2023 (1) TMI 548 - AT - Insolvency and Bankruptcy

Bank Guarantee can be invoked during moratorium period under the Insolvency and Bankruptcy Code

IDBI Bank Ltd. Versus Indian Oil Corporation Ltd., Ashwini Mehra, Resolution Professional

The Tribunal dismissed the appeal, ruling that an irrevocable and unconditional Bank Guarantee can be invoked during the moratorium period under Section ... Seeking encashment of the Bank Guarantees issued by the Appellant and Central Bank of India, during moratorium under Section 14 of IBC - It is contended that the Corporate Debtor has illegally promised to keep the BG’s issued by the Appellant alive for full value on its own, without any concurrence from the Appellant Bank - HELD THAT:- Having regard to the findings in the Arbitration Award referring to the same BGs and encashment thereof and the observation of the Hon’ble Arbitral Tribunal that there was no reason to interfere with the encashment of ABGs by IOCL and that there was no injustice or harm caused to it by the encashment, we do not see any substantial ground to delve into the issue of any breach of terms of the contract or any alleged fraud between IOCL and the Corporate Debtor - It is also pertinent to note that the Appellant Bank had not taken any action with respect to the issue of fraud raised by them. Bank Guarantees are outside the scope of the moratorium under Section 14 of the Code and Section 3 (31) specifically excludes Performance Bank Guarantees (PBGs). The Hon’ble Supreme Court in M/S. DYNEPRO PRIVATE LIMITED VERSUS V. NAGARAJAN [2019 (3) TMI 2013 - SC ORDER], upholding the decision of this tribunal has held that NCLT has no jurisdiction to decide the question of disputes and claims/counter claims. Thus, an irrevocable and unconditional Bank Guarantee can be invoked even during moratorium period in view of the amended provision under Section 14 (3) (b) of the Code - appeal dismissed. Issues Involved:1. Whether Bank Guarantees can be invoked/encashed during moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (the Code).2. Whether the Adjudicating Authority failed to appreciate that Bank Guarantees are required to be strictly construed in terms thereof.3. Whether there was any arrangement entered into between IOCL and the Corporate Debtor for seeking additional advances without any intimation to the Bank.4. Allegations of fraud committed by IOCL and the Corporate Debtor against the Appellant Bank.Issue-wise Detailed Analysis:1. Invocation/Encashment of Bank Guarantees During Moratorium:The primary issue was whether the Bank Guarantees could be invoked during the moratorium period under Section 14 of the Code. The Tribunal referenced Section 14(3)(b) of the Code, which explicitly states that the moratorium does not apply to a surety in a contract of guarantee to a corporate debtor. The Tribunal also cited the legislative intent behind the statute, as explained in the Report of the Insolvency Law Committee, which emphasized that proceedings against sureties do not impact the CIRP and should be respected even during a moratorium. The Tribunal concluded that Bank Guarantees are outside the scope of the moratorium under Section 14 of the Code and can be invoked even during the moratorium period.2. Strict Construction of Bank Guarantees:The Appellant contended that the Bank Guarantees were wrongfully utilized contrary to their terms. The Tribunal noted that the Bank Guarantees in question were unconditional and irrevocable, payable on demand. The Tribunal cited the Hon'ble Supreme Court's ruling in U.P. Cooperative Federation Ltd. vs. Singh Consultants and Engineers Pvt. Ltd., which held that an irrevocable and unconditional bank guarantee payable on demand must be honored by the bank irrespective of any disputes raised by the customer. The Tribunal found no merit in the argument that the terms of the Bank Guarantees were altered or breached without the Bank's concurrence.3. Arrangement Between IOCL and Corporate Debtor:The Appellant argued that IOCL and the Corporate Debtor entered into a new arrangement for additional advances without the Bank's concurrence. The Tribunal referred to the findings of the Hon'ble Arbitral Tribunal, which had dismissed the Corporate Debtor's application seeking a stay on the encashment of the same Bank Guarantees. The Arbitral Tribunal had concluded that the invocation of the Bank Guarantees did not cause irretrievable injustice or harm to the Corporate Debtor and that the legislative intent behind the IBC was clear that the mere pendency of CIRP is not a ground for interdicting Bank Guarantees. The Tribunal found no substantial ground to delve into the issue of any breach of terms of the contract or any alleged fraud between IOCL and the Corporate Debtor.4. Allegations of Fraud:The Appellant alleged that fraud was committed by IOCL and the Corporate Debtor in concert. The Tribunal noted that the Appellant Bank had not taken any action with respect to the issue of fraud raised by them. The Tribunal referred to the findings of the Hon'ble Arbitral Tribunal, which had found no reason to interfere with the encashment of the Bank Guarantees and had dismissed the application of the Corporate Debtor seeking a stay on the encashment. The Tribunal concluded that there was no substantial ground to delve into the issue of fraud and that the findings of the Hon'ble Arbitral Tribunal had attained finality.Conclusion:The Tribunal dismissed the appeal, holding that an irrevocable and unconditional Bank Guarantee can be invoked even during the moratorium period under Section 14(3)(b) of the Code. The Tribunal found no merit in the arguments regarding the strict construction of the Bank Guarantees, the alleged new arrangement between IOCL and the Corporate Debtor, and the allegations of fraud. The findings of the Hon'ble Arbitral Tribunal regarding the encashment of the Bank Guarantees were upheld, and the appeal was dismissed with no order as to costs.