INVOCATION OF BANK GUARANTEE DURING MORATORIUM PERIOD

[Mr. M. GOVINDARAJAN]

Once the application for the initiation of corporate insolvency resolution process (‘CIRP’ for short) filed by either financial creditor or operational creditor, against a corporate debtor is admitted by the Adjudicating Authority, the Adjudicating Authority will declare a moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short).  During the moratorium period it shall be ensured that the corporate debtor’s assets are not liquidated or reduce till the CIRP is completed.  The moratorium bars the initiation or continuation of legal suits/actions against the corporate debtor.  However Section 14(3) of the Code provides that the restrictions during moratorium shall not apply to-

• such transactions, agreements or other arrangements as may be notified by the Central Government in consultation with any financial sector regulator or any other authority;
• a surety in a contract of guarantee to a corporate debtor.  ;

As such the guarantee can be revoked during CIRP.  The same has been confirmed by the National Company Law Appellate Tribunal (‘NCLAT’ for short) in THE NATIONAL SMALL INDUSTRIES CORPORATION LIMITED (NSIC) , DELHI VERSUS SH. PRABHAKAR KUMAR LIQUIDATOR OF SH. GANESH EQUIPMENT PVT. LTD., CANARA BANK (FORMERLY SYNDICATE BANK) - 2023 (10) TMI 749 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , PRINCIPAL BENCH , NEW DELHI.

In the above said case Ganesh Fire Equipments Private Limited (‘Corporate Debtor’ for reference) entered into an agreement with National Small Industries Corporation Limited, Delhi (‘appellant’ for reference) on 11.05.2012 for the raw material financial assistance against Bank Guarantee under the ‘Raw Material Assistance Scheme’ of the Appellant.  As per the agreement-

• the Corporate Debtor had agreed and undertaken to repay the amount with interest with the agree rate of interest;
• raw material assistance was provided to the Corporate Debtor by the Appellant subject to furnishing of the Bank Guarantee in form of security.

The Corporate Debtor initially required the raw material financial assistance for Rs.1 crore and later increased to Rs.2.99 crores by executing the supplementary agreement.  For this purpose 7 bank guarantees were submitted to the appellant.

In the meanwhile, Jasmeet Associates, an operational creditor initiated CIRP against the Corporate Debtor.  Public announcements were published in the newspapers on 12.2.2020.  The appellant invoked the bank guarantees on 14.02.2020 during the moratorium period.  Therefore the Resolution Professional filed an IA before the Adjudicating Authority praying that the actions of the Appellant in invoking Bank Guarantee were in violation of the provisions of Section 14(1)(c) of the Code, 2016, which provides moratorium prohibiting any action to foreclose, recover or enforce any security interest created by the Corporate Debtor in respect of its property including any action under the SARFAESI Act, 2002.

The Adjudicating Authority quashed the revocation of bank guarantees by the appellant.  The Adjudicating Authority held that RBI directions clearly demarcate the area while considering particular bank guarantee for its classification.  The financial bank guarantee is for financial assistance and performance bank guarantee is for non-performance of obligations in terms of performance of contract.  The appellant admittedly was secured by bank guarantee against the purchase of raw materials and other allied purchases to enhance manufacturing of a unit, which is financial assistance to the unit.  The Respondent No. 2 bank while filing its claim before Resolution Professional has included the amount of bank guarantee in its total claim which is admitted by Resolution Professional. Thus, the same claim cannot be allowed considered as payable twice though submitted by parties in different capacities.

Against this order of Adjudicating Authority the appellant filed the present appeal before NCLAT.  The prayers of the appellant before NCLAT are as below-

• to Set aside the Order dated 25.08.2021 in REKHA SHARMA, RP OF SHRI GNASH FIRE EQUIPMENTS PVT. LTD. AND ORS. VERSUS K. SHARMA, SR. BRANCH MANAGER OF THE NATIONAL SMALL INDUSTRIES CORPORATION LIMITED AND ORS. - 2021 (10) TMI 851 - NATIONAL COMPANY LAW TRIBUNAL , NEW DELHI BENCH passed by the National Company Law Tribunal, New Delhi Bench at New Delhi and not to quash the notices issued for invocation of Bank Guarantees by the Appellant;
• to declare that the Bank Guarantees in question can be invocated/encashed even during the moratorium period under section 14 of the Code against the Corporate Debtor;
• to Direct the Respondent No.2 to release the payment of Bank Guarantees invoked by the Appellant;
• to Direct the Respondent No. 2 to release amount of interest @ 16.05% per annum on amount of Bank.

