Kashyap Vaidya,RP In the matter of IDFC First Bank Limited Vs. Ashapura Intimates Fashion Limited - The approving votes must fulfill the threshold percent of voting share of the financial creditors.

NCLT Mumbai (05.10.2020) Kashyap Vaidya,RP In the matter of IDFC First Bank Limited  Vs. Ashapura Intimates Fashion Limited  [IA No. 1113 of 2020 in CP (IB) No. 4488/MB/2018] held that;

• For that, the "percent of voting share of the financial creditors" approving vis-a-vis dissenting-is required to be reckoned. It is not on the basis of members present and voting as such. At any rate, the approving votes must fulfill the threshold percent of voting share of the financial creditors.

• However, without going into the fact that whether the CoC passed the resolution with requisite percentage of voting or not, based on the mandate of Section 33(1)(a), since no Resolution Plan was received within CIRP period and also considering the fact that 270 days of CIRP period are over, this Bench hereby orders the liquidation of the Corporate Debtor.

Excerpts of the order;

# 1. This is an application by the Resolution Professional, Mr. Kashyap Vaidya, under Section 33(1) of the Insolvency and Bankruptcy Code, 2016 (the Code) seeking orders for liquidation of the Corporate Debtor.

#  6. The Applicant submits that the CIRP Period of 270 days expired on 24.03.2020 and since no Resolution Plan was received the Applicant filed the present application for liquidation under section 33(1)(a) and sought reliefs.

# 8. The Applicant further submits that the CoC passed a resolution with majority of not less than 66% of voting share, appointing Mr Bhavesh Rathod as the Liquidator of the Corporate Debtor and the remuneration payable to him is as per Regulation 4 of the IBBI (Liquidation Process Regulation), 2016. Even though, it is submitted that the resolution for appointment of Liquidator was passed with the requisite majority of more than 66%, we have noticed that the above resolution was supported by 60.47% voting share of CoC and 20.47% voted against the resolution and the remaining CoC abstained from voting.

# 9. The Applicant submitted that, considering the percentage of voting among the members present and voting, the percentage works out to 0.36% voting in favour of resolution and hence the resolution is passed.

# 10. The Applicant to buttress his point as above, relied on the Judgement of the Hon’ble NCLAT in the matter of ‘Tata Steel Limited vs. Liberty House Group, CA (AT) 198 of 2018’, wherein it is held as below: 

• “45. A member of the 'Committee of Creditors' who is not present in the meeting either directly or through Video Conferencing and thereby not considered its feasibility and viability and such other requirements as may be specified by the Board, their voting shares, therefore, cannot be counted for the purpose of counting the voting shares of the members of the 'Committee of Creditors'. Therefore, we hold that only the members of the 'Committee of Creditors' who attend the meeting directly or through Video Conferencing, can exercise its voting powers after considering the other requirements as may be specified by the Board. Those members of the 'Committee of Creditors' who are absent, their voting shares cannot be counted. 

• 46. We find that the 'Resolution Plan ' submitted by 'JSW Steel' has been approved by the 'Committee of Creditors' with 97.12% voting shares and voters having 2.88% voting shares remained absent. If some members of the 'Committee of Creditors' having 2.88% voting shares remained absent, it cannot be held that they have considered the feasibility and viability and other requirements as specified by the Board, therefore, their shares should not have been counted for the purpose of counting the voting shares of the 'Committee of Creditors'. In fact, 97.12% voting shares of members being present in the meeting of the 'Committee of Creditors' and all of them have casted vote in favour of 'JSW Steel we hold that the 'Resolution Plan' submitted by 'JSW Steel ' has been approved with 100% voting shares.”

