When to Invoke a Performance Guarantee During Contractor CIRP

A performance bank guarantee remains invocable by a project owner after a construction contractor is admitted into corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code, 2016, because Section 14(3)(b) excludes a surety under a contract of guarantee from the moratorium. The claim period on the guarantee, not the moratorium, is usually the real constraint, and it can close within weeks of admission. Termination, recovery of site plant and materials, retention money, and liquidated damages each follow different rules under the Code. This post sets out how a project owner should sequence these decisions in the fortnight after admission.

The First Fortnight After Admission: What the Project Owner Still Controls

The Insolvency and Bankruptcy Code, 2016 (the Code) does not suspend a project owner's contractual rights wholesale. Section 14 restrains suits and proceedings against the corporate debtor, transfer or disposal of its assets, enforcement of security interests over those assets, and recovery of property occupied by it. It says nothing about instruments issued by third parties, and nothing about rights the owner can exercise without touching the contractor's property. The difficulty is rarely doctrinal. It is that the project team learns of the admission late, by which time the guarantee's claim window may be weeks from closing.

Three clocks start together and run at different speeds. The claim period on the performance bank guarantee is the shortest and the least forgiving. The window for submitting claims to the interim resolution professional, ordinarily fourteen days from the public announcement made under section 15 of the Code, comes next. Slowest is the resolution professional's process of taking control of the corporate debtor's assets under sections 18 and 25, which is when the demand for the plant on site arrives. Treating all three as one problem to be solved once an opinion lands means missing the first.

What Should a Project Owner Review First After a Contractor's CIRP Admission?

Before any decision is taken, someone has to pull the file: the executed contract and every amendment, the originals of each guarantee with the validity date and the claim expiry date recorded on one sheet, the extension of time correspondence, the engineer's determinations, non-conformance reports, measurement books and delay notices. That record either shows a contractor already in default before the insolvency or it does not, and the distinction governs almost everything that follows. It is also worth confirming who the counterparty is. Infrastructure work is often awarded to an unincorporated joint venture or a project vehicle, and the moratorium attaches only to the entity named in the admission order, not to consortium partners who usually remain jointly and severally liable.

Why Does the Performance Guarantee Survive the Moratorium?

A performance bank guarantee is a contract between the issuing bank and the beneficiary. The bank's promise to pay against a conforming demand does not depend on the state of the construction contract, on whether the contractor accepts that it is in breach, or on whether the contractor is solvent. That autonomy, and the narrow fraud and special equities exceptions to it, is settled ground covered elsewhere on this site and is not restated here. What matters to a project owner is the insolvency overlay, and on that the Code is explicit.

Section 14(3)(b) and the Bank's Independent Undertaking

Section 14(3)(b) provides that the moratorium shall not apply to a surety in a contract of guarantee to a corporate debtor. The issuing bank is such a surety. In Bharat Aluminium Co. Ltd. v. J.P. Engineers Pvt. Ltd. [Company Appeal (AT) (Insolvency) No. 759 of 2020, decided on 26 February 2021] the National Company Law Appellate Tribunal held that a bank guarantee is not an asset of the corporate debtor and can be invoked during the moratorium, resting that conclusion on the amended section 14(3)(b). The Supreme Court had taken the underlying position in State Bank of India v. V. Ramakrishnan [(2018) 17 SCC 394], holding that the section 14 moratorium protects the corporate debtor alone and does not extend to guarantors of its debts.

So a bank that declines a conforming demand because its customer is in CIRP is wrong, and a letter from the resolution professional asking the bank to withhold payment has no force against the beneficiary. Disputes over margin money or cash cover held by the issuing bank have produced less consistent outcomes at the tribunals, but that contest concerns the bank's recourse against its customer and does not sit between the beneficiary and payment.

Invocation Timing: Expiry Dates, Claim Periods and the Termination Sequence

Two dates govern every guarantee and they are routinely confused. The validity date closes the guaranteed performance period. The claim period is the further window, commonly three, six or twelve months, within which a written demand must reach the issuing branch for the bank to remain liable. Indian guarantee wording almost invariably discharges the bank unless a claim is lodged at the named branch on or before the later date. A demand served a day late is worthless however complete the default record behind it.

