Whether margin money deposited by way of an FDR against a Letter of Credit (LC) construes, a ‘Security’ as provided for under the Code and Whether this margin money can be appropriated by the Bank during the period of Moratorium on the ground that it does not form a part of the asset of the Corporate Debtor – Punjab National Bank Vs. Supriyo Kumar Chaudhuri RP For JVL Agro Industries Ltd. – NCLAT New Delhi

I. Case Reference

Case Citation : (2022) ibclaw.in 731 NCLAT
Case Name : Punjab National Bank Vs. Supriyo Kumar Chaudhuri RP For JVL Agro Industries Ltd.
Corporate Debtor : M/s JVL Agro Industries Ltd.
Appeal No. : Company Appeal (AT) (Insolvency) No. 657 of 2020 (Arising out of Order dated 06th February, 2020 passed by NCLT, Allahabad Bench, in CA No. 96/2019 and CA No. 164/2019 in C.P. No. (IB)- 223/ALD /2018).
Judgment Date : 16-Sep-22
Court/Bench : NCLAT New Delhi
Present for Appellant(s) : Mr. PBA Srinivasan, Mr. Parth Tandon & Ms. Prerana Sabharwal, Advocates
Present for Respondent(s) : Ms. Swati Dalmia, Mr. Yash Tandon, Mr. Palzer Moktan & Mr. Shubham Raj, Advocates for R-1, Mr. Ramji Srinivasan, Sr. Advocate with Mr. Bishwajit Dubey, Mr. Aishwarya Gupta, Mr. Madhav Kanoria & Mr. Sudarshan Srikanth, Advocates for R-2/SBI.
Member (Judicial) : Mr. Justice Anant Bijay Singh
Member (Technical) : Ms. Shreesha Merla
Original Judgment : Download

II. Brief about the decision

Facts of the case

By the Impugned Order, the Adjudicating Authority has directed the Appellant/Banks herein to reverse the transactions of appropriation of the margin money against the Letters of Credit (LC) and to credit the same amount of the margin money into the Current Account of the Corporate Debtor. The brief question which arises in this Appeal is whether margin money deposited by way of an FDR against a Letter of Credit (LC) is an asset of the Corporate Debtor? Whether margin money construes, a ‘Security’ as provided for under the Code. Whether this margin money can be appropriated by the Appellant Bank during the period of Moratorium on the ground that it does not form a part of the asset of the Corporate Debtor.

Decision of the Appellate Tribunal

  • It is the case of the Appellant that these LCs are independent contracts whereby the Appellant undertook to make payment to the beneficiary on demand. Margin money for the LC is a part payment provided by the Corporate Debtor to the Banks to honour the liability for procuring the material to be used for its activity as ‘a going concern’. It is the case of the Appellant that margin money is not a security for LC but is a share of the contribution of the Corporate Debtor to procure any raw material. It is relevant to examine whether margin money falls within the definition of ‘Security Interest’ as defined under Section 3(31) of IBC and also to examine if it falls within purview of Section 14 of the IBC.
  • Section 14 provides that sub-Section (1) of the IBC shall not apply to ‘a surety in a contract of guarantee to a Corporate Debtor’. It is the case of the Appellant that margin money is not a security and does not fall within a definition of ‘Security Interest’ as ‘no ‘Security Interest’’ is created by the ‘Corporate Debtor’ on the margin money. It is submitted by the Appellant that it is the usual practice of the issuing Bank to retain a cash margin ranging from 0% to 25% of the value of the obligation that the Bank assumes in the LC. The margin amount is adjusted in the amount of the bill and the issuing Bank pays it on behalf of the buyer. Upon receipt of the goods in the buyer’s premises, issuing Bank applies on it the usual margin confirming to the terms of cash credit facility that the issuing banker may have extended to the buyer. The issuing Bank is bound to extend from time to time the validity of the period from the LC.
  • Admittedly, the amount of margin money is not debited to make any recovery or adjustment towards the dues of the Bank, but the payment is made to the supplier of the material to keep the Company ‘as a going concern’. It is also seen that the payment under the LC along with the margin money cannot be said to be an appropriation of the Corporate Debtor’s funds towards the dues of the issuing Bank. A perusal of the Clause 8 of Form-C as provided for under the CIRP, Regulations, 2016, the Claim submitted by the Banks specifically provides for the list of securities and it is pertinent to mention that there is no mention of ‘margin money’ in this list of securities. Furthermore, the margin money which is in the form of FDRs becomes the property of the Bank, the moment there is a default on behalf of the Company. In the instant case, the FDRs cannot be said to be a property of the Corporate Debtor as the date of default is much prior to the date when the Moratorium was invoked. A perusal of the material on record also shows that the entries which have been justified against the LCs and the payment loans are not shown as ‘assets of the Corporate Debtor’ in its Balance Sheet and Moratorium can be applicable under Section 14 of the IBC only to the assets of the Corporate Debtor.(p11)
  • The Learned Counsel for the Respondents relied on the following Judgements in support of their case that margin money/any amounts cannot be appropriated by the Bank during the Moratorium period:

We are conscious of the fact that the aforenoted Judgements pertain to the period prior to the amendment i.e., prior to 12.08.2019 on which date, Section 14(3)(a) & (b) had come into effect.(p12-13)

