2020 (10) TMI 390 - Tri - Insolvency and Bankruptcy

Invocation of Bank Guarantee - Whether a third party who happened to be employer/ contracting party of the Corporate Debtor can be restrained from invocation of its Performance Bank Guarantee as per the terms of the Guarantee/ Contract executed for completion of work contract/ project? HELD THAT - Such issue has already been examined by the Hon ble NCLAT in the matter of GAIL (INDIA) LIMITED VERSUS RAJEEV MANAADIAR ORS. 2018 (7) TMI 2144 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI and it is held by their Lordships that the security interest shall not include the Performance Bank Guarantee and the Performance Bank Guarantee given by the Corporate Debtor in favour of the party (Gail India Limited) is not covered by Section 14 and such party (Gail India Limited) is entitled to invoke its Performance Bank Guarantee in full or in part - Since the debatable issue involved in the present M.A. has now been legally settled by the Hon ble NCLAT, in the above referred judgement of GAIL (India) Ltd. , this Bench is not expected to go into the controversy of the other issues, hence the objection raised by the Applicant or Corporate debtor is not sustainable in the eye of law and invocation of the Performance Bank Guarantee does not fall within the purview of Section 14 of the I B Code and the relief being sought for cannot be granted. The status quo order granted against the Respondent no.1 stands ceased to have its effect automatically soon after the approval of Resolution Plan. Further, there cannot be status quo against Respondent no.2 Axis Bank for discharging contractual obligation and performing its part of contract. Therefore, the Respondent no.1 being a contracting party is eligible and entitled to invoke its Performance Bank Guarantee. It cannot be restrained by this Adjudicating Authority at the instance of Corporate Debtor and it is upto a competent civil court/ forum and not necessarily by this Adjudicating Authority under the provisions of the I B Code to deal with and decide the same. Hence, no injunction order can be passed, being out of the purview of the Section 14 of the I BC Moratorium. Application rejected.

Summary

Issues Involved:
1. Invocation of Bank Guarantees during the Corporate Insolvency Resolution Process (CIRP).
2. Application of the moratorium under Section 14 of the Insolvency and Bankruptcy Code (I&B Code) to Performance Bank Guarantees.
3. Jurisdiction of the National Company Law Tribunal (NCLT) to restrain invocation of Bank Guarantees.

Issue-wise Analysis:

1. Invocation of Bank Guarantees during CIRP:
The Applicant, EPC Constructions India Limited, sought an injunction against the invocation of two Bank Guarantees issued by Axis Bank Limited by Respondent No.1, NLC India Limited, alleging fraudulent invocation and violation of the I&B Code. The Tribunal noted that the moratorium under Section 14 of the I&B Code prohibits the institution of suits or transferring/encumbering any assets of the Corporate Debtor during the CIRP. However, the Tribunal found that the moratorium does not apply to Performance Bank Guarantees, as they do not constitute "security interest" under Section 14. The Tribunal referenced the NCLAT decision in GAIL (India) Limited, which held that Performance Bank Guarantees are not covered by the moratorium and can be invoked by the beneficiary.

2. Application of Moratorium under Section 14 to Performance Bank Guarantees:
The Tribunal clarified that the moratorium under Section 14 of the I&B Code does not extend to Performance Bank Guarantees. The Tribunal cited the definition of "security interest" under Section 3(31) of the I&B Code, which explicitly excludes performance guarantees. The Tribunal concluded that the invocation of Performance Bank Guarantees does not violate the moratorium provisions and thus, cannot be restrained by the NCLT. This position was reinforced by the NCLAT ruling in GAIL (India) Limited, which allowed the invocation of Performance Bank Guarantees during the moratorium period.

3. Jurisdiction of NCLT to Restrain Invocation of Bank Guarantees:
The Tribunal emphasized that it is not within the jurisdiction of the NCLT to adjudicate disputes regarding the invocation of Bank Guarantees, as these are independent contracts between the bank and the beneficiary. The Tribunal stated that such matters should be resolved by competent civil courts. The Tribunal referred to the Supreme Court's decision in Hindustan Construction Company and the Bombay High Court's ruling in Murablack India Limited, which underscored that Bank Guarantees are separate, distinct contracts and their invocation should not be interfered with by courts, except in cases of fraud or irretrievable injustice. The Tribunal concluded that the NCLT, under the I&B Code, should not restrain the invocation of Performance Bank Guarantees, as it falls outside its summary jurisdiction.

Conclusion:
The Tribunal rejected the Applicant's plea for an injunction against the invocation of the Bank Guarantees, stating that the moratorium under Section 14 does not apply to Performance Bank Guarantees. The Tribunal held that the invocation of such guarantees is permissible and cannot be restrained by the NCLT. The Tribunal directed that any surplus amount from the invocation should be kept in an escrow account and dealt with as per the orders of a competent court. The Tribunal disposed of the application accordingly.