NCLAT sets aside order restraining Mitsubishi from encashing guarantee by Punj Lloyd

Allowing the plea of Mitsubishi Heavy Industries, the Insolvency Appellate Tribunal NCLAT has set aside the order passed by NCLT, which had restrained the Japanese multinational engineering from encashing the Performance Bank Guarantee submitted by its contractor Punj Lloyd.

NCLAT said NCLT "committed an error" by allowing a plea filed by the RP of Punj Lloyd to restrain Mitsubishi Heavy Industries, State Bank of India and other banks who have given counter guarantee to invoke the Bank Guarantee.

"Order passed by the Adjudicating Authority (NCLT), thus is unsustainable," said a National Company Law Appellate Tribunal bench.

The NCLAT also said that it is well-settled law that Section 14 "in no manner impact the right of the Appellant (Mitsubishi) to invoke the Bank Guarantee during the pendency of the Moratorium and in the present case." Referring to previous judgements by the Supreme Court, the NCLAT said the Bank Guarantee is an independent Contract between the Bank and the Bank beneficiary and the Bank is always obliged to honour its Guarantee as long as it is an unconditional and irrevocable one.

"The dispute between the beneficiary and the party at whose instance the Bank has given the Guarantee is immaterial and is of no consequence," said a two-member NCLAT bench which also comprised Chairperson Justice Ashok Bhushan.

The matter pertains to the construction of LNG storage tanks in Ennore/Chennai by the state-owned Indian Oil Corporation, which has awarded the contract to Mitsubishi Heavy Industries.

The Japanese multinational had sub-contracted parts of the work relating to the construction/installation of LNG Tanks in Ennore to Punj Lloyd, which is now facing liquidation after its lenders failed to find a suitable buyer.

As per the terms and conditions of the agreement signed between them on September 15, 2015, Punj Lloyd had provided an "unconditional and irrevocable" Performance Bank Guarantee of Rs 47.72 crore issued by the State Bank of India.

Mitsubishi Heavy Industries also issued a mechanical Completion Certificate to Punj Lloyd on January 31, 2019. However, on August 26, 2019, certain leakage was detected in the LNG tanks.

Meanwhile Corporate Insolvency Resolution Process (CIRP) was initiated against Punj Lloyd by NCLT on March 8, 2019, and it came under the protection of the moratorium under section 14 of the Insolvency & Bankruptcy Code (IBC).

After the leakage, Mitsubishi approached Punj Lloyd, which denied its obligation.

On this Mitsubishi invoked the Performance Bank Guarantee by issuing a letter alleging breaches of the Contract, which included the failure to achieve Mechanical Completion within the agreed time and failure to inspect and repair a serious leakage in the LNG Tank, which arose during the Defects Liability Period.

This was challenged by the Resolution Professional of Punj Lloyd before NCLT, which in turn stayed the action on November 13, 2019.

Meanwhile, in May 2022 NCLT directed for liquidation of Punj Lloyd as a going concern.