The appellant submitted the following before NCLAT-

• In the Impugned Order the Adjudicating Authority has held that since the Bank Guarantee in question does not fall under the category of ‘Performance Bank Guarantee’ to qualify for exclusion as per provision of Section 3 sub-Section (31) of the Code, invocation of such Guarantee is not permissible under Section 14 of the Code.
• The Adjudicating Authority has erred in not accepting that the Bank Guarantee is irrevocable, unconditional and without demur and can be invoked even during the Moratorium period in view of the amended provisions under Section 14(3)(b) of the Code.
• The Appellant has not filed any claim either before the official Liquidator or the Resolution Professional. Thus, the question of claiming amounts pertaining to the Bank Guarantee twice does not arise at all.
• The Appellant is claiming the amount of Bank Guarantee from the Respondent Bank and even if the said amount of Bank Guarantee is included by the Bank in its claim before the Resolution Professional/Liquidator even then it will not amount to double claim.

The Resolution Professional, the first respondent in this case, submitted the following before NCLAT-

• The Bank Guarantees as submitted by the Corporate Debtor were not Performance Bank Guarantee but only Financial Guarantees as they were submitted only for obtaining raw material financial assistance and were not for securing the performance of providing any goods or services under any contract.
• The Bank Guarantees are also not covered by the exception given in Section 14(3)(b) as it is not a ‘surety’ in a ‘Contract of Guarantee’ towards Corporate Debtor.
• The respondent bank is a Corporate Guarantor and relied upon the provisions of Section 5A of the Code; is merely issuing authority of a Bank Guarantee and cannot be treated as a Corporate Guarantor.
• Such averment is made by the Appellant for the first time before the Appellate Tribunal and no such averment was ever made before the Adjudicating Authority.

The Canara Bank contended that the Bank Guarantee invoked is a Financial Bank Guarantee, that Bank is not a Corporate Guarantor and that the provisions of Section 14(3)(b) of the Code are not applicable to the facts of this case.

The NCLAT considered the submissions made by the parties to the present appeal.  The NCLAT observed that from the perusal of the Agreement and the Bank Guarantee it is apparent that the Bank Guarantee was given by the Bank to secure the interest of the Appellant, as per Clause 6 of the Agreement the raw material assistance under the Agreement was to be granted by the Appellant to the Corporate Debtor subject to furnishing of surety in the form of Bank Guarantee executed by a nationalized/approved Bank to the satisfaction of the Appellant.

The NCLAT analyzed the provisions of the contract entered into between the appellant and the corporate debtor. The NCLAT found that the Bank had undertaken to pay the amounts due and payable under the said Guarantee without any demur, merely on a demand from the Appellant and the Bank had undertaken to pay the Appellant any amount so demanded notwithstanding any dispute raised by the Corporate Debtor and that the Bank’s liability under the said Bank Guarantee is absolute and unequivocal.  The Bank had absolute, unequivocal and irrevocable liability to pay to the Appellant the amount guaranteed to the Appellant on demand without any demur and irrespective of any objection or dispute or any legal proceeding initiated by the Corporate Debtor.

The Appellant had not filed any claim before Resolution Professional and it is Respondent No. 2 who has filed the claim before the Resolution Professional.  The Moratorium shall not apply to a surety in a contract of Guarantee to a Corporate Debtor.  The NCLAT also analyzed the provisions of Section 126 of the Contract Act.    It is apparent that the `Bank Guarantee’ given by the Respondent No. 2 to the Appellant is covered by the exclusion given in Section 14(3)(b) and that provisions of Section 14(1) shall not apply to the instant case.  In the instant case also the `Bank Guarantee’ is an `irrevocable’ and unconditional one.

The NCLAT held that the ‘Bank Guarantee’ provided by the Respondent No. 2/Bank is held to be covered by the exception provided in provisions of Section 14(3)(b) of the Code and the Moratorium prescribed under Section 14(1) of the Code, shall not apply to its ‘Encashment’.  The NCLAT set aside the order of the Adjudicating Authority and allowed the appeal.