Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2020 Supreme(Bom) 215

IN THE HIGH COURT OF JUDICATURE AT BOMBAY
R.D. DHANUKA, J.
Palladian Hotels Private Limited, Mumbai — Appellant
Versus
Hotel Horizon Private Limited, Mumbai — Respondent
Company Application No. 282 of 2019; Company Petition No. 489 of 2015
Decided on : 02-01-2020

Advocates:
Advocate Appeared:
Naushad Engineer, Advocate, Spenta Havewalla, Advocate, Murtuza Federal, Advocate, Pauloni Mehta, Advocate, Arushi Poddar, Advocate, Shadab Jan, Advocate, Komal Khushalani, Advocate

The bank guarantee was deemed an independent contract and not subject to the moratorium under section 14(1) of the Insolvency & Bankruptcy Code, 2016, allowing for its encashment and the release of funds to the applicant.

Headnote:
Bank Guarantee - Release of Funds - Section 14(1) of the Insolvency & Bankruptcy Code, 2016 - Section 126 of the Indian Contract Act, 1872
Fact of the Case:

The applicant sought an order to encash a bank guarantee and release funds deposited as security. The respondent failed to return the security deposit, leading to arbitration and a subsequent order by the National Company Law Tribunal.
Finding of the Court:

The court found that the bank guarantee could be encashed and the amount released to the applicant, as it was an independent contract and not subject to the moratorium under section 14(1) of the Insolvency & Bankruptcy Code, 2016.
Issues: The key issue was whether the bank guarantee could be encashed and the funds released despite the moratorium under section 14(1) of the Insolvency & Bankruptcy Code, 2016.
Ratio Decidendi: The court held that the bank guarantee was an independent contract and not subject to the moratorium, allowing for its encashment and the release of funds to the applicant.
Final Decision: The court ordered the release of the encashed amount to the applicant, subject to the applicant providing an undertaking to return the amount if the respondent succeeds in the arbitration petition.

Judgement Key Points

Key Points: - The court held that a bank guarantee is an independent contract and is not subject to the moratorium under Section 14(1) of the Insolvency & Bankruptcy Code, 2016 (!) (!) . - The bank guarantee was deemed an independent transaction issued pursuant to a consent order, allowing for its encashment and the release of funds to the applicant (!) (!) . - Section 14(3)(b) of the Insolvency & Bankruptcy Code, 2016 explicitly states that the moratorium provisions do not apply to a surety in a contract of guarantee to a corporate debtor (!) (!) . - The court ruled that the application for encashment and release of funds is not an application for execution of an arbitral award and thus falls outside the scope of the moratorium bar (!) (!) . - The court ordered the release of the encashed amount to the applicant, subject to the applicant providing an undertaking to return the amount with interest if the respondent succeeds in the arbitration petition (!) (!) . - The court extended the principles laid down by the Andhra Pradesh High Court in Haryana Telecom Ltd. vs. Aluminium Industries Limited regarding bank guarantees under SICA to the facts of this case under the IBC (!) (!) . - The order passed by this Court on 6th September 2019 regarding the encashment of the bank guarantee had attained finality, barring any challenge by the respondent (!) (!) . - The court noted that a claim under Section 14(1)(a) would not prohibit the claim if a counter-claim was also filed, but did not decide this specific issue as the challenge to the award was pending (!) .

How to determine if a bank guarantee is subject to the moratorium under Section 14(1) of the Insolvency & Bankruptcy Code, 2016?

What are the rights of an applicant to encash a bank guarantee and release funds when the guarantee is deemed an independent contract?

What is the legal position regarding the release of funds deposited as security under a bank guarantee despite an order of moratorium?

JUDGMENT :

R.D. Dhanuka, J.

By this company application, the applicant seeks an order and direction against the Prothonotary & Senior Master of this Court to encash the bank guarantee and to receive the funds in his account and seeks further direction to release a sum of Rs.38,53,000/- to the applicant within a period of one week from the date of passing of the order in this application. Some of the relevant facts for the purpose of deciding this application are as under :

2. It is the case of the applicant that on 9th December, 2013 the applicant and the respondent had entered into a Term Sheet whereby the applicant had deposited a sum of Rs.10,53,000/- with the respondent as and by way of security deposit. The said Term Sheet contemplated a final leave and license agreement to be executed between the parties within four months, failing which the Term Sheet shall stand cancelled and the security deposit would have to be refunded to the applicant. The time to execute the final leave and license agreement was extended by letter dated 9th July, 2014 where under a further additional payment of Rs.28,00,000/- was deposited by the applicant with the respondent aggregating to Rs.38,53,000/- towards security deposit. No leave and license agreement was however, finalized even by the extended date.

3. The applicant filed a winding up petition (Company Petition No.489 of 2015) on 6th April, 2015 against the respondent in view of the respondent having failed to return the security deposit with interest to the applicant. On 5th April, 2017, this Court passed an order in the said company petition by consent of parties. The dispute between the parties was referred to arbitration of Ms.Sowmya Srikrishna, a counsel of this Court. The respondent through its counsel undertook to furnish a bank guarantee of a nationalized bank in the name of the Prothonotary & Senior Master of this Court in the sum of Rs.38,53,000/- initially for a period of one year and for like period if the proceedings were not concluded within a period of one year.

4. The order dated 5th April, 2017 was clarified by this Court to the effect that return of the bank guarantee shall be subject to the out come of the arbitral proceedings and not furnishing of such bank guarantee. It was also made clear that if the bank guarantee was not submitted within the time stipulated in the said order, the company petition would stand revived and admitted without further reference to the Court. On 24th May, 2017, Vacation Bench of this Court extended the time to furnish the bank guarantee till 7th June, 2017.

5. On 5th June, 2017, the respondent furnished a bank guarantee bearing No.15 of 2017 through Indian Bank to the satisfaction of the Prothonotary & Senior of this Court for the sum of Rs.38,53,000/-. The said bank guarantee was an unconditional bank guarantee and was irrevocable. The validity of the said bank guarantee was further extended on 5th May, 2018 till 4th June, 2018. By an order dated 5th June, 2018, learned Prothonotary & Senior Master of this Court directed the respondent to extend the bank guarantee within 60 days prior to its expiry making it clear that in the event of the failure, the bank guarantee would be encashed.

6. On 22nd March, 2019, learned arbitrator made an award allowing the claims made by the applicant and rejected the counter claim filed by the respondent. Learned arbitrator directed the respondent to pay a sum of Rs.38,53,000/- along with interest at the rate of 14% p.a. from 30th December, 2014 until payment or realization thereof and also to pay costs in the sum of Rs.19,17,547/- with interest at the rate of 7% p.a. from the date of award till payment or realization thereof. Learned arbitrator granted liberty to the applicant to apply to this Court for encashment of the bank guarantee furnished by the respondent. At the time of passing of award, Mr.Vishal Sharma, one of the Director of the respondent company was present on behalf of the respondent and sought s

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