# 11. However, we are unable to accept the contention of the Applicant that the resolution for appointment of liquidator was passed with more than 66% of voting, in view of the fact that the Hon’ble Supreme Court in the case of ‘K Sashidhar vs. Indian Overseas Bank & ors. [Civil Appeal No. 10673]’ at para no 29 held that:

• “29……………… ……Concededly, Regulations 25 and 39 must be read in light of Section 30(4) of the I & B Code, concerning the process of approval of a resolution plan. For that, the "percent of voting share of the financial creditors" approving vis-a-vis dissenting-is required to be reckoned. It is not on the basis of members present and voting as such. At any rate, the approving votes must fulfill the threshold percent of voting share of the financial creditors. Keeping this clear distinction in mind, it must follow that the resolution plan concerning the respective corporate debtors,namely, KS & PIPL and IIL, is deemed to have been rejected as it had failed to muster the approval of requisite threshold votes, of not less than 75% of voting share of the financial creditors. It is not possible to countenance any other construction or interpretation, which may run contrary to what has been noted herein before.”

# 12. However, without going into the fact that whether the CoC passed the resolution with requisite percentage of voting or not, based on the mandate of Section 33(1)(a), since no Resolution Plan was received within CIRP period and also considering the fact that 270 days of CIRP period are over, this Bench hereby orders the liquidation of the Corporate Debtor.

# 13. Mr Bhavesh Rathod, Insolvency Professional, has given his consent to act as a Liquidator of the Corporate Debtor.

ORDER

The application be and the same is allowed. The Corporate Debtor, Ashapura Intimates Fashion Limited, shall be liquidated in the manner as laid down in Chapter-III of the Code with the following consequential directions:

• a) Mr Bhavesh Rathod having Registration No. IBBI/IPA- 001/IPP01200/2018-19/11910 is appointed as Liquidator.

• b) The Liquidator shall issue public announcement stating that the Corporate Debtor is in liquidation.

• c) The Liquidator shall be entitled to such fees as may be specified by the Board in terms of Section 34 (8) of the Code.

• d) The Moratorium declared under Section 14 of the IBC 2016 shall cease to operate here from.

• e) Subject to section 52 of the IBC 2016 no suit or other legal proceedings shall be instituted by or against the Corporate Debtor. This shall however not apply to legal proceedings in relation to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.

• f) All powers of the Board of Directors, Key Managerial Personnel and partners of the Corporate Debtor shall cease to have effect and shall be vested in the Liquidator. 

• g) The Liquidator shall exercise the powers and perform duties as envisaged under Sections 35 to 50 and 52 to 54 of the Code, read with Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations 2016.

• h) Personnel connected with the Corporate Debtor shall extend all assistance and cooperation to the Liquidator as will be required for managing its affairs.

• i) This Order shall be deemed to be a notice of discharge to the officers, employees and workmen of the Corporate Debtor, except when the business of the Corporate Debtor is continued during the liquidation process by the Liquidator.

• j) The Liquidator is directed to send a copy of this Order to concerned Registrar of Companies and Insolvency and Bankruptcy Board of India, New Delhi.

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Sudip Bhattacharya RP Vs. UCO Bank - The amount received during the CIRP when the moratorium is in force, is the asset of the Corporate Debtor.

NCLT Ahmedabad (29.01.2021) in Sudip Bhattacharya RP Vs. UCO Bank  [I.A. No. 911 of 2020 in CP(IB) No. 418 of 2018] held that;

• the amount received during the CIRP when the moratorium is in force, is the asset of the Corporate Debtor and RP has to deal with the same as per the provisions of the IB Code. The Respondent is not entitled to adjust the same when the moratorium is in force. If, he has any dues pending from the Corporate Debtor on the date of commencement of CIRP, it is open for him to file his claim before the RP. 

Facts of the case;

• Respondent (FC) issued Bank guarantee on behalf of the applicant (CD).

• The said bank guarantee was  invoked and encashed  by the beneficiary/ customer on 29th August, 2019.

• Application of Financial Creditor viz. IDBI Bank Ltd filed against the CD, i.e. M/s Reliance Naval and Engineering Ltd to initiate CIRP under Section 7 of IB Code, 2016, was admitted on 15.01.2020.

• the Respondent submitted its claim to the extent of INR 468,55,10,963  before the IRP in Form C' dated 29th January, 2020. The Applicant submits that the entire Claim of the Respondent was duly admitted by the IRP.

