NCLAT (19.07.2021) in C & C Construction Ltd. Vs. Power Grid Corporation of India Ltd. (Company Appeal (AT) (Insolvency) No. 781 of 2019 & I.A No. 746, 951 & 952 of 2021) held that;
It is now amply clear that the bank guarantee issued by the bankers are also the responsibility of the bankers and the fund will go out of the fund of the banks and not directly the fund from the corporate debtor.
However, in order to keep the corporate debtor alive during moratorium, keeping in minds the provisions of Section 14 (1) (c) r/w Section 14 (3) (b), if any, such bank guarantee is liquidated, it can be restricted to the full value of the guarantee minus margin money provided by corporate debtor to the banker for taking that bank guarantee and accordingly, banks can release the fund to the extent of full value of the bank guarantee minus margin money provided by the corporate debtor to the banker for the bank guarantee.
Excerpts of the order;
# 1. The present appeal has been filed by Mr. Navneet Kumar Gupta ‘Resolution Professional’ (RP) of the ‘Corporate Debtor’ – ‘C&C Construction Limited’ under Section 61 of the ‘Insolvency and Bankruptcy Code, 2016’ (in short ‘Code’) against the order dated 22.07.2019 passed by the ‘Adjudicating Authority’ (National Company Law Tribunal), Principal Bench New Delhi, in C.A No. 1248/2019 in C.P No. (IB) 1367(PB)/2018. The RP is aggrieved by the Adjudicating Authority order as it has vacated an ‘ad-interim’ injunction which it has previously granted against encashment of bank guarantee issued on behalf of Appellant to its various customers including the Respondent herein.
# 2. An ‘Interlocutory Application’ (IA ) No. 746/ 2021 in Company Appeal (AT) (Ins) no. 781 of 2019 has been filed by Axis Bank Ltd., seeking clarifications / directions from this Tribunal regarding encashment of bank guarantee issued by ‘Axis Bank Ltd’ on behalf of the joint venture of the ‘Corporate Debtor’. The joint venture named M/s. EPI – C&C JV, is an unincorporated joint venture between ‘C&C Construction Ltd., and ‘Engineering Projects India Ltd’. The ‘Axis Bank’ has issued bank guarantees in favour of the ‘Ministry of External Affairs’ for this joint venture projects based on the request of the Corporate Debtor for the project.
# 4. The ‘Adjudicating Authority’ has elaborately explained briefly the material facts of the case, the position of the ‘Corporate Debtor’ and the provision of the Code particular Section 3(31) and Section 14 of the Code and also considered the certain citations and, thereafter, has allowed the C.A No.1248(PB)/2019 wherein the petitioner – M/s. ICICI Bank Ltd. vide order of the Adjudicating Authority has allowed the petition to invoke/encash bank guarantee issued in its favour by the Corporate Debtor without seeking leave of the Tribunal. The Adjudicating Authority has also stated that the ‘Performance Bank Guarantee’ may not be invoked / encashed before 01.08.2019. The CIRP of the Corporate Debtor has been initiated vide order dated 14.02.2019 in CP (IB) NO.1367(PB)/2018.
# 6. The Appellant is critical that the CIRP is in progress and law has provided a “calm period” where creditors stay their hands, the purpose is that the moratorium while in operation provides impetus for rival proposal and make up what has to be done. He has also submitted a good realisation can generally be obtained if the firm is sold as a going concern.
# 7. The Respondent is a GoI Enterprise and a Central Transmission Utility under ‘Ministry of Power’. As a national transmitter of Electricity the Respondent engages several contractors to set up electricity powers and conductors / wires where the Appellant is one such contractor. The Appellant and the Respondent has entered into 4(four) such contract/agreements dated 24.12.2010, 31.01.2012, 11.04.2016 & 27.09.2016. The Appellant has either completed the contract with much delay or has failed to return the material or has consumed excess material. All this has lead only under performance of the Respondent. As per the terms of the Contract, the Appellant has provided the various bank guarantee to the Respondent including in respect of work entrusted to the joint ventures. Such joint venture is not a separate legal entity. The Respondent has also stated that the Bank Guarantee is not an asset of the Corporate Debtor but the money will go from the account of the issuing bank and not from the Corporate Debtor, the Corporate Debtor will lose only margin money when the bank guarantee is encashed. They have also stated that bank guarantee can only be injuncted, if it is affected by fraud or encashment of bank guarantee will create special inequity that will cause ‘irretrievable injustice’. The Appellant has failed to establish both the ingredients. They have also stated that, if appeal is allowed the Respondent will suffer a major injury as it will affect their completion of various contracts.
# 8. The learned counsel for the ‘Axis Bank Ltd’ has stated that ‘Ministry of External Affairs’, GoI is asking them to invoke such bank guarantee. However, such bank guarantee is covered by an ‘omnibus counter guarantee’ from corporate debtor. This bank has issued number of guarantees in favour of various beneficiaries. In any case finally they sought the direction / clarification in respect of encashment of such bank guarantee issued by ‘Axis bank Ltd’ in favour of ‘Ministry of External Affairs’.
# 9. The learned counsel for the ‘Ministry of External Affairs’ submitted that the bank guarantee provided against the mobilisation advance were unconditional and irrevocable. The ‘MEA’ was constrained to approach the Axis Bank Ltd to forfeit the bank guarantee but they have refused to do so unless they get a clarification/direction from the Tribunal. The learned counsel has also submitted that the strategic importance of the project to the country. They have also stated that these bank guarantees involves bilateral relations with neighbouring country and delay in encashing the bank guarantee would result in further delaying the project of immense national and strategic importance.
