Confusion over treatment of margin money provided by corporate debtor for bank guarantee

By Arvind Mangla

Following are the excerpts of various judgements of NCLT/NCLAT, on treatment of Margin Money provided by corporate debtor for bank guarantee, in chronological order, without  any comments, for information and reference of stakeholders during CIRP.

i) NCLAT (20.02.2020)  in Bank of Baroda Vs. Sundaresh Bhatt, Resolution Professional, [Company Appeal(AT)(Insolvency) No. 635 of 2019] held that;

• 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.

ii). NCLT (PB) New Delhi (04.08.2020) in Phoenix ARC Pvt. Ltd. Vs. Anush Finleash & Construction Pvt. Ltd. [IA-2057(PB)/2020 in (IB)-1705(PB)/2018] held that; 

• the resolution applicant in its resolution plan, cannot seek to terminate agreements that have created legal rights in favour of third parties without adhering to due process of law by which those agreements could have been terminated in case there was no CIRP in place. Such termination of legally binding agreements would violate law under which such contracts are governed and, would thus be in violation of section 30(2)(e).”
• We must say that as per RBI guidelines and also as per the ratio decided in various judgements, margin money is construed as substratum of a Trust created to pay to the beneficiary to whom Bank Guarantee is given. Once any asset goes into trust by documentation for the benefit of beneficiary, the original owner will not have any right over the said asset unless is it is free from the trust.
• When margin money has character of Trust for the benefit of the beneficiary, as long as the Bank Guarantee Contract is not determined, the margin money will have the character of Trust. When it is not the asset of the Corporate Debtor, the Corporate Debtor, either during the CIRP process or after the CIRP period, will not have any legal right to have a claim on the said asset.
• Since it has been mentioned that Security Interest shall not include the Performance Guarantee, the incidental actions to the performance guarantee cannot be called as falling within the ambit of the Code. On the day the Bank is discharged, the applicant can get back this money from the Bank.

iii). NCLAT (28.09.2020)  in Indian Overseas Bank Vs. Arvind Kumar RP/Liquidator M/s Richa Industries Ltd [Company Appeal (AT)(Insolvency) No. 558 of 2020] held that;

• 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.
• 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.

iv). NCLAT (19.07.2021) in C & C Construction Ltd. Vs. Power Grid Corporation of India Ltd. (Company Appeal (AT) (Insolvency) No. 781 of 2019 & I.A No. 746, 951 & 952 of 2021) held that; 

• It is now amply clear that the bank guarantee issued by the bankers are also the responsibility of the bankers and the fund will go out of the fund of the banks and not directly the fund from the corporate debtor. 
• However, in order to keep the corporate debtor alive during moratorium, keeping in minds the provisions of Section 14 (1) (c) r/w Section 14 (3) (b), if any, such bank guarantee is liquidated, it can be restricted to the full value of the guarantee minus margin money provided by corporate debtor to the banker for taking that bank guarantee and accordingly, banks can release the fund to the extent of full value of the bank guarantee minus margin money provided by the corporate debtor to the banker for the bank guarantee.

The author is an insolvency consultant and an ex-banker. The article first appeared in https://ip-arvindmangla.blogspot.com/2021/07/confusion-prevails-on-treatment-of.html

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