The Mumbai Bench of the National Company Law Tribunal (NCLT) has held that the Bank Guarantee in question, being a contract of guarantee furnished by the Bank (surety) on behalf of the Corporate Debtor, falls squarely within the exception carved out under Section 14(3)(b) of the IBC. The Tribunal observed that the Bank Guarantee is a ‘contract of Guarantee’ provided/furnished by the Bank, the ‘surety’, to perform the ‘promise’, or ‘discharge’ the liability, of the third person, being the Corporate Debtor, in case of his ‘default’.
From the plain reading of Section 14(3)(b) of the IBC, 2016, along with Section 126 of the Indian Contract Act, 1872, it is apparent that the Bank Guarantee given by the Bank is covered by the exclusion given in Section 14(3)(b) and that the provisions of Section 14(1) shall not apply, added the Tribunal.
The NCLT concluded that the Bank Guarantee provided by the Bank is held to be covered by the exception provided in provisions of Section 14(3)(b) of IBC, 2016, and the Moratorium prescribed under Section 14(1) of IBC, 2016, shall not apply to its ‘Encashment’. In view of the same, the invocation of the Bank Guarantee by the Respondents does not constitute enforcement against the assets of the Corporate Debtor and is not barred by the moratorium under Section 14(1) of the IBC.
The Division Bench comprising Vinay Goel (Judicial Member) and Charanjeet Singh Gulati (Technical Member) examined the scope and applicability of the moratorium under Section 14 of the IBC, particularly in the context of invocation of a Bank Guarantee. Section 14(1)(c) prohibits ‘any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property’. However, Section 14(3)(b) of the Code expressly provides that the provisions of sub-section (1) shall not apply to ‘a surety in a contract of guarantee to a corporate debtor’. Furthermore, the proviso to Section 3(31) of the IBC clarifies that ‘security interest’ shall not include a performance bank guarantee.
The Tribunal noted that in the present case, the Bank Guarantee was furnished by the Corporate Debtor in favour of the Respondents through Axis Bank on June 28, 2023, for an amount of Rs. 87.88 lakhs, and that Axis Bank, as the surety, undertook to pay the guaranteed amount upon invocation by the beneficiary. The Tribunal also took note of the judgment of the NCLAT, New Delhi, in National Small Industries Corporation Ltd. v. Sh. Prabhakar Kumar Liquidator [Company Appeal (AT) (Insolvency) No. 841 of 2021], wherein it was held that an irrevocable and unconditional bank guarantee is not affected by the moratorium, and that the bank, being the surety, undertakes to discharge the liability of the Corporate Debtor and the assets of the surety are distinct from those of the Corporate Debtor.
Briefly, Interim Resolution Professional (IRP) of M/s DK Infrastructure Private Limited, Mr. Jayanti Lal Jain, filed an application under Section 14 of the Insolvency and Bankruptcy Code, 2016 read with Section 60(5) and Rule 11 of the NCLT Rules, 2016, before the NCLT Mumbai Bench-V, seeking a direction to the Respondents to refund Rs. 87.88 lakhs, being the amount realised by invoking Bank Guarantee during the subsistence of the moratorium. The Corporate Debtor was admitted into CIRP, and the Applicant was appointed as the Resolution Professional.
The Corporate Debtor had been awarded a work order dated Sep 11, 2015, by the Respondent (Rajasthan Urban Drinking Water Sewerage and Infrastructure Corporation Ltd. – RUDSICO) for construction of 272 flats in 17 towers at Fatehnagar, Udaipur. During CIRP, the Applicant continued the project as a going concern and incurred Rs. 1.11 crores towards material, labour and site expenses. While invoices of Rs. 10.76 lakhs were paid, the invoice for Rs. 71.78 lakhs including GST remained substantially unpaid, with the Respondent disputing the claim and stating that only Rs. 2.19 lakhs were payable.
The Corporate Debtor had furnished Bank Guarantee for Rs. 87.88 lakhs in favour of the Respondent, and despite the Applicant’s request for extension, the Respondent invoked the Bank Guarantee on the ground of non-completion of the project. The Applicant contended that the invocation and realisation of the Bank Guarantee during the subsistence of the moratorium under Section 14 of the IBC was in violation of the moratorium. The Respondents, on the other hand, contended that the application was misconceived and not maintainable, that Section 14 does not prohibit invocation or encashment of a bank guarantee, and that Section 14(3)(b) expressly excludes a surety in a contract of guarantee to a Corporate Debtor from the moratorium.