# 10. The parties have submitted various citations to supplement and advance their arguments in their own format. They have cited judgments both in relating to the Code and also relating to other laws to supplement their views.
# 11. We have gone through the elaborate submissions made by the parties and provisions of the Code. Section 3(31) and Section 14 of the Code are enumerated hereunder: . . . .
# 12. The Hon’ble Supreme Court in SBI Vs. Rama Krishnan (2018) 17 SCC 394 at para 30-33 has elaborately discussed the subject of surety and also the status of surety in a contract of guarantee for corporate debtor. Section 14 (3) (b) of the Code, states that the provisions of this section shall not apply to a surety in a contract of guarantee to a corporate debtor. The Insolvency Law Committee appointed by Ministry of Corporate Affairs through its report dated 26.03.2018 has also clarified this subject vide para 5.10 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 assets of the third party like surety. Section 14 (1) (c) makes amply clear that any security interest created by the Corporate Debtor in respect of its property is covered under moratorium. It is now amply clear that the bank guarantee issued by the bankers are also the responsibility of the bankers and the fund will go out of the fund of the banks and not directly the fund from the corporate debtor. However, in order to keep the corporate debtor alive during moratorium, keeping in minds the provisions of Section 14 (1) (c) r/w Section 14 (3) (b), if any, such bank guarantee is liquidated, it can be restricted to the full value of the guarantee minus margin money provided by corporate debtor to the banker for taking that bank guarantee and accordingly, banks can release the fund to the extent of full value of the bank guarantee minus margin money provided by the corporate debtor to the banker for the bank guarantee.
# 13. Accordingly, we are slightly modifying the Adjudicating Authority order dated 22.07.2019 and for brevity and clarity we are setting aside the Adjudicating Authority order with above observations and directions. Interim order, if any, issued by this Tribunal stands vacated.
Pending IAs, if any, stands disposed of. No order as to costs.
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NCLAT (28.09.2020) in Indian Overseas Bank Vs. Arvind Kumar RP/Liquidator M/s Richa Industries Ltd [Company Appeal (AT)(Insolvency) No. 558 of 2020] held that;
ReplyDeleteThe ‘margin money’ is the contribution on the part of the borrower who seeks ‘Bank Guarantee’. The said margin money remains with the Bank, as long as the Bank Guarantee is alive. If the Bank Guarantee expires without being invoked, then the margin money reverse back to the borrower, and in case the bank guarantee is invoked by the beneficiary, the margin money goes towards payment of bank guarantee to the beneficiary, and nothing remains with the financial institutions, which can be reversed to the Corporate Debtor.
NCLT (PB) New Delhi (04.08.2020) in Phoenix ARC Pvt. Ltd. Vs. Anush Finleash & Construction Pvt. Ltd. [IA-2057(PB)/2020 in (IB)-1705(PB)/2018] held that;
ReplyDeleteWe must say that as per RBI guidelines and also as per the ratio decided in various judgements, margin money is construed as substratum of a Trust created to pay to the beneficiary to whom Bank Guarantee is given. Once any asset goes into trust by documentation for the benefit of beneficiary, the original owner will not have any right over the said asset unless is it is free from the trust.
When margin money has character of Trust for the benefit of the beneficiary, as long as the Bank Guarantee Contract is not determined, the margin money will have the character of Trust. When it is not the asset of the Corporate Debtor, the Corporate Debtor, either during the CIRP process or after the CIRP period, will not have any legal right to have a claim on the said asset.
Since it has been mentioned that Security Interest shall not include the Performance Guarantee, the incidental actions to the performance guarantee cannot be called as falling within the ambit of the Code. On the day the Bank is discharged, the applicant can get back this money from the Bank.
This judgment has adopted various cited judgments of Supreme Court, which elaborated that BG and LC etc are separate contract and issued by the bank on behalf of corporate debtor, in favor of beneficiary. And such separate contract given obligation to issuer bank to must honor the BG or LC as and when invoked or due. This Judgement and referred judgement in case also clarified that the margin money is a contribution by corporate debtor for availing such BG or LC facility as per RBI guidelines, and such margin money shall remain with Bank until the BG expires or invoked. When expired the Bank should pay back the margin to CD and in case of invocation of BG such margin contribution is utilized to honor the BG.
DeleteHere it is understandable that such fund so called “Margin Money” is contributed by the CD for securing the BG value and BG contract clearly explains that the margin fund shall be forfeited in case of Invocation and payment of such BG value by the Bankers. So it is clear that such fund is held in trust until obligation and performance not completed, and hence CD can not claimed it as asset because it no more belongs to them.
Here it is also interesting point to be noted that margin contribution always made in form of FDR or other securities by creating a lien thereon and such lien is falling under definition of charge and if it registered then it will equivocal to security interest and as per section 14(1)(c), realization of such security interest is not permissible. But Performance Bank Guarantee are excluded from the definition of security interest.
It means such charge created for BG is out of security interest and out of section 14(1) (c) ? if yes than Bankers may adjust the FDR / Margin Money irresctive of argument of Trust Money.
Kindly guide if I am lacking anywhere?
in term of accounting :
ReplyDeleteThe commission paid on BG (BAnk Guarantee) shall be debited to Bank charges / Guarantee commission (Depending upon the materiality) When bank guarantee is invoked, the concerned banker pays the amount to your creditor and the amount should appear as loan in your books.
Bank Guarantee is non fund based limit sanctioned by banks and other financial institutions. BG is Contingent Liability and shown only in Notes to the Accounts. There is no entry required when no collateral or security is given. However, entry is required when any security by way of Cash margin like security deposit, FD etc and that can be shown under current assets in Balance sheet as Margin money on BG. When BG is settled or expired, entry for margin money should be reversed.