Case Note & Summary
The case involves an appeal by Mr. Rajendra Prasad Tak, the Liquidator of M/s. KVK Nilachal Power Pvt. Ltd. (Corporate Debtor), against an order of the NCLT, Hyderabad Bench dated 13.04.2023. The Corporate Debtor had entered into a loan agreement with financial creditors for setting up a 300 MW coal-based power plant in Odisha. As part of the arrangements, bank guarantees were issued by UCO Bank (Respondent No. 2) in favor of Mahanadi Coalfields Limited (Respondent No. 1) for supply of coal. The Corporate Debtor deposited margin money with UCO Bank for these guarantees. Subsequently, the Corporate Debtor went into liquidation under the Insolvency and Bankruptcy Code, 2016. The Liquidator filed an Interlocutory Application (IA No. 553/2023) before the NCLT seeking directions for Respondent No. 1 to return the bank guarantees and for Respondent No. 2 to refund the margin money. The NCLT dismissed the application, holding that once a bank guarantee is invoked, the margin money is part of the guarantee amount and cannot be separately claimed. The Liquidator appealed to the NCLAT. The NCLAT dismissed the appeal, affirming the NCLT's order. The court held that the invocation of the bank guarantee extinguishes the right to both the guarantee amount and the margin money. The margin money is not a separate asset but a security for the guarantee, and upon invocation, the bank is entitled to appropriate it towards the guarantee amount. The Liquidator cannot claim refund of margin money after invocation. The court also noted that the bank guarantees had been invoked by Respondent No. 1 before the liquidation proceedings, and thus the margin money ceased to be an asset of the Corporate Debtor.
Headnote
A) Insolvency and Bankruptcy Code - Liquidation - Bank Guarantee - Margin Money - The Liquidator sought return of bank guarantees and refund of margin money deposited by the Corporate Debtor. The NCLT dismissed the application holding that once a bank guarantee is invoked, the margin money is part of the guarantee amount and cannot be separately claimed. The NCLAT upheld this, ruling that the invocation of the bank guarantee extinguishes the right to both the guarantee amount and the margin money. (Paras 1-14) B) Contract Law - Bank Guarantee - Invocation - Margin Money - The court held that margin money deposited for a bank guarantee is not a separate asset but a security for the guarantee. Upon invocation, the bank is entitled to appropriate the margin money towards the guarantee amount. The Liquidator cannot claim refund of margin money after invocation. (Paras 5-10) C) Insolvency and Bankruptcy Code - Liquidation - Section 18 - Assets of Corporate Debtor - The court considered whether margin money and bank guarantees are assets of the Corporate Debtor under Section 18 of the IBC. It held that once a bank guarantee is invoked, the margin money ceases to be an asset of the Corporate Debtor and becomes part of the guarantee proceeds payable to the beneficiary. (Paras 11-14)
Issue of Consideration
Whether the Liquidator is entitled to the return of bank guarantees and refund of margin money deposited by the Corporate Debtor after the bank guarantees have been invoked by the beneficiary.
Final Decision
The appeal is dismissed. The impugned order of NCLT, Hyderabad dated 13.04.2023 is upheld. No order as to costs.
Law Points
- Bank Guarantee invocation extinguishes margin money
- Liquidator cannot claim refund post-invocation
- Section 18 of IBC does not override contractual rights under bank guarantee
