Bank Guarantee Expiry Management When the Beneficiary Enters CIRP

A bank guarantee is a contract between the issuing bank and the beneficiary, independent of the underlying transaction it secures, and section 14(3)(b) of the Insolvency and Bankruptcy Code, 2016 confirms the moratorium on a corporate debtor's insolvency does not touch a surety's obligation under such a guarantee. That proposition settles most questions that arise when insolvency enters the picture, and it is the one treasury teams most reliably forget. This post deals with expiry and claim-period management of guarantees and documentary credits where the beneficiary enters a corporate insolvency resolution process, and covers the more familiar converse case for comparison.

The Autonomy Principle and the Two Exceptions That Survive It

In U.P. Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd. [(1988) 1 SCC 174], arising from a contract for the supply and installation of a vanaspati plant, the Supreme Court held that an irrevocable bank guarantee or letter of credit creates an obligation on the bank that is independent of the underlying contract, that the autonomy of the instrument is entitled to protection, and that courts should not interfere save in very exceptional circumstances: established fraud of an egregious kind of which the bank has notice, or a case of irretrievable injustice. Later benches have added the language of special equities, which is generally understood as circumstances producing that same irretrievable injustice rather than as a third free-standing gateway.

What Never Qualifies as an Exception

A pending arbitration on the underlying contract does not qualify. Nor does a counterclaim, however large. Nor does the assertion that the demand is unfair, or that the amount claimed exceeds the loss actually suffered. The insolvency of either party is not an exception either, in either direction. Courts have been consistent that irretrievable injustice must be real and exceptional rather than a difficulty in recovering money later, which is precisely the argument that companies bring most often and lose most often.

Which Side Is in CIRP: The Permutation That Decides Everything

The Corporate Debtor as Applicant

This is the case most commentary addresses. The company now in insolvency procured the guarantee in favour of its customer. The instrument is the bank's obligation, not an asset of the corporate debtor, so the moratorium under section 14 of the Insolvency and Bankruptcy Code, 2016 (the Code) does not reach it. Section 14(3)(b) removes any residual doubt by providing that the moratorium does not apply to a surety in a contract of guarantee to a corporate debtor, and appellate authority has applied that to irrevocable and unconditional guarantees, including advance payment guarantees. What remains genuinely contested is the next layer down: whether the bank may recoup the sum paid from cash margin or fixed deposits standing in the corporate debtor's name. That turns on the terms of the security and on section 14(1)(b), and it is where the real litigation now sits.

The Corporate Debtor as Beneficiary

Reverse the parties and the analysis reverses with them. Where the corporate debtor holds the guarantee, the instrument is a right belonging to it, falling within the wide definition of property in section 3(27) of the Code, and its value is realisable only inside the claim period. The interim resolution professional takes control and custody of the assets of the corporate debtor under section 18(1)(f), and the resolution professional represents and acts on behalf of the corporate debtor with third parties and exercises its rights for its benefit under section 25(2)(b). The resolution professional will therefore usually want to invoke the instrument or extend it, not release it. Two consequences follow for the counterparty who procured the guarantee. The bank pays against a conforming demand and the beneficiary's insolvency gives it no reason to refuse. And the applicant cannot resist invocation on the ground that the beneficiary is in CIRP; the argument that money paid to an insolvent beneficiary can never be recovered if the underlying dispute is later won is an irretrievable injustice plea, it is treated as exceptional rather than routine, and it has to be made with evidence before invocation rather than asserted afterwards.

What the 2026 Amendment Clarified, and What It Left Alone

The Insolvency and Bankruptcy Code (Amendment) Act, 2026 clarified that the moratorium applies where a surety seeks to initiate or continue proceedings against the corporate debtor under a contract of guarantee. That clarification took effect on 26 May 2026. It does not cut down invocation against a bank, and it does not disturb section 14(3)(b). What it settles is the step after payment: once the bank has honoured the demand, its recourse against a corporate debtor applicant, whether framed as subrogation or on the counter-indemnity, is a proceeding against the corporate debtor and belongs in the claims process rather than in a recovery suit.

Who Is in CIRP, and What Each Side Should Actually Do

The table sets out the permutations that teams confuse, and the action each calls for.

The row that causes the most avoidable loss is the fourth, because it depends on nobody making a legal argument at all. It depends on somebody watching a date.

Expiry, Claim Periods and the Extend or Pay Demand

Which Dates on a Bank Guarantee Actually Matter?

A performance guarantee typically carries a validity date, up to which the secured obligation must arise, and a separate claim period running past it, commonly six or twelve months, within which a demand referable to that period will still be honoured. A third date, for return of the original, matters administratively but not legally. Exception 3 to section 28 of the Indian Contract Act, 1872, inserted by the Banking Laws (Amendment) Act, 2012, permits a guarantee given by a bank or financial institution to stipulate the extinguishment of rights or discharge of liability on the expiry of a specified period, provided that period is not less than one year from the date of the occurrence or non-occurrence of the specified event. So a claim period written into the instrument is enforceable on its own terms. A demand served on the last day of the validity date, when the claim period ran for another six months, is the single most common self-inflicted wound in this area, closely followed by its opposite.