The Lapsed Instrument Problem

The most expensive failure is not a wrong decision. It is no decision. An owner asks for an extension, the request is routed to a contractor now managed by a resolution professional, and nothing comes back. Extending a guarantee is a fresh commitment by the bank and usually needs fresh cash cover from a company that has none, so an extend-or-pay notice is the realistic response rather than an extension. Where the claim window will close before deliberation ends, invoke. Cash received can be held, accounted for and adjusted in the final account, and if recovery exceeds the loss the contractor has a money claim for the difference. A lapsed guarantee cannot be revived on any terms.

Invoking Before or After Termination

Sequencing turns on the operative clause of the instrument. Where the guarantee is unconditional and payable on first demand without proof or condition, invocation needs no prior termination and can precede it. Where the wording conditions the demand on a stated event, such as termination, a certified default or a determination by the engineer, that event must have occurred and the demand must recite it, because banks reject demands that do not track their own text. Assuming the claim period allows it, the cleaner order in a construction default is to serve the contractual notice to correct, record the failure to remedy, invoke on the performance ground, and terminate afterwards. Invoking on a recorded performance default rather than on the fact of admission removes most of the argument that the owner acted because of the insolvency.

Mechanics matter more than they should. The demand goes on the owner's letterhead, signed by someone whose authority the bank can verify, delivered to the issuing branch named in the guarantee rather than to a relationship manager elsewhere, worded in the guarantee's own language and stating the amount claimed. Where the instrument requires surrender of the original, arrange it. Keep the acknowledgement of delivery, since the date of receipt at the branch is the fact that gets litigated when something goes wrong.

Termination After CIRP Commences: Insolvency Default Versus Performance Default

Whether the owner can terminate at all while the moratorium runs generates the most anxiety and the least clarity. In Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta [(2021) 7 SCC 209] the Supreme Court restrained a power purchase agreement counterparty from terminating where the sole ground was the commencement of insolvency, holding that the National Company Law Tribunal could act under its residuary jurisdiction in section 60(5)(c) of the Code because termination would have driven the corporate debtor to certain liquidation. The Court was deliberate about the limits of what it decided: the agreement was the corporate debtor's only contract and its entire business, and the judgment cautions that section 60(5)(c) is no general licence to pull contractual disputes unconnected with the insolvency into the tribunal.

That limitation usually favours a construction owner. An engineering, procurement and construction contract is rarely the contractor's only agreement, and the grounds owners actually rely on are failure to maintain programme, abandonment of the works, failure to remedy defects after notice and persistent non-conformance. Those grounds rest on facts that predate the admission and exist independently of it. An owner who terminates by citing the insolvency clause hands the resolution professional a ready-made ipso facto argument. An owner who terminates on the delay record, with notices and determinations behind it, is defending a factual case rather than a doctrinal one.

Two practice points follow. Serve the contractual cure notice even where the contractor plainly cannot cure, because the notice converts a general complaint into a contractual default, and address it to the resolution professional as well as to the registered office. Then expect an application under section 60(5) seeking to restrain the termination, and prepare for it as an evidentiary exercise. Delay analysis, correspondence and the engineer's records decide that application, not submissions about ipso facto clauses.

Site, Plant, Retention and Liquidated Damages: The Owner's Position Asset by Asset

The table sets out the owner's principal assets and rights, where each stands once the contractor is admitted, the provision that governs it and what should be done.

Section 14(1)(d) and Plant Standing on the Owner's Site

Section 14(1)(d) prohibits the recovery of any property by an owner or lessor where that property is occupied by or is in the possession of the corporate debtor. Construction sites invert the usual geography. The contractor's cranes, formwork, batching plant and site establishment sit on land the project owner controls, while the owner's free issue materials and spares often sit in the contractor's stores. Asking the contractor to remove its own plant is not recovery of the owner's property and does not engage the provision in the ordinary way, but selling that plant, or detaining it as leverage for unpaid dues, interferes with the corporate debtor's assets. Where the owner's materials are held by the contractor, section 14(1)(d) is squarely engaged even though the owner holds title, and self-help is not available.

Many contracts give the owner a right to use the contractor's plant and temporary works to complete the project after termination. A licence to use is easier to defend than a lien, and neither supports a sale. The workable course is a joint inventory taken with the resolution professional's site representative within days of admission, a written custody and access protocol recording that the owner holds the plant on the corporate debtor's account and uses it under the contractual licence, and an application under section 60(5) for release of the owner's own materials if consent is withheld. Documented cooperation costs far less than litigation, and resolution professionals generally prefer it because it preserves the asset.

