The Mumbai Bench of the National Company Law Tribunal (NCLT) has held that margin money is the borrower’s contribution under lien only during subsistence of a live Bank Guarantee. The NCLT explained that margin money is the borrower’s contribution deposited as a condition precedent for issuance of Bank Guarantees and is not a ‘security interest’ of the Corporate Debtor under the IBC. Accordingly, upon expiry of the Bank Guarantee without invocation, the corresponding margin money must be released to the Corporate Debtor.
Once the underlying Bank Guarantees have lapsed, the Bank has no right to retain the margin money or adjust it towards any other liability of the Corporate Debtor, including fund-based working capital exposure, added the Tribunal.
The NCLT also observed that the tax department may determine tax, interest, fine or penalty and file its claim before the Resolution Professional during moratorium, but cannot enforce attachment or recovery against the Corporate Debtor’s property during the subsistence of the moratorium. However, permitting attachment or enforcement by the VAT Department during moratorium undermines the resolution process and prejudices the interests of all stakeholders, and is contrary to the spirit of the IBC.
The Division Bench comprising Vinay Goel (Judicial Member) and Charanjeet Singh Gulati (Technical Member) noted that no security interest had been created by the Corporate Debtor on the margin money, and that the margin money was deposited as a condition precedent for the sanction of Bank Guarantees. The margin money is a contribution on the part of the borrower seeking a Bank Guarantee, and the margin money remitted with the Bank is under lien as long as the Bank Guarantee is alive.
Once the Bank Guarantee is invoked by the beneficiary, the Bank would be able to remit the amount to the beneficiary along with the amount of margin money. The margin money can be utilised by the Bank as a matter of right as per the contract, and in case the Bank Guarantee is not invoked or has lapsed, the borrower/Corporate Debtor would be entitled to the margin money. The Bank has its rights over the margin money in terms of the contract only, added the Tribunal.
The Tribunal placed reliance on the order of the NCLAT in Indian Overseas Bank v. Arvind Kumar RP M/s Richa Industries Ltd [(2020) ibclaw.in 285 NCLAT], which held that the margin money remains with the Bank as long as the Bank Guarantee is alive. If the Bank Guarantee expires without being invoked, the margin money reverses back to the borrower, and in case the Bank Guarantee is invoked by the beneficiary, the margin money goes towards payment of the Bank Guarantee to the beneficiary, and nothing remains with the financial institutions which can be reversed to the Corporate Debtor.
On the VAT Department’s lien, the Tribunal relied on the NCLAT decision in Commissioner of State Tax Department v. Ramchandra Dallaram Chaudhary (Liquidator) [(2024) ibclaw.in 331 NCLAT], observing that during the moratorium period, the tax department could determine the tax, interest, fine or any penalty due, but could not enforce its claims for recovery or levy of interest on the tax due during the moratorium. Allowing attachment over property during the subsistence of the moratorium would undermine resolution of the Corporate Debtor and would prejudice the interests of all stakeholders, which is against the spirit of the Code.
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Briefly, the Interim Resolution Professional (IRP) of DK Infrastructure Private Limited (the Corporate Debtor) filed an application before the NCLT Mumbai Bench-V seeking directions to ICICI Bank to remit excess margin money lying with the Bank in respect of Bank Guarantees issued at the instance of the Corporate Debtor. The Corporate Debtor was admitted into CIRP on 17 April 2023, and the ICICI Bank’s claim was duly admitted. The Bank was holding Fixed Deposit Receipts of the Corporate Debtor as margin money for Bank Guarantees, retaining Rs. 1.32 crores against only two outstanding Bank Guarantees aggregating to Rs. 9.62 lakhs. The stipulated margin was 35%, amounting to Rs. 3.36 lakhs, leaving an excess of Rs. 1.28 crores. The IRP, without prejudice, sought release of Rs. 1.22 crores after permitting retention of margin up to 100% of the outstanding Bank Guarantees, despite repeated reminders between July 2023 and August 2024.
The Bank resisted the application, contending that a Bank Guarantee does not constitute a ‘Security Interest’ under Sections 3(31) and 14(1)(c) of the IBC and is therefore outside the scope of the moratorium. The Bank stated that the Corporate Debtor had availed working capital facilities of Rs. 260 million since around 2009, renewed from time to time including vide Credit Arrangement Letters. It was submitted that out of the seven Bank Guarantees, five had closed, while only two remained live, with the total amount of the Bank Guarantees being Rs. 2.05 crores.
The Bank further contended that the margin money did not constitute an asset or security interest of the Corporate Debtor for the purposes of Section 14, that a lien of Rs. 2.12 crores existed on the account pursuant to a notice issued by the VAT Department, Mumbai, and that the appropriation was made in accordance with the Credit Arrangement Letter, which provided that the fixed deposit margin relating to Bank Guarantees expiring during the relevant period would not be released but utilised towards reduction of the fund-based exposure.
