Case BriefsHigh Courts

Delhi High Court: Jayant Nath, J., held that,

Exception 3 to Section 28 of the Contract Act deals with curtailment of the period for the creditor to approach the court/tribunal to enforce his rights. It does not in any manner deal with the claim period within which the beneficiary is entitled to lodge his claim with the bank/guarantor.

In the present petition, the dispute centred around the interpretation of Section 28 of the Indian Contract Act, 1872.

Petitioner submitted that based on an erroneous interpretation of Section 28 of the Indian Contract Act, 1872 respondent bank forced a mandatory and unalterable claim period of a minimum of 12 months for the bank guarantee.

Further, it was stated that the claim period is a time period contractually agreed upon between the creditor and principal debtor, which provided a grace period beyond the validity period of the guarantee to make a demand on the bank for a default, which occurred during the validity period. Adding to the said, it was stated that the said claim period may or may not even exist in a bank guarantee.

As per respondent PNB, a claim period in a bank guarantee which was less than 12 months would render the claim period void and would effectively increase the claim period under the bank guarantee to 3 years under the Limitation Act, 1963.

Respondent 2 stated that it would be open for the banks to stipulate as a condition precedent that if the claim was not lodged before a stipulated time, the bank guarantee shall be revoked or terminated but the stipulated date cannot be less than one year in any event.

Petitioner 1’s case was that it had a number of contracts with Government Bodies and Public Sector Undertakings. Petitioner used to normally issue ‘Performance Bank Guarantee’ or ‘Advance Bank Guarantee’ in the course of performance of the contract.

It was pleaded that on a complete misinterpretation of Section 28 of the Contract Act, respondent 1 bank insisted that the claim period should be 12 months. Adverse fallout for the petitioner of such interpretation was that the petitioner was unnecessarily made liable to pay commission charges for such extended bank guarantee when as per the contract between the principal debtor and the creditor, the claim period would be much shorter.

The extended claim period affected the petitioners’ capability to do business by entering into new contracts and affected the fundamental rights of the petitioners under Article 19(1)(g) of the Constitution of India. 

Analysis, Law and Decision

Bench stated that under Article 226 (2) of the Constitution of India, order or writ can be issued by a High Court in relation to territories within which the cause of action wholly or in part arises.

Whether a high court has territorial jurisdiction to entertain a writ petition? 

Court stated that while entertaining a writ petition, the doctrine of forum convenience and nature of the cause of action are also required to be scrutinized by the High Court.

Since the part of the cause of action arose within the territory of this Court, it would have territorial jurisdiction to adjudicate the instant petition.

High Court held that limiting the time within which the rights are to be enforced is void provided the rights to be enforced under the Contract continue to exist even beyond the shorter agreed period for enforcing the rights.

Further, the Court added that, if beyond the shorter period agreed between the parties, the rights under the contract are not kept alive, no limiting of the time to enforce the rights under the contract arises and such an agreement putting a time limit to sue will not be hit by Section 28 of the Act.

Section 28 prior to the amendment

Bench noted that Section 28 of the Contract Act prior to the amendment provided that a clause limiting the time within which the rights are to be enforced, is void, if the right to be enforced under the Contract continued to exist even beyond the shorter period agreed for enforcing the rights.

If beyond the shorter period agreed between the parties for enforcing the rights, the rights under the contract are not kept alive, then such an agreement putting a time limit to sue was not hit by Section 28 of the Contract Act. 

Why was the newly added Section 28 of the Contract Act enacted?

The said was enacted to do away with the earlier distinction between remedy and rights i.e., a clause barring the remedy only was void but a clause extinguishing a right was valid.

Adding to the above, Bench stated that the said clause now provides that the beneficiary of the bank guarantee i.e. creditor would have time to approach the appropriate court for enforcement of his rights under the bank guarantee in terms of the provision of the Limitation Act i.e. 3 years for private parties and 30 years for government parties.

Later, the T.R. Andhyarujina Committee recommended that the said period be reduced to one year for enforcing the rights under the bank guarantee. Thereafter, Exception 3 to Section 28 of the Contract was added in 2013.

Hence,

Exception 3 to section 28 of the Contact Act deals with the rights of a creditor to enforce his rights under the bank guarantee after happening of a specified event. 