Retention Money, Liquidated Damages and the Narrow Room for Set-Off

Retention money in the standard Indian construction contract is not a fund. It is a percentage the owner may withhold from certified payments, and unless the contract requires it to go into a separate or escrow account, or to be replaced by a retention guarantee, it never leaves the owner's balance sheet and no trust arises over it. The resolution professional will still list it as a receivable. The owner's answer is contractual rather than proprietary: retention falls due only on completion, expiry of the defects liability period and rectification of listed defects, and those conditions are unmet. Where the contract does create a separate retention trust or escrow, the analysis changes and the money is likely to be beyond the owner's reach.

Liquidated damages are a claim, and claims meet a hard rule. In Bharti Airtel Ltd. v. Vijaykumar V. Iyer [2024 INSC 15, Civil Appeal Nos. 3088 to 3089 of 2020, decided on 3 January 2024] the Supreme Court held that insolvency set-off and statutory set-off have no application during the corporate insolvency resolution process, leaving two narrow exceptions: contractual set-off arising from an arrangement in place before commencement, and transactional or equitable set-off where claims are so inextricably linked that allowing one without the other would be plainly inequitable. For a project owner the lesson concerns mechanism and timing. Levying liquidated damages through the certification machinery, so that the amount certified as due is already net of the deduction, is a different exercise from asserting a set-off against a crystallised debt after commencement, and it is far more likely to survive.

Completion Cost Overruns and the Owner's Claim as an Operational Creditor

What the owner cannot recover from the guarantee and cannot deduct at certification becomes a claim. The owner is an operational creditor for the excess cost of completing the works over the unpaid balance of the contract price, together with liquidated damages, the cost of rectifying defects and any consequential recovery the contract permits. The claim is filed in Form B with the interim resolution professional or resolution professional, supported by the contract, the termination notice, the completion contractor's rates and the computation, with guarantee proceeds actually received deducted. Costs not yet incurred should still be claimed and marked as estimated, since a claim that is not fully quantified must be valued rather than ignored, and it can be updated as costs crystallise.

The realistic outcome should be put to the board without decoration. An operational creditor's claim ranks below the financial creditors' entitlement in the distribution waterfall in section 53 of the Code and, in the ordinary resolution plan, recovers a small fraction of its face value. That is precisely why the guarantee decision taken in the first fortnight is worth more than the claim filed in the third month, and why the guarantee register rather than the claim form is the document the project team should reach for on the day the admission order is reported.

Frequently Asked Questions

Can a project owner invoke a performance bank guarantee after the contractor's CIRP has commenced?

Yes. Section 14(3)(b) of the Code states that the moratorium does not apply to a surety in a contract of guarantee to a corporate debtor, and the issuing bank is such a surety. The appellate tribunal confirmed in the Bharat Aluminium case that a bank guarantee is not an asset of the corporate debtor and can be invoked during the moratorium. Your demand must still conform to the guarantee wording and reach the issuing branch within the claim period.

Should the guarantee be invoked before or after terminating the contract?

Read the operative clause. An unconditional guarantee payable on first demand can be invoked without terminating. If the wording requires termination, a certified default or an engineer's determination, that condition must be satisfied and the demand must say so. Where you have time, serving the cure notice and recording the default before invoking is the safer order, because it ties the invocation to performance rather than to the insolvency.

What should be done if the guarantee is about to expire and no decision has been taken?

Invoke. A contractor in CIRP will rarely procure an extension, because extension requires fresh cash cover the company does not have. Proceeds can be held and adjusted in the final account, and any excess over your loss is recoverable by the contractor as a money claim. A guarantee whose claim period has closed is gone, and no tribunal will restore it.

Can the contract be terminated once the contractor has been admitted to CIRP?

Usually yes, provided the ground is independent performance default rather than the insolvency itself. Gujarat Urja Vikas Nigam restrained a termination whose only ground was the commencement of insolvency, in a case where the contract was the corporate debtor's entire business. A construction contract terminated for delay, abandonment or unremedied defects, on a documented record, sits outside that reasoning. Do not rely on the insolvency clause in the contract.

