TMI Blog2021 (2) TMI 1151X X X X Extracts X X X X X X X X Extracts X X X X ..... her the financial bank guarantee can be invoked after issuance of moratorium under Section 14 of the IBC? - HELD THAT:- After substitution of Sub-Section 3(b) the provision of Section 14(1) of the IBC shall not apply to surety in the contract of guarantee to a Corporate Debtor - This amendment has been made on the recommendation of Report of Insolvency Law Committee March, 2018. In para 5.10 5.11 of the Report of Insolvency Law Committee specifies that the assets of the surety are separate from those of the Corporate Debtor and proceedings against the Corporate Debtor may not be seriously impacted by the actions against the assets of third parties like sureties. In Para 5.11 of the Report of Insolvency Law Committee concluded that Section 14 of the IBC does not intend to bar actions against assets of guarantors to the debts of the Corporate Debtor and recommended that explanation to clarify this may be inserted in Section 14 of the IBC. The scope of moratorium may be restricted to the assets to the Corporate Debtor only. Validity of argument that the amendment of 2018, which makes it clear that Section 14(3), is now substituted to read that the provisions of sub-section (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2572/ND/2020 and directed the Appellant not to demand the release of bank guarantee amount from the Respondent No. 2, in view of the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) against the M/s J.P. Engineers Private Limited. (Corporate Debtor) Respondent No. 1. 2. Brief facts of this case are that the Operational Creditor M/s Worldwide Metals Pvt. Ltd. filed Company Petition No. IB-1048/ND/2019 under Section 9 of the IBC for initiation of Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor M/s J.P. Engineers Pvt. Ltd. The Application was admitted by the Adjudicating Authority vide order dated 26.02.2020 and Mr. Sumit Bansal was appointed as an Interim Resolution Professional (IRP). 3. The Appellant had entered into an Agreement with the Corporate Debtor for Sale and Purchase of Aluminium Products for the period of 01.04.2019 to 31.03.2020. For ensuring the payments the Corporate Debtor had issued a bank guarantee dated 22.04.2019 amounting to ₹ 1,60,000,00/- executed by Andhra Bank Respondent No. 2 (Andhra Bank is now merged with Union Bank of India). Thereafter, the Respondent No. 2 extended the validity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ambit of moratorium under Section 14 of the IBC and that the same reasoning would apply to the bank guarantee. Performance bank guarantee is not defined in the IBC however, Regulation 36(B) of the IBBI Regulations (Insolvency Resolution Process for Corporate Persons) Regulations 2016, deals with the performance bank guarantees whereby it can be seen that the performance guarantee is monetary in nature and therefore, the reasoning behind excluding a performance bank guarantee can squarely be applied to bank guarantees as well. 9. It is further submitted that Section 14(3) (b) of the IBC provides that Moratorium will not be applicable to a surety in a contract of guarantee to a Corporate Debtor . Therefore, the Respondent No. 2 bank cannot take advantage of the moratorium that has been imposed upon the assets of the Corporate Debtor. For this purpose, placed reliance on the judgement of Hon ble Supreme Court in the Case of SBI Vs. V. Rama Krishnan Ors. (2018) 17 SCC 394. 10. It is also submitted that the legislative intend behind Section 14 of the IBC is only to secure the Assets of the Corporate Debtor and the benefit of moratorium ought not to be extended to third partie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capacity as a surety of the Respondent No. 1. Thus, the impugned order is not sustainable in law and is liable to be set aside. 15. Learned Counsel for the Respondent No. 1 has not filed any Reply Affidavit since the issue in regard to bank guarantee is between the Appellant and Respondent No. 2. 16. Learned Counsel for the Respondent No. 2 submitted that the guarantee in question is a bank guarantee and not a performance guarantee as held by Ld. Adjudicating Authority. The bank guarantee is covered by the moratorium under Section 14 of the IBC thus, enforcing such security interest during the moratorium period would violate the Section 14 of the IBC. The provisions of Section 3(31) of the IBC makes it clears that the guarantee in question falls under the ambit of any other agreement or arrangement securing payment or performance of any obligation of any person . This Appellate Tribunal in the case of State Bank of India Vs. Debashish Nanda CA (AT) (Ins) No. 49 of 2018 held that Financial Creditor cannot debit any amount from the Corporate Debtor accounts, after the order of moratorium, as it may amount to recovery in violation of the Section 14 of the IBC. This Appellate Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a letter to the Respondent No. 2 for invocation of the bank guarantee. 22. In view of aforesaid admitted facts and the terms and conditions of the guarantee, Ld. Adjudicating Authority rightly held that bank guarantee in question is a financial bank guarantee and not a performance bank guarantee. 