2021 (10) TMI 851 - Tri - Insolvency and Bankruptcy

Bank guarantees invoked during moratorium deemed financial, not performance, violating insolvency laws

The Tribunal held that the invocation of bank guarantees during the moratorium period violated the Insolvency and Bankruptcy Code. The guarantees were ... Moratorium under Section 14 of the IBC, 2016 - performance bank guarantee - financial bank guarantee - invocation and encashment of bank guarantees - classification of bank guarantees as per RBI guidelines - security interest - prevention of double recovery where claim already admittedPerformance bank guarantee - financial bank guarantee - classification of bank guarantees as per RBI guidelines - The nature of the bank guarantees furnished to NSIC was financial, not performance, and therefore they do not qualify as performance bank guarantees. - HELD THAT: - The Tribunal examined the distinguishing features of financial and performance bank guarantees as set out in the RBI circular and applied those principles to the terms of the raw material assistance arrangement and the guarantees on record. The raw material assistance scheme and the agreement contemplated credit/financial support for procurement of inputs, interest charges and repayment obligations, and the guarantees were furnished to secure that financial facility. The guarantees did not contain terms indicative of securing contractual non financial obligations (i.e., obligations to perform supply or service contracts) nor were they denominated or evidenced as performance guarantees. The Respondent bank itself included the invoked guarantee amount within its claim admitted by the resolution professional, reinforcing that the guarantees operated as a financial credit substitute rather than performance security. On this basis the Tribunal held that the guarantees are financial bank guarantees and not performance bank guarantees (reasoning recorded at paragraph 15). [Paras 15]Bank guarantees were financial in nature and not performance bank guarantees.Moratorium under Section 14 of the IBC, 2016 - invocation and encashment of bank guarantees - prevention of double recovery where claim already admitted - Invocation and encashment of the financial bank guarantees by NSIC during the CIRP amounted to action prohibited by the moratorium and the notices of invocation were quashed. - HELD THAT: - Having concluded that the guarantees were financial guarantees, the Tribunal held that invocation and encashment by NSIC during the moratorium would be action to enforce a security interest or to recover amounts from the corporate debtor contrary to the statutory moratorium under Section 14. The Tribunal observed that the debt and claims against the corporate debtor were required to be crystallised through the claims process in CIRP and that allowing invocation would undermine the pari passu and rule based distribution envisaged by the Code and could lead to preferential recovery. The bank had already included the guarantee amount in its claim admitted by the resolution professional, and permitting separate encashment would effectively permit double recovery. For these reasons, and in exercise of its jurisdiction to enforce the Code during CIRP, the Tribunal found the invocation inconsistent with the moratorium and quashed the notices of invocation (conclusions recorded at paragraphs 15-16). [Paras 15, 16]Notices of invocation/encashment of the bank guarantees by NSIC are quashed as barred by the moratorium.Final Conclusion: The application by the resolution professional is allowed: the bank guarantees furnished to NSIC were held to be financial guarantees (not performance guarantees) and invocation/encashment by NSIC during the CIRP was held to be barred by the moratorium; the notices of invocation are quashed and the order is directed to be communicated to the parties and IBBI. Issues Involved:1. Violation of the moratorium period under Section 14 of the Insolvency and Bankruptcy Code (IBC), 2016.2. Determination of the nature of the bank guarantees—whether they are performance bank guarantees or financial bank guarantees.3. Invocation of bank guarantees by NSIC and its legality during the moratorium period.4. The applicability of Section 14(3)(b) of IBC, 2016.5. The duty of the Resolution Professional (RP) in protecting the assets of the corporate debtor during the Corporate Insolvency Resolution Process (CIRP).Issue-wise Detailed Analysis:1. Violation of the Moratorium Period under Section 14 of IBC, 2016:The RP of the Corporate Debtor filed an application aggrieved by the actions of NSIC, which invoked bank guarantees during the moratorium period. Section 14(1)(c) of the IBC prohibits any action to foreclose, recover, or enforce any security interest created by the corporate debtor in respect of its property during the moratorium period. The RP argued that NSIC's actions violated this provision, as the moratorium was in place from 06.02.2020.2. Determination of the Nature of the Bank Guarantees:The RP contended that the bank guarantees provided were financial guarantees, not performance guarantees. The agreement between the corporate debtor and NSIC was for raw material financial assistance, which included interest and penal interest clauses, indicating a financial nature. The RP argued that the bank guarantees were submitted for obtaining raw material assistance and not for securing the performance of providing any goods or services under any contract. The RP emphasized that the term 'performance bank guarantee' was not mentioned in the bank guarantees.3. Invocation of Bank Guarantees by NSIC and Its Legality During the Moratorium Period:NSIC invoked the bank guarantees on 14.02.2020, arguing that they were performance guarantees and hence not subject to the moratorium under Section 14 of IBC. The RP countered this by asserting that the guarantees were financial in nature and thus covered by the moratorium. The RP further argued that the invocation of these guarantees could be considered preferential transactions under Section 43(2) of IBC, 2016, and should be restored as per Section 44 of IBC, 2016.4. Applicability of Section 14(3)(b) of IBC, 2016:NSIC argued that Section 14(3)(b) of IBC, 2016, which provides for the non-applicability of the moratorium to certain transactions, allowed the invocation of the bank guarantees. The RP refuted this, stating that the provision was not applicable as the guarantees were financial in nature. The RP emphasized that the moratorium under Section 14 should prohibit any recovery proceedings against the corporate debtor.5. Duty of the RP in Protecting the Assets of the Corporate Debtor During CIRP:The RP highlighted the duty to protect the assets of the corporate debtor during the CIRP. It was argued that any creditor owed money by the corporate debtor must approach the IRP/RP and file its claim, rather than invoking a bank guarantee during the moratorium period. The RP asserted that allowing the invocation of bank guarantees would affect the CIRP proceedings and was barred by the moratorium.Judgment:The Tribunal concluded that the invocation of bank guarantees by NSIC was not in consonance with the provisions of the IBC. The bank guarantees were determined to be financial guarantees, not performance guarantees, based on the RBI guidelines and the nature of the agreement. The Tribunal quashed the notices issued for the invocation of the bank guarantees by NSIC and directed that the application be disposed of in terms of the order. The judgment emphasized that the same claim could not be considered payable twice, even if submitted by parties in different capacities.