Fate of Bank Guarantee During Moratorium: A Conundrum

Abstract

A "bank guarantee" is a promise issued by a bank or other financial institution that, in the event that a borrower fails on a loan, it would pay any related losses. Through this bank guarantee, the bank or financial institution will reassure the original creditor that it will take care of the borrower's obligations if they are not met. When an insolvency proceeding is initiated against a Corporate Debtor, the Corporate Debtor is subject to a moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016, and no action may be taken to foreclose, recover, or enforce any "security interest" the Corporate Debtor has created in relation to its property during the duration of the moratorium. Although the legislature's intent was clear in that performance-based guarantees were to be exempt from the scope of security interests, allowing a financial creditor to invoke performance bank guarantees while the moratorium was still in effect, the conflicting rulings of the Adjudicating Bodies have left room for confusion.