1
Dr.GRR,J
WP No.16927 of 2021
THE HON'BLE Dr. JUSTICE G. RADHA RANI
WRIT PETITION No.16927 OF 2021
ORDER:
1. This writ petition is filed by the petitioner to issue a writ of mandamus declaring the action of 2nd respondent bank in refusing to honour the bank guarantee bearing No.128220IGFIN0033 in favor of the petitioner, inspite of the petitioner invoking the same on 12.07.2021 as illegal, arbitrary and violative of circulars issued by the Reserve Bank of India, and consequently to direct the respondent No.2 to remit the proceeds of the Bank Guarantee No.128220IGFIN0033 in favor of the petitioner.
2. Heard Sri P.S.S.Kailash Nath, learned counsel for the petitioner and the learned Senior Counsel Sri S. Ravi for respondent Nos.1 and 2.
3. The learned counsel for the petitioner submitted that the petitioner was a registered Proprietorship firm engaged in the business of real estate and construction activities. In the regular course of its business, the petitioner entered into an agreement with one M/s. Kompass Infrastructures Private Limited (Contractor) to construct a commercial complex on turn-key basis at Hyderabad on 28.09.2020. As per the terms of the contract, the contractor had to construct a commercial complex of 78,750 Sq.ft @ Rs.2000/- per Sft. which would bring the contract value to Rs. 15,75,00,000/-. As per Clause 9 of the 2 Dr.GRR,J WP No.16927 of 2021 contract, the petitioner had to give a mobilization advance of 20% of the contract value which comes to Rs.3,15,00,000/- to the contractor and to secure the same, the contractor had to submit a mobilization advance bank guarantee to the petitioner. In compliance of the agreed terms under the contract, the petitioner paid mobilization advance of Rs. 3,15,00,000/- to the contractor from time to time on various dates by way of bank transfers and the contractor issued a bank guarantee with BG No. 128220IGFIN0033 with the issuing bank as the 2nd respondent. The 2nd respondent executed a bank guarantee with the issue date as 29.09.2020 and expiry date as 28.09.2022 in favor of the petitioner, on behalf of the contractor. The bank guarantee was unconditional, irrevocable and without demur and with an undertaking to pay the beneficiary immediately on demand. It was submitted that pursuant to the issuance of bank guarantee by the 2nd respondent, the petitioner confirmed the same by sending a scanned copy of the bank guarantee vide e-mail on 06.10.2020. The petitioner also got a copy of the confirmation letter from the zonal office (Punjagutta) on 02.07.2021 confirming the validity of the bank guarantee. Pursuant to the commencement of the work under the contract, the contractor failed to comply with the terms of the contract dated 28.09.2020 which resulted in the breach of contract and thereby the petitioner was constrained to invoke the bank guarantee. As per the conditions of the bank guarantee dated 28.09.2020, the petitioner could invoke the same by way of a notice by way of speed post or otherwise to the 2nd 3 Dr.GRR,J WP No.16927 of 2021 respondent bank and upon receipt of the notice by the bank, the bank undertook to pay the same by way of RTGS or Demand Draft. The petitioner accordingly sent notices of demand invoking the bank guarantee vide e-mails on 12.07.2021, 15.07.2021, 17.07.2021, 19.07.2021 and 20.07.2021. The notice sent by way of speed post on 14.07.2021 and 16.07.2021 were delivered to the 2nd respondent. Inspite of seven (07) demand notices, the 2nd respondent bank failed to honor the bank guarantee. Aggrieved by the same, the petitioner filed the present writ petition.
4. The learned counsel for the petitioner further submitted that bank guarantee was a commitment made by the issuing bank to make payment to the beneficiary on behalf of its client. Failure on the part of the bank to honor the claim legitimately made on it projects a distorted picture of its functioning and is antithetical to the banking system and the legitimacy of the bank guarantee. In the instant case, the bank guarantee had been issued by the 2nd respondent which was a scheduled bank and an instrumentality of the State, and hence failure on the part of the 2nd respondent to honor the bank guarantee inspite of the petitioner having a valid claim invoking the bank guarantee within the time period and further holding the original deed of guarantee executed by the 2nd respondent bank was against the nature of the bank guarantee. The Master Circular - Guarantees and Co-acceptances issued by the Reserve Bank of India on 01.07.2009 would state that bank guarantee should be honored without any 4 Dr.GRR,J WP No.16927 of 2021 delay or demur. By failing to honor the bank guarantee invoked by the petitioner, the 2nd respondent failed to comply with the bank guarantee dated 29.09.2020 and also the Master Circular of the Reserve Bank of India which was binding on the 2nd respondent bank. On account of the delay, the 2nd respondent bank was providing the contractor a window of opportunity to take steps against the encashment of bank guarantee and prayed to allow the writ petition.
