2020 (2) TMI 1665 - Tri - Insolvency and Bankruptcy

Tribunal bars recovery of margin money by creditors during moratorium under IBC

The Tribunal ruled in favor of the Resolution Professional and the State Bank of India, holding that margin money, as a security for letters of credit, ... Seeking reversal of transaction of appropriating the margin money of the corporate debtor appropriated by the respondents in breach of the moratorium declared by this Hon’ble tribunal - whether margin money which is in form of security for issuance of letter of credit to the Corporate Debtor can be foreclosed/recovered/debited from the accounts of the Corporate Debtor by a financial creditor during the CIRP period? - such appropriation would tantamount to breach of moratorium by the financial creditors or not - HELD THAT:- It is admitted facts that LC is an independent transaction and bank is bound to extend from time to time the validity period of LC and it cannot be said that money payable by the issuing bank are money belonging to judgment debtor. It is further submitted that the corporate debtor has admitted in its annual report and balance sheet as on 31 March, 2018 that they have offset the financial asset and liability to the extent of 87.10 crores of which Rs. 59.26 crores is PNBs share which is also reflected in Form C. And as per clause 8 of Form C of IBBI (Insolvency Resolution Process for Corporate persons) Regulations, 2016, the claim submitted by the banks/creditors specifically provide for the list of securities, on which the moratorium applies and this list is an exclusive list of security and it does not find any mention of margin money. In light of the provision of Sec 14 of Insolvency and Bankruptcy Code, 2016, specifically Sec 14(1)(c)of IBC,2016 which covers the security as claimed in the present application; this adjudicating Authority is of the view that when as Corporate Insolvency Resolution Process is initiated against the corporate debtor, the sound rationale of granting moratorium is to ensures that individual creditors are prevented from unilaterally initiating enforcement action which could defeat a holistic restructuring of the company arid further ensures that the company has control over its operating assets to be able to continue transacting as a going concern and the financial economy of the company should not hampered during the process. The adjudicating authority finds that the margin money which is in form of security, was appropriated by the financial creditors from the accounts of the corporate debtor , after the CIR process has been intiated and all these transactions were done during moratorium period which this adjudicating authority finds, is against the purpose of which the moratorium is granted; as the purpose of moratorium includes keeping the corporate debtor’s assets together during the insolvency resolution process and facilitating orderly completion of the processes envisaged during the insolvency resolution process and further ensuring that the company may continue as going concern while the creditors take a view on resolution of default and the moratorium ensures a stand still period during which creditors cannot resort to individual enforcement action which may frustrate the object of the CIR process and the margin money which was the asset of the corporate debtor, was appropriated after moratorium being declared, which is against the provision of law and cannot be appropriated during the CIRP - Further, if the amount of margin money which is appropriated by the respondents bank is adjustment with the amount of bill, which was paid by the bank on behalf of corporate debtor and not the appropriation of corporate debtor’s fund towards the dues of the bank than this adjudicating authority is of the view that it should not have been done during the CIRP process and when moratorium has already being granted then the respondent banks cannot be permitted to transgress the provision of law as it will be considered as breach of moratorium and they cannot recover any amount from the account of the corporate debtor. This adjudicating authority directs all the respondents to reverse the transactions of appropriating the margin money against the letter of credit and the demand loan aggregating to Rs. 164,24,70,284/ and to credit the amount of the margin money into the current accounts of the Corporate debtor. Application allowed. Issues Involved:1. Whether margin money, which is a security for the issuance of a letter of credit to the Corporate Debtor, can be foreclosed/recovered/debited by a financial creditor during the CIRP period.2. Whether such appropriation would amount to a breach of the moratorium by the financial creditors.3. Whether, during the moratorium period, any debit can be made by the financial creditors from the accounts of the Corporate Debtor without the permission of the Resolution Professional.Issue-wise Detailed Analysis:1. Foreclosure/Recovery of Margin Money During CIRP Period:The applications were filed under Section 60(5) of the IBC, 2016, by the Resolution Professional (RP) and the State Bank of India (SBI) as an intervenor, seeking directions against several banks to reverse the appropriation of margin money, which was done in breach of the moratorium declared by the Tribunal. The RP argued that margin money, being a security for the issuance of letters of credit (LCs), cannot be foreclosed or recovered during the moratorium period as per Section 14(1)(c) of the IBC. The Tribunal noted that margin money continues to be an asset of the Corporate Debtor until appropriated and cannot be foreclosed during the moratorium.2. Breach of Moratorium by Financial Creditors:The RP contended that the appropriation of margin money by the respondent banks during the moratorium period was a violation of Section 14 of the IBC, which prohibits any action to foreclose, recover, or enforce any security interest created by the Corporate Debtor. The Tribunal agreed, stating that the moratorium is intended to keep the Corporate Debtor’s assets together during the insolvency resolution process and to prevent individual creditors from taking unilateral enforcement actions that could disrupt the process.3. Debit from Corporate Debtor’s Accounts Without Permission:The respondents argued that margin money is not a security but a contribution of the Corporate Debtor towards procuring raw materials, and its appropriation was to keep the Corporate Debtor as a going concern. They also argued that the goods procured through LCs are the actual securities, not the margin money. However, the Tribunal found that the margin money, being an asset of the Corporate Debtor, was appropriated after the commencement of CIRP and during the moratorium period, which was against the purpose of the moratorium. The Tribunal emphasized that the moratorium ensures that the company can continue as a going concern while creditors decide on resolving the default.Conclusion:The Tribunal directed all respondent banks to reverse the transactions of appropriating the margin money against the LCs and demand loans, aggregating to Rs. 164,24,70,284/-, and to credit the amount back into the Corporate Debtor's current accounts. The applications were allowed and disposed of, reinforcing that the appropriation of margin money during the moratorium period was against the provisions of the IBC and could not be permitted.