  • Learned Counsel also drew our attention to the Judgment of this Tribunal in State Bank of India Vs. Punjab National Bank & Ors., Comp. App. (AT) (Ins.) No. 329/2018, wherein it is noted that margin money belongs to the Corporate Debtor and the said amount could not have been debited during the period of Moratorium. It is pertinent to mention that this observation was also prior to the amendment made under Section 14 which has come into effect on 28.12.2019.(p14)
  • A three Member Bench of this Tribunal in Indian Oversees Bank Vs. Arvind Kumar (2020) ibclaw.in 285 NCLAT has held that margin money is not a security and therefore does not require any registration of charge and that margin money is the contribution on the part of the borrower who seeks Bank Guarantee and the said margin money remains with the Bank as long as the Bank Guarantee is alive 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 Institution. This principle has attained finality as the Judgement has not been challenged. We are of the view that the same principle ought to be applied to the LCs also. Learned Sr. Counsel Mr. Ramji Srinivasan relied on the Judgement of this Tribunal in Bank of Baroda Corporate Financial Services Vs. Sundaresh Bhatt, [2020] ibclaw.in 228 NCLAT, by which Order, this Tribunal has observed that the Bank had internally given instructions to appropriate the margin money kept in the form of an FD, subsequent to invocation of Bank Guarantee, on 01.08.2017, on which date, the Section 7 Application was admitted against the Corporate Debtor. The facts of this case are distinguishable from the facts on hand as it was held by this Tribunal in Bank of Baroda Corporate Financial Services, (Supra) that the ‘Bank was aware regarding initiation of CIRP, but adjusted the margin money without the consent of the CoC/IRP and that the Bank could not have been done so as the FD Accounts were closed on 02.08.2017, subsequent to the Admission of Section 7 Application. It is significant to mention that the Judgement of Indian Oversees Bank, (Supra) was rendered subsequent to Bank of Baroda Corporate Financial Services, (Supra).(p17)
  • 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 it is free from the Trust. As we observe that margin money has the character of Trust for the benefit of the beneficiary, it cannot be said to be an asset of the Corporate Debtor. These FDRs cannot be realized by the Corporate Debtor as and when it desires. The margin money is deposited in the FDRs which the Corporate Debtor becomes entitled to only when the Margin Money is free from the obligations of the terms of the LC.(p18)
  • The question which arises for consideration is with respect to margin money which has been deposited by the Corporate Debtor in the Bank and is an independent transaction and the issuing Bank is not concerned with any contract between the Corporate Debtor/beneficiary and in fact it is a part payment made by the Corporate Debtor to honour its liability for procuring any goods/raw material/services for its activity as ‘a going concern’.(p20)
  • It is the case of the Respondents that the LC cannot be equated to that of a Bank Guarantee and that they are different terms used in different situations. This Tribunal is of the considered view that while different, both Bank Guarantees and LCs assure the third party that if the borrower defaults what it owes, the Bank would step in on their behalf. LCs are especially important in international transactions. An LC carries a higher risk for the Bank as the Bank makes the payment of an LC when it becomes due. The Hon’ble Supreme Court discussed at length in Cooperative Federation Ltd. Vs. Singh Consultants and Engineers (P) Ltd., (1988) 1 SCC 174, as to how an LC is akin to a Performance Guarantee. Applying the above to the case on hand, this Tribunal is of the view that in terms of its functions, a Performance Guarantee is similar to that of an LC. Further, having observed so, we are of the view that the contention of the Respondents that the Banks have erroneously invoked the LCs and liquidated the margin money during the period of Moratorium, cannot be sustained.(p23-24)
  • The material on record does not establish that any ‘Security Interest’ was created by the Corporate Debtor with margin money. The provision of Section 14(3)(b) specifically excludes the Application of Section 14 to a surety in a contract of Guarantee to a Corporate Debtor. This Tribunal is of the earnest view that LC is basically akin to a contract of Guarantee, as it a contingent liability of the Corporate Debtor which gets crystallized on the happening of a future event.(25)
  • Both Sections 18 & 36(4) provide that asset held under Trust cannot be considered as an asset of the Corporate Debtor. This Tribunal is of the earnest view that margin money has the character of the Trust for the benefit of the beneficiary as long as the LC is alive and the same cannot amount to an asset of the Corporate Debtor. Therefore, the principle laid down in Shanti Prasad Jain’ Vs. ‘Director of Enforcement’ (1962) 2 SCR 297 and upheld in the aforementioned Reserve Bank of India’ Vs. ‘Bank of Credit and Commerce’, (1983) 78 Comp Cas 207 Bom reinforces that ‘the FDs were impressed in the ‘Trust’ as the same were earmarked for a specific purpose i.e., as a separate and distinct identifiable fund for honouring LCs’.(p26)
  • For all the aforenoted reasons, we are of the considered view that margin money can in no manner be said to be a ‘Security Interest’ as defined under Section 3(31) of the IBC. Section 14(1)(c) prohibits any action to foreclose, recover or ensure any ‘Security Interest’ created by the Corporate Debtor in respect of its property. As we hold that no ‘Security Interest’ was created by the Corporate Debtor with respect to the margin money that was deposited by the Corporate Debtor Company towards the opening of the LC in the Appellant Bank, we are of the considered view that the Banks having appropriated this money during the period of Moratorium is justified as we hold that the amount is not an asset of the Corporate Debtor. Therefore, a conjoint reading of Section 3(31) and Section 14 of the Code makes it abundantly clear that margin money is not included as a ‘Security’ and is not an asset of the Corporate Debtor.(p27)
  • For all the aforenoted reasons, this Appeal is allowed and the Order of the Adjudicating Authority is set aside. Needless to add, the Adjudicating Authority shall proceed in accordance with law.(p28)

 

III. Full text of the judgment

J U D G E M E N T

[Per; Shreesha Merla, Member (T)]

1. Challenge in this Appeal is to the Impugned Order dated 06.02.2020 passed by the Learned Adjudicating Authority (National Company Law Tribunal, Allahabad Bench), in CA No. 96/2019 and CA No. 164/2019 in CP (IB) No.- 223/ALD/2018. By the Impugned Order, the Adjudicating Authority has directed the Appellant/Banks herein to reverse the transactions of appropriation of the margin money against the Letters of Credit (‘LC’) and to credit the same amount of the margin money into the Current Account of the ‘Corporate Debtor’.

2. Facts in brief are that CIRP was initiated in respect of the ‘Corporate Debtor’/‘M/s. JVL Agro Industries Ltd.’ vide Order dated 25.07.2018. The RP filed CA 96 of 2019 & CA 164 of 2019 seeking a direction to the Respondent Banks to reverse the transaction of appropriation of the margin money of the ‘Corporate Debtor’ as it is in breach of the Moratorium imposed under Section 14 of the Insolvency and Bankruptcy Code, 2016, (hereinafter referred to as ‘The Code’).

3. The Adjudicating Authority while allowing these two Applications observed as follows:

“19. In view of the provisions contained thereof, the adjudicating authority finds that the margin money which is in form of security, was appropriated by the financial creditors from the accounts of the ‘Corporate Debtor’, after the CIR process has been initiated and all these transactions were done during Moratorium period which this adjudicating authority finds, is against the purpose of which the Moratorium is granted; as the purpose of Moratorium includes keeping the Corporate Debtor’s assets together during the insolvency resolution process and facilitating Orderly completion of the processes envisaged during the insolvency resolution process and further ensuring that the company may continue as going concern while the creditors take a view on resolution of default and the Moratorium ensures a stand still period during which creditors cannot resort to individual enforcement action which may frustrate the object of the CIR process and the margin money which was the asset of the ‘Corporate Debtor’, was appropriated after Moratorium being declared, which is against the provision of law and cannot be appropriated during the CIRP .

