Introduction

The case of Indian Overseas Bank v. Arvind Kumar adjudicated by the National Company Law Appellate Tribunal (NCLAT) in New Delhi on September 28, 2020, addresses the contentious issue of whether margin money held by a bank can be adjusted against a Performance Bank Guarantee invoked during the moratorium period under the Insolvency and Bankruptcy Code (I&B Code), 2016.

Parties Involved:

• Appellant: Indian Overseas Bank, represented by Ms. Rakesh Gupta.
• Respondent: Arvind Kumar, Resolution Professional/Liquidator of M/s Richa Industries Ltd, represented by Mr. Arun Saxena.

Key Issues:

• Whether the margin money retained by the bank against a Performance Bank Guarantee can be adjusted during the moratorium under Section 14 of the I&B Code.
• Whether such adjustment violates the provisions of the Companies Act, 2013, and the I&B Code.

Summary of the Judgment

The NCLAT upheld the decision of the lower adjudicating authority, allowing Indian Overseas Bank to retain the margin money of Rs.51,27,591/-. This amount consisted of the original margin money of Rs.40,50,000/- and accrued interest of Rs.10,77,591/-, which the bank had adjusted against the Performance Bank Guarantee invoked by M/s Tata Steel Processing & Distribution Limited during the moratorium period under Section 14 of the I&B Code.

The Tribunal held that the Performance Bank Guarantee does not fall under the definition of 'security interest' as per Section 3(31) of the I&B Code. Consequently, the invocation of the Performance Bank Guarantee is permissible during the moratorium, and the bank is entitled to adjust the margin money accordingly.

Analysis

Precedents Cited

The Tribunal referenced the case of GAIL (India) Limited vs. Rajeev Manaadiar & Others (Company Appeal (AT) (Insolvency) No. 319 of 2018) which clarified that Performance Bank Guarantees are excluded from 'security interests' under the I&B Code. This precedent was pivotal in determining that the invocation of the Performance Bank Guarantee was not impeded by the moratorium and that margin money could thus be adjusted.

Legal Reasoning

The core of the Tribunal's reasoning hinges on the definition of "security interest" as provided in Section 3(31) of the I&B Code, which explicitly excludes Performance Bank Guarantees. Since the Performance Bank Guarantee does not constitute a security interest, its invocation is permissible even during the moratorium period under Section 14. Consequently, any margin money held by the bank against such a guarantee can legitimately be adjusted to honor the guarantee.

The Tribunal further clarified that margin money is not a security in itself and does not require registration under Section 77 of the Companies Act, 2013. The margin money serves as a contribution by the borrower to secure the Bank Guarantee, and once the guarantee is invoked, the margin money is appropriately utilized to fulfill the guarantee's obligations.

Impact

This judgment sets a significant precedent in insolvency proceedings, particularly regarding the treatment of margin money against Performance Bank Guarantees during moratorium periods. Financial institutions can now confidently adjust margin money in situations where Performance Bank Guarantees are invoked, without contravening the moratorium provisions of the I&B Code. This clarity aids in balancing the interests of financial creditors and corporate debtors, ensuring smoother resolution processes.

Complex Concepts Simplified

Moratorium under Section 14 of the I&B Code

The moratorium is a crucial phase following the initiation of the Corporate Insolvency Resolution Process (CIRP). Under Section 14, it prohibits any legal actions against the corporate debtor, including the enforcement of existing security interests. This ensures that the debtor is not unduly harassed while attempts are made to restructure its obligations.

Security Interest Defined

A "security interest" refers to a legal claim on collateral that has been pledged, usually to secure a loan. It includes mortgages, charges, hypothecations, and other forms of encumbrances. Importantly, as per Section 3(31) of the I&B Code, Performance Bank Guarantees are explicitly excluded from this definition.

Performance Bank Guarantee

A Performance Bank Guarantee is a promise by a bank to cover the obligations of a company if it fails to perform as per the terms of a contract. Unlike traditional security interests, it is not considered collateral and, as established in this judgment, does not fall under the moratorium's protections.

Conclusion

The NCLAT's decision in Indian Overseas Bank v. Arvind Kumar reinforces the clear distinction between Performance Bank Guarantees and traditional security interests within the framework of the I&B Code. By upholding the bank's right to adjust margin money against a Performance Bank Guarantee invoked during the moratorium, the Tribunal has provided much-needed clarity on the treatment of such financial instruments in insolvency scenarios. This judgment not only aids banks and financial institutions in safeguarding their interests but also ensures that the insolvency process remains fair and structured for all parties involved.