Money Deposited By Borrower As Precondition For Sanction Of Guarantee Ceases To Be Corporate Debtor's Asset Upon Invocation Of Guarantees: NCLAT

The present appeal has been filed under section 61 of the Insolvency and Bankruptcy Code, 2016 against an order passed by National Company Law Tribunal by which it directed the Appellant Bank to pay a certain sum to the Successful Resolution Applicant towards reversal of Margin Money.

The Appellant submitted that the Margin Money no longer remained property of the Corporate Debtor once invocation of the BG was made by the third party beneficiaries. The Margin Money held in form of trust in favour of the third parties therefore stood specifically excluded from the asset of the Corporate Debtor in terms of Section 18 of the IBC.

It was further contended that the Adjudicating Authority failed to appreciate that the margin money in the form of Term Deposit becomes the property of the Bank the moment the BG is invoked and is therefore not hit by moratorium under Section 14 of IBC.

Per contra, the Respondent submitted that since the Appellant bank had appropriated money which belonged to the Corporate Debtor after the initiation of CIRP proceedings, this sum needed to be reversed and the Adjudicating Authority vide impugned order has correctly directed the reversal of Margin Money in favour of the SRA which decision was also in conformity with the “clean slate theory”.

The Tribunal observed that by the time CIRP had commenced, the BGs had already been invoked and the Margin Money was no longer the property or asset of the Corporate Debtor. When the Corporate Debtor was no longer the rightful owner of the Margin Money Term Deposits, the appropriation of the same by the Appellant bank was clearly not hit by moratorium.

It held that the appropriation of Margin Money by Appellant Bank was a contractual adjustment arising out of the BG Agreement and did not amount to enforcement of security interest and therefore did not attract Section 14 moratorium.

The Tribunal held that “Margin Money is a contribution on the part of the borrower who seeks BG; secondly, Margin Money as BG becomes part of substratum of trust created to pay to a beneficiary to whom a BG was given and hence such assets held under trust cannot be considered to be the assets of the corporate debtor or said to be a security interest under Section 3(31) of IBC and thirdly, that the provisions of Section 14(1) of IBC are not applicable to a surety in a contract of guarantee to a Corporate Debtor.”

It further held that the Margin Money does not constitute security interest under the IBC as no such security interest was created by the corporate debtor. It was a borrower's contribution, deposited as a precondition for sanction of the Bank Guarantees and remained with the Bank until the guarantee was invoked. Upon invocation, the Margin Money was applied towards payment of the BG to the beneficiary and ceased to be corporate debtor's assets. Under the facility agreement, the Bank had contractual rights to appropriate the Margin Money against the invoked BGs. Such appropriation could be done even after the invocation of the guarantee and such delayed appropriation did not extinguish its rights.

It concluded that “In such circumstances, for the Adjudicating Authority to have directed reversal of Margin Money amount of Rs 1,58,59,294/- by the Appellant bank at a time when their revised claim stood verified, validated and admitted at the time of approval of the plan by both the CoC and Adjudicating Authority tantamount to modification of the terms of resolution plan which is clearly not permissible.”

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

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

Judgment Date: 21/08/2025

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