10. Further, if the amount of margin money which is appropriated by the Respondents Bank is adjustment with the amount of bill, which was paid by the Bank on behalf of ‘Corporate Debtor’ and not the appropriation of Corporate Debtor’s fund towards the dues of the Bank than this adjudicating authority is of the view that it should not have been done during the CIRP process and when Moratorium has already being granted then the respondent Banks cannot be permitted to transgress the provisions of law as it will be considered as breach of Moratorium and they cannot recover any amount from the account of the ‘Corporate Debtor’.

11. In view of the above observations, this adjudicating authority directs all the respondents to reverse the transactions of appropriating the margin money against the letter of credit and the demand loan aggregating to Rs. 164,24,70,284/- and to credit the amount of the margin money into the current accounts of the ‘Corporate Debtor’.

4. Submissions of the Ld. Counsel for the Appellant/‘PNB’:

  • It is submitted by the Ld. Counsel that the Adjudicating Authority has erroneously interfered with the netting of margin money against the Letter of Credit (LC’s) carried out by the Appellant, specifically when such netting did not cause any irreparable damage to the ‘Corporate Debtor’; that the payments made to the beneficiary of LC made by the Banks along with the margin money is neither an adjustment of funds of the ‘Corporate Debtor’ towards the Appellants liability nor an exercise of right of lien/setting of dues.
  • The Adjudicating Authority has failed to appreciate that margin money is not a security for LC and that it becomes payable the moment default occurs on the part of the customer and that margin money falls outside the ambit of Security Interest in respect of properties of the ‘Corporate Debtor’. Hence, margin money cannot be said to be an asset of the ‘Corporate Debtor’.
  • The second Respondent/SBI has falsely submitted that margin money falls within the purview of Security Interest under Section 3 (31) of the Code. In fact, an LC is a contract exclusively between the Creditor and the Bank and is strictly governed by the terms and conditions of the LC only.
  • The Ld. Counsel drew our attention to the relevant extracts of LC Agreements dated 13.02.2018 and 12.03.2018 executed by the Appellant upon instructions from the ‘Corporate Debtor’ which is reproduced as hereunder:

“4. The relevant extracts of LC Agreements dated 13.02.2018 and 12.03.2018 executed by the Appellant upon instructions from the ‘Corporate Debtor’, is reproduced here as under;

“I/we agree that you shall have a pledge upon all goods and upon all Bills of Lading, Warrants, Delivery Orders, Documents of Title, Insurance Policies and/or Certificates and proceeds thereof and all securities whatsoever which have been already or shall be here after delivered into the possession of you or your correspondents by me/us or by any person, firm or company as a result of opening or in connection with any transaction under this Documentary Credit”.

…. “I/We agree that the terms of the said pledge are that the said goods and the said documents are and shall be pledged as security for all advances made or which may be made to me/us or to my/our agents and for all payments which may be made by you or your correspondents under this Documentary Credit and also for any liability whatsoever incurred or which may be incurred by you as a result of the opening of this Credit together with interest and all customary charges, and that you shall have full discretion and power of sale over the said goods without notice to me/us, and that you shall be held covered against fire and all other risk after expiry of the insurance above mentioned and that in the case of loss the amount due under such policies shall be paid over to you”.

  • In this regard it is submitted that LC is basically a contract of performance guarantee and is a contingent liability of the ‘Corporate Debtor’ which crystallizes on happening of an uncertain future event.
  • An LC like a performance Bank Guarantee, is a document or an Order issued by a Bank at one place, authorizing some other Bank, acting as the issuing Bank’s agent at another place, with a view to honouring the drafts or cheques of a beneficiary named in the document, for the amount stated in the letter and charge the total amount of the drafts so honoured or payments so made to the issuer of the LC. The particulars of all the drafts or cheques, drawn by the specified person against the credit are required to be endorsed at the back of the LC so that it would be easy to ascertain if the quantum of credit allowed has been utilised, and the quantum that is outstanding.
  • It is submitted that the issuing Bank may agree not to stipulate any margin on the Letter of Credit that the issuing Bank agrees to open in favour of its customers who are rated as excellent. The usual practice of the issuing Bank is to retain a cash margin ranging from 0% to 25% of the value of the obligation that the Bank assumes in the LC. Such margin is usually retained in the opener’s name on a no-interest basis. The margin amount is adjusted with the amount of the bill when the issuing Bank pays it on behalf of the buyer. Upon receipt of the goods in the buyer’s premises, the issuing Bank applies on it the usual margin confirming to the terms of cash credit facility that the issuing Banker may have extended to the buyer.
  • It is argued that an LC is an independent transaction. The issuing Bank is not at all concerned with contract and/or dispute between the opener and the beneficiary. The issuing Bank is bound to extend from time to time the validity period of the LC. The Counsel relies on the judgment of ‘Fargo Freight Ltd.’ Vs. ‘Commodities Exchange Corporation’, (2004) 7 SCC 203, wherein it is held that the money payable by the issuing Bank belongs to the judgment-Debtor.
  • It is contended that margin money for the LC is the part payment provided by the ‘Corporate Debtor’ to the Banks to honour the liability for procuring the material to be used for its activity as ‘a going concern’. It is submitted that margin money is not a security for LC but it is the share of the contribution of the ‘Corporate Debtor’ to procure the raw material. The amount of margin money is not debited to make any recovery or adjustment towards the dues of the Bank, but the payment is made to the supplier of the material to keep the ‘Corporate Debtor’ as ‘a going concern’. The payment under LC by the Bank along with margin money is not an appropriation of Corporate Debtor’s fund towards the dues of the issuing Bank.
  • • It is submitted that the Appellant reiterated its stand taken in the fifth Meeting of the CoC on 27.11.2018, in which Meeting, the Appellant, along with similarly affected Banks, represented that the netting of the margin money by the IRP while admitting the claim of the Appellant, was correct.
  • • ‘Security Interest’ as provided for in Section 3(31) of the Code excludes Performance Guarantee which is similar in nature to an LC. SBI has wrongly assumed margin money to be a security for LC. Margin money in the form of the FDRs becomes the property of the Bank, the moment default on the part of the Customer takes place.