5. The learned senior counsel for the respondents submitted that M/s. Kompass Infrastructures Private Limited represented by its directors Sri Kattamidi Santosh Reddy, Somavarapu Surender Reddy, Gopal Kondakal and Srinivas Nekkanti (Borrowers) were enjoying the credit facilities from erstwhile Andhra Bank, Madhapur Branch which was amalgamated with Union Bank of India w.e.f. 01.04.2020. At the request of the said borrower, the respondent bank sanctioned the credit facilities, a bank guarantee limit of Rs.15,00,00,000/- and secured overdraft limit of Rs. 3,26,00,000/-, in total Rs. 18,26,00,000/- vide sanction letter dated 05.09.2020 subject to the terms and conditions mentioned there in. The borrower represented by its Managing Director, Mr. K. Santosh Reddy informed the respondent bank that they had been awarded the contract for "Residential Housing" and as per the terms of the contract dated 28.09.2020 between the petitioner and the borrower, mobilization advance up to 20% of the original contract value of Rs. 15,75,00,000/- was 5 Dr.GRR,J WP No.16927 of 2021 payable to the contractor against bank guarantees and the borrower was required to submit the bank guarantee towards the mobilization advance of 20%, amounting to Rs. 3,15,00,000/- of the contract price against submitting of the bank guarantee for 100% of the mobilization advance. At the request of the borrower, the respondent bank issued a bank guarantee bearing No.128220IGFIN0033 dated 29.09.2020 for a period of one year for an amount of Rs.3,15,00,000/- in favor of the petitioner. The petitioner vide letter dated 06.10.2020 released / returned the above said bank guarantee to the respondent bank and on the basis of the said letter and receipt of the original bank guarantee, the respondent bank reversed/closed the bank guarantee on 06.10.2020. To the shock and surprise of the respondent bank, it had received an e-mail dated 12.07.2021 from the petitioner invoking the bank guarantee and demand for payment of entire bank guarantee amount.
6. The learned senior counsel submitted that the respondent bank also issued some other bank guarantees on behalf of the borrower and while the matter stood thus, one M/s. OFB Tech. Pvt. Ltd., vide e-mail dated 25.06.2021 requested the respondent to confirm the issuance of bank guarantee No. 12821IGL0003821 dated 24.08.2021 for Rs. 2,00,00,000/- with expiry date 23.06.2022. The respondent bank sent reply stating that the said bank guarantee number did not exist and it was not issued by their branch. On 01.07.2021, the branch had again received e-mail from M/s. OFB Tech. Pvt. Ltd., to confirm the 6 Dr.GRR,J WP No.16927 of 2021 bank guarantee referred above and the respondent reiterated that the said bank guarantee was not issued by their branch. The said M/s. OFB Tech. Pvt. Ltd., also filed a writ petition before the High Court at New Delhi. In the light of the above developments, suspecting four play, the respondent bank lodged a complaint dated 08.07.2021 with the Station House Officer, Madhapur, Hyderabad against the said borrower and its directors. The Station House Officer, Madhapur registered FIR No. 791 of 2021 under Sections 406, 420, 465, 467, 468 and 471 read with Section 120 of IPC and took up investigation. During the course of investigation, the said case was transferred to CCS, Economic Offences Wing , Cyberabad and the investigation was pending and the respondent bank also lodged supplementary complaint dated 07.09.2021 and the same was acknowledged by CCS-EOW on 08.09.2021. The respondent bank suspected that there might be nexus in between the borrower and the beneficiary to de-fraud the bank. The bank requested CCS-EOW to investigate into the matter whether the contracts which were awarded by the said beneficiaries to the borrower were genuine business constructions and whether the said beneficiaries had parted money to the borrower by way of mobilization advance, etc., and whether the borrower had received the material from the beneficiaries who were supposed to supply the material to the borrower. The respondent bank was also having an apprehension whether the above said beneficiaries were holding the genuine bank guarantee issued by the bank or 7 Dr.GRR,J WP No.16927 of 2021 fabricated bank guarantees and therefore requested CCS-EOW to call for the original bank guarantees from the beneficiaries and refer the matter for forensic lab to decide the genuineness of the said bank guarantees. The respondents came to know that CCS-EOW issued notices to the concerned parties under Section 91/160 Cr.P.C. including the beneficiaries referred in the complaint and a notice dated 10.08.2021 was issued to the petitioner also to appear before the investigating officer along with the original bank guarantees which were listed in the said notice and relevant documents and witnesses to examine and finalize the case at the earliest.
