The National Company Law Appellate Tribunal, Chennai Bench (“NCLAT”) in its decision dated July 25, 2025, in the matter of Rajendra Prasad Tak, Liquidator of Messrs. KVK Nilachal Power Private Limited v. Mahanadi Coalfield Limited and UCO Bank, IA No.186/2024 in Company Appeal (AT) (CH) (Ins) No.60/2024 upheld the order of the National Company Law Tribunal, Hyderabad Bench, by holding that performance bank guarantees and the margin money deposited by the corporate debtor for securing such performance bank guarantees do not constitute assets of the corporate debtor for the purposes of the Insolvency and Bankruptcy Code, 2016 (“Code”). Further, the NCLAT also held that such margin money assumes the character of a trust asset and is excluded from the corporate debtor’s liquidation estate under the Code.

Factual Background

Messrs. KVK Nilachal Power Private Limited (“Corporate Debtor”) entered into a loan agreement with its financial creditors for Rs. 1080 crores (Rupees one thousand eighty crore). As part of its business plan, it entered into a fuel supply agreement with Mahanadi Coalfield Limited (“Respondent No. 1”) and furnished performance bank guarantees issued by UCO Bank (“Respondent No. 2”), supported by margin money deposits. Subsequently, corporate insolvency resolution process (“CIRP”) was initiated by the adjudicating authority on September 17, 2019, with Mr. Rajendra Prasad Tak (“Appellant”) appointed as the interim resolution professional. After the failure of the CIRP, an order for liquidation was passed on December 17, 2020, appointing the Appellant as the liquidator of the Corporate Debtor.

The Appellant invited claims and constituted a stakeholders consultation committee based on the claims received. The Appellant then initiated the sale of the Corporate Debtor as a going concern through an e-auction process. However, despite several attempts and extensions, the sale could not be concluded due to the COVID-19 pandemic. Meanwhile, Respondent No. 1, who had not filed any claim in the liquidation proceedings, invoked the performance bank guarantees provided by Respondent No. 2 on behalf of the Corporate Debtor. The Appellant requested Respondent No. 2 to return the margin money and the original bank guarantees. Upon the failure of Respondent No. 2 to comply, the Appellant filed an application seeking return of the margin money and the guarantees. The application was dismissed by the adjudicating authority, i.e. National Company Law Tribunal, Hyderabad Bench (“AA Order”) and being aggrieved by the AA Order, the Appellant filed an appeal before the NCLAT.

Contentions

The Appellant challenged the AA Order primarily on the ground that it was contrary to the objectives of the Code. He submitted that under Section 35 of the Code, the liquidator is required to take custody of all assets, including the margin money deposits of the Corporate Debtor. Therefore, Respondent No. 1, being an unsecured creditor, should have filed its claims in the liquidation process, instead of invoking the bank guarantees held by it. Further, the Appellant also contended that in accordance with Section 53 of the Code, Respondent No. 1 was required to recover its dues in accordance with the prescribed distribution waterfall. Accordingly, it was the Appellant’s contention that along with the bank guarantees, the margin money, too, would have to be returned to the Appellant by Respondent No. 2.

NCLAT’s decision

The NCLAT analyzed the issue of whether performance bank guarantees and the margin money deposited to secure such performance bank guarantees form part of the liquidation estate and are recoverable by the liquidator. The NCLAT noted that a performance bank guarantee would not qualify as ‘security interest’ under Section 3(31), and therefore, would fall beyond the scope of protection of the moratorium imposed by Section 14(1)(c). Consequently, invocation of such performance bank guarantees during CIRP or liquidation would be valid and irreversible.

Further, referring to Punjab National Bank v. Supriyo Kumar Chaudhuri, 2022 SCC OnLine NCLAT 3924, and Indian Overseas Bank v. Arvind Kumar, 2020 SCC OnLine NCLAT 666, the NCLAT reiterated that margin money deposits, assume the character of trust property and therefore excluded from the liquidation estate. The NCLAT emphasized that margin money deposited for issuing performance bank guarantee does not belong to the corporate debtor after such deposit. If the contract is fulfilled, the margin money would be adjusted or returned. However, if the contract fails and the bank guarantee is invoked, the margin money would be forfeited and become the beneficiary’s or bank’s property. The NCLAT opined that this creates a trust-like structure, whereby the Corporate Debtor loses any proprietary right over the margin money once it is deposited for this purpose. The NCLAT also noted that under Sections 18 and 36(4) of the Code, assets held in trust are expressly excluded from the CIRP and the liquidation estate. Accordingly, neither the bank guarantee, nor the margin money being utilized to discharge contractual obligations would be liable to be returned to the Corporate Debtor.

Conclusion

The NCLAT, in upholding the AA Order, reaffirmed that margin money deposited for performance bank guarantees constitutes a trust asset and does not form part of the corporate debtor’s liquidation estate under the Code. The invocation of such bank guarantees during CIRP or liquidation is valid, and no residual rights remain with the corporate debtor or its liquidator over the margin money, once forfeited.

This judgment, thus, reiterates that (i) the invocation/ appropriation of performance bank guarantees and the related margin money is irreversible as they are not treated as ‘security interest’ under the Code; and (ii) assets held in trust and specific contractual obligations are to be treated distinctly from general assets in liquidation, providing clarity on the distinct treatment of margin money in insolvency proceedings.

Please find attached a copy of the Judgement.

This update has been contributed by Aseem Dhawan (Partner) and Aradhana Vaishnav (Associate).

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