Respondent in its counter-affidavit admitted that, Exception 3 to section 28 of the Contract Act deals with a clause in a bank guarantee to the effect that in case no claim is filed before the court of law within a period which is not less than 12 months from the date of occurring or non- occurring of the specified event, the liability of the bank shall get extinguished. Such a term is not contrary to law.

While concluding the matter, the Court stated that respondent 1 erred in taking the view that they were in law mandated to stipulate a claim period of 12 months in the bank guarantee failing which the clause shall be void under Section 28 of the Contract Act.

Section 28 deals with right of the creditor to enforce his rights under the bank guarantee in case of refusal by the guarantor to pay before an appropriate court or tribunal.

Therefore, all the communications issued by respondent 1 reproduced erroneous interpretation of Exception 3 to Section 28 of the Contract Act and were clearly vitiated.

Issue of prescribing the bank charges and the period for retention of security

Court held that the above-stated issue were matters of contract and this Court cannot interfere in such contractual matters.

In view of the above discussion, petition was disposed of. [Larsen & Toubro Limited v. Punjab and National Bank, WP (C) No. 7677 of 2019, decided on 28-07-2021]


Advocates before the Court:

For the Petitioners: Mr Neeraj Kishan Kaul, Sr. Adv. with Mr Rishi Agrawala, Mr Karan Luthra, Ms Megha Bengani, Mr Deepak Joshi and Mr Aakash Lamba, Advs.

For the Respondents: Mr Dhruv Mehta, Sr. Adv. with Mr Rajesh Gautam, Mr Anant Gautam and Mr Nipun Sharma, Advs. for R-1/PNB.

Dr Lalit Bhasin, Ms Nina Gupta, Ms Ananya Marwah, Ms Ruchika Joshi and Mr Ajay Pratap Singh, Advs. for R- 2/IBA.

Mr Ramesh Babu, Ms Nisha Sharma and Ms Tanya Chowdhary, Advocates for RBI/R-3

Op EdsOP. ED.

Introduction

Insolvency and Bankruptcy Code, 2016[1] (hereinafter “IBC”) has introduced a much more stable structure with strict time frames into the resolution process, providing the system with much-needed clarity and reliability. It has totally removed the governing powers of the companies under the resolution process and transferred them to a resolution professional to ensure a smooth transition and revival. Unlike the previous regime’s never-ending moratorium, the IBC established a far more practical structure with a set deadline. As per Section 14 of the IBC, while the moratorium is in effect, creditors of a company in the corporate insolvency resolution process (CIRP) are prohibited from taking any action to recover a security interest generated by the corporate debtor. However, the scope of this section has remained under debate for the longest time and has finally been settled by the Supreme Court as well as the National Company Law Appellate Tribunal (NCLAT). This comes after the 2018 Amendment to the IBC. In this paper, the issue whether a bank guarantee can be invoked during moratorium period in light of Bharat Aluminium Co. Ltd. v. J.P. Engineers (P) Ltd.[2]  has been analysed.

Facts

M/s Worldwide Metals Pvt. Ltd., the operational creditors, had filed a company petition under Section 9[3] of the IBC to initiate the corporate insolvency resolution process against M/s J.P. Engineers Pvt. Ltd., the corporate debtor and Respondent 1. The National Company Law Tribunal (NCLT) admitted the application and appointed an interim resolution professional (IRP). Bharat Aluminium, the appellants, and the corporate debtor had entered into an agreement for purchase and sale of aluminium products. Subsequently, the corporate debtor issued a bank guarantee worth Rs one crore and sixty lakhs which was executed by Respondent 2 i.e., Andhra Bank. At the end of the contractual period, the debtor failed to make the payments as a result of which, the appellant wrote a letter to Respondent 2 for invoking the bank guarantee. To this letter, Respondent 2 replied that the bank guarantee could be encashed only upon the approval of the IRP. Thereafter, the appellant applied to the IRP, but the IRP refused to allow encashment of the bank guarantee on the grounds of enforcing moratorium against Respondent 1. Thereafter, the appellant had filed an application before NCLT seeking encashment of the bank guarantee on the grounds that it is not covered by moratorium as specified under Section 14 of the IBC. The Tribunal dismissed this application and directed the appellant to not ask for encashment of bank guarantee, as the same is covered under moratorium declared under Section 14 of the IBC. Thus, the appellant filed this appeal.

