Phoenix ARC Pvt. Ltd. Vs. Anush Finleash & Construction Pvt. Ltd - Margin Money is construed as substratum of a Trust created to pay to the beneficiary to whom Bank Guarantee is given.

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; 

• the resolution applicant in its resolution plan, cannot seek to terminate agreements that have created legal rights in favour of third parties without adhering to due process of law by which those agreements could have been terminated in case there was no CIRP in place. Such termination of legally binding agreements would violate law under which such contracts are governed and, would thus be in violation of section 30(2)(e).”

• We 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.

 

Excerpts of the order;

It is an IA 2057/2020 filed by one Mr Aashish Gupta, Chairman of the Monitoring Committee (formed pursuant to approval of Resolution Plan) seeking directions against State Bank of India (R1&R2 - SBI) and Director General of Foreign Trade (DGFT) – R3 for release of Fixed Deposits Receipts of Anush Finlease and Construction Private Limited (AFCPL – the Corporate Debtor) maintained with SBI in the Controlled Account of the Corporate Debtor.

# 2. The issue involved in this case is – this Corporate Debtor had obtained authorisation for 40 export promotion capital goods (EPCG Authorisation) from CLA (The Additional Directorate General of Foreign Trade), New Delhi for Duty Saved Amount of ₹3,63,75,515.74 and Export Obligation of ₹29,80,86,017.92 and USD 5593452.05 for import of capital goods.

# 3. As against the authorisations and licenses, at the instance of the Corporate Debtor, SBI issued 23 Bank Guarantees on 100% margin on behalf of the Corporate Debtor involving total amount of ₹1,12,72,191 which are due to mature on different dates in the years 2021 & 2022. It says that the aforesaid bank guarantees were issued in favour of Government Departments/Deputy Commissioner of Customs and the Director General of Foreign Trade, New Delhi / the Beneficiaries.

# 5. The point for adjudication now is that whether or not margin money shall be released on the premise that it is the asset of the Corporate Debtor.

# 6. The export obligation stands unfulfilled as on date, therefore, DGFT says that the Corporate Debtor is bound to fulfil export obligation as per the condition laid down in the condition sheet of EPCG Authorisation as per Foreign Trade Policy (FTP).

# 7. DGFT further states that the Corporate Debtor has not submitted fulfilment of export obligation within the prescribed period nor submitted any customs duty with applicable interest to regularize the case in terms of para 5.22 of Handbook of Procedures (HBP 2015 – 2020), therefore its right remains in force over the Bank Guarantee given by SBI on behalf of the Corporate Debtor.

# 10. In the back drop of these facts, the Applicant submits that these FDRs being the asset of the Corporate Debtor and the Resolution Plan being approved by NCLT, this asset shall revert to the Corporate Debtor. He further states that the Resolution Plan envisages cancellation of all pledges/ lien/any other encumbrances upon the fixed deposits, therefore, the said bank guarantees for issuance of which the fixed deposits have been provided, ceased to be legally enforceable as the very liabilities for securing which they were issued ceased to be in force.

# 11. The applicant states that DGFT has not made any claim with the Resolution Professional, therefore it has to be construed that DGFT has no claim against the Corporate Debtor. As there is no claim by DGFT against the Corporate Debtor, for the same being shown as written off in the Resolution Plan, the very purpose of providing FDRs is not required to be achieved, henceforth they shall be returned to the Applicant.

# 12. In support of this contention, he relied upon the ratio held in the case of “Committee of Creditors of Essar Steel India Limited Vs. Satish Kumar and Others in Civil Appeal No. 8766-67 of 2019 in Supreme Court, which is as follows:

• Para 67:

• “A successful resolution applicant cannot suddenly be faced with “undecided” claims after the resolution plan submitted by him has been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who successfully take over the business of the corporate debtor. All claims must be submitted to and decided by the resolution professional so that a prospective resolution applicant knows exactly what has to be paid in order that it may then take over and run the business of the corporate debtor. This the successful resolution applicant does on a fresh slate, as has been pointed out by us hereinabove .......”.

# 13. He has also relied upon the following NCLT and NCLAT judgements:

• “1) Pankaj Khaitan, RP Vs. Allahabad Bank, Lajpat Nagar, Branch passed on 22.02.2019 in CA No.169/C-IV/ND/2018 in CP CIV(IB)-275/(ND)/2018 by the National Company Law Tribunal, New Delhi.

• 2) M/s. Tata Blue Scope Steel Limited v. M/s Richa Industries Limited dated 29.04.2020 passed by the Hon’ble NCLT, Chandigarh Bench.

• 3) JSW Steel Ltd. v. Mahender Kumar Khandelwal & Ors. Company Appeal (AT) (Insolvency) No. 957 of 2019 dated 17.02.2020 passed by the NCLAT.

• 4) State of Haryana v. Uttam Strips Ltd., Company Appeal (AT) (Insolvency) No. 319 of 2020 dated 23.06.2020 passed by the NCLAT”.

