Bharat Aluminium Co Limited (Appellant) Vs. Mr. Sumit Bansal – Interim Resolution Professional (IRP) of J.P. Engineers Pvt Ltd (Respondent) – in the order dated 26 Feb, 2021 passed by the National Company Law Appellate Tribunal, (NCLAT) New Delhi - MMJC

Facts of the Case

An application under section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) was filed by Worldwide Metals Pvt. Ltd – the Operational Creditor (OC) against the J.P. Engineers Pvt Ltd -corporate debtor for initiating Corporate Insolvency Resolution Process (CIRP) which was admitted by  National Company Law Tribunal (NCLT) on 26 Feb, 2021.  

The appellant entered into an agreement with the corporate debtor for the sale and purchase of Aluminium and the corporate debtor had issued a bank guarantee executed by Andhra Bank (Andhra Bank is now merged with Union Bank of India) on 22 April, 2019 for ensuring the payment.

The corporate debtor defaulted in making payments as a result of which the appellant invoked the bank guarantee and submitted a letter to the bank along with the original bank guarantee to the concerned banks branch. The Bank in return stated that the encashment of the bank guarantee required IRP`s approval and denied its encashment

IRP refused to allow encashment of Bank Guarantee citing Moratorium u/s 14 of the IBC. The Appellant then filed an application in NCLT for enforcing bank guarantee which was refused by the NCLT. The present appeal arises out of that Order passed by the NCLT.

Question for Consideration:

Whether the financial bank guarantee can be invoked after issuance of moratorium under Section 14 of the IBC?

Arguments of the Appellant:

• It was submitted that conjoined reading of the proviso to Section 3(31) and Section 14 of the IBC does not include performance bank guarantees from the ambit of Moratorium under Section 14 of the IBC and that the same reasoning would apply to the bank guarantee. 
• It further submitted that Section 14(3)(b) of the IBC provides that Moratorium will not be applicable ‘to a surety in a contract of guarantee to a corporate Debtor’. Therefore, bank cannot take advantage of the moratorium. For this purpose, reliance was placed on the judgement passed by the Hon’ble Supreme Court in the case of SBI vs. V. Rama Krishnan & Ors.
• Legislative intend behind Section 14 of the IBC is only to secure the Assets of the Corporate Debtor and the benefit of moratorium ought not to be extended to third parties i.e. surety, for this purpose.
• Reliance was also place on the judgement passed by Hon’ble Supreme Court in the case of UP State Sugar Corporations vs. Sumac International Ltd., wherein it was held that irrevocable & unconditional bank guarantee should be encashed irrespective of the dispute.
• Also submitted that Hon’ble Andhra Pradesh High Court in the case of Haryana Telecom Ltd. Vs. Aluminium industries Ltd., held that the bank guarantee cannot be said to be the property of the Corporate Debtor simply because it is indirectly going to be affected by enforcement of the said bank guarantee by the beneficiary.

Arguments of the Respondent:

• The Bank submitted that the guarantee in question is a bank guarantee and not a performance guarantee as held by NCLT. The bank guarantee is covered by the moratorium u/s 14 of the IBC thus, enforcing such security interest during the moratorium period would violate Section 14 of the IBC. The provisions of Section 3(31) of the IBC makes it clears that the guarantee in question falls under the ambit of “any other agreement or arrangement securing payment or performance of any obligation of any person”.
• Also submitted that IBC being a special law prevails on the Indian Contract Act, 1872 which happens to be general law. Thus, the guarantee in question being a bank guarantee will be hit by moratorium under Section 14 of the IBC.
• Further, pointed out the difference between the performance bank guarantee and financial bank guarantee. Thus, the intention of the legislature in carving out an exception for the Performance Bank Guarantee only is limited for excluding only the performance bank guarantee from the ambit of moratorium u/s 14 of the IBC.
• The bank guarantee in question is a security interest of the corporate debtor. Thus, encashing the same would violate the provisions of section 14 of the IBC and further would frustrate the process of CIRP.

Held

• 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 a third party like surety.
• Reliance was placed on the Para 5.11 of the Report of Insolvency Law Committee which provided 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, the section 14 of the IBC has been amended w.e.f 6 June, 2018.
• Further, also placed reliance on the Hon’ble Supreme Court Order, in the Case of SBI Vs. V. Ramakrishnan & Ors 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.
• The bank guarantee in question can be invocated/encashed even during the moratorium period under section 14 of the IBC against the corporate debtor.