LC Margin Money Not Asset of Corporate Debtor: NCLAT Delhi

NCLAT Rules LC Margin Money Outside Corporate Debtor’s Assets

The National Company Law Appellate Tribunal (NCLAT), Delhi, has ruled that funds provided as margin money for letters of credit (LCs) do not constitute assets of the corporate debtor during the Corporate Insolvency Resolution Process (CIRP). The ruling allows banks to appropriate such funds to adjust outstanding LC liabilities even during the moratorium period under Section 14 of the Insolvency and Bankruptcy Code (IBC), 2016.

The bench observed that margin money deposited for LCs is an earmarked fund held as security and does not merge with the general assets of the corporate debtor. Citing precedents including Standard Chartered Bank v. Union of India, the Tribunal emphasized the secured creditor’s right to realise collateral independently unless expressly restrained. The decision reinforces the priority of secured creditors over specific assets outside the resolution estate.

For practitioners, this clarifies the treatment of pre-CIRP security deposits and strengthens banks’ ability to manage credit risk. However, it may affect the value of the resolution plan, as liquid assets available for distribution are reduced when banks enforce security interests during moratorium.