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, cannot be foreclosed or recovered by financial creditors during the moratorium period under the IBC. The appropriation of margin money by respondent banks was deemed a breach of the moratorium, as it goes against the purpose of keeping the Corporate Debtor's assets intact during insolvency proceedings. The Tribunal ordered the banks to reverse the transactions and credit the amount back into the Corporate Debtor's accounts, totaling Rs. 164,24,70,284.

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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.

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