Resolution Professional can reject creditor committee's proposal for customs guarantee renewal under Section 25(1)

The NCLAT upheld the Adjudicating Authority's decision that renewal of customs bank guarantees during CIRP was not essential for the corporate debtor's going concern status. The tribunal found that since the company was not importing goods during CIRP, no customs duty exemption could be claimed under MPP status. Renewal would impose Rs. 70 crores in commission and renewal charges without providing benefits. The Resolution Professional was empowered under Section 25(1) to reject the Committee of Creditors' proposal for guarantee renewal as it would not lead to any advantage. The appeal was dismissed.

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ISSUES PRESENTED AND CONSIDERED

1. Whether the Resolution Professional is obliged to renew or cause renewal of pre-CIRP Customs Bank Guarantees in deference to a Committee of Creditors' commercial decision where such renewal is said to protect the Corporate Debtor as a going concern.

2. Whether the commission and renewal charges payable for continuation of such Bank Guarantees constitute CIRP costs recoverable from the Corporate Debtor (and thus justifying renewal), or whether renewal unduly burdens the Corporate Debtor without benefit.

3. Whether non-renewal of Customs Bank Guarantees would convert contingent guarantee exposure into immediate fund-based liability that undermines the Corporate Debtor's going concern status (and therefore mandates renewal).

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Obligation of the Resolution Professional to renew pre-CIRP Customs Bank Guarantees to protect the Corporate Debtor as a going concern

Legal framework: Sections 25(1), 20(1) read with 23(2) and 14 of the Insolvency Code govern the duties of the Resolution Professional to preserve assets, manage the Corporate Debtor as a going concern and operate under moratorium.

Precedent Treatment: No prior judicial precedents were cited or applied in the judgment to alter or displace statutory duties; the Tribunal evaluated statutory text and facts of the case.

Interpretation and reasoning: The Tribunal analyzed whether renewal of the Customs Bank Guarantees would in fact "protect and preserve the assets of the Corporate Debtor or support its operations as a going concern." The Tribunal accepted the RP's factual and commercial assessment recorded in CoC minutes that: (a) units for which MPP status was partial or absent would not, during CIRP, be importing goods entitling the Corporate Debtor to customs exemption; (b) there was no ongoing import activity that would make customs exemption actionable during CIRP; and (c) renewal would impose significant commission costs (~Rs.70 Crore) without corresponding operational benefit. Given these factual findings, the Tribunal held that renewal does not meaningfully preserve value or support operations and thus the RP may reject the CoC proposal under Section 25(1).

Ratio vs. Obiter: Ratio - Where renewal of pre-CIRP Bank Guarantees does not demonstrably protect assets or maintain going concern status (factually shown by lack of imports/MMP benefits during CIRP), the RP is empowered to reject CoC proposals to renew such guarantees under Section 25(1). Obiter - General observations on banks' commercial interests and the nature of bank guarantees as instruments of convenience to beneficiaries.

Conclusion: The Tribunal upheld the Adjudicating Authority's conclusion that the RP was justified in refusing renewal because renewal did not advance preservation of assets or the going concern objective.

Issue 2: Whether commission/renewal charges form part of CIRP costs that justify renewal

Legal framework: Section 15(3) makes costs incurred by the RP in running the business as a going concern part of CIRP costs; Sections 25(1) and 20(1) guide RP's decision-making in preserving value.

Precedent Treatment: No specific authorities were invoked to expand Section 15(3) to cover commission payable to banks for renewing pre-CIRP guarantees where renewal does not advance going concern objectives.

Interpretation and reasoning: The Tribunal accepted the principle that CIRP costs include expenses necessary to run the business as a going concern. However, it distinguished necessary costs from expenditures that merely increase financial burden without benefit. Because the renewal commission would not enable the Corporate Debtor to claim customs exemption during the CIRP (no imports/MPP confirmation), treating the commission as a justified CIRP cost would impose an onerous expense without corresponding preservation of value. The RP and CoC's commercial judgment against bearing such costs was afforded weight.

Ratio vs. Obiter: Ratio - Only those expenditures that are necessary and demonstrably contribute to preserving or running the Corporate Debtor as a going concern should be treated as CIRP costs; speculative or gratuitous renewals that increase financial burden without benefit are not appropriate CIRP costs. Obiter - The Tribunal noted that commission payable could, in other circumstances, be treated as part of CIRP costs if renewal were necessary for going concern preservation.

Conclusion: Commission/renewal charges were not to be treated as legitimate CIRP costs in the present factual matrix and did not mandate renewal of the Bank Guarantees.

Issue 3: Effect of non-renewal - conversion of contingent guarantee exposure into fund-based liability and impact on going concern status

Legal framework: Under general principles, invocation of guarantees can convert contingent obligations into immediate liabilities for the guarantor; the Code requires RP to consider contingent/as-yet-unrealized liabilities when preserving enterprise value.

Precedent Treatment: The judgment did not rely on authority establishing a bright-line rule that non-renewal of pre-CIRP guarantees invariably requires renewal to avoid conversion to fund-based liability; instead it applied fact-sensitive analysis.

Interpretation and reasoning: The Tribunal evaluated whether the risk of invocation and consequent conversion to fund liability was immediate and probable such that non-renewal would impair going concern. It found that the Customs Department had filed a claim for the assessed past liability, but that there were no ongoing imports that would trigger invocation of renewed guarantees during CIRP. The RP's assessment-supported by CoC minutes-that non-renewal would not materially affect going concern was accepted. The possibility of eventual invocation did not, on these facts, outweigh the immediate heavy financial burden of renewal.

Ratio vs. Obiter: Ratio - The prospect of contingent liabilities becoming fund-based does not, by itself and in absence of a demonstrated likelihood of invocation that would impair going concern during CIRP, mandate renewal of pre-CIRP guarantees. Obiter - A different factual matrix where invocation risk is imminent could lead to opposite outcome.

Conclusion: On the facts, non-renewal did not create a present adverse effect on the Corporate Debtor's going concern status sufficient to require renewal; therefore non-renewal was permissible.

Cross-references and overall conclusion

The Tribunal treated the issues as interrelated: the statutory duties of the RP (Sections 25(1), 20(1), 23(2)) and the scope of CIRP costs (Section 15(3)) were applied factually to determine whether renewal would preserve value. Where renewal imposes substantial cost without demonstrable preservation or operational benefit (no imports, partial MPP status, lack of immediacy of invocation), the RP may reject CoC proposals for renewal. The Tribunal affirmed the Adjudicating Authority's order dismissing the application and refused interference.

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