Issue

The NCLAT was posed with the issue whether a bank guarantee can be invoked against the surety once the moratorium has been imposed against the corporate debtor under Section 14 of the IBC.

Background of law

Section 14 of the IBC provides the effect and scope of the moratorium.[4] Until 2018, the law was unclear on whether the bank guarantees can be invoked during moratorium period. However, after an amendment passed in June 2018, a clause was introduced in the IBC which provided that in a contract of guarantee to a corporate debtor, the surety is not shielded under moratorium.[5] However, for a personal debtor, the Supreme Court, relying upon the report of the Insolvency Law Committee, held that moratorium will not apply to such debtor.[6] The report noted that the assets of the debtors and that of the surety are separate and thus, the ongoing proceedings of CIRP against the corporate debtor will not have any impact as a result of any actions taken against the assets of the surety.[7] Further, invoking guarantee will not have any significant impact on the corporate debtor’s debt because the creditor’s right against the debtor simply transfers to the surety, for the amount paid by surety.[8] The Committee recommended that the scope of moratorium should be limited only to the assets of the corporate debtor and actions against the guarantors cannot be barred.[9]

Analysis of the judgment

In the present case, the NCLAT held that “bank guarantee can be invoked even during moratorium period issued under Section 14 of the IBC in view of the amended provision under Section 14(3)(b) of the IBC”.[10] The appellant drew an analogy between performance bank guarantees and financial bank guarantees by referring to  Section 14 and proviso to Section 3(31)[11], which excludes performance bank guarantees from “security interest”, to emphasise their contention that bank guarantees can be invoked during moratorium.[12] They also relied on the amendment discussed above and various case laws to submit that bank guarantees can be invoked during moratorium.[13] On the contrary, the respondent relied on cases to establish that once the moratorium period has begun, no amount can be debited from the account of the corporate debtor.[14] They distinguished between financial and performance bank guarantees.[15] Further, they submitted that since IBC is a specific law, it will prevail over a general law like the Contract Act, 1872.[16]

The Tribunal perused the submissions of the parties and held that the guarantee in question is a financial bank guarantee and not a performance bank guarantee.[17] The Reserve Bank of India (RBI) has also distinguished between the two types of guarantees in one of its circular.[18] The NCLT in its judgment dated 31-7-2020 had relied on Nitin Hasmukhlal Parikh v. Madhya Gujarat Vij Co. Ltd.[19], where the Tribunal held that the moratorium applies for all bank guarantees, except for performance bank guarantees, as they form a part of “security interest” defined under Section 3(31) of the IBC. This case was decided on 9-2-2018. The amendment to Section 14 was introduced on 6-6-2018.[20] The court gave the judgment on 31-7-2020, which was after the amendment was introduced. As mentioned above, the amendment provided that the effect of moratorium will not apply to “a surety in a contract of guarantee to a corporate debtor”.[21] Thus, the NCLT erred in its decision by relying on Nitin case[22] and overlooking the amendment which had a retrospective effect. The Tribunal then relied on Ramakrishnan[23], where the Supreme Court held that Section 14(3) is clarificatory in nature and has retrospective effect.[24] The Tribunal also backed its finding by relying on principles of Contract Act, which provides that the “liability of surety is coextensive with that of a principal debtor and the creditor may go against either of them”.[25] Thus, the NCLAT rightly held that the corporate creditor can invoke bank guarantee during moratorium with no difficulties, as the bank guarantee is irrevocable and unconditional.[26] It was held in U.P. State Sugar Corpn. v. Sumac International Ltd. that a bank is bound to honour irrevocable bank guarantees irrespective of any issue raised by the customers.[27] It further distinguished the assets of the corporate debtor with those of the surety and overruled the decision of the lower court i.e., NCLT.

Conclusion

Prior to the amendment, the law on the point on invocation of bank guarantee during moratorium was not clear. There were several conflicting decisions being passed by the tribunals across the country. The amendment put an end to the series of conflicting judgments. In addition to this, the judgment of the Supreme Court in Ramakrishnan[28], which explained the application and scope of the amended provision, acted as a cherry on top of the cake and gave more clarity on this issue. The NCLT, though, erred in its decision by not taking the amendment into consideration and relying on a case which was decided before the amendment was introduced. The NCLAT corrected the error made by the NCLT and by relying on the reports of the Insolvency Law Committee, the object of IBC and Section 14 of the IBC, rightly held that financial bank guarantee can be invoked during moratorium period under Section 14 of the Code. The judgment of the NCLAT is also in consonance with the judgments of the Supreme Court on the same issues.