7. The learned counsel further submitted that the respondent bank strongly suspected that the alleged contract of "Residential Housing" dated 28.09.2020 between the petitioner and the borrower was non-existing and no real work had been allotted by the petitioner to the borrower. The respondent bank had been induced by the petitioner and the borrower by fraud and misrepresentation to issue the bank guarantee. At the first instance, the non-existing contract and the very bank guarantee issued by the respondent bank was a voidable agreement under Section 17, 18 and 19 of the Indian Contract Act and need not be honored by the bank. He further contended that the above transaction would require deep investigation by the investigating agency to find the roots of the fraud including verifying the genuineness of the work/contract, materials supplied by the petitioner to the borrower and whether the borrower and the beneficiary had 8 Dr.GRR,J WP No.16927 of 2021 obtained the bank guarantees with the sole purpose of defaulting when the bank guarantees were invoked and whether the borrower and beneficiary/petitioner had forged or fabricated and returned the bank guarantees and were trying to obtain unlawful gain by invoking the returned bank guarantees and the genuineness of the bank guarantees with the petitioner. As the matter was under investigation by the competent authorities, any order passed in favor of the petitioner during the investigation would have far reaching consequences on the investigation and the same would also cause irretrievable injustice to the respondent bank and prayed to dismiss the petition.
8. As per the Master Circular issued by the Reserve Bank of India on 09.11.2021 pertaining to payment of invoked guarantees, it was stated that:
"Where guarantees are invoked, payment should be made to the beneficiaries without delay and demur. An appropriate procedure for ensuring such immediate honoring of guarantees should be laid down so that there is no delay on the pretext that legal advice of approval of higher authorities is being obtained".
"Delays on the part of banks in honoring the guarantees when invoked tend to erode the value of the bank guarantees, the sanctity of the scheme of guarantees and image of banks. It also provides an opportunity to parties to take recourse to courts and obtain injunction orders. In the case of guarantees in favor of government departments, this not only delays the revenue collection efforts but also gives an erroneous impression that banks are actively in collusion with the parties, which tarnishes the image of the banking system".
"There should be an effective system to ensure that the persons on whose behalf the guarantees are issued will be in a position to perform their obligations in the case of performance guarantees and honor their commitments out of their own resources, as and when needed, in the case of financial guarantees".9
Dr.GRR,J WP No.16927 of 2021
9. The learned counsel for the petitioner also relied upon several judgments of the Hon'ble Apex Court. In this regard, he relied upon the judgment of the Hon'ble Apex Court in Standard Chartered Bank v. Heavy Engineering Corporation Limited and another1, wherein it was held that:
"As per the precedents laid down by this Court, the question of law is no more res integra and is well settled that the bank guarantee is an independent contract between the bank and beneficiary and bank is always obliged to honor its guarantee as long as it is an unconditional and irrevocable one. At the same time, the dispute between the beneficiary and the party at whose instance the bank has given the guarantee is immaterial and is of no consequence and only two exceptions to the rule have been carved out. The first is when there is a fraud of which the Bank has notice and a fraud of the beneficiary from which it seeks to benefit. The second exception to the general rule of non-intervention is such when there is an "irretrievable injury" or "irretrievable injustice" that would occur to the bank".
10. He also relied upon the judgment of the Hon'ble Apex Court in Ansal Engineering Projects Limited v. Tehri Hydro Development Corporation Limited2, wherein a three-judge bench of the Hon'ble Apex Court held that:
"It is settled law that bank guarantee is an independent and distinct contract between the bank and the beneficiary and is not qualified by the underlying transaction and the validity of the primary contract between the person at whose instance the bank guarantee was given and the beneficiary. Unless fraud or special equity exists, is pleaded and prime facie established by strong evidence as a triable issue, the beneficiary cannot be restrained from encashing the bank guarantee even if dispute between the beneficiary and the person at whose instance the bank guarantee was given by the Bank, had arisen in performance of the contract or execution of the Works undertaken in furtherance thereof. The bank unconditionally and irrevocably promised to pay, on demand, the amount of liability undertaken in the guarantee without any demur or dispute in terms of the bank guarantee. The object behind is to inculcate respect for free flow of commerce and trade and faith in the commercial banking transactions unhedged by pending disputes between the beneficiary and the contractor".1
2020 (13) SCC 574 2 1996 5 SCC 450 10 Dr.GRR,J WP No.16927 of 2021
11. He also relied upon the judgment of the Hon'ble Apex Court in Hindustan Corporation Limited v. State of Bihar3, wherein a two-judge bench of the Hon'ble Apex Court held that:
"What is important, therefore, is that the Bank Guarantee should be in unequivocal terms, unconditional and recite that the amount would be paid without demur or objection and irrespective of any dispute that might have cropped up or might have been pending between the beneficiary under the Bank Guarantee or the person on whose behalf the Guarantee was furnished. The terms of the Bank Guarantee are, therefore, extremely material. Since the Bank Guarantee represents an independent contract between the Bank and the beneficiary, both the parties would be bound by the terms thereof. The invocation, therefore, will have to be in accordance with the terms of the Bank Guarantee; or else, the invocation itself would be bad."
