2023 (9) TMI 85 - AT - Insolvency and Bankruptcy

Tribunal upholds validity of Bank Guarantees' invocation, dismissing challenge

The Tribunal upheld the validity of the 1st Respondent's invocation of Bank Guarantees, dismissing the Appellant's challenge. It was determined that the ... Performance Bank Guarantee - encashment of bank guarantee on adverse progress - exclusion of contract of guarantee / surety from moratorium - moratorium under the Insolvency and Bankruptcy Code and its limited ambit to assets of the corporate debtor - validity of invocation of bank guarantees under a Transmission AgreementPerformance Bank Guarantee - encashment of bank guarantee on adverse progress - validity of invocation of bank guarantees under a Transmission Agreement - Invocation of the bank guarantees furnished by the corporate debtor to Power Grid pursuant to the Transmission Agreement was valid and legally tenable. - HELD THAT: - The Tribunal held that the Transmission Agreement expressly provided for encashment of the bank guarantee in case of 'adverse progress' of work assessed during Joint Co-ordination Meetings and that, on the material before it, adverse progress in construction by the corporate debtor was recorded in such meetings. The bank guarantees were in the nature of performance bank guarantees under the Transmission Agreement and, having regard to the contractual mandate, encashment upon adverse progress was compulsory. The Tribunal found no sufficient cause to interfere with the invocation letters issued by Power Grid and upheld the NCLT's conclusion that the invocations were valid and tenable. [Paras 40, 41, 42]Invocation of the performance bank guarantees by respondent no.1 is valid and the impugned letters seeking encashment cannot be set aside.Moratorium under the Insolvency and Bankruptcy Code and its limited ambit to assets of the corporate debtor - exclusion of contract of guarantee / surety from moratorium - The moratorium under the I&B Code does not prohibit invocation of performance bank guarantees given by the corporate debtor; contracts of guarantee/surety are excluded from the moratorium's prohibition. - HELD THAT: - The Tribunal observed that Section 14's moratorium is confined to the assets of the corporate debtor and does not extend to actions against guarantors or performance bank guarantees. The Tribunal relied on the statutory exclusion of a contract of guarantee from the moratorium's operation and held that performance bank guarantees do not fall within the moratorium; accordingly, invocation of such guarantees is not barred by the Code's moratorium. [Paras 36, 38, 39]Moratorium under the Code does not prevent invocation of the performance bank guarantees; contracts of guarantee/surety are outside the moratorium's prohibition.Validity of invocation of bank guarantees under a Transmission Agreement - maximisation of value of assets / balancing stakeholder interests - The contention that invocation was arbitrary because the ISTS licensee had not undertaken capital investment or construction obligations was rejected. - HELD THAT: - The Tribunal considered the appellant's submissions that Power Grid had not made capital investment or commenced construction and therefore could not invoke the guarantees. The Tribunal found on the record of Joint Co-ordination Meetings and the terms of the Transmission Agreement that invocation was triggered by adverse progress attributable to the corporate debtor and was not rendered arbitrary by the licencee's alleged non-investment. The NCLT's conclusion that the invocation letters were justified was affirmed. [Paras 34, 35, 42]The plea that invocation was arbitrary due to lack of capital investment by respondent no.1 is rejected and does not invalidate the encashment.Final Conclusion: The appeal is dismissed; the NCLT order refusing to quash the letters of invocation of eleven performance bank guarantees is upheld as legally tenable and the encashments are not barred by the Code's moratorium. No costs. Issues Involved:1. Validity of the invocation of Bank Guarantees by the 1st Respondent.2. Applicability of moratorium under Section 14 of the I&B Code, 2016.3. Nature of the Bank Guarantees as Performance Bank Guarantees.Summary:Issue 1: Validity of the Invocation of Bank GuaranteesThe Appellant challenged the impugned order dated 15.06.2023, which dismissed their petition against the invocation of Bank Guarantees by the 1st Respondent. The Appellant contended that the 1st Respondent did not fulfill its obligations under the Transmission Agreement dated 31.03.2016, and had already encashed Bank Guarantees worth Rs.30 Crores, seeking to unjustly enrich themselves by another Rs.36 Crores. The Appellant argued that the project was stalled due to financial issues of the Corporate Debtor's developer, and no capital investment was made by the 1st Respondent. The Tribunal observed that the adverse progress of work by the Corporate Debtor was established during Joint Coordination Meetings, justifying the encashment of Bank Guarantees by the 1st Respondent. The Tribunal concluded that the invocation letters issued by the 1st Respondent were valid and legally tenable.Issue 2: Applicability of Moratorium under Section 14 of the I&B Code, 2016The Appellant argued that the moratorium under Section 14 should prevent the invocation of Bank Guarantees. The Tribunal noted that Section 14 does not prohibit actions against the Corporate Debtor's guarantors and is limited to the assets of the Corporate Debtor. Section 14(3) explicitly excludes contracts of guarantee from the moratorium. The Tribunal held that the Performance Bank Guarantees do not fall under the moratorium provisions of the I&B Code, 2016.Issue 3: Nature of the Bank Guarantees as Performance Bank GuaranteesThe Appellant claimed that the Bank Guarantees were not in the nature of Performance Bank Guarantees and should be considered as security interests under Section 3(31) of the I&B Code, 2016. The Tribunal found that the Bank Guarantees were indeed Performance Bank Guarantees as per Clause 1.0(d) of the Transmission Agreement, which mandated encashment in case of adverse progress of work. The Tribunal affirmed that the Performance Bank Guarantees are excluded from the definition of security interest under Section 3(31) and do not fall under the moratorium.Conclusion:The Tribunal upheld the dismissal of the Appellant's petition, affirming that the invocation of the Bank Guarantees by the 1st Respondent was valid, legally tenable, and not affected by the moratorium under Section 14 of the I&B Code, 2016. The appeal was dismissed, and the connected pending IA No. 819 of 2023 was closed.