# 14. As against these submissions, SBI as well as DGFT submit that Bank Guarantee is an independent contract between the beneficiary and the Bank, though these are shown as FDRs, for they are given as margin money towards the bank guarantee issued by SBI in favour of the beneficiary, it is not refundable to the Corporate Debtor unless the Bank is discharged. They further submit that it is the settled law that bank guarantee is independent and distinct contract between the bank and the beneficiary and it is not dependent on the actions of the Corporate Debtor at whose instance the bank guarantee is given.

# 15. To substantiate this proposition, the Bank has relied upon Supreme Court judgment in Ansal Engineering Projects Ltd. v. Tehri Hydro Development Corpn. Ltd., (1996) 5 SCC 450, inter alia observed that

• 4. It is settled law that bank guarantee is an independent and distinct contract between the bank and the beneficiary and is not qualified by the underlying transaction and the validity of the primary contract between the person at whose instance the bank guarantee was given and the beneficiary...”

• “5. It is equally settled law that in terms of the bank guarantee the beneficiary is entitled to invoke the bank guarantee and seek encashment of the amount specified in the bank guarantee. It does not depend upon the result of the decision in the dispute between the parties, in case of the breach. The underlying object is that an irrevocable commitment either in the form of bank guarantee or letters of credit solemnly given by the bank must be honoured. The court exercising its power cannot interfere with enforcement of bank guarantee/letters of credit except only in cases where fraud or special equity is prima facie made out in the case as triable issue by strong evidence so as to prevent irretrievable injustice to the parties...”.

# 16. They further state that in Section 30(2) (e) of the Code, it has been envisaged that the Resolution Plan does not contravene any of the provisions for the time being in force, thus purported extinguishment of bank guarantee by way of the Resolution Plan is in contravention of Section 30(2)(e) of the Code and against the provisions of Indian Contract Act with regard to the bank guarantee. The same has been held in “IMICL Dighi Maritime Ltd. v. Dighi Port Ltd., [2019] 107 taxmann.com 431 (NCLT – Mum.), that the resolution applicant in its resolution plan, cannot seek to terminate agreements that have created legal rights in favour of third parties without adhering to due process of law by which those agreements could have been terminated in case there was no CIRP in place. Such termination of legally binding agreements would violate law under which such contracts are governed and, would thus be in violation of section 30(2)(e).”

# 17. As to the allegation of the Applicant that the beneficiary does not make any claim, the Respondents have submitted that question of beneficiary making claim against default will not arise because in the event of default, the beneficiary will realize its monies through bank guarantee given by the bank, not from the Corporate Debtor.

# 18. . . . . .Besides this, SBI has mentioned that the adjudicating authority through its Order dated 01.04.2020 has held in the approval of the plan as follows:

• “In view of the urgency, I hereby approve the Resolution Plan under Section 31 of the IBC looking at the approval given by the CoC making it clear that the exemptions or discounts anything asked in this plan, which is not permissible under law, are not approved.”

# 21) These FDRs are given towards margin money against the bank guarantees given to the beneficiary, not as FDRs to be realized by the Corporate Debtor as and when it wishes. We 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. In this case, the Bank Guarantee being given to Government Authority, 100% margin money is deposited in the form of FDRs. In the event the margin money is free from the Bank Guarantee either by discharge or by efflux of time, then the Corporate Debtor is entitled for release of FDRs.

# 22. This ratio held in the judgment in between Reserve Bank of India vs. Bank of Credit And Commerce (1993 78 Comp Cas 207 Bom) clearly indicates that margin money acquires the character of trust when it is given against the Bank Guarantee issued to the beneficiary, which is reflected in the para below:

• “34. In my judgment, the facts of this case clearly indicate that the margin moneys in question were undoubtedly impressed with trust and the bank held the same as trustee for the benefit of the depositor to the extent of unutilised amount. In view of the background of the Reserve Bank guidelines and segregation of the amounts from the current account of the applicant for a specific purpose, it must be held and it is held that the amounts deposited by the applicant were impressed with the trust and are refundable to the applicant in full to the extent of the unutilised amount. In my judgment, it is relevant that the mode followed by the bank was that of issuing the four fixed deposit receipts in favour of the applicant after segregation of the amounts from the current account of the applicant for the specific purpose as aforesaid. The applicant was not at all free to utilise the said fixed deposits or the amounts thereunder. The applicant could not seek encashment of the fixed deposit receipts even on expiry of the due dates of the fixed deposit receipts at least so long as the letters of credit subsisted. The said margin money was constituted as a separate identifiable fund for honouring of letters of credit by the bank and for refund thereof to the applicant to the extent of credit by the bank and for refund thereof to the applicant to the extent of money not utilised for the specific purpose. The said fixed deposits were also impressed with trust as the same were earmarked for a specific purpose, i.e. as a separate and distinct identifiable fund for honouring of letters of credit. Having regard to the nature of the transaction, it is clear that the transaction entered into between the bank and the applicant was in a special fiduciary capacity. It is, therefore, irrelevant that the bank agreed to pay some interest to the applicant. The applicant did not deposit these amounts in fixed deposit in order to earn interest. The bank was not willing to open a letter of credit unless the applicant furnished security/margin money in terms of the Reserve Bank guidelines and retained the same till the letters of credit were worked out or cancelled on expiry thereof. Even if it is to be assumed that the bank had the permission of the applicant to use the amount of specific deposit in the meanwhile for purposes of its business, it would make no difference to the conclusion of the court. A trust money does not cease to be trust money merely because of user thereof by the trustee. In such a case, the bank in bound to reimburse the beneficiary an equivalent amount and the doctrine of tracing the trust fund would clearly apply. The principles laid down in Hallet's case [1879-80] 13 Ch 696 were clearly approved by the Privy Council in the case of Official Assignee v. Bhatt [1933] LR 60 IA 203 and by our Supreme Court in Shanti Prasad Jain's case [1963] 33 Comp Cas 231 (SC). Thus, the factual aspects emphasised by Mr. Thakkar noted in paragraph 23 of this judgment have not bearing on the ultimate conclusion of the court on the principal questions formulated in paragraph”.