The decision of the Court acts as a clarification on the issue whether the guarantees issued by third parties/banks can be invoked during the moratorium period. This decision, though, is definitely in favour of the creditors, banks may find it difficult to recover their money from a corporate debtor on whom moratorium is imposed under Section 14 of the IBC.


± 4th year student, BA LLB (Hons.), West Bengal National University of Juridical Sciences (WBNUJS) 
Kolkata

[1] <http://www.scconline.com/DocumentLink/86F742km>.

[2] 2021 SCC OnLine NCLAT 57

[3] <http://www.scconline.com/DocumentLink/09ftZIDF>.

[4] The Insolvency and Bankruptcy Code, 2016, S. 14

[5] The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, S. 10

[6] SBI v. V. Ramakrishnan, (2018) 17 SCC 394

[7] Shri Injeti Srinivas, Report of the Insolvency Law Committee, 35 (26-3-2018), <http://www.scconline.com/DocumentLink/sYKPTj8e>.

[8] Ibid.

[9] Ibid.

[10] Bharat Aluminium Co. Ltd. v. J.P. Engineers (P) Ltd., 2021 SCC OnLine NCLAT 57, para 37

[11] <http://www.scconline.com/DocumentLink/rOllWgj8>.

[12] Id at para 8.

[13] Id at para 9.

[14] Id at para 16.

[15] Id at para 18.

[16] Id at para 17.

[17] Id at para 22.

[18] Reserve Bank of India, Circular DBOD.No.BP.BC.89.21.04.009/2012-13 (Issued on 2-4-2013), <http://www.scconline.com/DocumentLink/z9UP86k8>.

[19] 2017 SCC OnLine NCLT 19360 

[20] The Insolvency and Bankruptcy Code, 2016, S. 14

[21] Ibid.

[22] 2017 SCC OnLine NCLT 19360

[23] SBI v. V. Ramakrishnan, (2018) 17 SCC 394.

[24] Bharat Aluminium Co. Ltd v. J.P. Engineers (P) Ltd., 2021 SCC OnLine NCLAT 57, para 31.

[25] Contract Act, 1872, S. 128.

[26] Bharat Aluminium Co. Ltd. v. J.P. Engineers (P) Ltd., 2021 SCC OnLine NCLAT 57, para 37.

[27] (1997) 1 SCC 568.

[28] SBI v. V. Ramakrishnan, (2018) 17 SCC 394.

Case BriefsTribunals/Commissions/Regulatory Bodies

Customs, Excise and Services Tax Appellate Tribunal (CESTAT): The Coram of Ramesh Nair (Judicial Member) and Raju (Technical Member) allowed an appeal which was filed against Order passed by the Commissioner of Customs whereby; the appellant’s imported seized goods had been provisionally released subject to the execution of bond for full value with Bank Guarantee of Rs1, 38, 12,513. The appellant had challenged the said order on the ground that the condition of bank guarantee is exorbitant therefore, they seek a reduction in the amount of the bank guarantee.

The Counsel for the appellant, Mr Hardik Modh submitted that the subject goods were seized alongwith other consignment under common seizure.

The Tribunal relied on the Order dated 16-07-2020 in the case of Wittenia Multi trading (P) Ltd. which had the same facts and it was held that,

  1. We have heard both sides and perused the record. In the overall facts of the case, we find that there is prima-facie case of malafide on the part of the appellant to claim exemption fraudulently. However, this is not our conclusion on the merits of the case as the detailed investigation is pending. We also find that the appellant requested for provisional release for re-export of the goods. In that case, a lenient view can be taken. Needless to say that the appellant shall clear the goods on payment of duty as assessed by the Customs. In these circumstances, we are of the view that the appellant deserve for some leniency as regards terms of provisional release of the seized goods. Accordingly, we hold that goods may be provisionally released on furnishing bond of total value with bank guarantee of the amount of 50% of the total duty.

