Recently, the NCLT, New Delhi on the application filed on behalf of Monitoring Committee (formed pursuant to approval of Resolution Plan) of Anush Finlease & Construction Pvt. Ltd. (Corporate Debtor) in the matter of Phoenix ARC Private Limited v. Anush Finlease & Construction Pvt. Ltd.1 has held that the incidental actions to the performance guarantee cannot be called as falling within the ambit of the Insolvency and Bankruptcy Code.
It was a case wherein the State Bank of India (SBI) had issued 23 bank guarantees on 100% margin on behalf of the Corporate Debtor involving total amount of Rs. 1,12,72,191.00 due to mature on different dates in the years 2021 & 2022. The aforesaid bank guarantees were issued in favour of Government Departments/Deputy Commissioner of Customs and the Director General of Foreign Trade, New Delhi ('beneficiaries').
The Monitoring Committee had filed an application before the NCLT seeking directions against the SBI for release of Fixed Deposits Receipts of the Corporate Debtor maintained with SBI in the Controlled Account of the Corporate Debtor.
The point for adjudication which fell before the Ld. Adjudicating Authority was whether or not the margin money should be released on the premise that it is the asset of the Corporate Debtor.
It was contended by the Monitoring Committee of Corporate Debtor:
- that the resolution plan stands approved by the Adjudicating Authority and these FDRs being the asset of the Corporate Debtor shall revert to the Corporate Debtor;
- that the beneficiary did not make any claim with the Resolution Professional;
- that the resolution plan envisages cancellation of all pledges/lien/any encumbrances upon 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.
- that the asset is covered by moratorium, therefore, Bank Guarantee cannot be invoked by beneficiary nor SBI can release the same to the beneficiary.
It was contended on behalf of SBI that Bank Guarantee is an independent contract between the beneficiary and the bank. Though the margin money deposited with the bank was shown as FDRs, it was towards the bank guarantee issued by SBI in favor of the beneficiary and is not refundable to the Corporate Debtor unless the bank is discharged. It was further contented on behalf of SBI that it is settled law that bank guarantee is an 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 was given. It was also submitted that the question of beneficiary making claim against the default will not arise because in the event of default, the beneficiary would realise its monies through bank guarantee given by the bank and not from the Corporate Debtor.
It was further contended that the NCLT had, while approving the Resolution Plan, had made it clear that "exemptions or discounts anything asked in the plan, which is not permissible under law, are not approved." In view of the same, the Monitoring Committee of the Corporate Debtor cannot rely upon the Resolution Plan to state that the bank guarantees are extinguished based on the resolution plan proposing to write-off of the bank guarantee.
Findings of NCLT
While dismissing the application filed by the Monitoring Committee, the NCLT noted that the bank is not discharged from the guarantees given to the beneficiary.
It further held that:
- the FDRs were given towards the margin money against the bank guarantees given to the beneficiary and not as FDRs to be realized by Corporate Debtor.
- the margin money is construed as substratum of a Trust created to pay to the beneficiary to whom Bank Guarantee is given. Once an asset goes into trust by documentation for the benefit of the beneficiary, the original owner will not have any right over the said asset unless it is free from the trust.
In this case, the Bank Guarantee being given to the 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.
The NCLT, while going a step forward, decided as to whether the asset held in Trust amounts to the asset of the Corporate Debtor or not, noted the provisions in Section 18 and Section 36(4) of the Code. It observed that these provisions clearly indicate that the assets held under the 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 is not determined, the margin money will have the character of the Trust. When it is not the asset of the Corporate Debtor, the Corporate Debtor, either during the CIR Process or after the CIRP period, will not have any legal right to have a claim on the said asset.
While dealing with the question if the asset is covered by moratorium and the money cannot be released by SBI to the beneficiary, the NCLT made it clear that the margin money was no where covered under Section 14 of the Code. The period after approval of resolution plan will not fall within the ambit of Moratorium. It further held that the Monitoring Committee cannot claim any right over the margin money for it is not the asset of the Corporate Debtor.
It further pointed out that 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. The NCLT further pointed out that write-off is a concept that is applied to the receivables but not with regard to the payables. If liabilities are to be written off, it has to be done with the concurrence of the person to whom it is payable. It observed:
"The Corporate Debtor cannot, under the cover of clean slate, collect anything and everything from everybody and anybody bulldozing the rights of other parties."
The NCLT raised another question:
If the beneficiary encashes the bank guarantee in future, who would be liable for the loss the bank would incur if the FDRs are released to the Corporate Debtor now?
It observed that concepts under the Code cannot be invoked transgressing the ambit of the Code and nullifying the pre-existing rights of the parties.
The NCLT has decided the issue with respect to the status of margin money kept for securing bank guarantees and made it clear that the incidental actions to the performance guarantee cannot be called as falling within the ambit of Code. Even though a resolution plan is finalized, the resolution applicant cannot claim the un-invoked bank guarantee as their monies. While respecting the settled legal position that that a bank guarantee is an independent contract between the beneficiary and the bank, the NCLT has rightly held that the liabilities under a bank guarantee cannot be extinguished or terminated by the action of a third party. Bank Guarantees are issued for some purpose and for a tenure which automatically get revoked on fulfillment of such purpose and/or completion of such specified period or vice versa.
The above decision is an eye-opener and sends a message that in the garb of a Resolution Plan, the Corporate Debtor or the Resolution Applicant cannot seek to modify or extinguish rights of third parties especially when such third parties were not part of the CIRP proceedings.
The authors advised and appeared for the State Bank of India and the Directorate General of Foreign Trade in this matter.
1. IA No. 2057(PB)/2020 in CP No. 1705(PB)/2018.
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