Bank guarantee invocation allowed during insolvency proceedings under Section 14 moratorium provisions

NCLAT Principal Bench allowed the appeal challenging an order that restrained invocation of a performance bank guarantee during corporate insolvency proceedings. The tribunal held that Section 14 moratorium provisions under IBC do not impact the right to invoke bank guarantees, citing SC precedent in State Bank of India v. V. Ramakrishnan. The adjudicating authority erred in finding the guarantee was conditional and no default existed. Evidence showed the contractor failed to complete work by the specified date (23.08.2018), with mechanical completion certificate issued only on 31.01.2019, constituting clear contractual breach. The tribunal ruled the guarantee invocation was valid despite ongoing moratorium proceedings.

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Issues Involved:
1. Validity of the invocation of the Performance Bank Guarantee.
2. Jurisdiction of the Adjudicating Authority to restrain the invocation of the Performance Bank Guarantee.
3. Applicability of the moratorium under Section 14 of the IBC to the Performance Bank Guarantee.
4. Exceptional circumstances justifying the non-invocation of the Performance Bank Guarantee.

Detailed Analysis:

1. Validity of the Invocation of the Performance Bank Guarantee:
The Appellant challenged the validity of the invocation of the Performance Bank Guarantee issued by the State Bank of India. The Appellant argued that the Performance Bank Guarantee was irrevocable and unconditional, and the Respondent No. 1 failed to fulfill its contractual obligations, including the timely completion of the mechanical work and addressing defects during the Defects Liability Period. The Appellant invoked the Performance Bank Guarantee on 30.10.2019 due to these breaches. The Adjudicating Authority, however, found that the Performance Bank Guarantee did not appear to be unconditional and that the Appellant failed to prove the fault of the Corporate Debtor. The Appellate Tribunal disagreed, emphasizing that the Guarantee was indeed unconditional and irrevocable, and the Contractor's delay in achieving Mechanical Completion constituted a breach of contract.

2. Jurisdiction of the Adjudicating Authority to Restrain the Invocation:
The Appellant contended that the Adjudicating Authority lacked jurisdiction to restrain the invocation of the Performance Bank Guarantee and to adjudicate the underlying contractual disputes. The Adjudicating Authority had previously entertained similar applications concerning other bank guarantees issued in favor of different entities within the same CIRP. The Appellate Tribunal noted that while the jurisdiction issue was raised, it was not necessary to delve into it given that the Tribunal had decided the application on merits and found the Adjudicating Authority's decision to restrain the invocation erroneous.

3. Applicability of the Moratorium Under Section 14 of the IBC:
The Appellant argued that the moratorium under Section 14 of the IBC does not cover Performance Bank Guarantees, as clarified by the amendment to Section 14(3) and the definition of "Security Interest" under Section 3(31). The Appellate Tribunal referred to the Supreme Court's judgment in 'State Bank of India Vs. V. Ramakrishnan & Anr.' and the Insolvency Law Committee's report, which clarified that the moratorium does not impact the invocation of Performance Bank Guarantees. The Tribunal concluded that the moratorium did not affect the Appellant's right to invoke the Guarantee during the insolvency proceedings.

4. Exceptional Circumstances Justifying Non-invocation:
The Respondent argued that the invocation of the Performance Bank Guarantee would cause irretrievable injury and special equities, particularly given the liquidation process and the potential impact on the Corporate Debtor's stakeholders. The Appellate Tribunal examined precedents, including 'UP State Sugar Corporation Vs. Sumac International Ltd.' and 'Maharashtra State Electricity Board Bombay Vs. Official Liquidator, High Court, Ernakulam & Anr.', and concluded that the mere pendency of liquidation proceedings or potential financial impact did not constitute irretrievable injury or special equities justifying the non-invocation of the Guarantee.

Conclusion:
The Appellate Tribunal allowed the appeal, set aside the Adjudicating Authority's order dated 30.10.2023, and dismissed I.A. No. 2478/2019 (re-numbered as I.A. 4393/2023). The Tribunal held that the Adjudicating Authority erred in restraining the invocation of the Performance Bank Guarantee, as the Guarantee was unconditional and irrevocable, and the moratorium under Section 14 of the IBC did not apply to it. The Tribunal also found no exceptional circumstances that would justify the non-invocation of the Guarantee.

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