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JC - Legal Updates - Amount refunded on reversal of Performance Guarantee invocation is not an asset of Corporate Debtor: NCLAT

Legal Updates

27 Sep 2021

Amount refunded on reversal of Performance Guarantee invocation is not an asset of Corporate Debtor: NCLAT

The money appropriated by the bank from reversal of invocation of a Performance Bank Guarantee, specifically when the margin money was also not deposited by the Corporate Debtor, cannot be said to be an asset of the Corporate Debtor under the I&B Code, 2016 (“Code”). Thus, no violation of Section 14 of the Code can be said to have occurred.

This has been held by the National Company Law Appellate Tribunal, New Delhi Bench (“NCLAT”) vide its judgment dated 21st September 2021 in the matter of UCO Bank vs. Sudip Bhattacharya, RP of Reliance Naval & Engineering Ltd.

The National Company Law Tribunal, Ahmedabad Bench (“NCLT”) had failed to appreciate that the amount received by the bank from reversal of a Performance Guarantee is not an asset of the Corporate Debtor and that sections 14 and 18 of the Code, or any provision of the Code does not vest the resolution professional with any authority and/or power or allows him to take control and/or utilise assets which belongs to any third party.

In the present appeal it was observed by the NCLAT that Performance Guarantees are to be dealt with keeping in view the provisions and exclusions under Sections 3(31) and 14(3)(b) of the Code which specifically excludes their applicability to guarantee contracts. Moreover, contractual principles of the guarantee are required to be respected even during the moratorium period and any alternate interpretation could not have been the intention of the Code. Essentially, meaning that termination of legally binding Agreements would be ultra vires to provisions of Section 30(2)(e) of the Code.

Accordingly, the NCLAT set aside the Impugned Order passed by the NCLT.


For any further information, please contact Mr. Shubhabrata Chakraborti (shubhabrata.chakraborti@jclex.com) or Mr. Dhruv Malik (dhruv.malik@jclex.com).