Bank's Section 7 application rejected as corporate debtor paid settlement and guarantees remained uninvoked

NCLAT Principal Bench upheld Adjudicating Authority's rejection of Section 7 application filed by bank against corporate debtor regarding live Performance Bank Guarantees. Court found no error as settlement amount was paid and guarantees were not invoked requiring deposit. Corporate debtor remained ready to provide cash margin or counter-guarantees. NCLAT directed corporate debtor to deposit Rs.3.68 crores with bank in no-lien account for clearing PBG liabilities, with bank to release securities and refund balance after adjustment. Appeal disposed with modified terms for guarantee settlement.

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Issues Involved:

1. Rejection of Section 7 Application.
2. Settlement and Payment of Settlement Amount.
3. De-risking of Live Bank Guarantees (BGs).
4. Invocation of BGs and Existence of Debt.
5. Use of IBC Proceedings for Recovery.

Summary:

1. Rejection of Section 7 Application:
This Appeal by a Financial Creditor challenges the order dated 18.07.2023 by the National Company Law Tribunal, Mumbai Bench-IV, which rejected the Section 7 Application filed by the Appellant. The Appellant, aggrieved by the rejection, has come up in this Appeal.

2. Settlement and Payment of Settlement Amount:
The Appellant extended various financial facilities to the Respondent, resulting in a default that led to the account being classified as a Non-Performing Asset (NPA) on 04.09.2019. A Section 7 Application was filed on 12.03.2021, claiming a default amount of Rs.58,44,90,194/- as on 01.03.2021. During the pendency of the application, a settlement was reached, and the State Bank of India (SBI) accepted a settlement offer of Rs.47.47 crores along with de-risking of live Performance Bank Guarantees (PBG) aggregating to Rs.30.40 crores. The Corporate Debtor paid the settlement amount within the extended time granted by the Adjudicating Authority.

3. De-risking of Live Bank Guarantees (BGs):
The Corporate Debtor faced issues with the format of the Counter Bank Guarantees (CBG) provided by ICICI Bank, which were not accepted by SBI. Despite further attempts to resolve the issue, including offering 100% cash margin against the outstanding BGs, SBI rejected these offers, leading to the contention that the compromise had failed.

4. Invocation of BGs and Existence of Debt:
The Adjudicating Authority held that since the entire settlement amount of Rs.47.47 crores was paid, no debt was due, and the BGs could not qualify as a 'debt' unless invoked. The Adjudicating Authority noted that the Corporate Debtor had made bonafide efforts to de-risk the BGs, which were not accepted due to the obstructive attitude of the Financial Creditor.

5. Use of IBC Proceedings for Recovery:
The Adjudicating Authority emphasized that the Insolvency and Bankruptcy Code (IBC) is not a mere recovery legislation but aims at the revival and continuation of the corporate debtor. The Financial Creditor's use of IBC proceedings for recovery, despite the settlement amount being paid, was deemed inappropriate.

Conclusion:
The Appeal was disposed of with the following directions:
(I) The impugned order dismissing the Section 7 Application was upheld.
(II) The Corporate Debtor was directed to deposit Rs.3.68 crores with the Appellant within thirty days, to be kept in a no-lien account for clearing liabilities of existing live PBGs.
(III) Upon deposit, the Appellant shall release securities over subject properties and hand over relevant documents to the Corporate Debtor.

Parties shall bear their own costs.

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