Why Must an Extend-or-Pay Mechanism Be Drafted Into the Guarantee?

An extend or pay demand is a demand for payment coupled with an offer to accept an extension of validity instead. Under article 23 of the ICC Uniform Rules for Demand Guarantees, URDG 758, the guarantor may suspend payment for up to thirty calendar days from receipt of such a demand while the extension request is considered. Most Indian domestic guarantees are not expressed to be subject to those rules, so the mechanism has to be replicated in the text of the instrument if it is to be available. Its value in an insolvency is direct. A resolution professional holding a guarantee whose claim period expires while the underlying dispute is still at pleadings should not have to choose between a premature invocation and losing the instrument altogether. A correctly served extend or pay demand preserves both options and, just as usefully, creates a dated record that the decision was taken deliberately.

Letters of Credit Under UCP 600

Documentary credits issued subject to the ICC Uniform Customs and Practice for Documentary Credits, UCP 600, follow the same logic in stricter form. Article 4 makes the credit a separate transaction from the sale or other contract on which it may be based, and provides that banks are in no way concerned with or bound by that contract even where a reference to it is included in the credit. Article 5 confines banks to documents and away from goods, services or performance. Article 6 requires the credit to state an expiry date and a place for presentation, and article 14 gives each nominated, confirming and issuing bank a maximum of five banking days following presentation to decide whether the presentation complies. Insolvency of the applicant changes none of this. Insolvency of the beneficiary changes none of it either, except that the resolution professional now has to get complying documents presented in the right place before the credit expires, and no tribunal will excuse a late or discrepant presentation on the ground that the company was distracted.

The Register, the Alerts and the Accounting Consequence

Every instrument given or held belongs on a single register carrying the reference number, issuing bank and branch, applicant, beneficiary, amount, currency, validity date, claim period end date, the address at which a demand must be served, whether the instrument is unconditional, the governing rules if any, and the location of the original. Each line needs a named owner in treasury and a named owner in legal. Alerts should run at ninety, sixty and thirty days before the claim period end date, not the validity date, because it is the claim period that governs the last moment for a demand. Where a dispute is running on the underlying contract, add a standing rule that no instrument may be allowed to lapse without written sign-off from whoever is conducting that dispute. The classic failure needs no legal sophistication: a guarantee quietly expires while the arbitration is still in its early stages, and nobody has a remedy against anybody.

What Changes in the Accounts on the Day of Admission

Guarantees given are ordinarily carried as contingent liabilities and disclosed under Ind AS 37, moving to a provision once an outflow becomes probable, with financial guarantee contracts issued measured under Ind AS 109. Admission of a counterparty into insolvency is an event that shifts that assessment immediately rather than at the next reporting date. For a company whose guarantee has been given on behalf of a corporate debtor, invocation moves from possible to probable and the disclosure has to move with it. For a company holding a guarantee from a counterparty now in insolvency, the receivable it secures needs fresh assessment, and the guarantee is only worth its face value while it remains live and enforceable. Both positions should reach the audit committee with the expiry dates attached, because that is the question the auditors will ask.

Frequently Asked Questions

Does the moratorium stop a beneficiary invoking a performance guarantee procured by a company now in CIRP?

No. The guarantee is an independent contract between the bank and the beneficiary, and section 14(3)(b) puts the position beyond argument by excluding a surety in a contract of guarantee to a corporate debtor from the moratorium. Appellate authority has applied this to irrevocable and unconditional guarantees, including advance payment guarantees. Invoke within the claim period rather than waiting for the process to conclude.

The beneficiary of a guarantee we procured has entered CIRP. Can we stop the resolution professional invoking it?

Only on the narrow grounds that apply to any invocation. Insolvency of the beneficiary is not itself a defence, and the bank must pay against a conforming demand. The argument that payment to an insolvent beneficiary is irrecoverable if you later win the underlying dispute is an irretrievable injustice plea. Courts treat it as exceptional, it needs evidence about the beneficiary's inability to repay, and it must be brought before invocation.

What did the 2026 Amendment change about guarantees and the moratorium?

Section 14 was clarified to apply where a surety seeks to initiate or continue proceedings against the corporate debtor under a contract of guarantee, and that clarification took effect on 26 May 2026. It does not restrict invocation against a bank and it does not touch section 14(3)(b). It governs the step after payment: the bank's recourse against a corporate debtor applicant belongs in the claims process, not in a recovery suit.

Should a resolution professional invoke a guarantee held by the corporate debtor while the dispute is unresolved?