5. Submissions of the Ld. Counsel for the first Respondent /Resolution Professional (‘RP’) of the ‘Corporate Debtor’:

  • It is submitted by the RP that Respondents 3 to 7 had issued LC on behalf of the ‘Corporate Debtor’ for making the payment to the Corporate Debtor’s suppliers for supplying raw material. The ‘Corporate Debtor’ provided margin money in the form of Fixed Deposits with respect to the LCs and demand loans of the issuing Bank.
  • While so, the Appellant and Respondents 3 & 7 had appropriated the margin money on liquidation of the FDRs after the commencement of the CIRP and during the subsistence of the Moratorium.
  • It is submitted that the disclosure made in the Balance Sheet is only the accounting disclosure in order to reflect the true and fair picture of the assets and liabilities of the Company in accordance with Indian Accounting Standards. The Appellant itself recognized that the margin money extended by the ‘Corporate Debtor’ is a ‘Security’ while submitting its claim in Form C with IRP. The IRP admitted the claim after netting of the margin money available with the Appellant. The comparison between an LC and ‘Performance Guarantee’ has no relevance at all in the instant case.
  • As per Section 14 of the IBC during the subsistence of the Moratorium, there is a complete prohibition on any action relating to foreclosure, recovery or enforcement of security interest created by the ‘Corporate Debtor’ in respect of any of its property.
  • The Ld. Counsel placed reliance on the Judgment of this Tribunal in Comp. App. (AT) (Ins.) No. 329 of 2018 in ‘State Bank of India’ Vs. ‘Punjab National Bank & Ors.’, in support of his argument that margin money belongs to the ‘Corporate Debtor’ and was kept in the FD Account and therefore the said account could not have been debited during the period of Moratorium.
  • The IRP has admitted the claim of the Appellant with a disclaimer that the amount admitted may change subsequently on the basis of reconciliation or on the basis of any additional information received on the existing claim.

6. Submissions of the Learned Sr. Counsel Mr. Ramji Srinivasan appearing for the second Respondent/SBI:

  • It is submitted that on 30.10.2018, when the claims of the ‘Financial Creditors’ were admitted and uploaded on the website of the ‘Corporate Debtor’, it was seen that six Banks including the Appellant herein had liquidated the FDs of the ‘Corporate Debtor’ which was available with them as margin money against the LCs issued on behalf of the ‘Corporate Debtor’. It is submitted that this was taken subsequent to the commencement of CIRP and therefore the RP addressed letters to the Respondent Banks to reverse the transactions. The matter was discussed during the fifth, seventh & eight CoC Meetings and it was decided that the RP would seek a direction by the Adjudicating Authority against the six Banks.
  • It is submitted that the Adjudicating Authority has rightly directed the six Banks to reverse the transactions and credit the Current Account of the ‘Corporate Debtor’ as the margin money is an asset of the ‘Corporate Debtor’ and the same cannot be foreclosed or recovered during a Moratorium period under Section 14(1)(c) of the Code. It is contended that till the margin money is not appropriated it continues to be an asset of the borrower and was held so by the Hon’ble Supreme Court in ‘Shanti Prasad Jain’ Vs. ‘Director of Enforcement’ (1962) 2 SCR 297.
  • The Financial Statements of the Corporate Debtor’s Balance Sheet only provide additional information of details of liquid cash available with the ‘Corporate Debtor’ after notionally reducing the margin money amount deposited with the Banks. This is in line of the accounting standard practice. As per the Balance Sheet of the ‘Corporate Debtor’, margin money amount is reflected as an asset of the ‘Corporate Debtor’ under the heading ‘Cash and Cash Equivalence’ and ‘Bank balances other than Cash and Cash Equivalence’.
  • The Appellant itself in its claim Form-C submitted before the IRP to classify the amount of margin money of Rs.1,26,92,34,923/- as ‘security’.
  • This Tribunal in ‘State Bank of India’ Vs. ‘Punjab National Bank & Ors. Comp. App. (AT) (Ins.) No. 329/2018, dated 11.04.2019 has held that margin money belongs to the ‘Corporate Debtor’ which was kept in an FD and therefore the said amount cannot be debited during the period of Moratorium.

• Learned Counsel placed reliance on the following Judgements in support of his case that margin money is an asset of the ‘Corporate Debtor’:

    • ‘Indian Overseas Bank’ Vs. ‘Mr. Dinkar T. Venkatsubramaniam’, Company Appeal (AT) (Insolvency) No. 267/2017).
    • ‘State Bank of India’ Vs. ‘Debashish Nanda’, Company Appeal (AT) (Insolvency) No. 49/2018.
    • ‘ICICI Bank Limited’ Vs. ‘IRP of Ruchi Soya Industries Limited’, Company Appeal (AT) (Insolvency) No. 390/2018.
  • Once the LC is invoked and honoured by the Bank, the Bank in turn raises a full demand of the complete amount of LC upon the ‘Corporate Debtor’ and recovers the same from the Corporate Debtor’s Saving Bank Account/Current Account. Once, the LC amount is paid by the ‘Corporate Debtor’, the margin money deposited with the Bank can be utilized as margin money for another LC transaction. However, in the event of nonavailability of funds and default by the ‘Corporate Debtor’, the Bank in turn appropriates the margin money kept with it as FD and also exercises its right against the goods of the ‘Corporate Debtor’, securitized with the Bank. These principles have also been upheld and reiterated in a number of cases.
  • It is submitted that the Hon’ble Supreme Court in ‘Shanti Prasad Jain’ (Supra), discussed the nature of margin monies and stated that ‘when moneys are deposited in a Bank, the relationship that is constituted between the banker and the customer is one of Debtor and Creditor and not trustee and beneficiary’. However, ‘when money is delivered to a Bank ‘for application to a particular purpose’ it is not a general deposit creating a relationship of Debtor and Creditor, but a ‘specific deposit’ creating the relationship of bailee and bailor or trustee and beneficiary’.
  • It is submitted that the Court also placed reliance on Section 171 of the Indian Contracts Act, 1872, which states that Bankers, factors, wharfingers, attorneys of a High Court and policy-brokers may, in the absence of a contract to the contrary, retain as a security for a general balance of account, any goods bailed to them; but no other persons have a right to retain, as a security for such balance, goods bailed to them, unless there is an express contract to that effect. Therefore, Banks hold the margin money in trust of the borrower, they do not have any right over the same and can only utilize it under certain special circumstances subject to the contract between the Bank and the borrower.
  • The exception to Moratorium under Section 14(3)(b) of the IBC ‘a surety in a contract of guarantee to a Corporate Debtor’ is not applicable to the facts of this case. This Section 14(3)(b) is applicable only to an asset of third-party surety’s and not assets of the ‘Corporate Debtor’ itself. The Learned Counsel placed reliance on the report of the Insolvency Law Committee, dated March 2018. The relevant paragraphs are reproduced as hereunder:

“A contract of guarantee is between the creditor, the principal debtor and the surety, where under the creditor has a remedy in relation to his debt against both the principal debtor and the surety. The surety here may be a corporate or a natural person and the liability of such person goes as far the liability of the principal debtor…. The Committee further noted that a literal interpretation of Section 14 is prudent, and a broader interpretation may not be necessary in the above context. The assets of the surety are separate from those of the corporate debtor, and proceedings against the corporate debtor may not be seriously impacted by the actions against assets of third parties like sureties. Additionally, enforcement of guarantee may not have a significant impact on the debt of the corporate debtor as the right of the creditor against the principal debtor is merely shifted to the surety, to the extent of payment by the surety58. Thus, contractual principles of guarantee require being respected even during a moratorium and an alternate interpretation may not have been the intention of the Code, as is clear from a plain reading of section 14. Further, since many guarantees for loans of corporates are given by its promoters in the form of personal guarantees, if there is a stay on actions against their assets during a CIRP, such promoters (who are also corporate applicants) may file frivolous applications to merely take advantage of the stay and guard their assets. In the judgments analysed in this relation, many have been filed by the corporate applicant under section 10 of the Code59 and this may corroborate the above apprehension of abuse of the moratorium provision. The Committee concluded that section 14 does not intend to bar actions against assets of guarantors to the debts of the corporate debtor and recommended that an explanation to clarify this may be inserted in section 14 of the Code. The scope of the moratorium may be restricted to the assets of the corporate debtor only.”

  • The IRP had only preliminarily admitted the claims of the Appellant subject to further reconciliation. RP has the power to verify, reverify and update the list of claims of the Creditors in accordance with the provisions of IBC. Likewise, the IRP who had preliminarily admitted the Appellant’s claim, had vide email dated 14.08.2020 informed that its existing claim may change based on the final reconciliation of the accounts and the information received. It is vehemently submitted that LC is basically a contract of Performance Guarantee and is a contingent liability of the ‘Corporate Debtor’ which crystallizes on happening of uncertain future event and therefore unless such a liability crystalizes, the margin money deposited with the Bank, remains an asset of the ‘Corporate Debtor’.

Assessment:

7. The brief question which arises in this Appeal is whether margin money deposited by way of an FDR against a Letter of Credit (LC) is an asset of the ‘Corporate Debtor’? Whether margin money construes, a ‘Security’ as provided for under the Code. Whether this margin money can be appropriated by the Appellant Bank during the period of Moratorium on the ground that it does not form a part of the asset of the ‘Corporate Debtor’.

8. It is the case of the Appellant that these LCs are independent contracts whereby the Appellant undertook to make payment to the beneficiary on demand. Margin money for the LC is a part payment provided by the ‘Corporate Debtor’ to the Banks to honour the liability for procuring the material to be used for its activity as ‘a going concern’. It is the case of the Appellant that margin money is not a security for LC but is a share of the contribution of the ‘Corporate Debtor’ to procure any raw material. It is relevant to examine whether margin money falls within the definition of ‘Security Interest’ as defined under Section 3(31) of IBC and also to examine if it falls within purview of Section 14 of the IBC. Section 3 (31) reads as hereunder:

3(31) “security interest” means right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person:

Provided that security interest shall not include a performance guarantee;

9. Section 14 was amended with effect from 28.12.2019. Section 14(3)(a) & (b) is reproduced as hereunder:

“14. Moratorium. –

(1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely: –

(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority;

(b) transferring, encumbering, alienating or disposing off by the corporate debtor any of its assets or any legal right or beneficial interest therein;

(c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002);

(d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

[Explanation.-For the purposes of this sub-section, it is hereby clarified that notwithstanding anything contained in any other law for the time being in force, a licence, permit, registration, quota, concession, clearance or a similar grant or right given by the Central Government, State Government, local authority, sectoral regulator or any other authority constituted under any other law for the time being in force, shall not be suspended or terminated on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising for the use or continuation of the license or a similar grant or right during moratorium period;

……………………………………………………………………

(3) The provisions of sub-section (1) shall not apply to-

(a) such transactions, agreements or other arrangement as may be notified by the Central Government in consultation with any financial sector regulator or any other authority;]

(b) a surety in a contract of guarantee to a corporate debtor.”

(Emphasis Supplied)

10. This Section provides that sub-Section (1) of the IBC shall not apply to ‘a surety in a contract of guarantee to a Corporate Debtor’. It is the case of the Appellant that margin money is not a security and does not fall within a definition of ‘Security Interest’ as ‘no ‘Security Interest’’ is created by the ‘Corporate Debtor’ on the margin money. It is submitted by the Appellant that it is the usual practice of the issuing Bank to retain a cash margin ranging from 0% to 25% of the value of the obligation that the Bank assumes in the LC. The margin amount is adjusted in the amount of the bill and the issuing Bank pays it on behalf of the buyer. Upon receipt of the goods in the buyer’s premises, issuing Bank applies on it the usual margin confirming to the terms of cash credit facility that the issuing banker may have extended to the buyer. The issuing Bank is bound to extend from time to time the validity of the period from the LC.

11. Admittedly, the amount of margin money is not debited to make any recovery or adjustment towards the dues of the Bank, but the payment is made to the supplier of the material to keep the Company ‘as a going concern’. It is also seen that the payment under the LC along with the margin money cannot be said to be an appropriation of the Corporate Debtor’s funds towards the dues of the issuing Bank. A perusal of the Clause 8 of Form-C as provided for under the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons), Regulations, 2016, the Claim submitted by the Banks specifically provides for the list of securities and it is pertinent to mention that there is no mention of ‘margin money’ in this list of securities. Furthermore, the margin money which is in the form of FDRs becomes the property of the Bank, the moment there is a default on behalf of the Company. In the instant case, the FDRs cannot be said to be a property of the ‘Corporate Debtor’ as the date of default is much prior to the date when the Moratorium was invoked. A perusal of the material on record also shows that the entries which have been justified against the LCs and the payment loans are not shown as ‘assets of the Corporate Debtor’ in its Balance Sheet and Moratorium can be applicable under Section 14 of the IBC only to the assets of the ‘Corporate Debtor’.

