NCLAT's Ping-Pong on Appropriation of Margin Money During Moratorium

*Aridaman Raghav & Apoorva Soni

In a recent judgment of Indian Overseas Bank v. Arvind Kumar, RP, the National Company Law Appellate Tribunal (“NCLAT”) has held that there is nothing wrong with the bank appropriating margin money against a Performance Bank Guarantee (“PBG”) invoked during the moratorium. In the present matter, the Resolution Professional demanded the margin money lying with the bank in the form of a Fixed Deposit Receipt (“FDR”), created to secure a bank guarantee. The bank contended that the margin money was adjusted to honor a bank guarantee which was invoked by the beneficiary. Since the margin money was adjusted against a bank guarantee invoked during the moratorium, the Interim Resolution Professional vehemently objected to this. The National Company Law Tribunal (“NCLT”) Chandigarh bench ruled in favor of the Resolution Professional and asked the bank to roll back the margin money. However, the NCLAT ruled otherwise upon appeal and held that the bank was well within its rights to adjust the margin money. While doing so NCLAT has deviated from its earlier decisions, the most recent being that of Bank of Baroda v. Sundaresh Bhatt, RP, wherein it had explicitly held that appropriation of margin money during moratorium was impermissible under Section 14 of the Insolvency and Bankruptcy Code, 2016 (“IBC”).

In the present matter, the NCLAT observed that Section 14 (1) (c) of the IBC seeks to prohibit any action to foreclose, recover or enforce any ‘security interest’ created by the Corporate Debtor in respect of its property. The term ‘security interest’ is defined under Section 3(31) of IBC and the legislature has carved out Performance Bank Guarantee as an exception to the definition of ‘security interest’ under the code. For this, reliance was placed on the decision of NCLAT in GAIL (India) Limited v. Rajeev Manaadiar & Ors., wherein it was held that Performance Bank Guarantee given by the Corporate Debtor is not covered by Section 14 as the same is excluded from the definition of security interest and it can be invoked in full or in part by the beneficiary during the moratorium. Further, the NCLAT was of the opinion that ‘margin money’ is the contribution on the part of the borrower who seeks ‘Bank Guarantee’ and it remains with the Bank, as long as the Bank Guarantee is alive. If the Bank Guarantee expires without being invoked, then the margin money is reverted to the borrower but if the bank guarantee is invoked by the beneficiary, the margin money is adjusted towards payment of bank guarantee to the beneficiary and nothing remains with the financial institutions, which can be reversed to the Corporate Debtor. Further, it was held that the resolution professional is only entitled to those payments which the Corporate Debtor is entitled had there been no orders of Moratorium under Section 14 of the Code.

However, this decision fails to refer the previous rulings of NCLAT in cases such as Bank of Baroda v. Sundaresh Bhatt, RP& Punjab National Bank v. Kannan Tiruvengadam, wherein it was held that the banks are not allowed to appropriate margin money as it belongs to various creditors of corporate debtor and it has to be utilized in the Corporate Insolvency Resolution Process. The NCLAT even went to the extent of asking the banks to roll back the appropriated margin money and place its claim as a financial creditor before the resolution professional. Further, the NCLAT in Debashish Nanda, RP v. State Bank of India, held that during Moratorium, debiting of any amount from the accounts of a corporate debtor results in recovery, which is impermissible under Section 14 of the Code.

At this juncture, it is imperative to note that the intent of imposing moratorium under the Code is to maintain calm on the assets and liabilities of corporate debtor, till there being a resolution plan or liquidation. However, invocation/encashment of bank guarantee or appropriation of margin money deposited against such guarantee during the CIRP affects the assets of a corporate debtor. As a result, the interim resolution professional/resolution professional is duty bound to take necessary actions to protect the assets of a corporate debtor till completion of CIRP.

However, the author is of the opinion that the present case rightly upholds the provisions of law and the earlier decisions were per incuriam. A critical analysis of the judgment indicates that it was taken along sound judicial lines and is in consonance with the letter of law. It is pertinent to note here that Section 3(31) of IBC enunciates that the definition of security interest extends to an interest created for a secured creditor by way of transaction that secured ‘performance of an obligation’. However, the legislature in its wisdom has excluded performance bank guarantee from the ambit of security interest. Recently, the NCLT, Delhi in Phoenix ARC Private Limited v. Anush Finlease And Construction Private Limited has made it clear that the margin money is nowhere covered under Section 14 of the Code and beneficiaries are always at liberty to directly realize its dues from the bank guarantee instead of initiating proceeding or making claim against the Corporate Debtor. Further, the NCLT, Ahmedabad bench in the case of Nitin H. Parikh, IRP v. Madhya Gujarat Vij Co. Ltd. & Ors has held that Section 3(31) of the Code clearly excluded performance guarantees from the ambit of Section 14(1) (c) of the Code; hence moratorium would not apply to the performance guarantees given by the corporate debtor. Since performance bank guarantee has been explicitly excluded from the definition of security interest and the same can be invoked during moratorium, there remains no rational justification as to why margin money, which forms a part of such bank guarantee shall not be adjusted to honor that guarantee.

While the present case has cleared the air around appropriation of margin money during moratorium to a great extent, the discordant rulings of various adjudicating authorities have unsettled the position of law over the time. Interestingly, the decision in both Indian Overseas Bank v. Arvind Kumar, RP and Bank of Baroda v. Sundaresh Bhatt, RP was delivered by a three member bench, which further adds to the confusion as they both have equal precedential value. In absence of a standard precedent, the adjudicating authorities have been deciding the issue on a case to case basis without addressing the question of law. Therefore, a ruling from a higher court or a larger bench of NCLAT is necessary to settle the correct position of law and provide an infallible precedent.

*The authors are students at National University of Study and Research in Law, Ranchi.