Failure To Opt For Non-Relinquishment Within 30 Days Of Liquidation Makes Bank Guarantees Part Of Estate: NCLAT

The National Company Law Appellate Tribunal (NCLAT), New Delhi, has held that a secured creditor's failure to communicate its decision regarding its security within 30 days of commencement of liquidation results in the assets covered by the security being presumed to form part of the liquidation estate.

“As the creditor did not give its choice of non-relinquishment of security within 30 days, it is presumed that the creditor relinquished its security against the Corporate Debtor,” a bench comprising Judicial Member Justice Sharad Kumar Sharma, Technical Member Arun Baroka and Indevar Pandey observed.

The ruling came in an appeal by the Assistant Commissioner (EPM), the Principal Commissioner of Customs (Import), ICD Tughlakabad, against the NCLT's direction to return original bonds relating to Bank Guarantees and to Bank of Baroda to remit the FDR amounts to the liquidation account of Metalite Eco Future Labs Pvt. Ltd.

Metalite Eco Future Labs had executed eight EPCG bonds after importing goods under customs duty exemptions. Bank of Baroda issued Bank Guarantees in favour of Customs against the bonds. The company was admitted into insolvency on March 14, 2023, and liquidation commenced on November 21, 2023.

Customs claimed ₹1.81 crore towards customs duty arising from non-fulfilment of export obligations. The NCLAT noted that Customs first filed a claim in Form B on December 15, 2023 and later filed a Form C claim on January 30, 2024, seeking to retain the Bank Guarantees as security.

The dispute turned on Regulation 21A of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. It requires a secured creditor to inform the liquidator, in Form C or Form D, whether it will relinquish its security interest to the liquidation estate or realise the security itself. If no decision is communicated within 30 days of the liquidation commencement date, the assets covered by the security are presumed to form part of the liquidation estate.

The NCLAT held that Customs' subsequent decision not to relinquish the Bank Guarantees could not overcome its failure to exercise that option within the prescribed period. The security therefore stood relinquished by operation of law.

The bench also held that whether the Bank Guarantees were still subsisting was not the determinative issue. The relevant question was whether Customs had exercised its option of non-relinquishment within 30 days, “irrespective of the fact whether the guarantees are still subsisting or not.”

It further observed that the guarantees had not been invoked or auto-renewed by the bank. Even if they had been auto-renewed, the bench held, they would still form part of the liquidation estate because Customs had not opted for non-relinquishment within the prescribed period.

The NCLAT held that Customs was therefore to be treated under the waterfall mechanism under Section 53 of the IBC, which governs distribution of the liquidation estate.

It accordingly upheld the NCLT's directions to return the original bonds and remit the FDR amounts to the liquidation account. The appeal was dismissed, with the connected applications also disposed of.