2022 (9) TMI 1129 - AT - Insolvency and Bankruptcy

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 ... Invocation and encashment of Performance Bank Guarantee(s) (PBG) granted by the Appellant - surety in a contract of guarantee to a ‘Corporate Debtor’ - Scope of section 14 of IBC - whether fraud or irretrievable injustice has been done? - HELD THAT:- Section 14(3)(b) states that a surety in a contract of guarantee to a ‘Corporate Debtor’ is not covered under Section 14 - Section 3(31) Describe Security Interest and states that Security Interest shall not include a Performance Bank Guarantees. A Performance Bank Guarantee does not enjoy the benefits of a moratorium under Section 14 of the Code. It is pertinent to mention that the CIRP commenced on 07.11.2019 and notices for invocation were sent prior to the commencement on 18.10.2019. The actual disbursement took place pursuant to the Order of the Hon’ble High Court of Telangana. Having regard to the fact that the Bank Guarantees stood invoked vide letter dated 18.10.2019 by the ‘Corporate Debtor’ on the ground that the Appellant has failed to perform its obligations in terms of the Agreements, read with Clause 2 of the Bank Guarantees and also keeping in view that there are no material on record with respect to any fraud, we do not find any illegality or infirmity in the Order of the Impugned Order. The question of fraud has been dealt with by the City Civil Court, which held that there was ‘no element of fraud’ involved. It is the case of the Resolution Professional that the amount of Rs.2,50,16,972/- be released and permitted to be utilised against the overall outstanding amount of Rs.13,06,30,410/- to ensure that the plant of the ‘Corporate Debtor’ is kept running as a ‘Going Concern’ - the amount may be utilised for the functioning of the ‘Corporate Debtor’ as a Going Concern. Appeal dismissed. 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.