WAPCOS Ltd. vs. D. Thakkar Constructions Pvt. Ltd. Through Ram Ratan Kanoongo – NCLAT New Delhi
Facts of the Case
- WAPCOS Ltd. (the appellant) and D. Thakkar Constructions Pvt. Ltd. (the respondent) entered into a contract for construction-related services.
- As part of the contract, D. Thakkar Constructions Pvt. Ltd. provided a Performance Bank Guarantee (PBG) to WAPCOS Ltd. to ensure the completion of the contractual obligations.
Initiation of CIRP:
- Thakkar Constructions Pvt. Ltd. faced financial difficulties, leading to the initiation of the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC).
- During the CIRP, a moratorium was imposed under Section 14 of the IBC, which prohibits actions like property recovery or enforcement of security interests against corporate debtors.
Dispute Over Invocation of PBG:
- WAPCOS Ltd. attempted to invoke the PBG due to alleged non-performance of the contract by D. Thakkar Constructions Pvt. Ltd.
- The Resolution Professional (RP) objected, arguing that the invocation of the PBG during the CIRP violated the moratorium provisions under Section 14 of the IBC.
- The matter was taken to the National Company Law Appellate Tribunal (NCLAT).
Judgement
No Restraint on Invocation of PBG:
The NCLAT ruled that Performance Bank Guarantees (PBGs) are not covered under the moratorium provisions of Section 14 of the IBC, as they do not form part of the corporate debtor’s assets.
Key Observations:
- Independent Nature of PBGs: A PBG is a contract between the bank and the beneficiary, independent of the contract between the corporate debtor and the beneficiary. The bank’s obligation to honor the guarantee is separate and cannot be impacted by the CIRP.
- Section 14 Exclusion: The moratorium under Section 14(1)(c) of the IBC does not apply to PBGs because they are not the corporate debtor’s property or security interest.
Ruling:
- WAPCOS Ltd. was entitled to invoke the PBG, and the RP’s objection was dismissed.
- The NCLAT emphasized that restraining the invocation of PBGs would defeat their purpose as a risk mitigation tool in commercial contracts.
Significance of the Judgement
This judgement reinforces the principle that Performance Bank Guarantees are sacrosanct and can be invoked even during the CIRP. It upholds the independence of bank guarantees in commercial transactions and ensures that creditors can rely on these instruments for risk management, irrespective of insolvency proceedings involving the corporate debtor.