12. The Learned Counsel for the Respondents relied on the following Judgements in support of their case that margin money/any amounts cannot be appropriated by the Bank during the Moratorium period:

  • ‘Punjab National bank & Anr.’ Vs. ‘State Bank of India & Ors.’, CA91/2018 in CP/540/IB/CB/2017.
  • ‘State Bank of India’ Vs. ‘Punjab National Bank & Ors.’, Comp. App. (AT) (Ins.) No. 329/2018.
  • ‘Indian Overseas Bank’ Vs. ‘Mr. Dinkar T. Venkatsubramaniam’, Comp. App. (AT) (Ins.) No. 267/2017.
  • ‘State Bank of India’ Vs. ‘Debashish Nanda’, Comp. App. (AT) (Ins.) No. 49/2018.
  • ‘ICICI Bank Limited’ Vs. ‘IRP of Ruchi Soya Industries Limited’, Comp. App. (AT) (Ins.) No. 390/2018

13. We are conscious of the fact that the aforenoted Judgements pertain to the period prior to the amendment i.e., prior to 12.08.2019 on which date, Section 14(3)(a) & (b) had come into effect.

14. Learned Counsel also drew our attention to the Judgment of this Tribunal in ‘State Bank of India’ Vs. ‘Punjab National Bank & Ors.’, Comp. App. (AT) (Ins.) No. 329/2018, wherein it is noted that margin money belongs to the ‘Corporate Debtor’ and the said amount could not have been debited during the period of Moratorium. It is pertinent to mention that this observation was also prior to the amendment made under Section 14 which has come into effect on 28.12.2019.

15. The Hon’ble Supreme Court in the matter of ‘Commissioner of Income Tax Madras’ Vs. ‘Laxmi Villas Bank Ltd. Karur’, (1996) 8 SCC 458, observed in paras 5 & 6 as follows:

“5. There was nothing in law to prevent the Bank from adjusting the margin money forfeited by it and which had become its own just at that point of time against the cost of the securities. It was, however, held that the profits and gains of the Bank would arise only when the Bank sold the securities or redeemed them at the time of maturity if it had become the owner of the securities. Since the Bank became the owner of the securities at the same time when it became the owner of the margin amount also, there was nothing unnatural or illegal for the Bank taking into account this margin amount which had become its money at that time, in arriving at its cost of the securities. For these reasons, the High Court answered the question referred to it in affirmative and against the Department. The Department has now come up in appeal before this Court.

6. The facts of this case clearly go to show that when the Bank forfeited the margin money deposited by the customers with it, the Bank was doing something which was in course of its usual banking business. After the deposits made by the constituents were forfeited by the Bank, the forfeited amount became Bank’s money. There is no reason why this amount should not be treated as income of the Bank earned in course of carrying on its business. The Bank undertook to buy the securities on behalf of its constituents. Before purchasing the securities, the Bank took from its constituents “margin money deposits”. These deposits served two purposes. In the event of the constituent paying the balance amount, the deposits were to be treated as part payment of the price of the securities. But in the interval between the deposits and the due date of payment of the balance amount, the deposit was to be treated as earnest money liable to be forfeited. In this case, the Bank bought the securities on behalf of its constituents in course of its business and for the purpose of making profit. If the contract was duly executed, the Bank would have been entitled to charge brokerage. The entire transaction was a part of the profit-making process of the Bank. This is not a case of pre-deposit of money for acquisition of licence or business contract which had to be kept deposited with the principal for the entire duration of the period of contract. Each deposit was made for a specific transaction. The Bank undertook to purchase the securities for and on behalf of its constituents. The Bank’s practice was to take a deposit before purchasing the security, which was liable to be forfeited in case of default. The money was received and forfeited incidentally and in the course of day-to- day banking business. After the forfeiture, the money became the Bank’s own money. The Income Tax Officer was right in treating this forfeited money as income of the assessee earned in usual course of banking business. The securities purchased by the Bank in its own name became the property of the Bank. If the securities were ultimately sold, any profit made would be profit earned by the Bank. The cost of acquisition of the security will be the price actually paid for it. In the instant case, the finding of fact is that the Bank had purchased them at face value. There is no justification in law for reducing the price actually paid by the Bank by reducing it by the amount of margin money forfeited by the Bank. This is a straightforward case. The Bank has purchased the securities at face value. Its cost cannot be anything less than the price which was actually paid by the Bank. The Bank would have handed over the securities to the constituent if he had not defaulted. In that case, the Bank would have been entitled only to the brokerage. Since the constituent defaulted, the deposit amount was forfeited and the end result of the transaction was that the Bank became the full owner of the securities and the amount lying in deposit with it became its own money. The forfeited amount was Bank’s income made in course of its banking business and had to be assessed accordingly in the year in which it became the Bank’s money. The accrual of income cannot be deferred by adjusting the deposit amount against the cost of the securities. It may have utilised the deposits although there is no finding of fact to that effect, as part payment of the price of the securities. But after its forfeiture, the deposit amount became the property of the Bank. The money that was utilised for the purchase of the securities was Bank’s money. No question of reduction of costs of the securities by adjustment of the deposit amount can arise in the facts of this case.

(Emphasis Supplied)

16. The aforenoted Judgement drew a parallel between margin money and ‘earnest money’. Margin Money is an amount given for the purpose of binding of contract, if in the event, the contract is executed the amount would be deducted from the price and in the event the contract did not go through, the amount would be forfeited. The observation by the Hon’ble Supreme Court that ‘each deposit was made for a specific transaction and in the event of default, the forfeited money became the Bank’s money’ is applicable to this case also.

17. A three Member Bench of this Tribunal in ‘Indian Oversees Bank’ Vs. ‘Arvind Kumar’, Comp. App. (AT) (Ins.) No. 558/2020, dated 28.09.2020 has held that ‘margin money’ is not a security and therefore does not require any registration of charge and that margin money is the contribution on the part of the borrower who seeks Bank Guarantee and the said margin money remains with the Bank as long as the Bank Guarantee is alive 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 Institution. This principle has attained finality as the Judgement has not been challenged. We are of the view that the same principle ought to be applied to the LCs also. Learned Sr. Counsel Mr. Ramji Srinivasan relied on the Judgement of this Tribunal in ‘Bank of Baroda Corporate Financial Services’ Vs. ‘Sundaresh Bhatt’, 2020 SCC OnLine NCLAT 434, by which Order, this Tribunal has observed that the Bank had internally given instructions to appropriate the margin money kept in the form of an FD, subsequent to invocation of Bank Guarantee, on 01.08.2017, on which date, the Section 7 Application was admitted against the ‘Corporate Debtor’. The facts of this case are distinguishable from the facts on hand as it was held by this Tribunal in ‘Bank of Baroda Corporate Financial Services’, (Supra) that the ‘Bank was aware regarding initiation of CIRP, but adjusted the margin money without the consent of the CoC/IRP and that the Bank could not have been done so as the FD Accounts were closed on 02.08.2017, subsequent to the Admission of Section 7 Application. It is significant to mention that the Judgement of ‘Indian Oversees Bank’, (Supra) was rendered subsequent to ‘Bank of Baroda Corporate Financial Services’, (Supra).

