Status as on: 16/08/2021
Brief Facts of the case
The Appellant entered into an agreement with the Respondents for the sale and purchase of aluminium products, with Andhra Bank guaranteeing the payments (which has since merged with the Union Bank of India). Meanwhile, the respondent’s application to initiate the corporate insolvency resolution process was granted, resulting in the imposition of a moratorium under Section 14 of the IBC. When the respondent failed to make payments as agreed, the appellant invoked the bank guarantee. However, Andhra Bank objected to the invocation, claiming that a bank guarantee could not be invoked due to the IBC moratorium. As a result, the Appellant filed an application for the invocation of the bank guarantee with the adjudicating authority of respondent’s corporate insolvency resolution process (the National Company Law Tribunal (NCLT)). Andhra Bank filed an application with the NCLT to oppose the invocation or release of the bank guarantee. In light of the IBC moratorium, the NCLT granted Andhra Bank’s application, directing the appellant to demand no invocation or release of the bank guarantee. Thus, the Appellant filed an appeal to the NCLAT
Held
The Hon’ble NCLAT held as follows
- 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.
- The IBC prevents personal and other guarantors from escaping the independent and co-extensive liability to pay off the entire outstanding debt.
- 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 vs 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.
- Section 14 of the IBC does not apply to such guarantees
Conclusion
The NCLAT ruling is a welcome clarification of the problem of whether financial bank guarantees, which are given by third parties outside the bankruptcy process under the IBC, can be invoked during a moratorium period imposed under Section 14 of the IBC. The NCLAT acknowledged that the revision was based on the suggestions presented in the March 2018 Report of the Insolvency Law Committee. The NCLAT ruling, on the other hand, may present some difficulties for banks that have extended bank guarantees. When the IBC imposes a moratorium period, recouping funds paid under bank guarantees from a corporate debtor may be difficult.
Source- (NCLAT Judgement dated 26.02.2021 in COMPANY APPEAL (AT)(INSOLVENCY) NO.759 OF 2020)
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