2024 (8) TMI 669 - AT - Insolvency and Bankruptcy

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 ... Invocation of Performance Bank Guarantee - Jurisdiction of order restraining the Appellant from encashing the Performance Bank Guarantee - applicability of moratorium u/s 14 of IBC - HELD THAT:- The basis of Judgment of the Adjudicating Authority is that Performance Bank Guarantee is not unconditional and sufficient ground has not made out by the Appellant to prove the fault on the part of Corporate Debtor, hence the Guarantee could not be invoked. The issue as to invocation of Performance Bank Guarantee during the period of Moratorium is now well settled. Reference made to the Judgment of the Hon’ble Supreme Court in the matter of STATE BANK OF INDIA VERSUS V. RAMAKRISHNAN AND ANR. [2018 (8) TMI 837 - SUPREME COURT], where Hon’ble Supreme Court has noticed the amendment made in Section 14(3) and has also noted the Report of the Insolvency Law Committee dated 26.03.2018 in consequence of which amendments were made in Section 14(3). The Committee in its Report has opined that Assets of the surety are separate from those of the Corporate Debtor and proceeding against the Corporate Debtor may not be seriously impacted by the actions against Assets of third parties like sureties. Thus, it is well settled that Section 14 in no manner impact the right of the Appellant to invoke the Bank Guarantee during pendency of the Moratorium and in the present case, it was during currency of the Moratorium 30.10.2019, the Guarantee was invoked. The observation made by the Adjudicating Authority that reading of Clauses of Performance Bank Guarantee does not give the impression of it being unconditional. There is no dispute between the parties that Mechanical Completion Certificate, the date for Mechanical Completion as per the Contract was 23.08.2018 and Certificate was issued as specifying the date of Mechanical Completion as 31.01.2019 - When the Contractor does not complete the Contract within the period specified, it cannot be said that Contractor has complied the terms and conditions of the Contract. In the letter invoking the Bank Guarantee, it was clearly stated by the Appellant that Contractor has not perform his obligation in accordance with the Contract was advised of such failure and did not cure the failure within the time period allowed for in the Contract. When it is an admitted fact that Contractor did not complete the Contract as per the Mechanical Completion Certificate it is not open to hold that there is no default on the part of the Contractor. The Adjudicating Authority committed an error in allowing the Application filed by the RP of the Corporate Debtor for restraining the Appellant, the State Bank of India and other Bank who has given counter Guarantee to invoke the Bank Guarantee. Order passed by the Adjudicating Authority, thus is unsustainable. Appeal allowed. 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.