EMD and PBG Cannot Be Refunded; Only Equity Infusion in Escrow Is Refundable Under Insolvency Rules

The NCLAT held that the Earnest Money Deposit (EMD) and Performance Bank Guarantee (PBG) invoked by the CoC cannot be refunded to the appellant, only the equity infusion amount held in escrow is refundable. The tribunal clarified that it lacks jurisdiction to review its prior judgment, and the operative portion of the judgment must align with its findings. The EMD of Rs. 5 crore, although invoked and included in the total amount considered, was not appropriated by the bank and cannot be distributed to interim creditors or the appellant. The application seeking clarification was disposed of accordingly.

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1. ISSUES PRESENTED and CONSIDERED

• Whether the amount of Earnest Money Deposit (EMD) and Performance Bank Guarantee (PBG) invoked by the Committee of Creditors (CoC) can be refunded to the unsuccessful Resolution Applicant.
• Whether the refund to the unsuccessful Resolution Applicant and payment to Interim Trade Creditors should be made only out of the equity infusion amount, excluding the invoked EMD and PBG amounts.
• Whether interest is payable on the equity infusion amount kept in a non-interest bearing escrow account.
• Whether the timeline for payment to the unsuccessful Resolution Applicant and Interim Trade Creditors should commence before the clarification of the judgment.
• Whether the application filed for clarification amounts to impermissible review or modification of the Tribunal's judgment.
• Whether the operative portion of the judgment requires rectification to align with the findings in the main body of the judgment.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Refundability of Earnest Money Deposit (EMD) and Performance Bank Guarantee (PBG)

Relevant legal framework and precedents: The Resolution Framework and Request for Resolution Plan (RFRP) provisions empower the CoC to invoke EMD and PBG upon non-compliance by the Resolution Applicant. The Tribunal's earlier judgment upheld the invocation of EMD and PBG as per the terms of the RFRP.

Court's interpretation and reasoning: The Tribunal found that the CoC rightly invoked the EMD of Rs.5 Crore and PBG of Rs.50 Crore as per the RFRP and Process Memorandum. The invocation was triggered by the unsuccessful Resolution Applicant's failure to extend the EMD as required. The invocation was upheld in paragraph 72 of the judgment, confirming that these amounts are not refundable.

Key evidence and findings: The amount of Rs.5 Crore as EMD and Rs.50 Crore as PBG were deposited by the unsuccessful Resolution Applicant. The PBG was invoked and appropriated by the CoC. The EMD was invoked but encashed and placed in a fixed deposit account; it was never appropriated by the CoC at the relevant time.

Application of law to facts: Since the EMD and PBG were invoked in accordance with the RFRP, these amounts are not refundable to the unsuccessful Resolution Applicant.

Treatment of competing arguments: The unsuccessful Resolution Applicant contended that the invoked EMD amount should be refunded, but the Tribunal rejected this, holding invocation was justified and refund impermissible.

Conclusions: The invoked EMD and PBG amounts are not refundable and rightly retained by the CoC.

Issue 2: Source of refund/payment to unsuccessful Resolution Applicant and Interim Trade Creditors

Relevant legal framework and precedents: The Tribunal's judgment distinguished between amounts invoked (EMD and PBG) and equity infusion amount deposited by the unsuccessful Resolution Applicant, which was kept in an escrow account.

Court's interpretation and reasoning: The Tribunal clarified that only the equity infusion amount (Rs.37,99,01,370) is refundable to the unsuccessful Resolution Applicant, after payment to Interim Trade Creditors. The invoked EMD amount forms part of the total Rs.42.99 Crores but is excluded from refund and distribution.

Key evidence and findings: The total amount deposited was Rs.92.99 Crores comprising PBG (Rs.50 Crores), EMD (Rs.5 Crores), and equity infusion (Rs.37.99 Crores). The PBG was appropriated, EMD invoked and placed in fixed deposit but not appropriated, and equity infusion kept in a non-interest bearing escrow account.

Application of law to facts: The Tribunal rectified the operative portion of the judgment to reflect that payments to Interim Trade Creditors (Rs.20.9 Crores) and refund to the unsuccessful Resolution Applicant (Rs.17.09 Crores) shall be made only out of the equity infusion amount, excluding the EMD.

