the right of lien and set off claimed by the Respondent Bank was not applicable during the Corporate Insolvency Resolution Process.4. The Tribunal emphasized that the exemptions under the Code only applied to performance guarantees and not to all types of security interests. The Respondent Bank's reliance on previous judgments related to non-insolvency cases was deemed inapplicable to the present situation governed by insolvency proceedings under the Code.5. Consequently, the Tribunal directed the Respondent Bank to transfer the amount payable on closure of the fixed deposits to the Corporate Debtor's account with another bank. The application filed by the RP was allowed, affirming that the fixed deposits could not be redeemed by the Respondent Bank during the Corporate Insolvency Resolution Process.