• As there was no claim under the performance guarantee, beneficiary/customer returned the amount of bank guarantee to the respondent (FC).

• Respondent submitted its revised FORM C dated 29th October, 2020 wherein it deducted the amount equivalent to the Refund Amount from its total claim amount.

Excerpts of the order;

# 1. The instant application is filed by the RP seeking with the  following relieves: 

• (i) to direct the Respondent to forthwith refund the Refund  Amount and deposit the same in the following bank  account with interest at the rate of 18% p.a for the period held by the Respondent as it forms part of the assets of the Corporate Debtor as the Respondent has acted in contrary and violate the provisions of Section 14 of the Code. 

• (ii) to pass such other necessary orders to enable the Applicant for the purpose of protecting and preserving the assets of the Company. 

# 2. The Applicant stated that the Financial Creditor viz. IDBI Bank Ltd had filed a petition being numbered as CP(IB) 418/2018 against the Corporate Debtor, i.e. M/s Reliance Naval and Engineering Ltd to initiate Corporate Insolvency Resolution process under Section 7 of IB Code, 2016, which was admitted on 15.01.2020. 

# 3. The Applicant submits that pursuant to the public announcement, the Respondent herein submitted its claim to the extent of INR 468,55,10,963(Indian Rupees Four Hundred Sixty-Eight Fifty-Five Lakhs Ten Thousand Nine Hundred and Sixty-Three) before the IRP in Form C' dated 29th January, 2020. The Applicant submits that the entire Claim of the Respondent was duly admitted by the IRP. 

# 22. The Applicant submits that the adjustment of Refund Amount against the dues of the Respondent is in contempt, violation and breach of Section 14 of the Code for the following reasons: 

• (a). Pursuant to the completion of the work and expiry of the warranty period, the Corporate Debtor had written to the Customer for refund of the Bank Guarantee amount as there were no claims during the warranty period from the beneficiary against the Corporate Debtor with respect to the Project. However, the Respondent had sent a communication to the Beneficiary on 19th December, 2019 requesting for refund of the Bank Guarantee amount into the Respondent's designated current account. Accordingly, the Customer vide letter dated 23rd December, 2019 requested the Corporate Debtor and the Respondent to reconcile the conflict amongst themselves regarding which bank account the Refund Amount should be credited and intimate the same to the Customer for the Refund Amount. 

• (b). The Applicant submits that as per Section 14 of the Code, moratorium has been imposed on the Company and therefore transferring, encumbering, alienating or disposing off any of the assets of the Company has been prohibited under the Code. The Applicant submits that Bank Guarantee has been secured by way of the Securities as stated above and no specific charge has been created by the Corporate Debtor in favour of the Respondent. Hence, disposing or adjusting of the Refund Amount by the Respondent would tantamount to enforcement security interest created by way of the Securities and the same has been specifically prohibited under Section 14 of the Code. 

• (C). The Applicant submits that the Hon'ble National Company Law Appellate Tribunal in the matter of Indian Overseas Bank vs. Mr. Dinkar T. Venkatsubramaniam, Resolution Professional for Amtek Auto Limited, Company Appeal (AT) (Insolvency) No. 267 of 2017_vide its order dated November 15, 2017, held that once moratorium is imposed by an order of the Adjudicating Authority, the same shall be applicable on all the stakeholders of the Corporate Debtor including all the financial creditors, hence the Financial Creditors cannot recover any amount from the account of the Corporate Debtor, nor can it appropriate any amount towards its own dues. Relevant paragraph has been reproduced below: 

• - "Having heard learned counsel for the Appellant, we do not accept the submissions made on behalf of the Appellant in view of the fact that after admission of any application under Section 7 of the 'I & B Code', once moratorium has been declared it is not open to any person including 'Financial Creditors' and the appellant bank to recover any amount from the account of the ‘Corporate Debtor” nor it can appropriate any amount towards its own dues." 

• A copy of the order dated November 15, 2017 has been annexed and marked hereto as Exhibit “T”. 

