2022 (9) TMI 751 - AT - Insolvency and Bankruptcy

Tribunal: Margin money not asset of Corporate Debtor. Bank's appropriation during Moratorium period justified.

The Tribunal held that margin money deposited against a Letter of Credit is not an asset of the 'Corporate Debtor' and does not constitute a 'Security ... Seeking reversal of transactions of appropriation of the margin money against the Letters of Credit (LC) - seeking to credit the same amount of the margin money into the Current Account of the Corporate Debtor - breach of the Moratorium imposed under Section 14 of the Insolvency and Bankruptcy Code, 2016. Whether margin money deposited by way of an FDR against a Letter of Credit (LC) is an asset of the Corporate Debtor? - Whether margin money construes, a Security as provided for under the Code? - Whether this margin money can be appropriated by the Appellant Bank during the period of Moratorium on the ground that it does not form a part of the asset of the Corporate Debtor. HELD THAT:- Admittedly, the amount of margin money is not debited to make any recovery or adjustment towards the dues of the Bank, but the payment is made to the supplier of the material to keep the Company as a going concern. It is also seen that the payment under the LC along with the margin money cannot be said to be an appropriation of the Corporate Debtor’s funds towards the dues of the issuing Bank. A perusal of the Clause 8 of Form-C as provided for under the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons), Regulations, 2016, the Claim submitted by the Banks specifically provides for the list of securities and it is pertinent to mention that there is no mention of ‘margin money’ in this list of securities - In the instant case, the FDRs cannot be said to be a property of the Corporate Debtor as the date of default is much prior to the date when the Moratorium was invoked. A perusal of the material on record also shows that the entries which have been justified against the LCs and the payment loans are not shown as assets of the Corporate Debtor in its Balance Sheet and Moratorium can be applicable under Section 14 of the IBC only to the assets of the Corporate Debtor. Margin money is construed as substratum of a Trust created to pay to the beneficiary to whom Bank Guarantee is given. Once any asset goes into trust by documentation for the benefit of beneficiary, the original owner will not have any right over the said asset unless it is free from the Trust. As it is observed that margin money has the character of Trust for the benefit of the beneficiary, it cannot be said to be an asset of the Corporate Debtor. These FDRs cannot be realized by the Corporate Debtor as and when it desires. The margin money is deposited in the FDRs which the Corporate Debtor becomes entitled to only when the Margin Money is free from the obligations of the terms of the LC. This Tribunal is of the view that in terms of its functions, a Performance Guarantee is similar to that of an LC. Further, having observed so, the contention of the Respondents that the Banks have erroneously invoked the LCs and liquidated the margin money during the period of Moratorium, cannot be sustained - the material on record does not establish that any Security Interest was created by the Corporate Debtor with margin money. The provision of Section 14(3)(b) specifically excludes the Application of Section 14 to a ‘surety’ in a contract of Guarantee to a Corporate Debtor. This Tribunal is of the earnest view that LC is basically akin to a contract of Guarantee, as it a contingent liability of the Corporate Debtor which gets crystallized on the happening of a future event. The margin money can in no manner be said to be a Security Interest as defined under Section 3(31) of the IBC. Section 14(1)(c) prohibits any action to foreclose, recover or ensure any Security Interest created by the Corporate Debtor in respect of its property - a conjoint reading of Section 3(31) and Section 14 of the Code makes it abundantly clear that margin money is not included as a Security and is not an asset of the ‘Corporate Debtor. Appeal allowed. Issues Involved:1. Whether margin money deposited by way of an FDR against a Letter of Credit (LC) is an asset of the 'Corporate Debtor'.2. Whether margin money constitutes a 'Security' as provided under the Insolvency and Bankruptcy Code (IBC).3. Whether margin money can be appropriated by the Appellant Bank during the period of Moratorium.Detailed Analysis:1. Whether margin money deposited by way of an FDR against a Letter of Credit (LC) is an asset of the 'Corporate Debtor':The Tribunal examined whether margin money falls within the definition of 'Security Interest' as defined under Section 3(31) of IBC and if it falls within the purview of Section 14 of the IBC. It was noted that margin money, which is in the form of FDRs, becomes the property of the Bank the moment there is a default on behalf of the Company. The FDRs cannot be considered as an asset of the 'Corporate Debtor' since the date of default is prior to the date when the Moratorium was invoked. The Tribunal also observed that the margin money deposited in the FDRs is not shown as 'assets of the Corporate Debtor' in its Balance Sheet, and thus, Moratorium under Section 14 of the IBC applies only to the assets of the 'Corporate Debtor'.2. Whether margin money constitutes a 'Security' as provided under the Insolvency and Bankruptcy Code (IBC):The Tribunal referred to Section 3(31) of the IBC, which defines 'security interest' and explicitly excludes performance guarantees. The Tribunal held that margin money is not a security and does not require any registration of charge. Margin money is the contribution on the part of the borrower who seeks a Bank Guarantee, and the said margin money remains with the Bank as long as the Bank Guarantee is alive. The Tribunal further noted that margin money has the character of Trust for the benefit of the beneficiary, and it cannot be said to be an asset of the 'Corporate Debtor'.3. Whether margin money can be appropriated by the Appellant Bank during the period of Moratorium:The Tribunal observed that margin money is not debited to make any recovery or adjustment towards the dues of the Bank, but the payment is made to the supplier of the material to keep the Company 'as a going concern'. The Tribunal also noted that the payment under the LC along with the margin money cannot be said to be an appropriation of the Corporate Debtor's funds towards the dues of the issuing Bank. It was held that margin money is construed as substratum of a Trust created to pay to the beneficiary to whom Bank Guarantee is given. Once any asset goes into trust by documentation for the benefit of the beneficiary, the original owner will not have any right over the said asset unless it is free from the Trust. Therefore, margin money cannot be appropriated during the Moratorium period as it is not an asset of the 'Corporate Debtor'.Conclusion:The Tribunal concluded that margin money deposited against an LC is not an asset of the 'Corporate Debtor' and does not constitute a 'Security Interest' under the IBC. Consequently, the appropriation of margin money by the Appellant Bank during the Moratorium period is justified. The appeal was allowed, and the order of the Adjudicating Authority was set aside.