2025 (7) TMI 1720 - AT - IBC

Margin Money Held by Bank Guarantees Is Not Refundable During Liquidation Under Insolvency Rules

Mr. Rajendra Prasad Tak, Liquidator of M/s. KVK Nilachal Power Pvt. Ltd. Versus Mahanadi Coalfield Limited

The NCLAT upheld the NCLT's decision dismissing the appeal regarding the refund of margin money deposited by the corporate debtor during liquidation. ... CIRP - Return of bank Guarantees, that were lying with Respondent No. 2 on behalf of the Corporate Debtor - refund of Margin Money, that stood deposited by the Corporate Debtor during liquidation proceedings - Bank Guarantee and the margin money deposited to secure such Bank Guarantee would constitute to be the asset of the Corporate Debtor or not - HELD THAT:- The admitted facts, in respect to the proceedings, which were held before the Ld. NCLT, in the instant case are that at the relevant point of time when the Interlocutory Application was being considered, the Bank Guarantees had already been invoked and hence, it was contended that, as a matter of fact, the Interlocutory Application has become infructuous, because of the invocation of the Bank Guarantee was a fact that was not denied by the parties to the proceedings and hence, it was rightly observed by the Ld. Tribunal in its Impugned Order dated 13.04.2023, that the Appellant will not be entitled for refund of all the margin money once the Bank Guarantee has already been invoked because, the margin money is only a part of the amount for which the Bank Guarantee is taken and invocation of the Bank Guarantee would be both against the money which was deposited as margin money by the Corporate Debtor and the money which has been extended by the Bank towards securing the performance of the Corporate Debtor. There cannot be any iota of doubt, that though the Liquidator has the rights to preserve the assets of the Corporate Debtor, in the present set of circumstances, where the Bank Guarantee and the margin money deposited to secure such Bank Guarantee would not constitute to be the asset of the Corporate Debtor - the view is endorsed that the margin money is a contribution only, towards securing the Bank Guarantee, that it remains with the Bank, as long as the Bank Guarantee is alive, that if the Bank Guarantee expires without being invoked, the margin money reverses back to the Borrower and in case, the Bank Guarantee is invoked by the beneficiary, the margin money goes towards the payment of the amount guaranteed by the said Bank Guarantee to the beneficiary and nothing remains with the Financial Institution, which can be reversed to the Corporate Debtor. Appeal dismissed. ISSUES: Whether the Liquidator is entitled to the refund of margin money deposited with the Bank against Bank Guarantees issued on behalf of the Corporate Debtor during liquidation proceedings.Whether invocation of Bank Guarantees during the moratorium period under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) can be restrained or reversed.Whether margin money deposited as security for Bank Guarantees constitutes an asset of the Corporate Debtor and/or a 'Security Interest' under Section 3(31) and Section 14(1)(c) of the IBC.Whether invocation and appropriation of margin money by the Bank after invocation of Bank Guarantees violates the moratorium under the IBC. RULINGS / HOLDINGS: The Liquidator is not entitled to the refund of margin money once the Bank Guarantee has been invoked, as 'the margin money is only a part of the amount for which the Bank Guarantee is taken' and its invocation applies to both the margin money and the amount extended by the Bank.Invocation of Performance Bank Guarantees is not prohibited under Section 14 of the IBC because 'Security Interest shall not include a performance guarantee' as per Section 3(31) of the Code; therefore, invocation during moratorium cannot be restrained or reversed.Margin money deposited with the Bank 'imbibes within itself a character of the Trust for the benefit of the beneficiary' and hence 'cannot be treated as to be the assets of the Corporate Debtor' or a Security Interest under the IBC.The appropriation of margin money by the Bank upon invocation of the Bank Guarantee during the moratorium period is justified and does not violate the moratorium provisions of the IBC. RATIONALE: The Court applied the statutory definitions under Sections 3(31), 14, 18, 35, and 36(4) of the Insolvency and Bankruptcy Code, 2016, and relied heavily on precedent decisions of the Principal Bench of the National Company Law Appellate Tribunal (NCLAT), including Punjab National Bank v. Supriyo Kumar Chaudhuri and Indian Overseas Bank v. Arvind Kumar.The Court referred to the Supreme Court's decision in Commissioner of Income Tax, Madras v. Laxmi Vilas Bank Ltd., which held that forfeiture of margin money by the Bank in the course of banking business converts the margin money into the Bank's own money, not subject to reversal.The Court emphasized that margin money functions akin to earnest money or a trust deposit for the benefit of the Bank Guarantee beneficiary, and thus is not an asset of the Corporate Debtor that can be included in the liquidation estate.The Court noted that the moratorium under Section 14 prohibits enforcement of Security Interests created by the Corporate Debtor, but since Performance Bank Guarantees and margin money do not constitute Security Interests under the Code, their invocation and appropriation are outside the scope of the moratorium.There was no dissenting or differing opinion expressed in the judgment.