The instrument is an asset of the corporate debtor and section 25 requires it to be preserved and protected. Where the claim period is closing and the dispute cannot be resolved in time, the realistic choices are to invoke or to secure an extension. Allowing the instrument to lapse is the one course that is difficult to justify afterwards. Whichever route is taken, record the reasoning at the time.

Does UCP 600 change anything when the applicant for a letter of credit is insolvent?

No. Article 4 makes the credit a separate transaction from the underlying contract and article 5 confines banks to documents. The issuing bank honours a complying presentation whatever the applicant's condition, and its reimbursement claim against the applicant becomes a claim in the insolvency process. A presentation made after expiry is bad, and insolvency of any party does not excuse it.

How long can a bank guarantee validly restrict the time for making a claim?

Exception 3 to section 28 of the Indian Contract Act, 1872 allows a bank or financial institution to stipulate that rights are extinguished or liability discharged on the expiry of a specified period, provided the period is not less than one year from the occurrence or non-occurrence of the specified event. A shorter stipulated period is vulnerable, so read the instrument and diarise the date rather than assuming a general limitation period applies.

What is the difference between a bank guarantee and a documentary letter of credit for insolvency purposes?

Both are independent obligations of a bank, distinct from the underlying contract, but a bank guarantee typically secures performance or payment as a fallback, while a letter of credit under UCP 600 is the primary payment mechanism for the underlying trade transaction. In either case, the insolvency of the applicant or the beneficiary does not affect the bank's obligation to honour a conforming demand or presentation; only the recourse between the bank and the insolvent party moves into the insolvency process.

Can a bank set off a cash margin against a guarantee it has paid on behalf of a corporate debtor in CIRP?

This is contested and depends on the terms of the security and on section 14(1)(b) of the Insolvency and Bankruptcy Code, 2016, which prohibits action to foreclose, recover or enforce security interests during the moratorium. Whether a cash margin or fixed deposit charged to the bank counts as a security interest caught by that prohibition, or as an independent right of set-off, is the genuinely litigated question, and treasury teams should not assume automatic recoupment without legal advice specific to the security documentation.

Does the resolution professional need court or tribunal approval to invoke a guarantee held by the corporate debtor?

No. Under section 25(2)(b) of the Insolvency and Bankruptcy Code, 2016 the resolution professional represents and acts on behalf of the corporate debtor in exercising its rights, which includes invoking a guarantee held by the corporate debtor as beneficiary, without needing separate tribunal approval for the invocation itself. Approval questions arise instead around the broader resolution plan or contested claims, not around the routine act of invocation before expiry.

What happens to a bank guarantee if nobody invokes it before the claim period expires?

The right to demand payment under the guarantee lapses, and the beneficiary, or the resolution professional acting for a beneficiary in CIRP, loses the value of the instrument permanently. Because the claim period, not the validity date, governs the outer limit for a demand, this loss can occur even when the underlying dispute or default is still live, which is why alerts should be set against the claim period end date rather than the validity date.

How is a bank's claim for reimbursement after paying a guarantee treated in the corporate debtor's insolvency?

Once the bank has honoured a demand on a guarantee procured by a corporate debtor now in CIRP, its recourse against that corporate debtor, whether framed as subrogation or under a counter-indemnity, is a proceeding against the corporate debtor for the purposes of section 14 of the Insolvency and Bankruptcy Code, 2016, following the 2026 clarification. The bank must file a claim with the resolution professional within the process rather than pursue a separate recovery suit.

Should an advance payment guarantee be treated differently from a performance guarantee in this analysis?

No, not for the autonomy or moratorium analysis. Appellate authority has applied section 14(3)(b) of the Insolvency and Bankruptcy Code, 2016 to both irrevocable and unconditional guarantees, expressly including advance payment guarantees, so the type of guarantee does not change the conclusion that the moratorium does not reach the bank's independent obligation. What differs is the commercial urgency, since an advance payment guarantee often secures a larger, earlier-stage exposure.

Who within a company should own the guarantee and letter of credit register?

Treasury should own day-to-day tracking of validity and claim period dates, while legal should own sign-off on invocation, extension and dispute-related decisions, with each line on the register carrying a named owner in both functions. Neither function alone reliably catches the risk: treasury may not know a dispute is pending on the underlying contract, and legal may not be tracking expiry dates unless the register forces the two teams to communicate before a date lapses.

Vikrant D. Shetty | Vikrant D. Shetty leads the Insolvency and Arbitration Practice at the Mumbai-based law firm Vikrant D. Shetty & Associates, Advocates & Solicitors, which advises banks, corporates and insolvency professionals on bank guarantee and documentary credit disputes, invocation and injunction proceedings before the Bombay High Court, and matters before the National Company Law Tribunal (NCLT), Mumbai Bench, including claims arising from guarantees and indemnities in insolvency processes.

Related reading: the mistakes Indian banks and NBFCs make that lead to overpaying for arbitration claims.

This article is for general informational purposes only and does not constitute legal advice. For advice specific to your situation, please seek direct consultation with an advocate.