Date of judgement:
11 August 2021
Bench:
Justice G. S. Patel
Parties:
Plaintiff – SKS Power Generation (Chhattisgarh) Ltd.
Defendant – Canara Bank
Subject
The following judgement clarified the extent to which the judiciary shall get involved in the process of invoking unconditional bank guarantees.
Overview
- In the year 2011, SKS Power Ltd. entered into various contracts with Cethar Constructions Ltd to set up a power project in Chhattisgarh. This agreement required Cethar to furnish advance and performance bank guarantees, hence they requested Canara Bank to issue five bank guarantees in the aggregate amount of Rs.121,65,00,000/-, in favour of SKS Power. All five bank guarantees were unconditional and payable on demand.
- In 2017, Cethar requested Canara Bank to extend the bank guarantees. The request was granted and bank guarantees were extended until 30th September 2017. However, around the same time, the National Company Law Appellate Tribunal (NCLAT) ordered a Corporate Insolvency Resolution Process (CIRP) against Cethar Ltd, which resulted in an immediate moratorium. It also appointed V Nagarajan as the Resolution Professional (RP).
- Within a month, SKS Power invoked their bank guarantees and requested Canara Bank to remit the entire amount. Surprisingly, neither Cethar Ltd. nor the RP filed for an injunction against this. Instead, Canara Bank applied and obtained an ex parte injunction against SKS Power’s invocation. The said injunction lasted for only two years because the suit was withdrawn by the order of the High Court.
- Since Canara Bank refused to pay, SKS Power filed this summary suit and took out the summons for judgement against Canara Bank. It was at this point that Nagarajan (liquidator for Cethar) entered with his interim application of impleadment (right to sue) claiming that Cethar is at least a proper party, if not a necessary party.
- The main contention of the defendant Bank was that if they are ordered to pay SKS Power under the bank guarantees, then it would be difficult to recover the amount since Cethar Ltd. is in liquidation. Hence, it is a ground of irretrievable prejudice. They further argued that a reference was pending against the plaintiff before the Board of Industrial and Financial Reconstruction and thus, even if they succeed, they won’t be able to realize its claim.
Issues
- Is the principal debtor (Cethar Ltd.) entitled to make an interim application of impleadment?
- Should the courts interfere in cases involving the enforcement of unconditional bank guarantees?
Judgement
- Upon the question of interim application, the court rejected it on the grounds that a bank guarantee is an independent contract, and while enforcing it, the principal debtor (in this case Cethar Ltd) is never a necessary party. The court held the application of impleadment is unsustainable and thereby dismissed it.
- The court made a reference to the observation of the Supreme Court in Hindustan Steelworks Construction Ltd v Tarapore & Co & Anr, wherein it was held that courts must interfere only in exceptional cases which involves fraud or irretrievable injustice if the bank guarantee is allowed to be encashed.
- Applying the aforementioned observation in the present case, the court held that there seems to be no fraud in the power plant construction contract or in the issuance of the bank guarantee. Even the invocation was held to be legitimate. Putting this on record, the court refused to grant protection to Canara Bank.
- Relying on the judgement of UP State Sugar Corporation v. Sumac International Ltd, the court reiterated that a bank guarantee which is unconditional will eventually be realized, despite any pending disputes. Hence, banks must honour its terms or else it defeats its entire purpose. As a result, injunctions should not be granted readily.
- The court also pointed out that in such cases, in order to invoke these special equities, it must be proved and the court must be absolutely satisfied that there is no possibility of restitution in the amount. Thereby, the summons of the judgement was made absolute and the suit was decreed in favour of 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.
Conclusion
Justice G. S. Patel while denying relief to the defendant Bank, clearly stated that in order to procure relief in the form of injunction in such cases, it must be proved that it will lead to injustice on the Bank and its customers, which will be grave, catastrophic and monumental.
Hence, a mere apprehension that the other party will not be able to pay, is not a good enough defence. Exceptional circumstances making it impossible for the guarantor to reimburse himself, if he eventually succeeds, will have to be conclusively established.
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