# 23. The Applicant submits that placing reliance on the above mentioned judgment, Hon'ble NCLAT in the matter of State Bank of India vs. Debashish Nanda, Company Appeal (AT) (Insolvency) No. 49 of 2018 vide its order dated April 24, 2018 has held that: 

• “Prima facie, we are of the view that the appellant cannot debit any amount from the Corporate Debtor's account after the order of moratorium, as it may amount to recovery amount in spite of the order of moratorium passed by the Adjudicating Authority in violation of Section 14 of the IBC” 

• A copy of the order dated April 24, 2018 has been attached and marked hereto as Exhibit “U”. 

# 25. Gone through the records and arguments made by the learned counsels of both sides. 

# 26. It is noted that Bank Guarantee was issued on 14.07.2016 for Rs. 3,34,90,458/- in favour of the customer of the Corporate Debtor, which was valid upto 31.08.2019. The Bank Guarantee was invoked by the Customer, Indian Navy on 22.08.2019 for warranty obligations before the commencement of the CIRP date i.e on 15.01.2020. The amount paid by the Respondent Bank on invocation of Bank Guarantee from its own funds on account of non-availability of Funds in Corporate Debtor's Accounts before the commencement of CIRP amounts to grant of credit facility to the Corporate  Debtor before CIRP. The amount retained by the Customer, Indian Navy by invoking Bank Guarantee was released by Indian Navy on 28.09.2020. The amount was released by the customer, Indian Navy after the date of commencement of CIRP when the moratorium is in force to the Corporate Debtor. 

# 27. As per Section 14 of IB Code and in line with the decision of the Hon'ble NCLAT in the matter of Indian Overseas Bank vs. Mr. Dinkar T. Venkatsubramaniam, Resolution Professional for Amtek Auto Limited, Company Appeal (AT) (Insolvency) No. 267 of 2017, the amount received during the CIRP when the moratorium is in force, is the asset of the Corporate Debtor and RP has to deal with the same as per the provisions of the IB Code. The Respondent is not entitled to adjust the same when the moratorium is in force. If, he has any dues pending from the Corporate Debtor on the date of commencement of CIRP, it is open for him to file his claim before the RP. 

# 28. The instant IA is allowed with the above observations and accordingly disposed of. No order as to cost. 

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Bharat Aluminium Ltd. Vs J.P. Engineers Pvt. Ltd. - Bank guarantee can be invoked even during moratorium period issued under section 14 of the IBC.

NCLAT (26.02.2021) in Bharat Aluminium Ltd. Vs J.P. Engineers Pvt. Ltd. [CA (AT)(Insolvency) No.759 of 2020] held that;

• 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

Excerpts of the order;

The Appellant ‘Bharat Aluminium Company Limited’ filed this Appeal against the order dated 31.07.2020 passed by the Adjudicating Authority (National Company Law Tribunal) New Delhi, Bench No. II. Whereby dismissed the Appellant’s Application I.A. No. 2085/ND/2020 and allowed the Respondent No. 2’sApplication I.A. No. 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 Rs. 1,60,00,000/- 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 of aforesaid bank guarantee till 21.04.2020. The Corporate Debtor defaulted in making of payments, therefore, the Appellant for invoking bank guarantee has written a letter dated 03.03.2020 to the Respondent No. 2 bank and also deposited the original bank guarantee to the concern branch. The Respondent No. 2 sent a reply to the Appellant that they can encash the bank guarantee only after taking approval from the IRP. Thereafter, the Appellant had sent a legal notice on 20.03.2020 to the Respondent No. 2 seeking encashment of bank guarantee dated 22.04.2019 in favour of the Appellant. The Respondent No. 2 vide its reply dated 27.03.2020 refused to allow the invocation of the bank guarantee on the ground of enforcement of moratorium under Section 14 (1) of the IBC against the Respondent No. 1.

# 4. The Appellant ‘Bharat Aluminium Ltd.’ filed an application I.A. No. 2085/ND/ 2020 before the Adjudicating Authority for the following relief: (a) Declare that the invocation/encashment of bank guarantee No. 016219/GPR 0021 dated 22.04.2019 is not covered by Moratorium under Section 14 of the IBC.

