Court upholds invocation of Performance Bank Guarantees by Corporate Debtor in insolvency case

The appeal challenging the dismissal of the application and allowing the invocation and encashment of Performance Bank Guarantees (PBGs) by the Corporate Debtor was dismissed. The court held that the invocation of PBGs was proper, not subject to the moratorium under Section 14 of the Insolvency and Bankruptcy Code, and found no evidence of fraud. The High Court's order allowing the invocation was deemed final, permitting the Corporate Debtor to utilize the PBG amounts for its operations.

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Issues Involved:
1. Invocation and encashment of Performance Bank Guarantees (PBGs).
2. Applicability of moratorium under Section 14 of the Insolvency and Bankruptcy Code (IBC).
3. Allegations of fraud in the invocation of PBGs.
4. Jurisdiction and finality of orders passed by different courts.

Issue-wise Detailed Analysis:

1. Invocation and Encashment of Performance Bank Guarantees (PBGs):
The present appeal challenges the order dated 11.12.2020 by the Adjudicating Authority (NCLT, Hyderabad Bench), which dismissed the appellant's application and allowed the respondents to continue with the invocation and encashment of the PBGs. The PBGs were issued by the appellant in favor of the first respondent (Corporate Debtor) undergoing CIRP. The Corporate Debtor invoked the PBGs on 18.10.2019, claiming the appellant failed to perform its obligations under the agreements.

2. Applicability of Moratorium under Section 14 of the Insolvency and Bankruptcy Code (IBC):
The appellant argued that the invocation of the PBGs was wrongful and should be restrained under Section 14 of the IBC, which imposes a moratorium on the institution or continuation of suits or proceedings against the Corporate Debtor. However, the Adjudicating Authority observed that the PBGs were invoked before the initiation of CIRP on 07.11.2019, and thus, the moratorium under Section 14 does not apply. Section 14(3)(b) explicitly states that a surety in a contract of guarantee to a Corporate Debtor is not covered under the moratorium.

3. Allegations of Fraud in the Invocation of PBGs:
The appellant alleged that the invocation of the PBGs was fraudulent. However, the Adjudicating Authority noted that the City Civil Court had already addressed the issue of fraud and found no element of fraud involved in the invocation. The High Court of Telangana also set aside the trial court's interim injunction on the grounds that the PBGs were irrevocable and had been invoked before the suit was filed.

4. Jurisdiction and Finality of Orders Passed by Different Courts:
The appellant contended that the High Court of Telangana's order allowing the invocation of PBGs violated Section 14 of the IBC. However, the Adjudicating Authority held that the High Court's order had attained finality since the appellant had withdrawn the SLPs filed before the Supreme Court. The Supreme Court permitted the withdrawal of the SLPs, noting that the NCLT was already seized of the matter and had restrained the Corporate Debtor from utilizing the amounts under the PBGs.

Assessment:
The Adjudicating Authority concluded that the invocation of the PBGs was proper and in accordance with the terms agreed upon by the parties. The PBGs were irrevocable and had been invoked before the initiation of CIRP. The moratorium under Section 14 of the IBC does not apply to PBGs, and there was no evidence of fraud in the invocation. The High Court's order allowing the invocation had attained finality, and the amounts under the PBGs could be utilized for the functioning of the Corporate Debtor as a going concern.

Conclusion:
The appeal was dismissed, and the invocation of the PBGs by the Corporate Debtor was upheld. The amounts under the PBGs could be used to ensure the Corporate Debtor's operations as a going concern. No order as to costs was made.

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