Financial Bank Guarantee Can Be Encashed During IBC Moratorium: NCLAT Delhi Clarifies Scope of Section 14(3)(b)
1. Background and Context
The question of whether a bank guarantee — particularly a financial bank guarantee as opposed to a performance bank guarantee — can be invoked and encashed during the moratorium period imposed under Section 14 of the Insolvency and Bankruptcy Code, 2016 has been a subject of significant judicial debate. The NCLAT Delhi, in Bharat Aluminium Company Limited Vs J.P. Engineers Private Limited & Ors. (Company Appeal (AT)(Insolvency) No. 759 of 2020, decided on 26/02/2021), provided important clarity on this issue by allowing the encashment of an irrevocable and unconditional financial bank guarantee notwithstanding the ongoing moratorium against the corporate debtor.
The Adjudicating Authority (NCLT, New Delhi Bench No. II) had, by its order dated 31.07.2020, dismissed the appellant's application seeking encashment and simultaneously allowed the respondent bank's application restraining invocation of the guarantee. The NCLAT set aside that order and ruled decisively in favour of the appellant.
2. Factual Matrix
Bharat Aluminium Company Limited had entered into a commercial arrangement with J.P. Engineers Private Limited — the corporate debtor — for the sale and purchase of aluminium products covering the period 01.04.2019 to 31.03.2020. To secure payment obligations under this agreement, Andhra Bank (subsequently merged with Union Bank of India) issued a bank guarantee dated 22.04.2019 for a sum of Rs. 1,60,00,000/- in favour of Bharat Aluminium. The validity of this guarantee was subsequently extended by the bank until 21.04.2020.
Separately, an operational creditor, M/s Worldwide Metals Pvt. Ltd., filed Company Petition No. IB-1048/ND/2019 under Section 9 of the IBC for initiation of Corporate Insolvency Resolution Process (CIRP) against J.P. Engineers Private Limited. The NCLT admitted this petition vide order dated 26.02.2020 and appointed Mr. Sumit Bansal as the Interim Resolution Professional (IRP).
Following the corporate debtor's default in payment, Bharat Aluminium sent a letter dated 03.03.2020 to the respondent bank invoking the guarantee and deposited the original bank guarantee document with the concerned branch. The bank, however, declined encashment, insisting that approval from the IRP was first required. A legal notice was subsequently issued on 20.03.2020, to which the bank replied on 27.03.2020 refusing encashment on the ground that moratorium under Section 14(1) of the IBC was in force against the corporate debtor.
3. Applications Before the NCLT
Bharat Aluminium filed I.A. No. 2085/ND/2020 before the NCLT seeking the following reliefs:
- A declaration that the invocation and encashment of bank guarantee No. 016219/GPR0021 dated 22.04.2019 was not covered by the moratorium under
Section 14of the IBC - A direction to the respondent bank to encash the guarantee
The respondent bank filed I.A. No. 2572/ND/2020 seeking:
- A direction restraining Bharat Aluminium from invoking the bank guarantee in view of
Section 14of the IBC - A direction restraining Bharat Aluminium from demanding release of the guarantee amount from the bank
The NCLT dismissed Bharat Aluminium's application and allowed the bank's application, directing Bharat Aluminium not to demand release of the bank guarantee amount in view of the moratorium. Aggrieved, Bharat Aluminium preferred the present appeal before the NCLAT.
4. Arguments Advanced by the Appellant
The appellant's counsel raised several interconnected contentions before the NCLAT:
(i) The Surety Exception Under Section 14(3)(b)
The central argument was that Section 14(3)(b) of the IBC, as substituted by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 with retrospective effect from 06.06.2018, expressly carves out a surety in a contract of guarantee from the scope of the moratorium. The substituted provision reads:
"(3) The provisions of sub-section (1) shall not apply to— (a) such transaction as may be notified by the Central Government in consultation with any financial regulator; (b) a surety in a contract of guarantee to a corporate debtor."
The appellant argued that the respondent bank, having issued an irrevocable and unconditional bank guarantee, stood in the position of a surety and could not shelter behind the moratorium imposed on the assets of the corporate debtor.
(ii) Legislative Intent and the Insolvency Law Committee Report
The appellant drew the Tribunal's attention to the Report of the Insolvency Law Committee dated March 2018, specifically paragraphs 5.10 and 5.11, which articulate the rationale for excluding sureties from the moratorium. The Committee had observed that the assets of a surety are separate from those of the corporate debtor, and that enforcement of a guarantee merely shifts the creditor's claim against the principal debtor to the surety to the extent of payment made — it does not substantially impact the CIRP itself.