Bank Guarantees' Margin Money Must Be Released Post Expiry; Enforcement Actions During Moratorium Barred Under IBC Section 14
In a significant ruling dated September 7, 2026, the National Company Law Tribunal (NCLT), Mumbai Bench - V, clarified the treatment of margin money deposited by a Corporate Debtor during the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC). The bench, comprising Mr. Vinay Goel (Judicial Member) and Mr. Charanjeet Singh Gulati (Technical Member), ordered the Respondent Bank to remit Rs. 1,22,57,258 to the CIRP account of the Corporate Debtor, M/s DK Infrastructure Private Limited.
The dispute arose when the Resolution Professional (RP) of the Corporate Debtor filed an application challenging the Bank's retention of margin money that was deposited as security for Bank Guarantees issued before the CIRP commenced. The RP contended that while the Bank was entitled to retain margin money corresponding to live Bank Guarantees, it had wrongfully retained margin money linked to expired guarantees. Specifically, the Bank was holding Rs. 1,32,19,458 as margin against several Bank Guarantees, but only two remained active with a value of Rs. 9,62,200. The RP allowed the Bank to retain margin money up to 100% of the outstanding guarantees but sought the release of the excess Rs. 1,22,57,258.
The Bank argued that Bank Guarantees do not constitute a "security interest" under the IBC and hence are outside the moratorium imposed under Section 14 of the Code. Furthermore, the Bank cited a lien claimed by the VAT Department over the margin money and insisted on its right to appropriate the funds as per the Credit Arrangement Letter, which allowed utilization of margin money from expired guarantees towards reduction of the borrower's exposure.
After hearing both parties and reviewing precedents, the Tribunal held that margin money is essentially a deposit held as collateral while the Bank Guarantee is alive. Once the Bank Guarantee expires without invocation, the margin money must be released back to the Corporate Debtor. The Tribunal relied on the authoritative judgment by the National Company Law Appellate Tribunal (NCLAT) in Indian Overseas Bank v. Arvind Kumar RP M/s Richa Industries Ltd (2020), which clarified that margin money cannot be retained indefinitely and must revert to the borrower upon expiry of the guarantee.
On the issue of enforcement during moratorium, the Tribunal referenced the NCLAT's ruling in Commissioner of State Tax Department v. Ramchandra Dallaram Chaudhary (Liquidator) (2024), emphasizing that attachment or enforcement actions against the Corporate Debtor's property during moratorium are prohibited under Section 14 of the IBC. The VAT Department may file its claim as an unsecured operational debt but cannot enforce or attach the property during the moratorium period.
Consequently, the Tribunal directed the Bank to remit Rs. 1,22,57,258 to the Corporate Debtor's designated bank account within 30 days. This ruling reinforces the principle that funds deposited as margin for Bank Guarantees must be treated strictly in accordance with the contractual terms and the moratorium provisions under the IBC, safeguarding the Corporate Debtor's assets during insolvency resolution.
Bottom Line:
Margin money deposited for Bank Guarantees by a Corporate Debtor during CIRP cannot be retained beyond the subsistence of live Bank Guarantees. Upon expiry or non-invocation of the Bank Guarantee, the margin money must be returned to the Corporate Debtor, and any attachment or enforcement during moratorium is barred under Section 14 of the Insolvency and Bankruptcy Code, 2016.
Statutory provision(s):
Insolvency and Bankruptcy Code, 2016 - Sections 14, 60(5), 74
Jayanti Lal Jain v. Pranaya Prusty, (NCLT)(Mumbai Bench - V) : Law Finder Doc Id # 2974134
