Bank Guarantee Not Security Interest: Tribunal Allows Bank to Adjust Margin Money

The Appellate Tribunal held that the performance bank guarantee is not covered by Section 14 of the Insolvency and Bankruptcy Code, 2016, as it does not constitute a security interest. The Tribunal ruled that the adjustment of margin money by the bank towards the payment of the invoked bank guarantee during the moratorium period was legal, as the margin money is not considered a security interest and does not require registration of charge. Consequently, the bank was not obligated to release the margin money to the Resolution Professional, and the appeal was partly allowed, setting aside the direction to release the margin money.

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Issues:
1. Interpretation of Section 14 of the Insolvency and Bankruptcy Code, 2016 regarding the applicability of moratorium on the invocation of bank guarantees during the moratorium period.
2. Determination of whether the adjustment of margin money by the bank towards the payment of the invoked bank guarantee is legal and in compliance with the provisions of the Code.
3. Analysis of whether the margin money constitutes a security interest and if its adjustment violates the provisions of the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016.

Issue 1: Interpretation of Section 14 of the Insolvency and Bankruptcy Code, 2016

The case involved an appeal arising from an order passed by the Adjudicating Authority/National Company Law Tribunal, Chandigarh Bench, regarding the release of margin money retained by the Appellant bank after the invocation of a bank guarantee during the moratorium period. The Appellant bank argued that the moratorium order should not apply to the performance bank guarantee based on a previous judgment. The Appellate Tribunal referred to the definition of "security interest" under Section 3(31) of the Code, which excludes performance bank guarantees from the purview of security interest. Therefore, it was held that the performance bank guarantee is not covered by Section 14 of the Code.

Issue 2: Legality of Adjustment of Margin Money

The Appellant bank adjusted the margin money towards the payment of the invoked bank guarantee during the moratorium period. The Resolution Professional objected to this adjustment, claiming it was illegal. The Respondent argued that the adjustment violated Section 14(1)(c) of the Code and Section 77 of the Companies Act, 2013. The Respondent contended that the margin money was the asset of the Corporate Debtor and no charge was created in favor of the bank. The Appellate Tribunal held that the margin money is not a security interest and does not require registration of charge. Once the margin money was used to honor the bank guarantee, the bank had no obligation to release that amount to the Resolution Professional.

Issue 3: Nature of Margin Money and Compliance with Legal Provisions

The margin money deposited by the Corporate Debtor was utilized to secure a bank guarantee, which was invoked during the moratorium period. The Appellate Tribunal clarified that the margin money is a contribution by the borrower seeking a bank guarantee and remains with the bank until the guarantee is invoked. The Tribunal emphasized that the Resolution Professional is only entitled to payments that the Corporate Debtor would have received if no moratorium orders were in place. As the margin money was utilized for the bank guarantee payment, the Tribunal held that the Resolution Professional could not demand its release. The Tribunal concluded that the appeal should be partly allowed, setting aside the direction to release the margin money.

This detailed analysis of the judgment provides insights into the interpretation of relevant legal provisions, the legality of actions taken by the bank, and the nature of margin money in the context of insolvency proceedings.

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