NCLAT held that the bank must honour an unconditional and irrevocable Performance Bank Guarantee irrespective of insolvency proceedings or disputes.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench comprising Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member) was hearing an appeal and observed that An unconditional and irrevocable Performance Bank Guarantee must be honoured by the bank irrespective of insolvency proceedings or disputes, as such guarantees represent independent contracts whose enforcement is not impeded by the moratorium under Section 14 of the Insolvency and Bankruptcy Code.
The appeal in question challenges the order dated 30.10.2023 issued by the National Company Law Tribunal (NCLT), Principal Bench, New Delhi, which restrained the appellant from invoking a Performance Bank Guarantee. The case arose from a 2014 tender by Indian Oil LNG Pvt. Ltd. for LNG Tank construction, with the appellant entering a contract and subsequently subcontracting the work to M/s. Punj Lloyd Ltd., who provided a Performance Bank Guarantee of ₹47,72,34,933/- from the State Bank of India. The agreed mechanical completion date was 23.03.2018, but delays and unresolved leakage issues led the appellant to invoke the Guarantee on 30.10.2019.
Following the initiation of the Corporate Insolvency Resolution Process (CIRP) against Punj Lloyd Ltd. in March 2019, the Resolution Professional (RP) sought to restrain the invocation of the Guarantee, which was initially granted by the Adjudicating Authority based on Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC). Despite prior rulings indicating that such moratoriums do not cover Performance Bank Guarantees, the RP's application was entertained. The Adjudicating Authority’s decision was based on its view that the Guarantee was not truly unconditional, though this observation contradicted the clear terms of the Guarantee which mandated payment upon demand, without conditions or disputes.
The appellant’s counsel argued that the Guarantee was unequivocally unconditional and irrevocable and that the breaches by Punj Lloyd justified its invocation. They contended that the Adjudicating Authority overstepped its jurisdiction. Conversely, the respondent argued that the decision to restrain the invocation was within the Adjudicating Authority's jurisdiction and was justified by specific contractual and moratorium considerations.
The NCLAT found that the Adjudicating Authority had erred in its assessment of the Guarantee's unconditional nature. Established legal principles, supported by Supreme Court judgments, affirm that unconditional and irrevocable Bank Guarantees must be honoured by banks regardless of underlying disputes or insolvency proceedings. The court rejected the RP’s arguments for restraining the invocation based on special equities or irretrievable harm, as such arguments were not substantiated by the legal standards governing bank guarantees. Ultimately, the NCLAT set aside the Adjudicating Authority’s order, thereby allowing the appellant to proceed with the invocation of the Performance Bank Guarantee as per its terms, reinforcing the enforceability of unconditional guarantees in the face of insolvency or contractual disputes.
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