CASE BRIEF:The National Small Industries Corporation Limited Vs. Rekha Sharma Resolution Professional of Shri Ganesh Equipment’s Pvt. Ltd. & Anr.

CASE NAME	The National Small Industries Corporation Limited Vs. Rekha Sharma Resolution Professional of Shri Ganesh Equipment’s Pvt. Ltd. & Anr.
CITATION	Company Appeal (At) (Insolvency) No. 841 Of 2021
COURT	National Company Law Appellate Tribunal
Bench	M. Venugopal, Ajai Das Mehrotra
Date of Decision	12 February 2024

Introduction

The case of The National Small Industries Corporation Limited vs. Rekha Sharma, Resolution Professional of Shri Ganesh Equipment’s Pvt. Ltd. & Anr. is a significant ruling in India’s insolvency jurisprudence, addressing crucial aspects of moratorium applicability and the enforceability of bank guarantees under the Insolvency and Bankruptcy Code (IBC), 2016. This decision, delivered by the National Company Law Appellate Tribunal (NCLAT), scrutinized the legal interpretation of financial assistance extended by a government entity and the rights of creditors during the Corporate Insolvency Resolution Process (CIRP).

The appeal arose from a dispute concerning the invocation of bank guarantees issued by Canara Bank in favor of The National Small Industries Corporation Limited (NSIC) for financial assistance provided to Shri Ganesh Equipment’s Pvt. Ltd. The Resolution Professional contested this invocation, arguing it contravened the moratorium under Section 14 of the IBC. However, NSIC maintained that the guarantees were enforceable, irrespective of the moratorium.

The NCLAT’s ruling reinforced key principles of insolvency law, particularly regarding creditor protections and the scope of statutory exclusions under Section 14(3)(b) of the IBC. This decision underscores the judiciary’s role in balancing creditor rights with insolvency safeguards, ensuring compliance with statutory mandates while fostering financial stability in corporate resolution mechanisms.

FACTS

The appellant, The National Small Industries Corporation Limited (NSIC), is a government entity that provides financial assistance to Micro, Small, and Medium Enterprises (MSMEs) through various support schemes. The dispute in this case arose from NSIC’s attempt to invoke bank guarantees issued by Canara Bank in favor of NSIC for financial assistance provided to Shri Ganesh Equipment’s Pvt. Ltd. (the Corporate Debtor). The invocation was challenged by Ms. Rekha Sharma, the Resolution Professional (RP), on the grounds that it violated the moratorium imposed under Section 14 of the Insolvency and Bankruptcy Code (IBC), 2016.

On May 11, 2012, NSIC entered into an agreement with the Corporate Debtor under its Raw Material Assistance Scheme. The agreement provided financial support against bank guarantees, which the Corporate Debtor furnished as security for repayment. Initially, the assistance was limited to ₹1 crore but was later increased to ₹2.99 crore through a supplementary agreement executed on October 5, 2018. In compliance with these agreements, the Corporate Debtor provided seven bank guarantees issued by Canara Bank.

Subsequently, M/s Jasmeet Associates, an operational creditor, initiated a Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor under IBC. The National Company Law Tribunal (NCLT) admitted the CIRP petition on February 12, 2020, and imposed a moratorium under Section 14. However, just two days later, on February 14, 2020, NSIC invoked the bank guarantees, seeking to recover its dues from Canara Bank.

The RP challenged this action by filing an interlocutory application (IA No. 3139/ND/2020) before the NCLT, arguing that NSIC’s invocation of the bank guarantees was prohibited by the moratorium under Section 14(1)(c) of IBC. The NCLT ruled in favor of the RP, holding that the bank guarantees in question were financial guarantees rather than performance guarantees and, therefore, could not be enforced during the moratorium. It further reasoned that allowing NSIC to recover its dues separately would amount to preferential treatment, as Canara Bank had already included the bank guarantees in its claim before the RP.

Aggrieved by this ruling, NSIC appealed before the National Company Law Appellate Tribunal (NCLAT), arguing that the moratorium under Section 14 did not apply to bank guarantees due to the statutory exception under Section 14(3)(b). NSIC contended that Canara Bank, as the issuer of the guarantees, was a surety in a contract of guarantee under Section 126 of the Indian Contract Act, 1872. Therefore, its liability was distinct from that of the Corporate Debtor, and the bank guarantees should be encashable despite the ongoing CIRP.

ISSUES

Whether the invocation of bank guarantees by The National Small Industries Corporation Limited (NSIC) during the moratorium period was legally permissible under Section 14 of the Insolvency and Bankruptcy Code (IBC), 2016.
Whether the National Company Law Tribunal (NCLT) erred in holding that the bank guarantees in question were financial guarantees rather than performance guarantees, thereby subjecting them to the moratorium under Section 14(1)(c) of IBC.
Whether the exclusion of NSIC’s claim from the insolvency resolution process and the classification of Canara Bank as the sole claimant of the bank guarantee amount violated creditor rights and the statutory framework of IBC.