Treatment of competing arguments: The Bank of Baroda argued that the operative portion incorrectly included the EMD in amounts payable, which was clarified and rectified. The unsuccessful Resolution Applicant opposed reduction of refund by EMD amount, but the Tribunal held the invocation barred refund.

Conclusions: Refund and payments shall be made exclusively from the equity infusion amount, after adjusting Interim Trade Creditors' dues; EMD and PBG are excluded.

Issue 3: Interest on equity infusion amount kept in non-interest bearing escrow account

Relevant legal framework and precedents: Interest entitlement depends on whether the amount was held in an interest-bearing account.

Court's interpretation and reasoning: The equity infusion amount was kept in an escrow current account which is non-interest bearing, as confirmed by audited financial statements. Therefore, no interest is payable on this amount to either the unsuccessful Resolution Applicant or Interim Trade Creditors.

Key evidence and findings: The audited financial statements and record showed the equity infusion amount was in a non-interest bearing escrow account.

Application of law to facts: Since no interest was earned, no interest liability arises on the equity infusion amount.

Treatment of competing arguments: Interim Trade Creditors sought payment of interest earned, but the Tribunal clarified that no interest was earned on the escrow account funds.

Conclusions: No interest is payable on the equity infusion amount held in the non-interest bearing escrow account.

Issue 4: Commencement of timeline for payment to unsuccessful Resolution Applicant and Interim Trade Creditors

Relevant legal framework and precedents: The Tribunal's judgment directed payment timelines but the Bank of Baroda sought clarification that the timeline should not commence until clarification applications are decided.

Court's interpretation and reasoning: The Tribunal did not explicitly direct postponement of timelines but considered the clarification necessary to avoid confusion regarding amounts payable and source of funds.

Key evidence and findings: The Bank of Baroda's application prayed that payment timelines not commence before clarification.

Application of law to facts: The Tribunal allowed clarification but did not expressly stay the timeline; however, the clarification implicitly affects the payment process.

Treatment of competing arguments: No significant opposition to postponement was recorded; the Tribunal focused on clarity of payment amounts and sources.

Conclusions: Clarification ensures proper execution of payment timelines consistent with the judgment's findings.

Issue 5: Nature of application - Clarification versus impermissible review/modification

Relevant legal framework and precedents: The Tribunal lacks jurisdiction to review or modify its judgment except through clarification applications that do not alter the substantive findings.

Court's interpretation and reasoning: The Tribunal distinguished the present application as a clarification seeking explanation and rectification of operative portions to conform with findings, not a review or modification.

Key evidence and findings: The Bank of Baroda sought clarification on interpretation and operative directions regarding refund and payment amounts.

Application of law to facts: The Tribunal held that the application did not seek to revisit or overturn findings but to clarify and align the operative order accordingly.

Treatment of competing arguments: The unsuccessful Resolution Applicant argued the application was a disguised review, which the Tribunal rejected.

Conclusions: The application is maintainable as a clarification and not an impermissible review or modification.

Issue 6: Rectification of operative portion of judgment to conform with main findings

Relevant legal framework and precedents: It is settled that the operative portion of a judgment must be consistent with the reasoning and findings in the main body.

Court's interpretation and reasoning: The Tribunal found that the operative portion incorrectly stated refund amounts including EMD, which conflicted with the main judgment that EMD and PBG were invoked and non-refundable.

Key evidence and findings: The operative paragraph 100(i) and 100(iv) referred to refund and payment out of Rs.42.99 Crores including EMD, contrary to findings.

Application of law to facts: The Tribunal rectified paragraph 100(i) to reflect refund of Rs.17.09 Crores (equity infusion minus Interim Trade Creditors' dues) and paragraph 100(iv) to direct payment to Interim Trade Creditors out of the equity infusion amount only.

Treatment of competing arguments: The parties agreed on the need for clarity; the Tribunal ensured consistency by rectification.

Conclusions: Operative portions were rectified to conform with the judgment's findings, ensuring clarity and enforceability.

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