• (b) Consequently, direct the respondent bank to encash the bank guarantee

• (c) Pass any other order as this Hon’ble Tribunal may deem fit.

# 5. The Respondent No. 2 filed an application IA No. 2572/ND/2020 before the Adjudicating Authority for the following relief:-

• (a) Direct the Appellant not to invoke the bank guarantee in view of Section 14 of the IBC imposed on the Respondent No. 1 i.e Corporate Debtor

• (b) Direct the Appellant not to demand the release of bank guarantee amount from the bank in view of section 14 of the IBC

• (c) Pass any order as this Hon’ble Tribunal may deem fit in the interest of justice.

# 6. Learned Adjudicating Authority by the impugned common order dismissed the Appellant’s application whereas allowed the Respondent No. 2’s application with the direction to the Appellant not to demand the release of bank guarantee amount from the Respondent No. 2 bank, in view of the moratorium declared under section 14 of the IBC2016 in relation to the Corporate Debtor.

# 7. Being aggrieved with the impugned order the Appeal has been filed.

# 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 that moratorium order passed by the Tribunal applies in respect of bank guarantees other than performance bank guarantees furnished by the Corporate Debtor, in respect of its property since it comes within the meaning of security interest’. Therefore, Financial/Operational Creditor is not entitled to invoke bank guarantees other than that comes within the purview of performance guarantee, during moratorium period. Ahmadabad Tribunal, delivered this order on 09.02.2018 whereas with retrospective effect from 06.06.2018 Sub-Section 3 (b) of Section 14 of the IBC has been substituted therefore, in this Order amended provision has not been considered.

# 26. Sub Section 3 of Section 14 of the IBC substituted by the Insolvency and Bankruptcy Code (second Amendment) Act 26 of 2018 with retrospective effect from 06.06.2018, it reads as under:- 

• In section 14 of the principal Act, for sub-section (3), the following sub-section shall be substituted, namely:—

• (3) The provisions of sub-section (1) shall not apply to—

• (a) such transaction as may be notified by the CentralGovernment in consultation with any financial regulator;

• (b) a surety in a contract of guarantee to a corporate debtor."

# 27. We noted that Ld. Adjudicating authority in the impugned order has not considered the aforesaid amendment.

# 28. Learned Counsel for the Respondent No. 2 cited following orders:

• (1) Indian Overseas Bank Vs. Mr. Dinker T Venkatsubramaniam NCLAT decided on 15.11.2017

• (2) Nitin Hashkhmukh Lal Parikh (Dimond Power Transformers) Ltd. vs. Madhya Gujarat Vis Company Ltd. & Ors. NCLT, Ahmadabad Bench, decided on 09.02.201

• (3) IRP of Ruchi Soya Industry Ltd. Vs. ICICI Bank Ltd. NCLT, Mumbai Bench, decided on 05.06.2018

# 29. Aforesaid orders have been passed before the amendment therefore, these citations are not helpful to the Respondent No. 2.

# 30. 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.

# 31. 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. 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: . . . . . .

# 32. Hon’ble Supreme Court in the case V Ramakrishnan (Supra) held that sub-section 3(b) of Section 14 amendment being clarificatory in nature and is retrospective. Section 14 of the IBC refers only to debts due by Corporate Debtors, who are limited liability companies, and it is clear that the vast majority of the cases, personal guarantees are given by Directors who are not in management of the companies. The object of the IBC is not allowed such guarantors to escape from an independent and co-extensive liability to pay off the entire outstanding debt, which is why section 14 of the IBC is not applied to them. Also held that contract of guarantee is between the creditor and principal debtor and the surety whereunder the creditor has a remedy in relation to his debt against both the principal debtor and surety. As per Section 128 of the Contract Act, 1872 the liability of surety is coextensive with that of principal debtor and the creditor may go against either principal debtor or surety or both in no particular sequence. 

