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

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

Punjab National Bank Versus Supriyo Kumar Chaudhuri Resolution Professional For JVL Agro Industries Ltd., State Bank of India, Corporation Bank, Indian Overseas Bank, Bank of Baroda, Allahabad Bank, Oriental Bank of Commerce

Punjab National Bank Versus Supriyo Kumar Chaudhuri Resolution Professional For JVL Agro Industries Ltd., State Bank of India, Corporation Bank, Indian ... 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.