Bank Guarantee Can Be Invoked During CIRP Moratorium; Section 14 IBC Does Not Bar Encashment: NCLT Mumbai

The National Company Law Tribunal (NCLT), Mumbai, has ruled that a bank guarantee can be invoked and encashed during the moratorium imposed on a company undergoing insolvency proceedings.

The bench of Judicial Member Vinay Goel and Technical Member Charanjeet Singh Gulati held that the bank guarantee in the case fell within the exception under Section 14(3)(b) of the Insolvency and Bankruptcy Code (IBC). The provision excludes a surety in a contract of guarantee to a corporate debtor from the operation of the moratorium.

“We find that the Bank Guarantee in question, being a contract of guarantee furnished by the Bank (surety) on behalf of the Corporate Debtor, falls squarely within the exception carved out under Section 14(3)(b) of the IBC, In view of the above, invocation of the Bank Guarantee by the Respondents does not constitute enforcement against the assets of the Corporate Debtor and is not barred by the moratorium under Section 14(1) of the IBC. The objection raised in this regard is, accordingly, untenable” the tribunal observed.

The application was filed by the Resolution Professional of DK Infrastructure Private Limited. The company was admitted into the corporate insolvency resolution process (CIRP) on April 17, 2023.

DK Infrastructure had been awarded a work order by the Rajasthan Urban Drinking Water Sewerage and Infrastructure Corporation Ltd. (RUDSICO) for construction of 272 flats in 17 towers at Fatehnagar, Udaipur.

During CIRP, the Resolution Professional continued the project as a going concern. The Corporate Debtor had furnished a ₹87,88,258 bank guarantee through Axis Bank, which RUDSICO invoked on July 18, 2024, citing non-completion of the project. It was encashed five days later.

The Resolution Professional argued that this violated the Section 14 moratorium and sought a refund. RUDSICO contended that Section 14 does not bar bank guarantee invocation, as Section 14(3)(b) excludes a surety from the moratorium.

These include enforcement of a security interest created by the corporate debtor over its property.

Section 14(3)(b), however, creates an exception for a surety in a contract of guarantee to a corporate debtor. The tribunal also referred to the proviso to Section 3(31) of the IBC, which excludes a performance guarantee from the definition of “security interest”.

The tribunal noted that the bank guarantee in the present case had been furnished through Axis Bank. It observed that Axis Bank, as the surety, had undertaken to pay the guaranteed amount upon invocation. The invocation therefore fell within the exception under Section 14(3)(b).

The tribunal relied on the NCLAT's decision in National Small Industries Corporation Ltd. v. Sh. Prabhakar Kumar Liquidator and Anr., Company Appeal (AT) (Insolvency) No. 841 of 2021, decided on October 16, 2023.

In that case, the NCLAT held that an irrevocable and unconditional bank guarantee is not affected by the moratorium.

It observed that the bank, as surety, undertakes to discharge the liability of the corporate debtor and that the assets of the surety are distinct from those of the corporate debtor.

Applying that reasoning, the Mumbai bench observed that invocation of the bank guarantee did not constitute enforcement against the assets of DK Infrastructure. It held that the invocation was therefore not barred by the moratorium under Section 14(1) of the IBC.

The tribunal also recorded that the dispute concerning an outstanding invoice of ₹71.78 lakh for work done during the CIRP period had already been dealt with separately by an order dated August 18, 2026.

The tribunal ultimately ruled that the invocation of the bank guarantee did not violate the moratorium under Section 14 of the IBC. It held that the Resolution Professional was therefore not entitled to seek a refund of the amount realised.

The application was accordingly dismissed.

For Applicant: Advocates Ayush Rajani, Khushboo Rajani, Anurag Mishra instructed by AKR Legal

For Respondent: Advocate Sarvesh Jain