Thus, the appeal is partly allowed in the above terms. Early hearing application also disposed of.”

The Tribunal allowed the appeal coming to the conclusion the seized goods shall be released on furnishing bond of total value of the goods with a bank guarantee of the amount of 50% of the total duty.[MM9 International v. C.C.- Mundra, 2021 SCC OnLine CESTAT 82, decided on 04-02-2021]


Suchita Shukla, Editorial Assistant has put this story together.

Hot Off The PressNews

On the basis of specific intelligence, under the direction of the Commissioner of Customs (Preventive), Bhubaneswar Shri Debashish Sahu, investigation was initiated and relevant business premises of Exporter and Customs House Agent at various places was searched.

Prima facie evasion of Customs duty to the extent of Rs 8,07,66,314/- (Rupees Eight Crore Seven Lakh Sixty-Six Thousand Three Hundred and Fourteen) only by M/s. B S Minerals, Keonjhar, Odisha-758001 on Iron Ore fines which was to be exported from Paradeep, India to Main Port, China in-vessel “MV MAGNUM FORTUNE” was detected by the Customs officials.

Thereafter, 52051 MT of goods valued at Rs.26,92,21,045/-were seized. Subsequently, the exporter deposited Customs duty to the tune of Rs.8,07,66,314/- (Rupees Eight Crore Seven Lakh Sixty Six Thousand Three Hundred and Fourteen) only and submitted Bank Guarantee of Rs. One Crore to the government exchequer for taking the provisional release of the goods in addition to depositing a Bond of Rs 5.4 Crore with the Customs Authorities.

Further investigation is under progress.

PRESS RELEASE


CBIC

[Press Release dt. 29-12-2020]

Case BriefsHigh Courts

Orissa High Court: A Division Bench of Mohammad Rafiq, CJ and K.R. Mohapatra, J. set aside the impugned order being ultra vires the statutory provisions.

The petitioner is a licensee of Sikula IMFL Shop originally issued under the Bihar and Odisha Excise Act and the Rules made thereunder and later in the year 2017 under Odisha Excise Act 2008. The petitioner has been paying monthly consideration amount along with other statutory dues for issuance of license. While the excise licenses are renewed automatically, the Government made changes in rates and guidelines as applicable. When the petitioner submitted documents along with Solvency certificate for renewal of license as required under Rule 51 read with Rule 150 of the Odisha Excise Rule 2017, the Competent Authority refused to receive the same and required the petitioner to submit the documents along with Bank Guarantee and not the Solvency certificate vide order dated 02-01-2020 directing to phase out the practice of issuing of Solvency certificates and insist on producing IT Returns or Bank Guarantee, etc. for issuance of license by the State Government through its Revenue and Disaster Management Department. Hence the Excise Department of the Government of Orissa accordingly vide impugned letter dated 30-03-2020 directed the authorities to substitute Solvency certificate by Bank Guarantee. Hence, the instant petition has challenged the said letter.

Counsel for the petitioners submitted that the Government of Orissa by the aforesaid letter dated 30-03-2020 cannot supersede or override the statutory provisions contained in Rule 51 and Rule 150 of the Rules of 2017.

Counsel for the respondents Shri Ashok Parija submitted that the Government has taken a uniform decision in respect of all the departments wherever lease/license are issued. It was further submitted that the Government is in the process of incorporating the appropriate amendments in the Rules of 2017 to provide for Bank Guarantee in place of Solvency certificate.

After hearing the submission of both sides the Court held that that the statutory prescription enumerated in the statutory Rules namely; Rule 51 and Rule 150 of the Rules of 2017 and Rule 3 and Rule 4 of the Certificate Rules, cannot be overridden by mere executive order issued by the Revenue & Disaster Management Department dated 02-01-2020.

In view of the above, the impugned letter is quashed and petition disposed off.[Gopinath Sahu v. State of Orissa, 2020 SCC OnLine Ori 565, decided on 03-08-2020]


*Arunima Bose, Editorial Assistant has put this story together

Case BriefsHigh Courts

Kerala High Court: Anu Sivaram, J. allowed the Writ Petition by directing the respondent to only decide the amount of liability after having afforded the petitioner the chance to put forth his side

In the present case, the Petitioner who is the former Director of T.K. Manufacturing Enterprises Private Limited had entered into a contract for manufacture and supply of electricity poles to the respondent Board. The contract was awarded in the year 2000 and terminated in 2002, alleging delay in executing the work. The Company had while entering into the contract, given security by way of Bank Guarantee which, according to the petitioner, was encashed by the respondent Board towards liquidated damages.

