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

BACKGROUND OF THE CASE

• In 2011, SKS Power entered into multiple agreements with Cethar Construction Limited and Cethar Limited for the project of setting up a power project in Raigarh District of Chhattisgarh State.
• As per the requirements of those agreements, Cether had to furnish advance and performance bank guarantees.
• The Canara Bank had issued five bank guarantees in SKS Power’s favour in February 2021.
• On the request of Cether, Canara Bank extended the bank guarantees from 30th June 2017 to 30th September 2017.
• In the meantime, an application against Cether Limited was order by the NCLAT in 2017 which commenced a Corporate Insolvency Resolution Process resulting in an immediate moratorium.
• On 2017, Mr V Nagarajan was appointed as the resolution professional by the NCLAT.

THE LEGAL PROCEDURE

• SKS Power invoked the bank guarantees and requested Canara Bank to remit their full amount on 5th September, 2017.
• But a suit for injunction was neither brought by Cethar, nor by Nagarajan, against the invocation of the bank guarantee or payment.
• On 4th February 2020, SKS Power filed for an instant suit as Canara Bank did not pay them. Then, SKS Power took the summons for judgement against Canara Bank, stating the invocation of the bank guarantee.
• Finally, SKS Power moved the Bombay High Court against the Canara Bank.
• Acting as the liquidator of Cethar, Nagarajan, moved the interim application for impleadment stating that Cether was a proper party.

COURT’S OBSERVATION ON CETHAR

• The court observed that a bank guarantee comes under an independent contract.
• While dealing with the same, the principal debtor (in this case, Cethar), is not at all a necessary party.
• Then, the beneficiary of a guarantee (in this case, SKS Power), as per its wish, can choose to join both the principal debtor and the guarantor or can choose to proceed only against the guarantor or only against the principal debtor.
• The court dismissed the interim application and stated that the application for intervention or the impleadment as per the liquidator of the principal debtor can be considered to be wholly unsustainable.

COURT’S OBSERVATION ON SUMMONS

• The court must not interfere in the commitment made by the bank.
• Only in exceptional cases such as fraud or where there occurs irretrievable injustice, the court can interfere in those matters.
• The court held that in the present case, there was no fraud in the power plant construction contract, issuance of bank guarantees or the invocation.
• Further, the court added that as Cethar was in a precarious financial condition, something clearer than a mere apprehension must be demonstrated, and just liquidation is insufficient for this purpose.
• Therefore, the court held the summons for judgement to be absolute.
• The summary suit was decided in favour of the plaintiff with an amount of Rs 121.65 lakhs and interest of 6% per annum.

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