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2022 (5) TMI 489 - AT - Insolvency and BankruptcySeeking refund of money equivalent to the Bank Guarantees invoked - moratorium in place - whether a Performance Bank Guarantee and/or Mobilisation Advance Bank Guarantee be invoked or encashed after Moratorium has been imposed under Section 14 of the I B Code, 2016. Performance Bank Guarantee - HELD THAT - In a Performance Bank Guarantee , compensation of money will be made by the Bank when there is any delay in delivering the performance. The payment will necessarily have to be made even if the service is delivered inadequately. A Performance Bank Guarantee kicks in if services of goods are not provided to the buyer by the seller as per the specifications mentioned in the Contract. Thus, a Performance Bank Guarantee provides an assurance of compensation in the event of any inadequate performance of Contract. Section 3(31) of the Code excludes Performance Guarantee from the definition of Security Interest which certainly expresses the intention of the Legislature. Mobilisation Advance Bank Guarantee - HELD THAT - Mobilisation Advance Bank Guarantee is meant specifically for facilitating the Contractor to spend for provisioning the works contract service. The contract provides a mechanism in the form of this Bank Guarantee which ensures that the advance is not diverted to any other purpose but utilised for the specific work contract. It s application as payment is therefore direct and is like a consideration whether or not in the form of a deposit for the supply of the works contract service. This Tribunal in UCO BANK VERSUS SUDIP BHATTACHARYA RESOLUTION PROFESSIONAL OF RELIANCE NAVAL ENGINEERING LTD. 2021 (9) TMI 932 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , PRINCIPAL BENCH, NEW DELHI , has held that it is a well settled proposition that liability under Performance Bank Guarantee cannot be terminated by actions of a third party and that a Bank which gives a Performance Guarantee must honour its Guarantee according to its terms. Mobilisation Advance is an advance meant for ensuring/performing a contract and does not construe a debt except in the case of home allottees where there is consideration for Time Value of Money . In the instant case, the amount given as an advance under Mobilisation Advance Bank Guarantee is not a debt or an obligation in respect of a claim . It is only on completion of the Project/execution of the contract in its totality, that the debt / liability kicks in. An advance for a contract work which is still to be completed, there is no Time Value for Money. Therefore, we are of the considered view that the amount does not belong to the Corporate Debtor . What does not belong to the Corporate Debtor cannot be sought to be refunded back to the Corporate Debtor . In the instant case, the Corporate Debtor was unable to execute the work with the given advance and the Mobilisation Advance Bank Guarantee , which is generally issued at the commencement of the contract, viewed from any angle, cannot be said to be an Asset belonging to the Corporate Debtor - this Tribunal is of the considered opinion that undisputedly these two Bank Guarantees were issued to ensure Performance of an obligation to construct 105 Residential Quarters and towards Security for execution of the same, it is significant to mention that admittedly the Corporate Debtor has vide letter dated 11/12/2018 expressed its inability to complete the works, and the Contract has been terminated by the Appellant on 27/08/2019, which was unchallenged. Thus, a Security Interest does not include Performance Bank Guarantee and therefore is not covered under Section 14(1) and the Appellant is entitled to invoke its Performance Bank Guarantee in full. Having regard to the nature of the Guarantee, the relationship between the Appellant and the Corporate Debtor , the intent behind the issuing of the Mobilization Advance Bank Guarantee , it requires to be treated on an equal footing as that of a Performance Bank Guarantee . The Adjudicating Authority ought not to have allowed the refund of the amounts covered under these two Bank Guarantees - Appeal allowed - decided in favor of appellant.
Issues Involved:
1. Whether a Performance Bank Guarantee and/or Mobilisation Advance Bank Guarantee can be invoked or encashed after the imposition of Moratorium under Section 14 of the Insolvency and Bankruptcy Code (IBC), 2016. Issue-wise Detailed Analysis: 1. Invocation of Bank Guarantees During Moratorium: The primary issue was whether the invocation of a Performance Bank Guarantee and Mobilisation Advance Bank Guarantee is permissible after the imposition of a moratorium under Section 14 of the IBC, 2016. The moratorium prohibits actions to foreclose, recover, or enforce any security interest created by the corporate debtor in respect of its property. 2. Definition and Exclusion of Performance Guarantee from Security Interest: Section 3(31) of the IBC defines "security interest" and explicitly excludes "performance guarantee" from its ambit. The Tribunal emphasized that the legislative intent was clear in excluding performance guarantees from the definition of security interest, thus allowing their invocation even during the moratorium period. 3. Independent Nature of Bank Guarantees: The Tribunal reiterated that bank guarantees are independent contracts between the bank and the beneficiary, separate from the underlying contract between the debtor and the creditor. This principle was supported by precedents from the Supreme Court, including cases like Ansal Engineering Projects Ltd. v. Tehri Hydro Development Corporation Ltd. and SBI v. Mula Sahakari Sakhar Karkhana Ltd., which established that the invocation of bank guarantees should not be interfered with unless there is evidence of fraud or special equity. 4. Mobilisation Advance Bank Guarantee: The Tribunal clarified that a Mobilisation Advance Bank Guarantee, meant to facilitate the contractor's work, is not considered a debt or obligation in respect of a claim. It is an advance for ensuring the performance of a contract and does not constitute an asset of the corporate debtor. Thus, it should be treated similarly to a performance bank guarantee and can be invoked during the moratorium period. 5. Impact of the Second Amendment to the IBC: The Tribunal noted that the decisions relied upon by the Adjudicating Authority, such as Power Grid Corporation of India v. Jyoti Structures Ltd. and Indian Overseas Bank v. Mr. Dinkar T. Venkatsubramaniam, were prior to the second amendment of the IBC. The amendment clarified that the moratorium does not apply to sureties in a contract of guarantee to a corporate debtor, thus supporting the invocation of bank guarantees during the moratorium. 6. Timing of Invocation Relative to Moratorium Imposition: The Tribunal observed that the bank guarantees were invoked on 25/03/2019, two days before the moratorium was imposed on 27/03/2019. Although the bank released the amount on 28/03/2019, the Tribunal held that any delay by the bank should not negatively impact the appellant's right to invoke the guarantees. Conclusion: The Tribunal concluded that the Performance Bank Guarantee and Mobilisation Advance Bank Guarantee are not covered under the moratorium provisions of Section 14(1) of the IBC. The invocation of these guarantees is permissible, and the amounts involved do not constitute assets of the corporate debtor. Consequently, the Tribunal set aside the Adjudicating Authority's order directing the refund of the amounts covered under these bank guarantees and allowed the appeal.
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