18. 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 it is free from the Trust. As we observe that margin money has the character of Trust for the benefit of the beneficiary, it cannot be said to be an asset of the ‘Corporate Debtor’. These FDRs cannot be realized by the ‘Corporate Debtor’ as and when it desires. The margin money is deposited in the FDRs which the ‘Corporate Debtor’ becomes entitled to only when the Margin Money is free from the obligations of the terms of the LC.

19. Learned Sr. Counsel Mr. Ramji Srinivasan also relied on the Judgement of the Hon’ble Supreme Court in ‘Shanti Prasad Jain’ (Supra), in which the Hon’ble Apex Court has laid down as follows:

“44. In Paget’s Law of Banking, 6th Edn., p. 48, it is stated that “superimposed on this general relationship of banker to customer there may be special relationships arising from particular circumstances and requirements” and that the express terms of those relationships override the implied terms arising from the general relationship. It was argued for the respondents, that this statement of the law could have, as suggested by the word “superimposed”, reference only to special contracts entered into with customers, and that involves the admission that the appellant is a customer. Normally no doubt banks would undertake these works for their customers, but there is nothing to prevent them from doing so for others as well. In Corpus Juris Secundum, Vol. 9, it is stated “The intention of the parties controls the character of the relation between bank and depositor, which may be that of bailee and bailor, but is ordinarily that of debtor and creditor” (p. 546). And it is pointed out when money is delivered to a bank “for application to a particular specific purpose” it is not a general deposit creating the relationship of debtor and creditor, but a “specific deposit” creating the relationship of bailee and bailor or trustee and beneficiary. Vide p. 570.

45. Therefore the fact that money has been put in a bank does not necessarily import that it is a deposit in the ordinary course of banking. We have to examine the substance of it to see whether it is in fact so or not. It is unnecessary for the purpose of this case to elaborately examine what banking business, properly so called, consists in. It is summed up as follows in Halsbury’s Laws of England, 3rd Edn. Vol. 2 p. 150 Para 277: “the receipt of money on current or deposit account and the payment of cheques drawn by and the collection of cheques paid in by a customer”. Applying these tests, can it be said that Account No. 50180 is truly a banking account? Did the appellant open the account in the Bank with a view to deposit his moneys from time to time, and to operate on it by drawing cheques? The question admits of only one answer, and that is in the negative. The account was opened in the Bank with a view to effectuate the arrangement between the German firms, and the appellant, which was that the amounts were to be repaid to the depositors as price of new machineries to be supplied by them and the appellant was not to operate on it except for that purpose. The Bank was informed of this arrangement and took the deposits with notice of the rights of the parties thereunder. Under the circumstances the Bank has really only custody of the money as if it were a stakeholder, with a liability to hand it over to the persons who would become entitled to it under the arrangement. On these facts it cannot be said that there is a deposit in a commercial sense of the word. It would be more correct to say that the Bank holds the money under a special arrangement which constitutes it not a debtor, but a sort of stakeholder.

20. In the aforenoted Judgement it was held that the deposits were made in the Bank not in the course of normal banking business but under the special arrangement and therefore the Bank was a stakeholder with a liability to hand over the money to the persons who are entitled to receive it. The question which arises for consideration is with respect to margin money which has been deposited by the ‘Corporate Debtor’ in the Bank and is an independent transaction and the issuing Bank is not concerned with any contract between the ‘Corporate Debtor’/beneficiary and in fact it is a part payment made by the ‘Corporate Debtor’ to honour its liability for procuring any goods/raw material/services for its activity as ‘a going concern’.

21. In fact the aforenoted ratio in ‘Shanti Prasad Jain (Supra), was discussed subsequently by the Hon’ble Supreme Court in a later Judgement in ‘Reserve Bank of India’ Vs. ‘Bank of Credit and Commerce’, (1983) 78 Comp Cas 207 Bom, in which the character of ‘Trust of margin money’ is clearly explained:

“34. In my judgment, the facts of this case clearly indicate that the margin moneys in question were undoubtedly impressed with trust and the bank held the same as trustee for the benefit of the depositor to the extent of unutilised amount. In view of the background of the Reserve Bank guidelines and segregation of the amounts from the current account of the applicant for a specific purpose, it must be held and it is held that the amounts deposited by the applicant were impressed with the trust and are refundable to the applicant in full to the extent of the unutilised amount. In my judgment, it is relevant that the mode followed by the bank was that of issuing the four fixed deposit receipts in favour of the applicant after segregation of the amounts from the current account of the applicant for the specific purpose as aforesaid. The applicant was not at all free to utilise the said fixed deposits or the amounts thereunder. The applicant could not seek encashment of the fixed deposit receipts even on expiry of the due dates of the fixed deposit receipts at least so long as the letters of credit subsisted. The said margin money was constituted as a separate identifiable fund for honouring of letters of credit by the bank and for refund thereof to the applicant to the extent of credit by the bank and for refund thereof to the applicant to the extent of money not utilised for the specific purpose. The said fixed deposits were also impressed with trust as the same were earmarked for a specific purpose, i.e. as a separate and distinct identifiable fund for honouring of letters of credit. Having regard to the nature of the transaction, it is clear that the transaction entered into between the bank and the applicant was in a special fiduciary capacity. It is, therefore, irrelevant that the bank agreed to pay some interest to the applicant. The applicant did not deposit these amounts in fixed deposit in order to earn interest. The bank was not willing to open a letter of credit unless the applicant furnished security/margin money in terms of the Reserve Bank guidelines and retained the same till the letters of credit were worked out or cancelled on expiry thereof. Even if it is to be assumed that the bank had the permission of the applicant to use the amount of specific deposit in the meanwhile for purposes of its business, it would make no difference to the conclusion of the court. A trust money does not cease to be trust money merely because of user thereof by the trustee. In such a case, the bank in bound to reimburse the beneficiary an equivalent amount and the doctrine of tracing the trust fund would clearly apply. The principles laid down in Hallet’s case [1879-80] 13 Ch 696 were clearly approved by the Privy Council in the case of Official Assignee v. Bhatt [1933] LR 60 IA 203 and by our Supreme Court in Shanti Prasad Jain’s case [1963] 33 Comp Cas 231 (SC). Thus, the factual aspects emphasised by Mr. Thakkar noted in paragraph 23 of this judgment have not bearing on the ultimate conclusion of the court on the principal questions formulated in paragraph”.