The petitioner was served with a revenue recovery notice by the respondent. The petitioner raised objection against the recovery proceedings and approached the Court.

The Court had directed the respondent Board to consider the representation submitted by the petitioner on merits. Having afforded an opportunity of hearing to the petitioner, he submitted evidence to prove his contentions.

The Court reprimanded the respondent and held that the Chairman was bound to deal with those contentions and take a reasoned decision. Moreover, nothing was brought on record to indicate that a proper process of quantification of liability with notice to the petitioner was undertaken prior to the initiation of the revenue recovery proceedings.

It is settled law that one party to an agreement cannot unilaterally quantify the liability and proceed for recovery.

The Writ Petition was allowed on the grounds that the liability of the petitioner cannot and should not be quantified without giving him a chance to appear and give his side. [Sundeep Abraham v. Kerala State Electricity Board, 2020 SCC OnLine Ker 3048, decided on 04-08-2020]

Case BriefsTribunals/Commissions/Regulatory Bodies

Appellate Tribunal for Electricity (APTEL): A Coram of Justice Manjula Chellur (Chairperson) and S.D. Dubey, (Technical Member) allowed an appeal filed against an impugned order passed by the Central Electricity Regulatory Commission.

The counsel for the appellant Anand K. Ganesan, Swapna Seshadri,  Ashwin Ramanathan and Utkarsh Singh had submitted that in 2011 the transmission system in issue was not required for the Applicant/Appellant in view of the Appellant being unable to obtain the Consent for Establishment (CFE) from the Pollution Control Board. This non-issuance of the CFE was beyond the control of the Applicant/Appellant and therefore a force majeure under the Bulk Power Transmission Agreement was entered into between the parties and further a petition had been filed before the Central Commission seeking directions on the declaration of force majeure and also return on the bank guarantee retained by Powergrid. The Central commission had disposed of the petition holding that the Applicant/Appellant had acted bona fide aggrieved by which the Applicant/Appellant had preferred an appeal which was pending before this tribunal and they further submitted that the delay was not deliberate but on bona fide reasons. 

The Tribunal while allowing the appeal condoned the delay of 148 days and found that the reasoning assigned in the application explaining the delay in filing the Appeal was satisfactory. [PEL Power Ltd. v. CERC, 2019 SCC OnLine APTEL 115, decided on 19-12-2019]

Case BriefsHigh Courts

Kerala High Court: Raja Vijayaraghavan V, J. allowed a civil writ petition filed by a company and directed release of its vehicles and goods that had been detained by the tax officer due to the expiry of its e-way bills.

Petitioner herein was a logistics company which was involved in the transportation of Maruti cars. Petitioner’s vehicle was obstructed, and on inspection, it was found that the validity of the e-way bills had expired. Hence, both – the vehicle and the goods – were detained. This had led to the filing of this writ petition seeking a certiorari quashing of notice issued under Section 129 of Goods and Services Tax Act, 2017 whereby his goods were seized; and sought a writ of mandamus directing the 1st respondent to release the goods by accepting a penalty of Rs 500.

The Court relied on the earlier judgment of a Division Bench  in Renji Lal Damodaran v. State Tax Officer (Order dated 06-08-2018 in WA No. 1640 of 2018) in which it was directed to release the goods of the appellant furnishing bank guarantee for tax and penalty found due and a bond for the value of goods in the form as prescribed under Rule 140(1) of the Central Goods and Services Tax Rules, 2017. So, applying the ratio of that judgment, the Court directed the respondent authorities to release the petitioner’s goods and vehicle on the execution of a bank guarantee for tax and penalty found due, and a bond for the value of goods in the form as prescribed under Rule 140(1) of the CGST Rules.

