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 Tribunal allowed the appeal, setting aside the Adjudicating Authority's order that quashed the invocation of Bank Guarantees during the moratorium ... Moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 - Exception for a surety in a contract of guarantee under Section 14(3)(b) - Irrevocable and unconditional bank guarantee - Contract of guarantee as defined in Section 126 of the Indian Contract Act, 1872Moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 - Exception for a surety in a contract of guarantee under Section 14(3)(b) - Irrevocable and unconditional bank guarantee - Contract of guarantee as defined in Section 126 of the Indian Contract Act, 1872 - Whether the bank guarantees given to secure raw material finance could be invoked/encashed during the moratorium in view of the exception in Section 14(3)(b) of the IBC, 2016. - HELD THAT: - The Adjudicating Authority had held that the guarantees were financial in nature and, not being 'performance bank guarantees', were caught by the moratorium. This Tribunal examined the Agreement and the bank guarantee instruments and found that the guarantees were issued by the Bank to secure repayment of financial assistance and that the guarantees were expressly irrevocable, unconditional and payable on demand without demur. Applying the exclusion in Section 14(3)(b) read with the definition of 'contract of guarantee' in Section 126 of the Indian Contract Act, 1872, the Tribunal held that a bank guarantee given by a bank as surety to discharge the liability of the corporate debtor is covered by the exception for a surety and therefore the moratorium under Section 14(1) does not apply to its encashment. The Tribunal noted the policy behind the moratorium and the rationale for the 2018 amendment but observed that enforcement of a surety's obligation ordinarily does not affect the corporate debtor's assets and is therefore excepted. The Tribunal further observed that the Adjudicating Authority did not address applicability of Section 14(3)(b) and proceeded to set aside the impugned order, holding the invocation permissible in the facts of this case where the guarantee is irrevocable and unconditional. [Paras 15, 16, 23, 26, 27]The bank guarantees being irrevocable, unconditional contracts of guarantee given by the Bank as surety fall within the exception in Section 14(3)(b) and their encashment is not barred by the moratorium; the impugned order quashing invocation notices is set aside.Final Conclusion: The Tribunal allowed the appeal, held that the irrevocable and unconditional bank guarantees constituted a surety's obligation excluded from the moratorium under Section 14(3)(b) of the IBC, 2016, and set aside the Adjudicating Authority's order quashing the invocation of those guarantees; no order as to costs. 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.