ARGUMENTS FROM BOTH SIDES

Arguments by the petitioners

NSIC argued that the invocation of bank guarantees is legally permissible even during the moratorium period under Section 14(3)(b) of the Insolvency and Bankruptcy Code (IBC), 2016. It contended that a bank guarantee constitutes a contract of guarantee where Canara Bank acts as a surety, making it distinct from the Corporate Debtor’s assets. Thus, enforcing the guarantee does not violate the moratorium provisions under IBC.
The petitioner emphasized that the bank guarantees issued in its favor were irrevocable and unconditional, allowing NSIC to invoke them on demand. NSIC contended that these guarantees were financial securities ensuring repayment rather than forming part of the Corporate Debtor’s estate. Therefore, their invocation should not be restricted by the CIRP proceedings.
NSIC argued that the NCLT incorrectly categorized the bank guarantees as financial guarantees instead of performance guarantees. Since the guarantees secured the repayment of financial assistance provided for raw material procurement, their invocation should not have been subject to the moratorium under Section 14(1)(c) of IBC.

Arguments by the Respondents

The respondents argued that NSIC’s invocation of bank guarantees directly contravened Section 14(1)(c) of IBC, which prohibits the enforcement of any security interest during the moratorium period. They asserted that the guarantees were financial in nature, ensuring repayment rather than guaranteeing performance, and were therefore subject to the moratorium restrictions.
The Resolution Professional contended that Canara Bank had already included the bank guarantees in its claim before the Committee of Creditors (CoC), which was duly recognized under CIRP. Allowing NSIC to invoke the guarantees separately would amount to double recovery, disrupting the equitable distribution of assets among creditors.
The respondents maintained that the resolution plan was approved following due process and in line with the business wisdom of the CoC, which is non-justiciable in judicial review. The CoC determined the best course of action to ensure the revival of the corporate debtor while balancing the claims of all stakeholders, including NSIC.

DECISION

In The National Small Industries Corporation Limited vs. Rekha Sharma, Resolution Professional of Shri Ganesh Equipment’s Pvt. Ltd. & Anr., the National Company Law Appellate Tribunal (NCLAT) addressed critical issues regarding the applicability of the moratorium under Section 14 of the Insolvency and Bankruptcy Code (IBC), 2016, and the enforceability of bank guarantees during Corporate Insolvency Resolution Process (CIRP).

The Tribunal ruled that the invocation of bank guarantees by NSIC was legally permissible despite the moratorium imposed under IBC. It held that under Section 14(3)(b), bank guarantees constitute a contract of guarantee in which the issuing bank acts as a surety, making them distinct from the Corporate Debtor’s assets. Consequently, their enforcement does not violate the moratorium restrictions.

The NCLAT further determined that the National Company Law Tribunal (NCLT) erred in treating the bank guarantees as financial guarantees rather than performance guarantees, which led to an incorrect application of Section 14(1)(c). It clarified that an irrevocable and unconditional bank guarantee can be invoked even during CIRP, reinforcing creditor rights under insolvency law.

As a result, the NCLAT set aside the NCLT’s ruling and upheld NSIC’s right to enforce the bank guarantees. This decision reaffirmed the judiciary’s commitment to ensuring statutory compliance while protecting the interests of creditors, thereby strengthening the legal framework governing insolvency proceedings in India.

CONCLUSION

The decision in The National Small Industries Corporation Limited vs. Rekha Sharma, Resolution Professional of Shri Ganesh Equipment’s Pvt. Ltd. & Anr. underscores the judiciary’s role in ensuring statutory compliance, creditor protection, and clarity in insolvency proceedings under the Insolvency and Bankruptcy Code (IBC), 2016.

A key aspect of the ruling was the distinction between financial guarantees and performance guarantees in the context of Section 14 of IBC. By recognizing that irrevocable and unconditional bank guarantees fall under the exception provided in Section 14(3)(b), the National Company Law Appellate Tribunal (NCLAT) reinforced the principle that a surety’s obligation remains distinct from the assets of the Corporate Debtor. This interpretation prevents undue restrictions on creditor rights and ensures financial institutions can enforce guarantees without procedural roadblocks.

Additionally, the ruling highlights the necessity of correctly applying moratorium provisions. The earlier decision by the National Company Law Tribunal (NCLT) misapplied Section 14(1)(c) by treating the bank guarantees as financial securities subject to CIRP restrictions. By overturning this, the NCLAT reaffirmed that the IBC must be interpreted in a manner that balances business recovery with fair treatment of creditors.

This case sets an important precedent for future insolvency proceedings, reinforcing that judicial intervention is necessary to correct misinterpretations and uphold the fundamental principles of fairness, transparency, and statutory compliance in corporate resolution processes.