2023 (10) TMI 749 - AT - Insolvency and Bankruptcy

Tribunal rules bank guarantees can be encashed during moratorium; Section 14(3)(b) IBC 2016 exception applies. No costs awarded.

The National Small Industries Corporation Limited (NSIC), Delhi Versus Sh. Prabhakar Kumar Liquidator of Sh. Ganesh Equipment Pvt. Ltd., Canara Bank (formerly Syndicate Bank)

The Tribunal allowed the appeal, setting aside the Adjudicating Authority's order that quashed the invocation of Bank Guarantees during the moratorium ... Invocation of Bank Guarantee allowing the Application of the Resolution Professional - Performance Bank Guarantee or not - exclusion as per provision of Section 3 sub-Section (31) of the IBC, 2016 - applicability of Moratorium under Section 14 of IBC for encashment of the bank guarantee - HELD THAT:- From the perusal of the Agreement and the Bank Guarantee it is apparent that the Bank Guarantee was given by the Bank to secure the interest of the Appellant, as per Clause 6 of the Agreement, the raw material assistance under the Agreement was to be granted by the Appellant to the Corporate Debtor subject to furnishing of surety in the form of Bank Guarantee executed by a nationalised/approved Bank to the satisfaction of the Appellant. It further prescribes that the Appellant shall be entitled to invoke and encash the said Bank Guarantee on the terms and conditions as stipulated in the said Bank Guarantee. From the perusal of the Bank Guarantee bond dated 30.05.2012, this Tribunal finds that the Bank had undertaken to pay the amounts due and payable under the said Guarantee without any demur, merely on a demand from the Appellant and the Bank had undertaken to pay the Appellant any amount so demanded notwithstanding any dispute raised by the Corporate Debtor and that the Bank’s liability under the said Bank Guarantee is absolute and unequivocal - it is apparent that the Bank had absolute, unequivocal and irrevocable liability to pay to the Appellant the amount guaranteed to the Appellant on demand without any demur and irrespective of any objection or dispute or any legal proceeding initiated by the Corporate Debtor. The Moratorium was envisaged to ensure that the Corporate Debtor’s Assets are not liquidated or reduced till the CIRP is completed. The idea behind Moratorium was that no additional stress is brought on the business which is being rescued. In the instant case, the Appellant has raised the demand on the Bank for payment which was guaranteed by the Bank much prior to the initiation of the CIRP. No recovery is being made from the Corporate Debtor and therefore there is no threat immediately to the Assets of the Corporate Debtor. The Bank Guarantee is a contract of Guarantee provided/furnished by the Bank, the surety, to perform the promise, or discharge the liability, of the third person, being the Corporate Debtor herein, in case of his default. From the plain reading of Section 14(3)(b) of the IBC, 2016, along with Section 126 of the Indian Contract Act, 1872, it is apparent that the Bank Guarantee given by the Respondent No. 2 to the Appellant is covered by the exclusion given in Section 14(3)(b) and that provisions of Section 14(1) shall not apply to the instant case. The Appellant had also brought to the attention of this Tribunal to the Judgement of this Tribunal in IDBI Bank Ltd. Vs. Indian Oil Corporation Ltd. [2023 (1) TMI 548 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , PRINCIPAL BENCH , NEW DELHI], wherein it was held that an irrevocable and unconditional Bank Guarantee can be invoked even during Moratorium period in view of the amended provisions under Section 14(3)(b) of the IBC, 2016 - In the instant case also the Bank Guarantee is an irrevocable and unconditional one, and the said Judgement squarely applies to the facts of this case on all fours. Thus, as per the facts of this case, the Bank Guarantee, provided by the Respondent No. 2/Bank is held to be covered by the exception provided in provisions of Section 14(3)(b) of IBC, 2016, and the Moratorium prescribed under Section 14(1) of IBC, 2016, shall not apply to its Encashment. Appeal allowed. Issues Involved:1. Delay in filing the appeal.2. Invocation of Bank Guarantee during the moratorium period.3. Classification of the Bank Guarantee as Financial or Performance.4. Applicability of Section 14(3)(b) of the IBC, 2016.Summary:1. Delay in filing the appeal:The Appellant's delay of two days in filing the present appeal was condoned by the Tribunal vide Order dated 29.11.2021, allowing amendments in the cause title and pleadings.2. Invocation of Bank Guarantee during the moratorium period:The Appellant invoked the Bank Guarantees on 14.02.2020, post the initiation of Corporate Insolvency Resolution Process (CIRP) on 12.02.2020. The Adjudicating Authority quashed the notices for invocation, stating it violated Section 14(1)(c) of IBC, 2016, which prohibits actions to foreclose, recover, or enforce any security interest during the moratorium period.3. Classification of the Bank Guarantee as Financial or Performance:The Adjudicating Authority determined that the Bank Guarantee in question was a Financial Bank Guarantee, not a Performance Bank Guarantee. This distinction was crucial as the moratorium under Section 14 would not apply to Performance Bank Guarantees. The Bank Guarantees were provided for financial assistance to the Corporate Debtor for purchasing raw materials, not for securing performance under a contract.4. Applicability of Section 14(3)(b) of the IBC, 2016:The Tribunal noted that the Adjudicating Authority did not address the applicability of Section 14(3)(b) of IBC, 2016, which exempts sureties in a contract of guarantee from the moratorium. The Tribunal found that the Bank Guarantee was indeed a contract of guarantee, making Section 14(3)(b) applicable. The assets of the surety (the Bank) are separate from those of the Corporate Debtor, and thus, the moratorium does not apply to the encashment of the Bank Guarantee.Conclusion:The Tribunal set aside the Impugned Order of the Adjudicating Authority, allowing the appeal and holding that the Bank Guarantee provided by the Respondent Bank is covered by the exception under Section 14(3)(b) of IBC, 2016. The moratorium under Section 14(1) does not apply to its encashment. The appeal was allowed, and no order as to costs was made.