# 33. We have considered whether the bank guarantee is an asset of Respondent No. 1 (Corporate Debtor).

# 34. Ld. Counsel for the Appellant has placed reliance on the Judgment of Hon’ble AP High Court in the case of Haryana Telecom Ltd. (Supra) held that:

• “The bank guarantee cannot be said to be the property of the first Respondent (Buyer) simply because it is indirectly going to be affected by enforcement of the said bank guarantee by the writ Appellant”

# 35. Ld. Counsel for the Appellant also cited the Judgment of Hon’ble Supreme Court in the Case of UP State Sugar Corporation (Supra)in which it is held that:

• “When irrevocable and unconditional bank guarantee payable on demand without demur then, whenever such bank guarantee is sought to be encashed by the beneficiary, bank is bound to honour the bank guarantee irrespective of any dispute raised by the customer (at whose instance the guarantee was issued) against the 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 the Appellant’s Application I.A.No.2085/ND/2020 is allowed and declare that the bank guarantee in question can be invocated/encashed even during the moratorium period under section 14 of the IBC against the Corporate Debtor (Respondent No. 1). No order as to costs.

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Energy Watchdog Vs. Central Electricity Regulatory Commission and Ors. Etc. - “Force majeure” clause

Supreme Court (11.04.2017) in Energy Watchdog Vs. Central Electricity Regulatory Commission and Ors. Etc. [Civil Appeal Nos.5399-5400 of 2016] held that;

• “Force majeure” is governed by the Indian Contract Act, 1872. In so far as it is relatable to an express or implied clause in a contract,

• it is governed by Chapter III dealing with the contingent contracts, and more particularly, Section 32 thereof. In so far as a force majeure event occurs de hors the contract, it is dealt with by a rule of positive law under Section 56 of the Contract. 

• when a contract contains a force majeure clause which on construction by the Court is held attracted to the facts of the case, Section 56 can have no application.

Excerpts of the order;

# 32. “Force majeure” is governed by the Indian Contract Act, 1872. In so far as it is relatable to an express or implied clause in a contract, such as the PPAs before us, it is governed by Chapter III dealing with the contingent contracts, and more particularly, Section 32 thereof. In so far as a force majeure event occurs de hors the contract, it is dealt with by a rule of positive law under Section 56 of the Contract. Sections 32 and 56 are set out herein: 

• 32. Enforcement of Contracts contingent on an event happening - Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void. 

• 56. Agreement to do impossible act - An agreement to do an act impossible in itself is void. Contract to do act afterwards becoming impossible or unlawful. A contract to do an act which, after the contract made, becomes impossible or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. 

• Compensation for loss through non-performance of act known to be impossible or unlawful. Where one person has promised to do something which he knew or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promise for any loss which such promisee sustains through the non-performance of the promise.”

# 33. Prior to the decision in Taylor vs. Caldwell, (1861-73) All ER Rep 24, the law in England was extremely rigid. A contract had to be performed, notwithstanding the fact that it had become impossible of performance, owing to some unforeseen event, after it was made, which was not the fault of either of the parties to the contract. This rigidity of the common law in which the absolute sanctity of contract was upheld was loosened somewhat by the decision in Taylor vs. Caldwell in which it was held that if some unforeseen event occurs during the performance of a contract which makes it impossible of performance, in the sense that the fundamental basis of the contract goes, it need not be further performed, as insisting upon such performance would be unjust.

# 34. The law in India has been laid down in the seminal decision of Satyabrata Ghose v. Mugneeram Bangur & Co., 1954 SCR 310. The second paragraph of Section 56 has been adverted to, and it was stated that this is exhaustive of the law as it stands in India. What was held was that the word “impossible” has not been used in the Section in the sense of physical or literal impossibility. The performance of an act may not be literally impossible but it may be impracticable and useless from the point of view of the object and purpose of the parties. If an untoward event or change of circumstance totally upsets the very foundation upon which the parties entered their agreement, it can be said that the promisor finds it impossible to do the act which he had promised to do. It was further held that where the Court finds that the contract itself either impliedly or expressly contains a term, according to which performance would stand discharged under certain circumstances, the dissolution of the contract would take place under the terms of the contract itself and such cases would be dealt with under Section 32 of the Act. If, however, frustration is to take place de hors the contract, it will be governed by Section 56.

