Court Can Interfere In Unconditional Bank Guarantee Only When There Isn't A Slightest Possibility Of Amount's Restitution: Bombay HC

The Bench of Justice G. S. Patel observed that while a bank guarantee's encashment or realization has a localized adverse effect on the bank, this must be set against, and weighed against, the larger adverse effect on country-wide commerce of the grant of an injunction itself.

"Therefore, to successfully obtain an injunction, the localized injustice to the bank and its customer must be shown to be so grave, so monumental and so catastrophic, that the ill-effects or wider ramifications of an injunction would pale in comparison," added the Court.

The facts in brief

In the year 2011, one SKS Power entered into various agreements with Cethar Constructions Limited and Cethar Limited to set up a power project in Raigarh District, Chhattisgarh.

These agreements required Cethar to furnish advance and performance bank guarantees and at its request, in February 2012, the Canara Bank issued five Bank Guarantees in favor of SKS Power.

On 6^th March 2017, Cethar asked Canara Bank to extend the bank guarantees, pursuant to this, on 30^th June 2017, the Bank extended the bank guarantees until 30th September 2017

Meanwhile, by an order of 16^th June 2017, the NCLAT, Chennai admitted an application against Cethar Limited and ordered the commencement of a Corporate Insolvency Resolution Process or CIRP and which resulted in an immediate moratorium.

On 19^th July 2017, the NCLT appointed one Mr V Nagarajan ("Nagarajan") as the Resolution Professional/Interim Resolution Professional (RP/IRP).

On the other hand, on 5th September 2017, SKS Power invoked the Bank Guarantees and requested Canara Bank to remit the full amounts, however, neither Cethar nor Nagarajan (for Cethar) brought suit for an injunction against the invocation of Bank Guarantee or payment.

However, the Canara Bank did not pay SKS power and therefore, on 4^th February 2020, SKS Power filed the instant suit (summary suit on Bank Guarantee) and then took out the Summons for Judgment against Canara Bank for invocation of Bank Guarantee.

Now, when SKS Power moved the Bombay High Court (against Canara Bank), Nagarajan (as the liquidator of Cethar) moved his Interim Application for impleadment in the suit, claiming that Cethar was, if not a necessary party, at least a proper party.

Court's order on the impleadment application of Nagarajan

At the outset, the Court observed that a bank guarantee is an independent contract and in enforcing the same, the principal debtor (Cethar) is never a necessary party and that the beneficiary of a guarantee (SKS Power) may, at his option, join both the principal debtor and the guarantor or may choose proceed only against the guarantor or only against the principal debtor.

Therefore, noting that the application for intervention or the impleadment at the instance of the Liquidator of the principal debtor was wholly unsustainable, the Court dismissed the interim application.

Court's order on Summons for Judgment

Importantly, before the Court, the Canara Bank claimed that now that the Cethar Limited (principal debtor) is in liquidation, and so, if the Bank is required to make payment (to SKS Power) under the bank guarantees, it would have great difficulty in the recovery of the amount.

In this backdrop, the Court referred to the case of Hindustan Steelworks Construction Ltd v Tarapore & Co & Anr (1996) 5 SCC 34, in which, the Apex Court had held as follows:

"the commitment of banks must be honoured free from interference by the courts and it is only in exceptional cases, that is to say, in case of fraud or in a case where irretrievable injustice would be done if bank guarantee is allowed to be encashed, the court should interfere."

Now, in the context of the instant case, the Court observed that there was no fraud shown in

• The underlying power plant construction contract; or
• The issuance of the bank guarantees; or
• The invocation.

It was also contended by the Canara Bank that the party invoking the bank guarantee had a reference pending against it before the Board of Industrial and Financial Reconstruction under the then Sick Industrial Companies (Special Provisions) Act, 1985 and thus, it was argued, even if the respondent succeeded in arbitration, it would not be able to realize its claim.

In this backdrop, the Court also observed thus:

"In order to invoke these special equities, that is to say, that the person against whom invocation is made would never be able to recover the amount under the bank guarantees, it must be shown decisively to the satisfaction of the Court that there is no possibility — i.e. not the slightest possibility at all — of restitution in this amount."

Again, showing that Cethar is in a precarious financial condition, the Court added, or that it is in liquidation is insufficient for this purpose, what must be demonstrated must be something far clearer than a mere apprehension."

Therefore, the Summons for Judgment was made absolute and the Summary Suit was decreed in favor of the Plaintiff in the amount of Rs.121.65 lakhs with interest at 6% per annum from the date of the decree till payment or realization.

Click Here To Download Order

Read Order