# 23. Since it has been made clear margin money is to be construed as asset of the trust, now the point to be seen is, as whether the asset held in Trust amounts to the asset of the Corporate Debtor or not.

# 27. On looking at the comparative chart of Explanation given to Sec. 18 and Sec. 36(4), it is a clear indication that assets held under Trust cannot be considered as the asset of the Corporate Debtor. 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.

# 28. The Applicant has made another argument saying that this asset is covered by moratorium, therefore, Bank Guarantee cannot be invoked by DGFT nor Bank can release the same to the beneficiary.

# 29. As to this point, we make it clear that margin money was no where covered under Sec. 14 of the Code,

• (a) deals with prohibition of initiation or continuation of legal proceedings against the Corporate Debtor, 

• (b) deals with prohibition of creation of rights over the asset of the Corporate Debtor,

• (c) prohibition of action under SARFAESI, it need not be said separately that performance guarantee is exempted from the ambit of Code, (d) speaks of recovery of property in possession of the Corporate Debtor, the present issue is not relevant to

• (d). In effect, margin money is not covered under section 14 of the Code, Moratorium is indeed a calm period to be maintained, but Moratorium will not alter or confer new rights upon anybody.

# 30. In view of the reasons aforementioned, the Applicant cannot claim any right over the margin money for it is not the asset of the Corporate Debtor.

# 34. The beneficiary is not a party to the resolution plan and it has not made any claim. It need not claim also because the beneficiaries are always at liberty to directly realize its dues from the bank guarantee instead of initiating proceeding or making claim against the Corporate Debtor. When a procedure is set out for easy realization by encashing bank guarantee, nobody would file a claim with the Corporate Debtor.

# 35. Write off is a concept that is applied to the receivables, but not with regard to payables. If liabilities are written off, it has to be done with the concurrence of the person to whom it is payable. It is a categorical statement of the bank that no discharge note has been received from the beneficiary, therefore it could not be said that bank is free from the obligation of clearing the bank guarantee whenever it is invoked. It is on record that the bank guarantee expires in the years 2021 and 2022. Bank has also made a statement as and when discharge note has come from the beneficiary, it would on its own release the FDRs to the Corporate Debtor, therefore, today it could not be said that the Bank is free to release the FDRs taken as margin money from the Corporate Debtor. Indeed, today the Corporate Debtor has become the company of the Resolution Applicant; it would be the company of the Resolution Applicant. Assuming Bank has agreed for extinguishment of Bank Guarantee, it on its own cannot do or concede extinguishment of beneficiary right, because a party cannot create or invalidate a right that is not vested with it.

# 36. SBI, as to this issue, is not a Creditor to the Corporate Debtor. As long as claim is not raised by the beneficiary against the Corporate Debtor, no claim is considered to have come into existence.

# 38. Let us assume a situation tomorrow, the Beneficiary encashes the bank guarantee, in case FDRs are released to the Corporate Debtor on being asked by this Chairman/Applicant, who would be liable for the loss Bank incurs. What way public money is to be lost just by looking at the lofty principles of maximisation and going concern concept? Of course, they are the concepts applicable while dealing with CIRP process for timely conclusion of CIRP, for timely conclusion of liquidation, for timely realization from avoidance, undervalued, extortionate credit, fraudulent trading and fraudulent transactions and for timely approval of Resolution Plan. But for other reasons, we cannot invoke these concepts transgressing the ambit of the Code and nullifying the pre-existing rights of the parties.

# 39. For this reason alone, it has been said in Section 30(2)(e) that, the Resolution Plan shall not contravene any of the provisions of the laws for time being in force, the same is again reiterated in Section 238 of the Code saying that this Code will have overriding effect over other laws which are inconsistent with the provisions of this Code. Harmonisation of statutes is the hall mark of justice, not invalidating the rights conferred under one enactment by another enactment save and except to the extent mentioned.

# 40. 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.

# 41. Accordingly, this application is hereby dismissed as misconceived.

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