# 35. In M/s Alopi Parshad & Sons Ltd. v. Union of India, 1960 (2) SCR 793, this Court, after setting out Section 56 of the Contract Act, held that the Act does not enable a party to a contract to ignore the express covenants thereof and to claim payment of consideration, for performance of the contract at rates different from the stipulated rates, on a vague plea of equity. Parties to an executable contract are often faced, in the course of carrying it out, with a turn of events which they did not at all anticipate, for example, a wholly abnormal rise or fall in prices which is an unexpected obstacle to execution. This does not in itself get rid of the bargain they have made. It is only when a consideration of the terms of the contract, in the light of the circumstances existing when it was made, showed that they never agreed to be bound in a fundamentally different situation which had unexpectedly emerged, that the contract ceases to bind. It was further held that the performance of a contract is never discharged merely because it may become onerous to one of the parties.

# 36. Similarly, in Naihati Jute Mills Ltd. v. Hyaliram Jagannath, 1968 (1) SCR 821, this Court went into the English law on frustration in some detail, and then cited the celebrated judgment of Satyabrata Ghose v. Mugneeram Bangur & Co. Ultimately, this Court concluded that a contract is not frustrated merely because the circumstances in which it was made are altered. The Courts have no general power to absolve a party from the performance of its part of the contract merely because its performance has become onerous on account of an unforeseen turn of events.

# 37. It has also been held that applying the doctrine of frustration must always be within narrow limits. In an instructive English judgment namely, Tsakiroglou & Co. Ltd. v. Noblee Thorl GmbH, 1961 (2) All ER 179, despite the closure of the Suez canal, and despite the fact that the customary route for shipping the goods was only through the Suez canal, it was held that the contract of sale of groundnuts in that case was not frustrated, even though it would have to be performed by an alternative mode of performance which was much more expensive, namely, that the ship would now have to go around the Cape of Good Hope, which is three times the distance from Hamburg to Port Sudan. The freight for such journey was also double. Despite this, the House of Lords held that even though the contract had become more onerous to perform, it was not fundamentally altered. Where performance is otherwise possible, it is clear that a mere rise in freight price would not allow one of the parties to say that the contract was discharged by impossibility of performance.

# 38. This view of the law has been echoed in ‘Chitty on Contracts’, 31st edition. In paragraph 14-151 a rise in cost or expense has been stated not to frustrate a contract. Similarly, in ‘Treitel on Frustration and Force Majeure’, 3rd edition, the learned author has opined, at paragraph 12-034, that the cases provide many options of the principle that a force majeure clause will not normally be construed to apply where the contract provides for an alternative mode of performance. It is clear that a more onerous method of performance by itself would not amount to an frustrating event. The same learned author also states that a mere rise in price rendering the contract more expensive to perform does not constitute frustration. (See paragraph 15-158)

# 45. We are, therefore, of the view that neither was the fundamental basis of the contract dislodged nor was any frustrating event, except for a rise in the price of coal, excluded by clause 12.4, pointed out. Alternative modes of performance were available, albeit at a higher price.This does not lead to the contract, as a whole, being frustrated. Consequently, we are of the view that neither clause 12.3 nor 12.7, referable to Section 32 of the Contract Act, will apply so as to enable the grant of compensatory tariff to the respondents. Dr. Singhvi, however, argued that even if clause 12 is held inapplicable, the law laid down on frustration under Section 56 will apply so as to give the respondents the necessary relief on the ground of force majeure. Having once held that clause 12.4 applies as a result of which rise in the price of fuel cannot be regarded as a force majeure event contractually, it is difficult to appreciate a submission that in the alternative Section 56 will apply. As has been held in particular, in the Satyabrata Ghose case, when a contract contains a force majeure clause which on construction by the Court is held attracted to the facts of the case, Section 56 can have no application. On this short ground, this alternative submission stands disposed of.

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