Pranav B Prem

The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, comprising Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member), has held that margin money deposited by a borrower as a precondition for the sanction of bank guarantees ceases to be the asset of the corporate debtor once the guarantees are invoked by the beneficiary. Consequently, the bank’s appropriation of such margin money is not hit by the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC).

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Background

The appeal was filed by Indian Overseas Bank challenging the order dated 24 April 2024 passed by the National Company Law Tribunal (NCLT), Ahmedabad Bench, which had directed the bank to reverse an amount of ₹1,58,59,294 to the Successful Resolution Applicant (SRA) of Diamond Power and Infrastructure Ltd. (DPIL) towards alleged wrongful appropriation of margin money during the moratorium period. DPIL had availed several credit facilities from Indian Overseas Bank, including a Bank Guarantee (BG) facility, for which it was required to maintain cash margin in the form of term deposits as a precondition. These BGs were issued by the bank in favour of various third-party beneficiaries and were invoked between April and May 2018, before the commencement of Corporate Insolvency Resolution Process (CIRP) against DPIL on 24 August 2018.

After invocation, the bank utilized the margin money term deposits to honour the invoked BGs. Later, the NCLT admitted DPIL into CIRP and approved a resolution plan submitted by the Consortium of GSEC Limited and Rakesh Shah as SRA in June 2022. Upon taking over management, the SRA demanded reversal of the margin money amount, contending that the bank had appropriated funds during moratorium in violation of Section 14 of the IBC. The NCLT accepted this contention and ordered the reversal of ₹1.58 crore to the SRA, prompting the present appeal before the NCLAT.

Appellant’s Submissions

The appellant contended that the margin money ceased to be the property of the corporate debtor once the BGs were invoked and payments were made to beneficiaries. It argued that the margin money constituted a trust created in favour of third-party beneficiaries, and thus, in terms of Section 18 of the IBC, such assets are excluded from the corporate debtor’s estate. It was further submitted that once the guarantees were invoked, the margin money became the property of the bank, and therefore, the moratorium under Section 14 of the IBC could not restrict its appropriation. The bank also emphasized that the SRA’s resolution plan had been approved based on verified claims reflecting the deduction of the margin money; hence, ordering reversal would amount to modifying an approved resolution plan, which is impermissible under the Supreme Court’s ruling in Ghanashyam Mishra & Sons v. Edelweiss Asset Reconstruction Co. Ltd. (2021) 9 SCC 657.

Respondent’s Submissions

The SRA argued that the bank had wrongfully appropriated funds after the commencement of CIRP without disclosing it to the Committee of Creditors (CoC) or the Resolution Professional (RP). It was submitted that such unilateral adjustment violated Section 14 of the IBC and the “clean slate” principle, as it disturbed the resolution plan implementation. The SRA further contended that under Clause 8.1(x) of the approved resolution plan, all cash and bank balances, including term deposits, were to remain available to the corporate debtor, and therefore, the deduction was contrary to the plan terms.

Findings Of The Tribunal

The NCLAT examined the facts and statutory provisions, including Sections 3(31), 14, and 18 of the IBC and Section 126 of the Indian Contract Act, 1872. It observed that the margin money deposited by the borrower forms part of the substratum of trust created to pay beneficiaries upon invocation of BGs, and such assets cannot be treated as part of the corporate debtor’s estate. The Bench held that since the BGs had already been invoked prior to the initiation of CIRP, the margin money had ceased to be an asset of the corporate debtor. The bank’s subsequent appropriation of the margin money was therefore not hit by the moratorium under Section 14 of the IBC, as it was merely a contractual adjustment arising from the BG agreement.

“Margin Money is a contribution on the part of the borrower who seeks Bank Guarantee. Once the Bank Guarantee is invoked, the Margin Money becomes part of the trust created to pay the beneficiary and cannot be considered an asset of the Corporate Debtor or treated as a security interest under Section 3(31) of the IBC,” the Tribunal observed. The NCLAT emphasized that the moratorium does not apply to a surety in a contract of guarantee, as explicitly provided under Section 14(3)(b) of the IBC. Therefore, the bank’s action could not be construed as a violation of the moratorium.

On Modification Of Resolution Plan

Addressing the NCLT’s direction for reversal of funds, the Tribunal observed that the margin money adjustment had already been accounted for in the bank’s revised claim, which was part of the Information Memorandum considered by the CoC and approved by the NCLT. Hence, the SRA was aware of this treatment when it submitted its plan. “Ordering reversal of the Margin Money amount when the revised claim had been verified, validated, and approved by both the CoC and the Adjudicating Authority amounts to modification of the resolution plan, which is clearly not permissible,” the Bench held. The Tribunal clarified that the Ghanashyam Mishra judgment bars introduction of new claims post-plan approval but does not extinguish claims already incorporated within the approved plan. Since the margin money adjustment formed part of the approved claim, directing reversal would contravene settled principles and disturb the sanctity of the resolution plan.

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The NCLAT concluded that the margin money, upon invocation of the BGs, ceased to be the asset of the corporate debtor, and the bank’s appropriation was valid and outside the scope of moratorium restrictions. It further held that the NCLT erred in directing reversal of the amount, as such direction effectively modified an approved resolution plan. Accordingly, the appeal was allowed, and the NCLT’s order directing reversal of ₹1.58 crore was set aside.  “The margin money deposited for the issuance of bank guarantees, once invoked, loses its character as an asset of the corporate debtor and cannot be reclaimed under Section 14 of the IBC. The NCLT’s direction for reversal of the amount runs contrary to the principles laid down in Ghanashyam Mishra and is unsustainable in law.”

Appearance

For Appellant: Mr. Mohit Chadha, Mr. Milind Bhaskar, Advocates.

For Respondent: Mr. Malak Bhatt, Ms. Neeha Nagpal, Ms. Soumya Saxena, Advocates.

Cause Title: Indian Overseas Bank Versus Consortium of GSEC Limited and Rakesh Shah and Anr.

Case No: Company Appeal (AT) (Insolvency) No. 943 of 2024

Coram: Justice Ashok Bhushan (Chairperson), Mr. Barun Mitra (Technical Member)