2022 (1) TMI 1239 - Tri - Insolvency and Bankruptcy

Respondent Violates Moratorium by Encashing Bank Guarantees: Tribunal Orders Refund

Mr. Ram Ratan Kanoongo, Resolution Professional of D. Thakkar Construction Private Limited Versus Engineering Projects (India) Limited And M/s. S.K. Ganguli Versus D. Thakkar Constructions Private Limited

The Tribunal found the Respondent's encashment of Bank Guarantees during the Corporate Insolvency Resolution Process (CIRP) to be a violation of Section ... Seeking to refund the money equivalent to the Bank Guarantee - mobilisation advances invoked and encashed during the CIRP without any termination of contract - HELD THAT:- The Bench notes that the encashment of these Bank Guarantees were done by the Respondent, Engineering Projects (India) Limited without termination of contract and without any valid reason of dispute between Corporate Debtor and the Respondent. The Bench also notes that these Bank Guarantees were renewed annually and on timely basis. It is also clear from the records of the Corporate Debtor that the Respondent took illegal benefit of initiation of CIRP of the Corporate Debtor on 27.03.2019 and recovered unlawfully Bank Guarantees in violation of Section 14 of the Code. The Bench notes that this act of the Respondent is a clear violation of the provisions of Section 14 of the Code i.e. moratorium and the Respondent should not have proceeded with encashing the Bank Guarantee during the CIRP period. The Bench also notes that these Bank Guarantees are covered within the definition of the Terms Security Interest and is hit by Section 14(1)(c) of the Code. The Bench directs the Respondent, Engineering Projects (India) Limited to refund an amount of Rs. 34,28,000/- which has been wrongfully encashed by the Respondent by invoking Bank Guarantee during the CIRP. The Bench directs that this refund be made to the account of the Corporate Debtor within one week of the pronouncement of this order - Application allowed. Issues:Violation of Section 14 of the Insolvency and Bankruptcy Code, 2016 by the Respondent regarding encashment of Bank Guarantees during the Corporate Insolvency Resolution Process (CIRP).Analysis:Issue 1: Violation of Section 14 of the CodeThe Resolution Professional filed an application seeking direction from the Tribunal for the Respondent to refund money equivalent to the Bank Guarantee against 'mobilisation advances' that were encashed during the CIRP without any termination of contract or dispute regarding services provided by the Corporate Debtor. The Bank Guarantees were encashed by the Respondent after the commencement of the CIRP, in violation of Section 14 of the Code, which imposes a moratorium on actions to foreclose, recover, or enforce any security interest created by the Corporate Debtor. The Respondent's actions were deemed unlawful as they encashed the Bank Guarantees without valid reasons or termination of the contract, taking advantage of the initiation of CIRP.Issue 2: Interpretation of Section 14 and Relevant Case LawsThe Tribunal referred to Section 14 of the Code, emphasizing that the moratorium prevents alienation of the Corporate Debtor's assets until the approval of a Resolution Plan or a liquidation order. The Tribunal cited judgments of the Hon'ble NCLAT and Delhi High Court, establishing that Bank Guarantees are considered security interests, and any invocation of Bank Guarantees during the CIRP is prohibited. The case of Indian Overseas Bank Vs. Mr. Dinkar T Venkatsubramaniam highlighted that once a moratorium is declared, no recovery can be made from the Corporate Debtor. The decision in Power Grid Corporation of India V. Jyoti Structures Limited emphasized that Section 14 is intended to protect the Corporate Debtor's assets, prohibiting debt recovery actions during the moratorium period.ConclusionThe Tribunal found the Respondent's actions to be a clear violation of Section 14 of the Code, directing them to refund the wrongfully encashed amount of Rs. 34,28,000 to the account of the Corporate Debtor within one week. The application was allowed, and the matter was disposed of accordingly, reinforcing the importance of adhering to the provisions of the Code during the CIRP to protect the interests of the Corporate Debtor.