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TMI Blog2022 (9) TMI 751X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany Law Tribunal, Allahabad Bench), in CA No. 96/2019 and CA No. 164/2019 in CP (IB) No.- 223/ALD/2018. By the Impugned Order, the Adjudicating Authority has directed the Appellant/Banks herein to reverse the transactions of appropriation of the margin money against the Letters of Credit ('LC') and to credit the same amount of the margin money into the Current Account of the 'Corporate Debtor'. 2. Facts in brief are that CIRP was initiated in respect of the 'Corporate Debtor'/'M/s. JVL Agro Industries Ltd.' vide Order dated 25.07.2018. The RP filed CA 96 of 2019 & CA 164 of 2019 seeking a direction to the Respondent Banks to reverse the transaction of appropriation of the margin money of the 'Corporate Debtor' as it is in breach of the Moratorium imposed under Section 14 of the Insolvency and Bankruptcy Code, 2016, (hereinafter referred to as 'The Code'). 3. The Adjudicating Authority while allowing these two Applications observed as follows: "19. In view of the provisions contained thereof, the adjudicating authority finds that the margin money which is in form of security, was appropriated by the financial creditors from the accounts of the 'Corporate Debtor', after the CIR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Appellants liability nor an exercise of right of lien/setting of dues. * The Adjudicating Authority has failed to appreciate that margin money is not a security for LC and that it becomes payable the moment default occurs on the part of the customer and that margin money falls outside the ambit of Security Interest in respect of properties of the 'Corporate Debtor'. Hence, margin money cannot be said to be an asset of the 'Corporate Debtor'. * The second Respondent/SBI has falsely submitted that margin money falls within the purview of Security Interest under Section 3 (31) of the Code. In fact, an LC is a contract exclusively between the Creditor and the Bank and is strictly governed by the terms and conditions of the LC only. * The Ld. Counsel drew our attention to the relevant extracts of LC Agreements dated 13.02.2018 and 12.03.2018 executed by the Appellant upon instructions from the 'Corporate Debtor' which is reproduced as hereunder: "4. The relevant extracts of LC Agreements dated 13.02.2018 and 12.03.2018 executed by the Appellant upon instructions from the 'Corporate Debtor', is reproduced here as under; "I/we agree that you shall have a pledge upon all goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the Bank assumes in the LC. Such margin is usually retained in the opener's name on a no-interest basis. The margin amount is adjusted with the amount of the bill when the issuing Bank pays it on behalf of the buyer. Upon receipt of the goods in the buyer's premises, the issuing Bank applies on it the usual margin confirming to the terms of cash credit facility that the issuing Banker may have extended to the buyer. * It is argued that an LC is an independent transaction. The issuing Bank is not at all concerned with contract and/or dispute between the opener and the beneficiary. The issuing Bank is bound to extend from time to time the validity period of the LC. The Counsel relies on the judgment of 'Fargo Freight Ltd.' Vs. 'Commodities Exchange Corporation', (2004) 7 SCC 203, wherein it is held that the money payable by the issuing Bank belongs to the judgment-Debtor. * It is contended that margin money for the LC is the part payment provided by the 'Corporate Debtor' to the Banks to honour the liability for procuring the material to be used for its activity as 'a going concern'. It is submitted that margin money is not a security for LC but it is the share of the contributi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foreclosure, recovery or enforcement of security interest created by the 'Corporate Debtor' in respect of any of its property. * The Ld. Counsel placed reliance on the Judgment of this Tribunal in Comp. App. (AT) (Ins.) No. 329 of 2018 in 'State Bank of India' Vs. 'Punjab National Bank & Ors.', in support of his argument that margin money belongs to the 'Corporate Debtor' and was kept in the FD Account and therefore the said account could not have been debited during the period of Moratorium. * The IRP has admitted the claim of the Appellant with a disclaimer that the amount admitted may change subsequently on the basis of reconciliation or on the basis of any additional information received on the existing claim. 6. Submissions of the Learned Sr. Counsel Mr. Ramji Srinivasan appearing for the second Respondent/SBI: * It is submitted that on 30.10.2018, when the claims of the 'Financial Creditors' were admitted and uploaded on the website of the 'Corporate Debtor', it was seen that six Banks including the Appellant herein had liquidated the FDs of the 'Corporate Debtor' which was available with them as margin money against the LCs issued on behalf of the 'Corporate Debtor'. