The National Company Law Appellate Tribunal stayed invocation of bank guarantees in the Jaiprakash Associates Ltd case after contractor Velocity Projects approached the tribunal claiming over Rs 1 crore in unpaid dues. NCLAT admitted Velocity’s plea following the National Company Law Tribunal’s rejection of the contractor’s claims while simultaneously approving Adani Enterprises’ resolution plan for JAL.
Bank guarantee invocations during resolution proceedings create a procedural tension. Resolution applicants typically want clean balance sheets, while operational creditors hold guarantees as their primary recovery mechanism. The NCLT’s initial position—rejecting contractor claims while approving the resolution plan—effectively left Velocity with limited recourse beyond the guarantee route.
The stay order raises questions about guarantee invocation timing in resolution contexts. Banks issuing guarantees face conflicting pressures: honoring legitimate contractor claims versus supporting resolution processes that may ultimately benefit the banking system’s broader recovery rates. When resolution plans get approved without addressing all operational creditor claims, guarantee invocations become the default collection mechanism.
Velocity’s Rs 1 crore claim appears relatively modest against JAL’s overall debt structure, yet the NCLAT intervention suggests the tribunal views the guarantee stay as necessary for resolution plan integrity. This creates a sequencing problem: if contractors cannot invoke guarantees during resolution proceedings, their claims risk getting subsumed into the overall haircut structure that typically favors financial creditors.
The broader pattern here involves operational creditors using bank guarantees as quasi-security instruments in infrastructure and construction contracts. When these projects end up in resolution proceedings, guarantee holders find themselves competing with the resolution process itself. The NCLAT stay effectively freezes this competition while the appellate process plays out.
Resolution plans increasingly include specific provisions for operational creditor treatment, but guarantee-backed claims occupy an ambiguous position. Banks providing guarantees must assess whether their exposure shifts from direct payment risk to contingent liability during resolution proceedings. The Velocity case suggests this assessment may depend on appellate tribunal discretion rather than established precedent.
My Boardroom Takeaway: Directors overseeing companies with significant contractor relationships should review their guarantee frameworks in light of potential resolution scenarios. Bank guarantee invocations during insolvency proceedings create timing and priority complications that may not be apparent in standard contract documentation. Audit committees may wish to assess whether current guarantee disclosures adequately reflect the contingent nature of these obligations during resolution processes.