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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