This petition was disposed of in the above terms.[OSL Logistics Private Ltd. v. Assistant State Tax Officer, 2019 SCC OnLine Ker 1554, decided on 14-05-2019]

Case BriefsHigh Courts

Delhi High Court: Vibhu Bhakru, J. allowed a writ petition filed against the action of Andhra Bank in debiting a sum of Rs 68.93 lakhs in the petitioner’s current account as commission charges for the unexpired period of a bank guarantee that was surrendered by the petitioner.

The petitioner, represented by Tarun Johri and Ankit Saini, claimed that the Bank had not informed them at the time of issuance of the bank guarantee that any such charges would be payable, and therefore, levy of such charges was illegal and contrary to guidelines issued by the Reserve Bank of India. The Bank, represented by P.B.A. Srinivasan, claimed that it was entitled to levy such charges.

The foremost question to be considered by the High Court was whether the Bank was obliged to disclose the charges to the petitioner at the time of according to the request of providing the guarantee. Referring to the relevant circulars issued by the RBI, and it’s earlier decision in DLF Ltd. v. Punjab National Bank, 2011 SCC OnLine Del 2465, noted that the RBI clearly stated that levy of charges, which were not initially disclosed to the borrower, would constitute an unfair practice. The Court reiterated the principal to be:

“a person, who is visited with any charges for a facility, should be aware of the same at the time of availing the facility and not at the time of discharging the same. This is a principle of fair play and fair practice, which the banks are obliged to follow. It would make little difference whether the facilities extended by the banks are fund based or non-fund based.” In such view of the matter, the charges levied by the Bank were held to be unsustainable and the Bank was directed to refund the same with an interest at the rate of 6 per cent per annum. [Athena Energy Ventures (P) Ltd. v. Andhra Bank, 2019 SCC OnLine Del 8854, decided on 30-05-2019]

Case BriefsHigh Courts

Kerala High Court: The Bench of Dama Seshadri Naidu, J. granted a stay on encashment of bank guarantee by tax authorities until the statutory appeal preferred in that regard was considered by the competent court.

Petitioner herein was transporting certain goods from Tamil Nadu to Perinthalmanna. When the authorities checked the documents carried along with the goods, they found the same to be defective. Suspecting tax evasion, authorities detained the goods and demanded a penalty, as well as tax. Aggrieved, the petitioner filed a petition for the release of goods and for the expeditious completion of adjudication. In terms of the judgment delivered in the said petition, the petitioner furnished a bank guarantee for the entire amount demanded and had the goods released.

Later, the primary authority completed the adjudication and issued an order under imposing a penalty under Section 129(3) of the State Goods & Services Tax Act, 2017 and also appropriating the bank guarantee. The petitioner filed an appeal under Section 107 of the Act against the said order. However, by way of caution, he preferred the instant appeal as he apprehends that the authorities, in the meanwhile, may encash the bank guarantee.

In view of the fact that a statutory appeal had already been filed, the Court directed the respondent authority to keep the bank guarantee untouched till the appeal is considered. [Vinod P.A. v. Assistant State Tax Officer, 2019 SCC OnLine Ker 39, dated 03-01-2019]

Case BriefsHigh Courts

Delhi High Court: A Division Bench comprising of Ravindra Bhat and A.K. Chawla, JJ., dismissed a First Appeal against an order declining grant of interim relief under Section 9 of the Arbitration and Conciliation Act, 1996.

The contract between the parties was the result of bidding in a public tendering process. The consideration of the contract was over Rs. 69 crores, with the period of execution being of 15 months along with an option to apply for extension. The appellant was aggrieved by the termination of contract after several defects and deficiencies during performance were pointed out. The grievance of the appellant was threefold viz. against invocation of performance guarantee, mobilization of advance bank guarantee and alleged unlawful termination of contract.

The Court directed that the issue of wrongful termination was a matter to be decided on merits during the arbitral proceedings and proceeded to decide upon the issues of invocation.