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n raises a full demand of the complete amount of LC upon the 'Corporate Debtor' and recovers the same from the Corporate Debtor's Saving Bank Account/Current Account. Once, the LC amount is paid by the 'Corporate Debtor', the margin money deposited with the Bank can be utilized as margin money for another LC transaction. However, in the event of nonavailability of funds and default by the 'Corporate Debtor', the Bank in turn appropriates the margin money kept with it as FD and also exercises its right against the goods of the 'Corporate Debtor', securitized with the Bank. These principles have also been upheld and reiterated in a number of cases. * It is submitted that the Hon'ble Supreme Court in 'Shanti Prasad Jain' (Supra), discussed the nature of margin monies and stated that 'when moneys are deposited in a Bank, the relationship that is constituted between the banker and the customer is one of Debtor and Creditor and not trustee and beneficiary'. However, 'when money is delivered to a Bank 'for application to a particular purpose' it is not a general deposit creating a relationship of Debtor and Creditor, but a 'specific deposit' creating the relationship of bailee and bailor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orporates are given by its promoters in the form of personal guarantees, if there is a stay on actions against their assets during a CIRP, such promoters (who are also corporate applicants) may file frivolous applications to merely take advantage of the stay and guard their assets. In the judgments analysed in this relation, many have been filed by the corporate applicant under section 10 of the Code59 and this may corroborate the above apprehension of abuse of the moratorium provision. The Committee concluded that section 14 does not intend to bar actions against assets of guarantors to the debts of the corporate debtor and recommended that an explanation to clarify this may be inserted in section 14 of the Code. The scope of the moratorium may be restricted to the assets of the corporate debtor only." * The IRP had only preliminarily admitted the claims of the Appellant subject to further reconciliation. RP has the power to verify, reverify and update the list of claims of the Creditors in accordance with the provisions of IBC. Likewise, the IRP who had preliminarily admitted the Appellant's claim, had vide email dated 14.08.2020 informed that its existing claim may change based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... namely: - (a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority; (b) transferring, encumbering, alienating or disposing off by the corporate debtor any of its assets or any legal right or beneficial interest therein; (c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002); (d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor. [Explanation.-For the purposes of this sub-section, it is hereby clarified that notwithstanding anything contained in any other law for the time being in force, a licence, permit, registration, quota, concession, clearance or a similar grant or right given by the Central Government, State Government, local authority, sectoral regulator or any other authority constituted under any other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties. Furthermore, the margin money which is in the form of FDRs becomes the property of the Bank, the moment there is a default on behalf of the Company. In the instant case, the FDRs cannot be said to be a property of the 'Corporate Debtor' as the date of default is much prior to the date when the Moratorium was invoked. A perusal of the material on record also shows that the entries which have been justified against the LCs and the payment loans are not shown as 'assets of the Corporate Debtor' in its Balance Sheet and Moratorium can be applicable under Section 14 of the IBC only to the assets of the 'Corporate Debtor'. 12. The Learned Counsel for the Respondents relied on the following Judgements in support of their case that margin money/any amounts cannot be appropriated by the Bank during the Moratorium period: * 'Punjab National bank & Anr.' Vs. 'State Bank of India & Ors.', CA91/2018 in CP/540/IB/CB/2017. * 'State Bank of India' Vs. 'Punjab National Bank & Ors.', Comp. App. (AT) (Ins.) No. 329/2018. * 'Indian Overseas Bank' Vs. 'Mr. Dinkar T. Venkatsubramaniam', Comp. App. (AT) (Ins.) No. 267/2017. * 'State Bank of India' Vs. 'Debashish Nanda', Comp. App. (AT) (In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its constituents "margin money deposits". These deposits served two purposes. In the event of the constituent paying the balance amount, the deposits were to be treated as part payment of the price of the securities. But in the interval between the deposits and the due date of payment of the balance amount, the deposit was to be treated as earnest money liable to be forfeited. In this case, the Bank bought the securities on behalf of its constituents in course of its business and for the purpose of making profit. If the contract was duly executed, the Bank would have been entitled to charge brokerage. The entire transaction was a part of the profit-making process of the Bank. This is not a case of pre-deposit of money for acquisition of licence or business contract which had to be kept deposited with the principal for the entire duration of the period of contract. Each deposit was made for a specific transaction. The Bank undertook to purchase the securities for and on behalf of its constituents. The Bank's practice was to take a deposit before purchasing the security, which was liable to be forfeited in case of default. The money was received and forfeited incidentally and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'each deposit was made for a specific transaction and in the event of default, the forfeited money became the Bank's money' is applicable to this case also. 17. A three Member Bench of this Tribunal in 'Indian Oversees Bank' Vs. 