Margin Money Not Asset of Corporate Debtor Upon Bank Guarantee Invocation: NCLAT Upholds Dismissal of Liquidator’s Claim
- REEDLAW
- Jul 29
- 3 min read
Updated: Aug 12
REEDLAW Legal News Network reports that the NCLAT Chennai Bench has held that the margin money deposited for a bank guarantee does not form part of the corporate debtor’s assets upon invocation. The Tribunal upheld the dismissal of the liquidator’s claim seeking recovery of the invoked amount.
On 25 July 2025, the National Company Law Appellate Tribunal (NCLAT), Chennai Bench, comprising Justice Sharad Kumar Sharma (Judicial Member) and Mr. Jatindranath Swain (Technical Member), while adjudicating a company appeal along with a connected interlocutory application, held that margin money deposited to secure a performance bank guarantee assumes the character of trust property in favour of the beneficiary and, upon invocation of the guarantee, ceases to remain an asset of the Corporate Debtor; consequently, the Liquidator is not entitled to seek its refund during the liquidation proceedings under the Insolvency and Bankruptcy Code, 2016.
The National Company Law Appellate Tribunal (NCLAT), Chennai Bench, dismissed the appeal filed by the Liquidator, challenging the order dated 13.04.2023 passed by the Adjudicating Authority (NCLT, Hyderabad) in IA No. 553/2023. The Liquidator had sought a direction for the return of margin money and original bank guarantees furnished by the Corporate Debtor in favour of Mahanadi Coalfield Limited (Respondent No. 1), which had been invoked by Respondent No. 1 through Respondent No. 2 (the issuing bank). The NCLT rejected the plea, holding that once the bank guarantee was invoked, the margin money, being a part of the secured amount, could not be refunded.
The Corporate Debtor, in the process of establishing a power project, had entered into a fuel supply agreement with Respondent No. 1 and had provided four bank guarantees backed by margin money. Following the commencement of CIRP and subsequent liquidation, the Liquidator sought the return of the bank guarantees and margin money on the grounds that these should be treated as assets of the Corporate Debtor under Sections 18 and 36(4) of the IBC. The Adjudicating Authority rejected the application, observing that the invocation of the bank guarantees and consequent appropriation of margin money occurred in the normal course of banking and were no longer assets of the Corporate Debtor.
The NCLAT relied on settled principles laid down in Punjab National Bank v. Supriyo Kumar Chaudhuri Resolution Professional of JVL Agro Industries Ltd. and Others, REEDLAW 2022 NCLAT Del 09567 and Indian Overseas Bank v. Arvind Kumar Resolution Professional/ Liquidator Richa Industries Ltd, REEDLAW 2020 NCLAT Del 09518, reiterating that margin money deposited to support bank guarantees acquires the character of trust property for the benefit of the beneficiary. Once the bank guarantee is invoked, the margin money gets appropriated towards fulfilment of the guarantee obligation and cannot be treated as an asset of the Corporate Debtor. The Appellate Tribunal clarified that performance bank guarantees are not covered under the moratorium imposed by Section 14 of the IBC, and margin money does not constitute "security interest" under Section 3(31) of the Code.
The Tribunal concluded that the margin money, once the bank guarantee is invoked, is no longer retrievable by the Corporate Debtor or the Liquidator, as it stands forfeited and appropriated. The Liquidator’s claim seeking its return was held to be legally untenable, and the appeal was dismissed as devoid of merit. The NCLAT affirmed the findings of the Adjudicating Authority and held that no interference with the impugned order was warranted. All pending interlocutory applications were also disposed of accordingly.
Mr. Abhishek Anand and Mr. Karan Kohli, Advocates, represented the Appellant.
Mr. Kishore Balasubramanian, Advocate, appeared for the Respondent No. 1.
Mr. Surya Teja S.S. Nalla, Advocate, appeared for the Respondent No. 2.
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