On that issue, the Court held that the performance guarantee mandates the bank to honour without demur any demand by the principal, who is the real beneficiary of any sums, claimed by it as due under the contract. In other words, the bank cannot adjudicate as to whether the claim by the beneficiary was in fact determined by it in accordance with the underlying contract between it and a third party. It was further held, that guarantee is an independent contract and has only a referential connection to the contract between the two parties, who agree upon the execution of performance of a particular contract for which the bank guarantee is issued. In the circumstances, mere invocation of a guarantee does not provide valid grounds for interdicting the invocation of guarantee. [M/s Classic KSM Bashir JV v. Rites Ltd., 2018 SCC OnLine Del 9056, decided on 14-05-2018]

Case BriefsSupreme Court

Supreme Court: Dealing with an interesting question as to the retrospective applicability of the 1997 Amendment to Section 28 of the Contract Act, 1872, the Bench of C. Nagappan and R.F. Nariman, JJ, answered in the negative and said that Section 28 of the Contract Act, being substantive law, operates prospectively as retrospectivity is not clearly made out by its language as the Amendment does not purport to be either declaratory or clarificatory.

In the present case, the bank guarantees dated 31.1.1996 which restricted the period within which they could be invoked were in question and it was contended by the Union of India that such Bank Guarantees would not be affected by an amendment made one year later i.e. on 8.1.1997 and the relevant date and the relevant law applicable would be as on 31.1.1996, which would be the unamended Section 28. Accepting the aforementioned contention, the Court said that the unamended Section 28 would be the law applicable as on 31.1.1996, which is the date of the agreement of bank guarantee.

The Court considered the Statements of Object and Reasons of the Amendment as stated in the 97th Law Commission Report where it was stated that the Amendment seeks to bring about a substantive change in the law by stating, for the first time, that even where an agreement extinguishes the rights or discharges the liability of any party to an agreement, so as to restrict such party from enforcing his rights on the expiry of a specified period, such agreement would become void to that extent. The Amendment therefore seeks to set aside the distinction made in the case law up to date between agreements which limit the time within which remedies can be availed and agreements which do away with the right altogether in so limiting the time. The Court, hence, noticed that these are obviously substantive changes in the law which are remedial in nature and cannot have retrospective effect. [Union of India v. Indusind Bank Ltd.2016 SCC OnLine SC 944, decided on 15.09.2016]

Case BriefsHigh Courts

Delhi High Court: While deciding a crucial matter relating to work contracts and  bank guarantee the Division Bench comprising of Sanjeev Sachdeva and B.D. Ahmed JJ., observed that invocation of a bank guarantee cannot be restrained unless fraud, irretrievable injury/injustice or special equities is proved. In the present case, the petitioner had issued a letter of intent to the respondent no. 1 for construction of a power project. The respondent no. 1 in response gave a bank guarantee. The petitioner had invoked the bank guarantee alleging the respondent no. 1 failed to act according to terms of the contract. The Single Judge had restrained encashment of this bank guarantee under Section 9 of the Arbitration and Conciliation Act, 1996 as per a plea filed by the respondent no. 1. The order of restraint was challenged in front the High Court in view of the settled legal principles governing bank guarantees.

The Court observed ‘The petition under section 9 was filed after the Bank Guarantee was invoked and as such, the contract of guarantee had come into operation. The Respondent no. 1 in the petition under Section 9 of the Act has not even raised a plea of fraud leave alone aver facts to establish the plea of fraud. There is not even the plea of “irretrievable injury” or “irretrievable injustice”. The respondent no. 1 has not even pleaded “special equities”. The respondent no. 1 apart from raising disputes on merits has merely stated that “the petitioner would be highly prejudiced if the Bank Guarantee is invoked and the properties are alienated as the petitioner has a prima facie case and is likely to succeed in the Arbitration” and “that the petitioner would in fact, suffer irreparable loss, in case the reliefs prayed for are not granted”. Since none of the three mandatory pleas, fraud, irretrievable injury/injustice or special equities has been pleaded, the respondent no. 1 is not entitled to any order of restraint from invocation of bank guarantee. The unconditional bank guarantee has been provided in the course of commercial dealings. The appellant is entitled to realize the bank guarantee in terms thereof irrespective of any pending dispute. The respondent no. 2/bank is bound to honour the bank guarantee as per its terms irrespective of any dispute raised by its customer/the respondent no. 1. Otherwise, the very purpose of giving such a bank guarantee would be defeated. The existence of any dispute between the appellant and respondent no. 1 with regard to the underlying contract cannot be a ground for issuing an injunction to restrain the enforcement of the bank guarantee.’ [Zillion Infra Projects (P) Ltd. v. Fab-Tech Works & Constructions Pvt. Ltd.,   2015 SCC OnLine Del 13163decided on 2-11-2015]