NCLAT upholds bank guarantee invocation during moratorium, rules guarantees are independent contracts despite insolvency proceedings

Bhuvan Madan Interim Resolution professional of Indrajit Power Private Limited, Versus Nominated Authority, Ministry of Coal, Indian Bank (erstwhile Allahabad Bank),

Bhuvan Madan Interim Resolution professional of Indrajit Power Private Limited, Versus Nominated Authority, Ministry of Coal, Indian Bank (erstwhile ... Issues Involved:

1. Whether the invocation of the Performance Bank Guarantee (PBG) by the Nominated Authority during the moratorium period under Section 14 of the Insolvency and Bankruptcy Code (IBC) is permissible.
2. Whether the decision of the Nominated Authority to appropriate the PBG was valid and in accordance with the law.
3. Whether the order of the Adjudicating Authority refusing to restrain the invocation of the PBG was correct.

Issue-wise Detailed Analysis:

1. Invocation of PBG During Moratorium:

The central issue was whether the invocation of the PBG during the moratorium period imposed under Section 14 of the IBC was permissible. The Appellant argued that the Nominated Authority should not have proceeded with the invocation of the PBG after the moratorium was enforced by the Adjudicating Authority on 01.02.2024. The Appellant contended that such action was in contravention of the moratorium provisions under Section 14(1)(a) of the IBC, which restricts the continuation of proceedings against the Corporate Debtor.

The Tribunal, however, noted that Section 14(3) of the IBC, as amended, explicitly states that the provisions of the moratorium do not apply to a surety in a contract of guarantee to a corporate debtor. This interpretation was supported by precedents, including the judgment in Bharat Aluminium Co. Ltd. vs. J.P. Engineers Pvt. Ltd., where it was held that bank guarantees can be invoked even during the moratorium period. Additionally, the Supreme Court in State Bank of India vs. V. Ramakrishnan clarified that the moratorium does not extend to the assets of guarantors, reinforcing that the invocation of a PBG is not barred during the moratorium.

2. Validity of the Nominated Authority's Decision:

The Appellant challenged the decision of the Nominated Authority to appropriate the PBG, arguing that it was taken after the moratorium was imposed. The Tribunal examined the timeline and found that the Appropriation Order by the Nominated Authority was issued on 27.10.2023, prior to the commencement of the Corporate Insolvency Resolution Process (CIRP) on 01.02.2024. The Tribunal noted that the decision to appropriate the PBG was based on the recommendations of the Scrutiny Committee, which had determined that the Corporate Debtor failed to comply with the Efficiency Parameters outlined in the Coal Mine Development and Production Agreement.

The Tribunal further observed that the Writ Petition filed by the Corporate Debtor before the Delhi High Court was against the Minutes of the Scrutiny Committee Meeting and not the Appropriation Order. The Writ Petition was dismissed as withdrawn, and thus, did not impact the validity of the Appropriation Order. The Tribunal concluded that the Nominated Authority's decision was valid and in accordance with the law.

3. Order of the Adjudicating Authority:

The Appellant sought an injunction from the Adjudicating Authority to restrain the invocation of the PBG. The Adjudicating Authority, however, held that Section 14 of the IBC does not prohibit the encashment of PBG during the moratorium. The Tribunal upheld this view, emphasizing that a performance guarantee is not considered a security interest under Section 3(31) of the IBC and thus, is not subject to the moratorium's restrictions.

The Tribunal also referred to the Supreme Court's judgment in Standard Chartered Bank vs. Heavy Engineering Corporation Limited, which established that a bank guarantee is an independent contract and should be honored unless there is a case of fraud, irretrievable injustice, or special equities. The Tribunal found no such exceptions in the present case, as the default by the Corporate Debtor was established, and the invocation of the PBG was in accordance with the terms of the Agreement.

In conclusion, the Tribunal dismissed the appeal, affirming the order of the Adjudicating Authority and allowing the invocation of the PBG. The Tribunal found no merit in the Appellant's arguments and held that the Nominated Authority's actions were lawful and justified.