23. Now, we have to consider whether the financial bank guarantee can be invoked after issuance of moratorium under Section 14 of the IBC. 24. The Adjudicating Authority held that the bank guarantee does not fall within the purview of the proviso to Section 3(31) of the IBC because a bank guarantee cannot be described as performance bank guarantee. The bank guarantee falls within the purview of the definition of security interest as defined under section 3(31) of the IBC. Therefore, during the moratorium the bank guarantee cannot be invoked as the same may be prohibited under Section 14(1) (c) of the IBC. 25. Ld. Adjudicating Authority while giving the aforesaid finding placed reliance on the judgment of NCLT Ahmadabad Bench passed in the matter of Nitin Hashkhmukh Lal Parikh (Diamond Power Transformers) Ltd. vs. Madhya Gujarat Vis Company Ltd. Ors. Wherein it is held tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the assets of third parties like sureties. In Para 5.11 of the Report of Insolvency Law Committee concluded that Section 14 of the IBC does not intend to bar actions against assets of guarantors to the debts of the Corporate Debtor and recommended that explanation to clarify this may be inserted in Section 14 of the IBC. The scope of moratorium may be restricted to the assets to the Corporate Debtor only. Pursuant to this Report Legislation has substituted Sub Section 3(b) of Section 14 (With retrospective effect 06.06.2018) by Insolvency and Bankruptcy Code, (Second Amendment) Act, 26 of 2018. The effect of the amendment has been considered by the Hon ble Supreme Court in the Case of SBI Vs. V. Ramakrishnan Ors. (2018) 17 SCC 394 read as under: 30. We now come to the argument that the amendment of 2018, which makes it clear that Section 14(3), is now substituted to read that the provisions of sub-section (1) of Section 14 shall not apply to a surety in a contract of guarantee for corporate debtor. The amended Section reads as follows: 14. Moratorium. -(1)-(2) xxx xxxxxx (3) The provisions of sub-section (1) shall not apply to- (a) such transactions as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat such a broad interpretation of the moratorium may curtail significant rights of the creditor which are intrinsic to a contract of guarantee. 5.9 A contract of guarantee is between the creditor, the principal debtor and the surety, where under the creditor has a remedy in relation to his debt against both the principal debtor and the surety [National Project Construction Corporation Limited v. Sandhu and Co., AIR 1990 P H 300]. The surety here may be a corporate or a natural person and the liability of such person goes as far the liability of the principal debtor. As per section 128 of the Indian Contract Act, 1872, the liability of the surety is co-extensive with that of the principal debtor and the creditor may go against either the principal debtor, or the surety, or both, in no particular sequence [Chokalinga Chettiar v. Dandayunthapani Chattiar, AIR 1928 Mad 1262]. Though this may be limited by the terms of the contract of guarantee, the general principle of such contracts is that the liability of the principal debtor and the surety is co-extensive and is joint 36 and several [Bank of Bihar v. Damodar Prasad, AIR 1969 SC 297]. The Committee noted that this characteri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 33.1. (i) CIT v. Shelly Products, (2003) 5 SCC 461: 38. It was submitted that after 1-4-1989, in case the assessment is annulled the assessee is entitled to refund only of the amount, if any, of the tax paid in excess of the tax chargeable on the total income returned by the assessee. But before the amendment came into effect the position in law was quite different and that is why the legislature thought it proper to amend the section and insert the proviso. On the other hand learned counsel for the Revenue submitted that the proviso is merely declaratory and does not change the legal position as it existed before the amendment. It was submitted that this Court in CIT v. Chittor Electric Supply Corpn [(1995) 2 SCC 430 : (1995) 212 ITR 404] has held that proviso (a) to Section 240 is declaratory and, therefore, proviso (b) should also be held to be declaratory. In our view that is not the correct position in law. Where the proviso consists of 38 two parts, one part may be declaratory but the other part may not be so. Therefore, merely because one part of the proviso has been held to be declaratory it does not follow that the second part of the proviso is also declarator ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of statutes. Usually, if not invariably, such an Act contains a Preamble, and also the word declared as well as the word enacted . But the use of the words it is declared is not conclusive that the Act is declaratory for these words may, at times, be used to introduced new rules of law and the Act in the latter case will only be amending the law and will not necessarily be retrospective. In determining, therefore, the nature of the Act, regard must be had to the substance rather than to the form. If a new Act is to explain an earlier Act, it would be without object unless construed retrospective. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended. The language shall be deemed always to have meant is declaratory, and is in plain terms retrospective. In the absence of clear words indicating that the amending Act is declaratory, it would not be so construed when the pre-amended provision was clear and unambiguous. An amending Act may be purely clarificatory to c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... beneficiary . 36. Ld. Counsel for the Appellant has also cited the Order of this Appellate Tribunal in the Case of Gail India Ltd. (Supra) in this case the Corporate Debtor has issued performance bank guarantee whereas the case in hand is in regard to financial bank guarantee. Therefore, this judgment is not helpful to the Appellant. 37. With the aforesaid, we hold that the Corporate Debtor has issued bank guarantee for ensuring the price of goods. The bank guarantee is irrevocable and unconditional and payable on demand without demur. The assets of the surety are separate from those of the corporate debtor, and proceedings against the corporate debtor may not be seriously impacted by the actions against assets of third party like surety. Bank guarantee can be invoked even during moratorium period issued under section 14 of the IBC in view of the amended provision under section 14 (3)(b) of the IBC. 38. Ld. Adjudicating Authority has not considered the aforesaid amended provision. Therefore, the impugned order is not sustainable in law. Hence, the impugned order is hereby set aside. Resultantly the Respondent No. 2 s Application I.A.No.2572/ND/2020is dismissed whereas th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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