Bank Guarantees and Moratorium in Corporate Insolvency: An In-depth Examination of National Small Industries Corporation Ltd. Vs. Sh. Prabhakar Kumar
Case Number: Company Appeal (AT) (Insolvency) No. 841 of 2021
Parties Involved: National Small Industries Corporation Ltd. Vs. Sh. Prabhakar Kumar
Presiding Judges: Mr. Justice Venugopal M. and Shri Ajai Das Mehrotra
- For Appellant: Advocates Mr. Sanjay Sharma Darmora and Mr. Yoginder P. Uniyal
- For Respondent: Advocate Mr. Ishwar Mohapatra for Liquidator; Advocate Mr. Sunil Kr. Jha for R-2/Canara Bank
The Crux of the Matter
M/s. Ganesh Fire Equipments Pvt. Ltd., the Corporate Debtor, entered into an agreement with National Small Industries Corporation Ltd. (NSIC) Delhi (Appellant) on 11th May 2012 for raw material financial assistance against Bank Guarantee. Following this agreement, seven Bank Guarantees were submitted to the Appellant. The Corporate Debtor was admitted in CIRP and the announcement regarding initiation of CIRP was made in the newspapers on 12th February 2020. The Appellant invoked the Bank Guarantees on 14th February 2020.
Understanding Bank Guarantees
A bank guarantee is a promise from a bank or other lending institution that if a particular borrower defaults on a loan, the bank will cover the loss. It is a type of ‘surety’ wherein the bank says that it will pay a beneficiary if the other party fails to fulfill its obligations.
The bank guarantee, therefore, serves as a safety mechanism for the beneficiary, ensuring that they will receive the amount specified in the guarantee if the opposing party cannot fulfill their obligations. This does not directly affect the assets of either party but shifts the liability to repay from one party to another.
The Legal Conundrum
The Resolution Professional filed an Interim Application (I.A. 3139/ND/2020), arguing that the Appellant’s actions in invoking the Bank Guarantee violated Section 14(1)© of IBC, 2016. This section prohibits any action to foreclose, recover, or enforce any security interest created by the Corporate Debtor in respect of its property.
The Legal Arguments
The Appellant argued that Section 14(3)(b) of IBC, 2016 applied to this case. This section provides exceptions to the moratorium imposed under Section 14(1), stating that it shall not apply to a surety in a contract of guarantee to a corporate debtor.
Counter Arguments on Bank Guarantees
The Resolution Professional contended that the Appellant’s invocation of Bank Guarantees was in violation of Section 14(1)© of IBC, 2016. Canara Bank argued that since the assets of the ‘surety’ (Respondent No. 2) are separate from those of the
Corporate Debtor, encashment of
Bank Guarantee would not impact the Assets of the
Court’s Observations and Conclusion on Bank Guarantees in cirp
The court observed that a
Bank Guarantee is an
irrevocable and unconditional one. It concluded that as per the facts of this case, the
Bank Guarantee, provided by Respondent No. 2/Bank is covered by the exception provided in provisions of Section 14(3)(b) of IBC, 2016, and the Moratorium prescribed under Section 14(1) of IBC, 2016, shall not apply to its
The Tribunal set aside the Impugned Order passed by NCLT, New Delhi, and allowed the present Appeal, thereby affirming the legality of invoking Bank Guarantees during CIRP under exceptions provided in Section 14(3)(b) of IBC, 2016.
Key Legal Provisions
|Sr No.||Provision / Section of Law||What it Stands for||Context in the Case|
|1||Section 14(1)(c) of IBC, 2016||Prohibits any action to foreclose, recover, or enforce any security interest created by Corporate Debtor||The Resolution Professional argued that invoking Bank Guarantees violated this provision|
|2||Section 14(3)(b) of IBC, 2016||Provides exceptions to moratorium imposed under Section 14(1)||The Appellant argued that this provision applied to this case|