2021 (6) TMI 348 - Tri - Insolvency and Bankruptcy

Seeking invocation and encashment of Bank Guarantees during CIRP period - scope of moratorium u/s 14 of IBC - HELD THAT - When the guarantee given by a Guarantor does not fall within the ambit of Security Interest provided by the Corporate Debtor, the moratorium that comes into force by Section 14 of the Code is not applicable not only to the bank guarantees, but also to the Surety given to the Corporate Debtor by a guarantor - It is evident that Section 14(1)(c) applies only to the Security Interest created by the Corporate Debtor but not to the guarantee created by third party in favour of the creditor on behalf of the Corporate debtor. It is a well settled preposition that the bank guarantees constitute an independent contract between the Respondent Banks and the Applicant and therefore the Respondent Banks are under obligation to honour the request made by the IOCL, unless and until the transaction is hit by Section 14 of the Code, therefore CIRP cannot be a ground to deny encashment of the bank guarantees. It is evident on record that neither the Corporate Debtor indulged in fraud nor the IOCL had indulged in fraud giving scope to the bankers to raise objections against the bank guarantees because the Banks are under obligation to permit IOCL to encash the bank guarantees. In case, any issue is pending between the banks and the Corporate Debtor, it has to be dealt with the Corporate Debtor, but not with IOCL to whom the guarantee has been given - It is evident on record that work is not complete, so long as work is not complete, the Contractor is at liberty to encash the guarantee because mobilization advance is given so as to facilitate the corporate debtor Contractor to accomplish the work without any impediment, advance bank guarantee cannot be seen as something different from performance bank guarantee. In the performance bank guarantee, guarantee will be taken without even providing any advance. If bank guarantee is beyond the mentioned amount in the bank guarantee, if the bank guarantee is encashed by indulging into fraud behind the back of the Banks, then it could be understood that this Contract is vitiated the fraud, but in this case, the bank guarantees have remained same and the Corporate Debtor has taken additional financial support to accomplish the contract work. Such availing additional financial support cannot mean that Banks are absolved from the obligation of discharging their part of contract - The Corporate Debtor taking an additional financial support or IOCL not reducing the advance amount from the running bills will not tantamount to indulge in fraud, therefore IOCL is at liberty to encash the bank guarantees. Application dismissed.

Summary

Issues:
1. Application to restrain encashment of bank guarantees invoked by IOCL during Corporate Insolvency Resolution Process (CIRP).
2. Validity of bank guarantees and invocation during the CIRP.
3. Interpretation of Sections 14(1)(c), 43(2), and 238 of the IBC, 2016 in relation to the invocation of bank guarantees.
4. Arguments regarding the independence of bank guarantees, obligations of banks, and the impact of additional financial support on the bank guarantees.
5. Examination of whether IOCL can invoke and encash bank guarantees during the CIRP.

Analysis:
1. The Resolution Professional (RP) sought to restrain IOCL from encashing bank guarantees invoked during the CIRP, citing potential impairment of the resolution process due to the invoked guarantees.
2. RP argued that the bank guarantees were valid and should not be encashed, especially during the COVID-19 pandemic, emphasizing the need to maintain status quo on the invoked guarantees.
3. The RP contended that the invocation of bank guarantees by IOCL was contrary to specific sections of the IBC, 2016, and should be declared null and void.
4. The Banks Counsel argued that the guarantees were advanced against mobilization advances and should be reduced proportionately to payments made, highlighting the Corporate Debtor's promise to keep guarantees alive for additional financial support.
5. The Banks Counsel further asserted that any changes to guarantee terms required bank concurrence and that the invocation of guarantees during the CIRP could lead to preferential transactions, defeating the moratorium's purpose.
6. IOCL maintained that the guarantees were independent contracts enforceable against the banks, beyond the moratorium's scope, and could only be denied on grounds of fraud, which were not present in this case.
7. The Tribunal ruled that IOCL was within its rights to invoke and encash the bank guarantees, as the guarantees were independent contracts between the banks and IOCL, not subject to the moratorium under the IBC, 2016.
8. The judgment emphasized that the completion of work was a prerequisite for encashment, and the Corporate Debtor's obligations stood irrespective of additional financial support received, allowing IOCL to proceed with the encashment of the invoked bank guarantees.
9. The Tribunal dismissed the RP's application, along with related applications, as the guarantees were deemed valid for encashment by IOCL, with no fraud involved and no basis for interference under the IBC, 2016.

This comprehensive analysis covers the key legal aspects and arguments presented in the judgment regarding the restraint and validity of bank guarantees invoked during the Corporate Insolvency Resolution Process.