3 April 2021

A tale of two judgements; Appropriation of Margin Money FD towards invoked Bank Guarantee during CIRP

Query; Whether the margin money FD can be appropriated towards invoked Bank Guarantee during CIRP.


On the above issue, there are divergent judgements of Appellate Tribunal (NCLAT). 


In Bank of Baroda Vs. Sundaresh Bhatt, Resolution Professional [1], NCLAT (Three member bench) held that margin money FD cannot be appropriated towards invoked bank guarantee during CIRP, & ordered as under;

  • # 6. Considering the submission made by both the sides, looking into the documents and keeping in view the reasons recorded by the Adjudicating Authority, it does appear that money which was lying with the Bank as margin money in the Form of 3 FDs in the name of Corporate Debtor were appropriated after the CIRP was initiated and thus the same could not have been done under Section 14 of IBC. What internal instructions the Bank gave on 01.08.2017 is not relevant. Admittedly, F.D. Accounts were closed on 02.08.2017 when Moratorium was in force. We do not find any error in the Impugned Order passed by the Adjudicating Authority.

  • 5.5.7 Accordingly, the instant IA is disposed of with the following directions:

  • a) The Respondent Bank is directed to roll back/reverse the wrongfully appropriated amount of Rs. 9.74,62,608/- (Rupees Nine Crore Seventy- Four Lakh Sixty-two Thousand Six Hundred and Eight only) into the TRA account of the Corporate Debtor Company maintained with ICICI Bank.

  • b) The Respondent Bank is directed to pay the Applicant accrued interest on the wrongfully appropriated amount of Rs. 9,74,62,608/- (Rupees Nine Crore Seventy-Four Lakh Sixty-two Thousand Six Hundred and Eight only) from the date of wrongful appropriate of the fixed deposit till the actual date of the reversal/roll back into the TRA account of the Corporate Debtor Company maintained with ICICI bank.


However, subsequently in Indian Overseas Bank Vs. Arvind Kumar RP/Liquidator M/s Richa Industries Ltd [2] NCLAT (Three member bench)  held that margin money FD can be appropriated towards invoked bank guarantee during CIRP.

  • # 13. The ‘margin money’ is the contribution on the part of the borrower who seeks ‘Bank Guarantee’. The said margin money remains with the Bank, as long as the Bank Guarantee is alive. If the Bank Guarantee expires without being invoked, then the margin money reverse back to the borrower, and in case the bank guarantee is invoked by the beneficiary, the margin money goes towards payment of bank guarantee to the beneficiary, and nothing remains with the financial institutions, which can be reversed to the Corporate Debtor.

  • # 14. In this case, Bank Guarantee was invoked on 27th December 2018 by the beneficiary M/s Tata Steel Processing & Distribution Limited, and the margin money amount was used towards the payment of the Bank Guarantee. Once this margin money was used to honour the bank guarantee, nothing remained with the Bank, and as such, the Respondent Resolution Professional cannot demand that amount.

  • # 15. The Resolution Professional/IRP is only entitled to those payments to which the Corporate Debtor is entitled if no orders of Moratorium would have been passed under Section 14 of the Code. The Corporate Debtor had no right to claim the margin money after the invocation of Bank Guarantee.


So the situation is in flux, till such time the issue is decided by a bigger bench of NCLAT or the Hon’ble Supreme Court of India.


The Doctrine of “Binding Precedent”.

Constitution Bench of Hon’ble SCI (1989.05.16) in Union of India v. Raghubir Singh [(1989) 2 SCC 754], held that:- 

  • The doctrine of binding precedent has the merit of promoting a certainty and consistency in judicial decisions, and enables an organic development of the law, besides providing assurance to the individual as to the consequence of transaction forming part of his daily affairs. And, therefore, the need for a clear and consistent enunciation of legal principle in the decisions of a Court. 


References;

[1] NCLAT (2020.02.20) Bank of Baroda Vs. Sundaresh Bhatt, Resolution Professional, [Company Appeal(AT)(Insolvency) No. 635 of 2019]

[2] NCLAT (2020.09.28) Indian Overseas Bank Vs. Arvind Kumar RP/Liquidator M/s Richa Industries Ltd [Company Appeal (AT)(Insolvency) No. 558 of 2020]

[3] Hon’ble SCI (1989.05.16) in Union of India v. Raghubir Singh [(1989) 2 SCC 754]


Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.


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4 comments:

  1. Bank guarantee is a contingent liability on the part of the bank, which may or may not arise in future. So the concept of providing margin for a contingent liability is a bit confusing. It is basically a security interest created by the CD on its asset. FD is an asset of the CD. By executing a lien document CD creates security interest of the Bank on FD.

    Adjustment of FD amount towards bank's claim of invoked bank guarantee will tantamount to preferential payment to the bank.

    Now the second question is, in which form the margin for bank guarantee was provided by the CD, which could have been done by way of;

    i). In the form of straight transfer of margin money amount to the bank, to be kept by the bank as margin for the bank guarantee.

    ii). In the form of some financial assets (FD, Corporate Bonds, Govt. Securities etc) on which the bank exercises it’s lien towards margin for the bank guarantee.

    In the present case margin for the bank guarantee was kept with the bank in the shape of FD under lien as per contract. Obviously the FD would have been in the name of the CD.

    In an alternate scenario, what would have been the position if the FD in question was issued by some other bank.

    Charge has been defined in IBC as under;

    I&B Code, 2016
    Section 3(4) “charge” means an interest or lien created on the property or assets of any person or any of its undertakings or both, as the case may be, as security and includes a mortgage;

    The Companies Act, 2013
    Section 2(16) “charge” means an interest or lien created on the property or assets of a company or any of its undertakings or both as security and includes a mortgage;

    Section 77. Duty to register charges, etc. - (1) It shall be the duty of every company creating a charge within or outside India, on its property or assets or any of its undertakings, whether tangible or otherwise, and situated in or outside India, to register the particulars of the charge signed by the company and the charge-holder together with the instruments, if any, creating such charge in such form, on payment of such fees and in such manner as may be prescribed, with the Registrar within thirty days of its creation:

    ReplyDelete
  2. Very useful article and seriously this a confusing matter till decided by SC. Moreover this is very common issue we face.

    ReplyDelete
  3. Adjustment of Lien marked FD, will tantamount to enforcement of security interest during CIRP. As per the Code security interest can be enforced only during liquidation under the provisions of section 52.

    ReplyDelete
  4. A corollary to this situation shall be that the FD (Lien marked) being encumbered asset of the CD, it can not be utilised during CIRP.

    ReplyDelete

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