2018 (3) TMI 231 - Tri - Insolvency and Bankruptcy

Respondent entitlement to invoke Bank Guarantees during moratorium period - Whether Performance Guarantee is a Security Interest or not? - Whether supply of power to Corporate Debtor can be restated? - Held that - The moratorium imposed is only in respect of the properties of the Corporate Debtor. The moratorium order clearly says that any Security Interest created by the Corporate Debtor cannot be enforced in respect of the property of the Corporate Debtor during the moratorium period. In the case on hand, the moratorium period was extended for further period of 90 days beyond 180 days as per order dated 1st December, 2017. The 180 days period had expired on 2.12.2017. Now, it is extended for another period of 90 days. Section 3 (31) clearly says that Performance Guarantees are not included in the Security Interest. What is covered by the order of this Authority under Section 14(l)(c) is the Security Interest. Therefore, the moratorium order passed by this Tribunal is not applicable to the Performance Guarantees given by the Corporate Debtor. Therefore, the Bankers are at liberty to allow the 1st Respondent to encash the Bank Guarantees that are given in respect of Performance Guarantees subject to other objections, if any. The moratorium order passed by this Tribunal applies in respect of Bank Guarantees other than Performance Guarantees furnished by the Corporate Debtor in respect of its property since it comes within the meaning of security interest . Respondent No. 1 is not entitled to invoke Bank Guarantees other than that comes within the meaning of performance Guarantees, during Moratorium period. Coming to the aspect of disconnection of power supply by the 1st Respondent to the Applicant, it appears that without issuing any notice the power supply was disconnected to the Corporate Debtor. In the case on hand, it appears that the power supply was disconnected to the Corporate Debtor after the declaration of moratorium. Section 14(2) of the Code says, the supply of essential goods or services to the Corporate Debtor shall not be terminated or suspended or interrupted during moratorium period. The supply of power is an essential goods and service with reference to the Corporate Debtor. Essential Supplies is defined under Regulation 32 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. Therefore, following the orders passed by this Adjudicating Authority and the interim order dated 15.1.2018 passed by the Hon ble Appellate Tribunal in Company Appeal (AT) (Insolvency) the Respondent No. 1 MGVCL is hereby directed to continue to supply electricity to the Corporate Debtor provided Applicant has cleared all the electricity consumption charges as on the date of disconnection.

Summary

Issues Involved:
1. Entitlement of the 1st Respondent to invoke Bank Guarantees during the moratorium period.
2. Classification of Performance Guarantee as a ‘Security Interest’.
3. Continuation of power supply to the Corporate Debtor.

Issue-Wise Detailed Analysis:

1. Entitlement of the 1st Respondent to Invoke Bank Guarantees During the Moratorium Period:
The Tribunal examined whether the 1st Respondent, MGVCL, could invoke Bank Guarantees during the moratorium period. The moratorium was imposed under Section 14 of the Insolvency and Bankruptcy Code, 2016, which restricts actions to foreclose, recover, or enforce any security interest created by the Corporate Debtor. However, Section 3(31) of the Code explicitly excludes Performance Guarantees from the definition of ‘Security Interest’. The Tribunal concluded that the moratorium order does not apply to Performance Guarantees, allowing the 1st Respondent to invoke them. The Tribunal emphasized that unless fraud or irrevocable injustice is demonstrated, as per the precedent set by the Supreme Court in U.P. State Sugar Corpn. v. Sumac International Ltd., the Bank must honor the Performance Guarantees.

2. Classification of Performance Guarantee as a ‘Security Interest’:
The Tribunal reiterated that Performance Guarantees are not classified as ‘Security Interest’ under Section 3(31) of the Code. This distinction is crucial because the moratorium under Section 14(1)(c) applies only to security interests. The Tribunal clarified that the moratorium does not cover Performance Guarantees, thus allowing their invocation by the 1st Respondent. The Tribunal directed the banks to honor the Performance Guarantees unless there are valid objections like fraud or irrevocable injustice.

3. Continuation of Power Supply to the Corporate Debtor:
The Tribunal addressed the issue of power supply discontinuation by MGVCL without prior notice. Referring to Section 14(2) of the Code, which mandates the continuation of essential services during the moratorium period, the Tribunal identified electricity as an essential service. The Tribunal cited previous orders, including IA No. 328 of 2017 in CP (IB) No. 53 of 2017, and the interim order by the Hon’ble National Company Law Appellate Tribunal in Company Appeal (AT) (Insolvency) No. 334 of 2017, which upheld the continuation of essential services. Consequently, the Tribunal directed MGVCL to resume power supply to the Corporate Debtor, provided all outstanding electricity charges were cleared as of the disconnection date.

Conclusion:
The Tribunal's decision allows the 1st Respondent to invoke Performance Guarantees during the moratorium period, as they are not considered ‘Security Interests’. It also mandates the resumption of power supply to the Corporate Debtor, affirming the essential nature of electricity under Section 14(2) of the Code. The Application was disposed of accordingly.