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2021 (2) TMI 1151 - AT - Insolvency and BankruptcySeeking direction to Appellant not to demand the release of bank guarantee amount from the Respondent No. 2, in view of the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) against the M/s J.P. Engineers Private Limited. (Corporate Debtor) Respondent No. 1 - HELD THAT - Admittedly the Appellant had entered into an agreement for sale and purchase of aluminium products for the period 01.04.2019 to 31.03.2020 with J.P. Engineering s (Corporate Debtor). For ensuring the payments the Respondent No. 2 issued bank guarantee dated 22.04.2019 for an amount of ₹ 1 Crores 60 Lakhs in favour of the Appellant. The Respondent No. 2 vide letter dated 21.10.2019 extended the period of guarantee till 21.04.2020. The Appellant on 03.03.2020 sent a letter to the Respondent No. 2 for invocation of the bank guarantee - Ld. Adjudicating Authority rightly held that bank guarantee in question is a financial bank guarantee and not a performance bank guarantee. Whether the financial bank guarantee can be invoked after issuance of moratorium under Section 14 of the IBC? - HELD THAT - After substitution of Sub-Section 3(b) the provision of Section 14(1) of the IBC shall not apply to surety in the contract of guarantee to a Corporate Debtor - This amendment has been made on the recommendation of Report of Insolvency Law Committee March, 2018. In para 5.10 5.11 of the Report of Insolvency Law Committee specifies that the assets of the surety are separate from those of the Corporate Debtor and proceedings against the Corporate Debtor may not be seriously impacted by the actions against the assets of third parties like sureties. In Para 5.11 of the Report of Insolvency Law Committee concluded that Section 14 of the IBC does not intend to bar actions against assets of guarantors to the debts of the Corporate Debtor and recommended that explanation to clarify this may be inserted in Section 14 of the IBC. The scope of moratorium may be restricted to the assets to the Corporate Debtor only. Validity of argument that the amendment of 2018, which makes it clear that Section 14(3), is now substituted to read that the provisions of sub-section (1) of Section 14 shall not apply to a surety in a contract of guarantee for corporate debtor - HELD THAT - The object of the IBC is not allowed such guarantors to escape from an independent and co-extensive liability to pay off the entire outstanding debt, which is why section 14 of the IBC is not applied to them. Also held that contract of guarantee is between the creditor and principal debtor and the surety whereunder the creditor has a remedy in relation to his debt against both the principal debtor and surety. As per Section 128 of the Contract Act, 1872 the liability of surety is coextensive with that of principal debtor and the creditor may go against either principal debtor or surety or both in no particular sequence. Corporate Debtor has issued bank guarantee for ensuring the price of goods. The bank guarantee is irrevocable and unconditional and payable on demand without demur. The assets of the surety are separate from those of the corporate debtor, and proceedings against the corporate debtor may not be seriously impacted by the actions against assets of third party like surety. Bank guarantee can be invoked even during moratorium period issued under section 14 of the IBC in view of the amended provision under section 14 (3)(b) of the IBC - Ld. Adjudicating Authority has not considered the aforesaid amended provision. Therefore, the impugned order is not sustainable in law. It is declared that the bank guarantee in question can be invocated/encashed even during the moratorium period under section 14 of the IBC against the Corporate Debtor (Respondent No. 1) - application allowed.
Issues Involved:
1. Applicability of moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) to the invocation of bank guarantees. 2. Classification of the bank guarantee as a financial or performance guarantee. 3. Impact of the amendment to Section 14(3)(b) of the IBC on the applicability of moratorium to sureties in a contract of guarantee. Detailed Analysis: 1. Applicability of Moratorium Under Section 14 of IBC to Bank Guarantees: The primary issue was whether the moratorium under Section 14 of the IBC prevents the invocation of a bank guarantee issued by the Corporate Debtor. The Appellant argued that the proviso to Section 3(31) and Section 14 of the IBC exclude performance bank guarantees from the moratorium, and this reasoning should extend to all bank guarantees. The Respondent No. 2 countered that the bank guarantee in question is a financial guarantee and falls under the moratorium's ambit as per Section 14(1)(c) of the IBC. The Tribunal concluded that the moratorium does not apply to sureties in a contract of guarantee to a Corporate Debtor as per the amended Section 14(3)(b) of the IBC, which is retrospective and clarificatory in nature. 2. Classification of the Bank Guarantee: The Tribunal evaluated whether the bank guarantee was a financial or performance guarantee. The Appellant claimed that the bank guarantee should be treated similarly to a performance guarantee, which is excluded from the moratorium. The Respondent No. 2 maintained that the bank guarantee is a financial guarantee, which falls under the moratorium's scope. The Tribunal agreed with the Adjudicating Authority's classification of the bank guarantee as a financial guarantee, not a performance guarantee, based on the terms and conditions of the guarantee. 3. Impact of the Amendment to Section 14(3)(b) of the IBC: The Tribunal considered the amendment to Section 14(3)(b) of the IBC, which states that the moratorium does not apply to a surety in a contract of guarantee to a Corporate Debtor. This amendment, based on the Insolvency Law Committee's recommendations, clarifies that the assets of the surety are separate from those of the Corporate Debtor and that actions against the surety's assets do not significantly impact the Corporate Debtor's insolvency proceedings. The Tribunal noted that the Adjudicating Authority had not considered this amendment in its decision. The Tribunal referenced the Supreme Court's judgment in SBI Vs. V. Ramakrishnan, which affirmed that the amendment is retrospective and clarificatory, allowing actions against sureties' assets during the moratorium. Conclusion: The Tribunal held that the bank guarantee issued by the Corporate Debtor can be invoked even during the moratorium period under Section 14 of the IBC. The assets of the surety are distinct from those of the Corporate Debtor, and the invocation of the bank guarantee does not violate the moratorium. Consequently, the Tribunal set aside the Adjudicating Authority's order, dismissed Respondent No. 2's application, and allowed the Appellant's application, permitting the invocation/encashment of the bank guarantee during the moratorium period.
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