(Emphasis Supplied)

22. In the instant case, the LC Agreements dated 13.02.2018 & 12.03.2018 executed by the Appellant specifies that the goods and services received by way of these LC transactions would be security for the whole LC amount including margin money. The relevant portion is detailed as hereunder:

“I/we agree that you shall have a pledge upon all goods and upon all Bills of Lading, Warrants, Delivery Orders, Documents of Title, Insurance Policies and/or Certificates and proceeds thereof and all securities whatsoever which have been already or shall be here after delivered into the possession of you or your correspondents by me/us or by any person, firm or company as a result of opening or in connection with any transaction under this Documentary Credit.”

……..“I/we agree that the terms of the said pledge are that the said goods and the said documents are and shall be pledged as security for all advances made….”

23. It is the case of the Respondents that the LC cannot be equated to that of a Bank Guarantee and that they are different terms used in different situations. This Tribunal is of the considered view that while different, both Bank Guarantees and LCs assure the third party that if the borrower defaults what it owes, the Bank would step in on their behalf. LCs are especially important in international transactions. An LC carries a higher risk for the Bank as the Bank makes the payment of an LC when it becomes due. The Hon’ble Supreme Court discussed at length in ‘Cooperative Federation Ltd.’ Vs. ‘Singh Consultants and Engineers (P) Ltd., (1988) 1 SCC 174, as to how an LC is akin to a Performance Guarantee and held as under:

“19. ………… The plaintiffs appealed to the Court of Appeal in England. It was held by a Bench consisting of Lord Denning, M.R., Browne and Geoffrey Lane, L.J. that a performance guarantee was similar to a confirmed letter of credit. Where, therefore, a bank had given a performance guarantee it was required to honour the guarantee according to its terms and was not concerned whether either party to the contract which underlay the guarantee was in default.

xxxx                                  xxxx                            xxxx

44. The modern documentary credit had its origin from letters of credit. We may, therefore, begin the discussion with the traditional letter of credit. Paul R. Verkuil in an article explains the salient features of a letter of credit in these terms:

“The letter of credit is a contract. The issuing party – usually a bank –
promises to pay the ‘beneficiary’ – traditionally a seller of goods – on demand if the beneficiary presents whatever documents may be required by the letter. They are normally the only two parties involved in the contract. The bank which issues a letter of credit acts as a principal, not as agent for its customer, and engages its own credit. The letter of credit thus evidences – irrevocable obligation to honour the draft presented by the beneficiary upon compliance with the terms of the credit.”

xxxx                              xxxx                             xxxx

49. This was also the view taken by this Court in United Commercial Bank case. There A.P. Sen. J. speaking for the Court, said (pages 323 and 324) : (SCC pp. 783 -84, paras 40-42)

“…the rule is well established that a bank issuing or confirming a letter of credit is not concerned with the underlying contract between the buyer and seller. Duties of a bank under a letter of credit are created by the document itself, but in any case it has the power and is subject to the limitations which are given or imposed by it, in the absence of the appropriate provisions in the letter of credit ……

xxxx                          xxxx                   xxxx

53. Whether it is a traditional letter of credit or a new device like performance bond or performance guarantee, the obligation of banks appears to be the same. If the documentary credits are irrevocable and independent, the banks must pay when demand is made………”

(Emphasis Supplied)

24. Applying the above to the case on hand, this Tribunal is of the view that in terms of its functions, a Performance Guarantee is similar to that of an LC. Further, having observed so, we are of the view that the contention of the Respondents that the Banks have erroneously invoked the LCs and liquidated the margin money during the period of Moratorium, cannot be sustained.

25. The material on record does not establish that any ‘Security Interest’ was created by the ‘Corporate Debtor’ with margin money. The provision of Section 14(3)(b) specifically excludes the Application of Section 14 to a ‘surety’ in a contract of Guarantee to a ‘Corporate Debtor’. This Tribunal is of the earnest view that LC is basically akin to a contract of Guarantee, as it a contingent liability of the ‘Corporate Debtor’ which gets crystallized on the happening of a future event.

26. Both Sections 18 & 36(4) provide that asset held under Trust cannot be considered as an asset of the ‘Corporate Debtor’. This Tribunal is of the earnest view that margin money has the character of the Trust for the benefit of the beneficiary as long as the LC is alive and the same cannot amount to an asset of the ‘Corporate Debtor’. Therefore, the principle laid down in ‘Shanti Prasad Jain’, (Supra) and upheld in the aforementioned ‘Reserve Bank of India’, (Supra) reinforces that ‘the FDs were impressed in the ‘Trust’ as the same were earmarked for a specific purpose i.e., as a separate and distinct identifiable fund for honouring LCs’.

27. For all the aforenoted reasons, we are of the considered view that margin money can in no manner be said to be a ‘Security Interest’ as defined under Section 3(31) of the IBC. Section 14(1)(c) prohibits any action to foreclose, recover or ensure any ‘Security Interest’ created by the ‘Corporate Debtor’ in respect of its property. As we hold that no ‘Security Interest’ was created by the ‘Corporate Debtor’ with respect to the margin money that was deposited by the ‘Corporate Debtor Company’ towards the opening of the LC in the Appellant Bank, we are of the considered view that the Banks having appropriated this money during the period of Moratorium is justified as we hold that the amount is not an asset of the ‘Corporate Debtor’. Therefore, a conjoint reading of Section 3(31) and Section 14 of the Code makes it abundantly clear that margin money is not included as a ‘Security’ and is not an asset of the ‘Corporate Debtor.

28. For all the aforenoted reasons, this Appeal is allowed and the Order of the Adjudicating Authority is set aside. Needless to add, the Adjudicating Authority shall proceed in accordance with law.

[Justice Anant Bijay Singh]
Member (Judicial)

[Ms. Shreesha Merla]
Member (Technical)

NEW DELHI
16th September, 2022


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