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Financial bank guarantee can be invoked after the imposition of a moratorium: NCLAT

Invocation of a bank guarantee during a moratorium period imposed under Section 14 of the Insolvency and Bankruptcy Code  2016. The judgment passed by the NCLAT New Delhi (principle bench), in its decision in  Bharat Aluminium Co Ltd v JP Engineers Pvt Ltd (COMPANY APPEAL (AT)(INSOLVENCY) NO.759 OF 2020)   by Hon’ble shri Justice Jarat Kumar Jain

The facts of the case was such that – Bharat Aluminum went into a concurrence with JP Engineers for the deal and acquisition of aluminum items, the installments for which were ensured by Andhra Bank (which has since converged with the Union Bank of India). Meanwhile, an application to start the corporate indebtedness goal interaction of JP Engineers was conceded, bringing about the inconvenience of a moratorium under Section 14 of the IBC.

At the point when JP Engineers defaulted on its installments under the arrangement, Bharat Aluminum conjured the bank ensure. Notwithstanding, Andhra Bank opposed the conjuring in light of the fact that a bank assurance couldn’t be summoned due to the IBC moratorium. Consequently, Bharat Aluminum documented an application before the mediating authority of JP Engineers’ corporate indebtedness goal measure (the National Company Law Tribunal (NCLT)) for the summon of the bank ensure. Andhra Bank documented an application before the NCLT to oppose the summon of the bank ensure.

The NCLT conceded Andhra Bank’s application considering the IBC moratorium, along these lines guiding Bharat Aluminum to request no summon or arrival of the bank ensure. Bharat Aluminum documented an allure before the NCLAT.

Learned Counsel for the Appellant presented that conjoined perusing of the stipulation to Section 3 (31) and Section 14 of the IBC explicitly prohibits execution bank ensures from the ambit of moratorium under Section 14 of the IBC and that a similar thinking would apply to the bank ensure. Execution bank ensure isn’t characterized in the IBC in any case, Regulation 36(B) of the IBBI Regulations (Insolvency Resolution Process for Corporate Persons) Regulations 2016, manages the exhibition bank ensures whereby it tends to be seen that the presentation ensure is money related in nature and hence, the thinking behind barring an exhibition bank assurance can decisively be applied to bank ensures also.

IBC being a special law prevails on the Indian Contract Act, 1872 which happens to be general law. Thus, the guarantee in question being a bank guarantee will be hit by moratorium under Section 14 of the IBC.

It is additionally presented that there is a distinction between the presentation bank ensure and monetary bank ensure. Along these lines, the expectation of the assembly in cutting out a special case for the presentation bank ensure just is restricted for barring just the exhibition bank ensure from the ambit of moratorium under Section 14 of the IBC. The Bank ensure being referred to is a security premium of the Corporate Debtor. Consequently, encashing the equivalent would disregard the arrangements of Section 14 of the IBC and further would disappoint the Corporate Insolvency Resolution Process.

The NCLAT held that the NCLT had not considered a retrospective amendment made to Section 14 of the IBC prior to the passing of its order and had wrongly relied on orders passed before the amendment, and observed that-

  • The IBC prevents personal and other guarantors from escaping the independent and co-extensive liability to pay off the entire outstanding debt;
  • Section 14 of the IBC does not apply to such guarantees; and
  • As per the amendment to the IBC, Section 14(1) does not apply to sureties in guarantee contracts for the debts of a corporate debtor.

Relying on the Supreme Court’s judgment in SBI v V Ramakrishnan, the NCLAT held that a bank guarantee can be invoked, even during a moratorium period under Section 14 of the IBC, in view of the amendment.

Click here to see the Judgment

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