Moratorium Under IBC Does Not Extend to Bank Guarantees, Rules Mumbai Bench
In a significant ruling, the National Company Law Tribunal (NCLT), Mumbai Bench, has dismissed an application filed by the Interim Resolution Professional (IRP) of DK Infrastructure Private Limited, seeking the refund of an amount realized through the invocation of a bank guarantee during the Corporate Insolvency Resolution Process (CIRP). The tribunal, comprising Mr. Vinay Goel (Judicial Member) and Mr. Charanjeet Singh Gulati (Technical Member), held that the moratorium under Section 14 of the Insolvency and Bankruptcy Code (IBC), 2016, does not bar the invocation or encashment of an unconditional bank guarantee provided on behalf of a corporate debtor.
The case arose when Mr. Jayanti Lal Jain, the IRP for DK Infrastructure Private Limited, filed an application against the invocation of a bank guarantee worth Rs. 87,88,258 by Mr. Arvind Mathur and others, during the CIRP. The IRP contended that such invocation violated the moratorium imposed under Section 14 of the IBC, which prohibits certain actions against the assets of the corporate debtor during the insolvency process.
However, the tribunal observed that Section 14(3)(b) of the IBC specifically excludes a surety in a contract of guarantee from the scope of the moratorium. The NCLT further clarified that, according to the proviso to Section 3(31) of the IBC, a performance bank guarantee does not fall under the definition of 'security interest.' Consequently, the encashment of such a guarantee is not considered an enforcement against the assets of the corporate debtor and is thus not restricted by the moratorium.
The tribunal also referenced previous judgments and legal interpretations, including the Hon'ble NCLAT's decision in the case of National Small Industries Corporation Ltd. v. Sh. Prabhakar Kumar Liquidator, which held that an irrevocable and unconditional bank guarantee is unaffected by the moratorium.
In its order, the NCLT concluded that the invocation of the bank guarantee in this case did not breach the moratorium provisions under the IBC. It dismissed the IRP's application, stating it was devoid of merit and did not entitle the applicant to a refund of the amount realized from the guarantee.
The decision underscores the independent nature of bank guarantees as financial instruments that are not impacted by insolvency moratoriums, provided they fall under the exceptions outlined in the IBC. This ruling is likely to have implications for similar cases where the status of bank guarantees during insolvency proceedings is contested.
Bottom Line :
Insolvency and Bankruptcy Code, 2016 - Moratorium under Section 14 does not bar invocation or encashment of an unconditional bank guarantee/performance bank guarantee furnished on behalf of the corporate debtor - Bank, being surety, is covered by exception under Section 14(3)(b) - Refund of amount realised under invoked bank guarantee cannot be sought on ground of violation of moratorium.
Statutory provision(s): Insolvency and Bankruptcy Code, 2016 - Sections 14, 14(3)(b), 3(31), 60(5)
Jayanti Lal Jain v. Arvind Mathur, (NCLT)(Mumbai Bench) : Law Finder Doc id # 2989470