'Arvind Kumar', Comp. App. (AT) (Ins.) No. 558/2020, dated 28.09.2020 has held that 'margin money' is not a security and therefore does not require any registration of charge and that margin money is the contribution on the part of the borrower who seeks Bank Guarantee and the said margin money remains with the Bank as long as the Bank Guarantee is alive and in case the Bank Guarantee is invoked by the beneficiary, the margin money goes towards payment of Bank Guarantee to the beneficiary and nothing remains with the Financial Institution. This principle has attained finality as the Judgement has not been challenged. We are of the view that the same principle ought to be applied to the LCs also. Learned Sr. Counsel Mr. Ramji Srinivasan relied on the Judgement of this Tribunal in 'Bank of Baroda Corporate Financial Services' Vs. 'Sundaresh Bhatt', 2020 SCC OnLine NCLAT 434, by which Order, this Tribunal has observed that the Bank had internally given instr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... them from doing so for others as well. In Corpus Juris Secundum, Vol. 9, it is stated "The intention of the parties controls the character of the relation between bank and depositor, which may be that of bailee and bailor, but is ordinarily that of debtor and creditor" (p. 546). And it is pointed out when money is delivered to a bank "for application to a particular specific purpose" it is not a general deposit creating the relationship of debtor and creditor, but a "specific deposit" creating the relationship of bailee and bailor or trustee and beneficiary. Vide p. 570. 45. Therefore the fact that money has been put in a bank does not necessarily import that it is a deposit in the ordinary course of banking. We have to examine the substance of it to see whether it is in fact so or not. It is unnecessary for the purpose of this case to elaborately examine what banking business, properly so called, consists in. It is summed up as follows in Halsbury's Laws of England, 3rd Edn. Vol. 2 p. 150 Para 277: "the receipt of money on current or deposit account and the payment of cheques drawn by and the collection of cheques paid in by a customer". Applying these tests, can it be said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tilised amount. In view of the background of the Reserve Bank guidelines and segregation of the amounts from the current account of the applicant for a specific purpose, it must be held and it is held that the amounts deposited by the applicant were impressed with the trust and are refundable to the applicant in full to the extent of the unutilised amount. In my judgment, it is relevant that the mode followed by the bank was that of issuing the four fixed deposit receipts in favour of the applicant after segregation of the amounts from the current account of the applicant for the specific purpose as aforesaid. The applicant was not at all free to utilise the said fixed deposits or the amounts thereunder. The applicant could not seek encashment of the fixed deposit receipts even on expiry of the due dates of the fixed deposit receipts at least so long as the letters of credit subsisted. The said margin money was constituted as a separate identifiable fund for honouring of letters of credit by the bank and for refund thereof to the applicant to the extent of credit by the bank and for refund thereof to the applicant to the extent of money not utilised for the specific purpose. The sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pening or in connection with any transaction under this Documentary Credit." ........"I/we agree that the terms of the said pledge are that the said goods and the said documents are and shall be pledged as security for all advances made...." 23. It is the case of the Respondents that the LC cannot be equated to that of a Bank Guarantee and that they are different terms used in different situations. This Tribunal is of the considered view that while different, both Bank Guarantees and LCs assure the third party that if the borrower defaults what it owes, the Bank would step in on their behalf. LCs are especially important in international transactions. An LC carries a higher risk for the Bank as the Bank makes the payment of an LC when it becomes due. The Hon'ble Supreme Court discussed at length in 'Cooperative Federation Ltd.' Vs. 'Singh Consultants and Engineers (P) Ltd., (1988) 1 SCC 174, as to how an LC is akin to a Performance Guarantee and held as under: "19. ............ The plaintiffs appealed to the Court of Appeal in England. It was held by a Bench consisting of Lord Denning, M.R., Browne and Geoffrey Lane, L.J. that a performance guarantee was similar to a confirmed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 25. The material on record does not establish that any 'Security Interest' was created by the 'Corporate Debtor' with margin money. The provision of Section 14(3)(b) specifically excludes the Application of Section 14 to a 'surety' in a contract of Guarantee to a 'Corporate Debtor'. This Tribunal is of the earnest view that LC is basically akin to a contract of Guarantee, as it a contingent liability of the 'Corporate Debtor' which gets crystallized on the happening of a future event. 26. Both Sections 18 & 36(4) provide that asset held under Trust cannot be considered as an asset of the 'Corporate Debtor'. This Tribunal is of the earnest view that margin money has the character of the Trust for the benefit of the beneficiary as long as the LC is alive and the same cannot amount to an asset of the 'Corporate Debtor'. Therefore, the principle laid down in 'Shanti Prasad Jain', (Supra) and upheld in the aforementioned 'Reserve Bank of India', (Supra) reinforces that 'the FDs were impressed in the 'Trust' as the same were earmarked for a specific purpose i.e., as a separate and distinct identifiable fund for honouring LCs'. 27. For all the aforenoted reasons, we are of the consid ..... X X X X Extracts X X X X X X X X Extracts X X X X
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