Can the owner detain the contractor's plant on site until dues are settled?

Not as leverage. The plant belongs to the corporate debtor and detaining or selling it to recover dues interferes with assets the moratorium protects. Where the contract grants a licence to use the plant to complete the works, that use is defensible, but it should be documented with a joint inventory and a written custody arrangement with the resolution professional rather than asserted unilaterally.

Is retention money held by the owner an asset of the corporate debtor?

In most Indian construction contracts it is a sum you are entitled to withhold, not a fund held for the contractor, so it is a contingent debt rather than trust property. It becomes payable only when the contractual conditions are met. If the contract requires retention to be placed in a separate or escrow account, or replaced by a retention guarantee, the position is different and the money is likely to belong to the contractor.

Can liquidated damages be set off against sums due to the contractor?

Only within narrow limits after commencement. Bharti Airtel held that insolvency and statutory set-off do not apply during CIRP, preserving contractual set-off under a pre-existing arrangement and equitable set-off between inextricably linked claims. The practical route is to levy liquidated damages through certification so the certified amount is already net, rather than to assert a set-off against an admitted claim later.

How does a project owner confirm who the correct counterparty is when the contractor is a joint venture or consortium?

The moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 attaches only to the entity named in the admission order, not automatically to every member of a joint venture or consortium. Before deciding on invocation or termination, the project owner should confirm which entity has actually been admitted to CIRP by checking the admission order itself, since consortium partners who are not the corporate debtor usually remain jointly and severally liable and can still be pursued directly, outside the insolvency process altogether.

Can a project owner recover free issue materials that are in the contractor's stores after CIRP begins?

Not by self-help. Section 14(1)(d) of the Code bars recovery of property occupied by or in the possession of the corporate debtor, and this applies even where the project owner holds clear title to materials supplied to the contractor for the works. The correct route is written notice to the resolution professional with proof of title, seeking release by consent, followed by an application under Section 60(5) of the Code if consent is refused, rather than removing the materials unilaterally.

How does a project owner claim the extra cost of completing the works after terminating a contractor in CIRP?

The excess cost of completion over the unpaid balance of the contract price is filed as an operational creditor's claim in Form B with the interim resolution professional or resolution professional, within the window announced under Section 15 of the Code. The claim should be supported by the contract, the termination notice, the completion contractor's rates and the computation, net of any guarantee proceeds actually received, and updated as costs crystallise rather than held back until they are final.

What priority does a project owner's completion cost claim have in the resolution plan?

It ranks as an unsecured operational creditor claim under the distribution waterfall in Section 53 of the Insolvency and Bankruptcy Code, 2016, behind the claims of financial creditors. In practice this means a project owner's claim for completion costs, liquidated damages and defect rectification typically recovers only a fraction of its face value under an approved resolution plan, which is why securing recovery through the performance guarantee in the first weeks after admission matters more than the claim filed later.

What is the deadline for a project owner to submit its claim to the resolution professional?

Claims are ordinarily invited within fourteen days of the public announcement made under Section 15 of the Insolvency and Bankruptcy Code, 2016, following the contractor's admission to CIRP. A project owner that misses this window can typically still file a belated claim before the resolution plan is approved, but a claim filed late risks being left out of the information memorandum used to negotiate the plan, which weakens its practical bargaining position even where it remains technically admissible.

Does it matter if the issuing bank is holding margin money or cash cover against the guarantee?

Not to the beneficiary's right to be paid. The bank's obligation to honour a conforming demand on the guarantee does not depend on whether it holds margin money or cash cover from the contractor, since the guarantee is a separate contract between the bank and the beneficiary. Disputes over that cash cover concern the bank's recourse against its own customer and are litigated separately from, and do not delay, the beneficiary's claim on the guarantee itself.

Vikrant D. Shetty | Vikrant D. Shetty leads the Insolvency and Arbitration Practice at the law firm Vikrant D. Shetty & Associates, Advocates & Solicitors which advises project owners, contractors, financial creditors and operational creditors in proceedings before the National Company Law Tribunal (NCLT), Mumbai Bench, and represents parties in construction and infrastructure arbitrations seated in India and abroad, including enforcement and challenge proceedings before the Bombay High Court.

Related reading: Multi-Tier Dispute Resolution Clauses: Drafting and Enforcing Conditions Precedent to Arbitration.

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.