.
12. He also relied upon the judgment of the Hon'ble Apex Court in SBI v. Mula Sahakari Sakhar Karkhana Limited4, wherein a two-judge bench of the Hon'ble Apex Court held that:
"It is beyond any cavil that a bank guarantee must be construed on its own terms. It is considered to be a separate transaction". "If a construction, as was suggested by Mr. Naphade, is to be accepted, it would also be open to a banker to put forward a case that absolute and unequivocal bank guarantee should be read as a conditional one having regard to circumstances attending thereto. It is, to our mind, impermissible in law."
13. The settled position in law that emerges from the precedents of this Court is that the bank guarantee is an independent contract between bank and the beneficiary and the bank is always obliged to honor its guarantee as long as it is an unconditional and irrevocable one. The dispute between the beneficiary and 3 (1999) 8 SCC 436 4 (2006) 6 SCC 293 11 Dr.GRR,J WP No.16927 of 2021 the party at whose instance the bank has given the guarantee is immaterial and is of no consequence. The exceptions to this rule is when there is a clear case of fraud, irretrievable injustice or special equities. The Court ordinarily should not interfere with the invocation or encashment of the bank guarantee so long as the invocation is in terms of the bank guarantee.
14. He also relied upon the judgment of the Hon'ble Apex Court in Bank of India v. Nangia Constructions (I) Pvt. Ltd., and others5 wherein it was held that:
"It is unfortunate that a nationalized bank is finding excuses for refusing to make the payment on totally untenable and frivolous grounds. The Division Bench was fully justified in making observations regarding the conduct of the nationalized bank. The entire trust, faith and confidence of people depend on the conduct and credibility of the nationalized bank. In the present day world, the national and international commercial transactions largely depend on bank guarantees. In case the banks are permitted to dishonour their commitments by adopting such subterfuges, the entire commercial and business transactions will come to a grinding halt. This principle has been reiterated in large number of cases by this court. We do not deem it appropriate to burden this judgment by reiterating all those judgments".
15. He also relied upon the judgment of the Hon'ble Apex Court in Uttar Pradesh Federation Ltd., v. Singh Consultants and Engineering (P) Ltd.6, wherein while explaining the salient features of letter of credit, it was held that:
"The letter of credit has been developed over hundreds of years of international trade. It was most commonly used in conjunction with the sale of goods between geographically distant parties. It was intended to facilitate the transfer of goods between distant and unfamiliar buyer and seller. It was found difficult for the seller to rely upon the credit of an unknown customer. It was also found difficult for a buyer to pay for goods 5 AIR 2008 SC 2906 6 (1998) 1 SCC 174 12 Dr.GRR,J WP No.16927 of 2021 prior to their delivery. The bank's letter of credit came into existence to bridge this gap. In such transactions, the seller (beneficiary) receives payment from issuing bank when he presents a demand as per terms of the documents. The bank must pay if the documents are in order and the terms of credit are satisfied. The bank, however, was not allowed to determine whether the seller had actually shipped the goods or whether the goods conformed to the requirements of the contract. Any dispute between the buyer and the seller must be settled between themselves. The Courts, however, carved out an exception to this rule of absolute independence. The Courts held that if there has been "fraud in the transaction" the bank could dishonour beneficiary's demand for payment. The Courts have generally permitted dishonour only on the fraud of the beneficiary, not the fraud of somebody else."
16. The learned senior counsel for the respondents also relied upon the same judgment on the ground that 'fraud unravels all', wherein it was held that:
"The whole commercial purpose for which the system of confirmed irrevocable documentary credits has been developed in international trade is to give to the seller an assured right to be paid before he parts with control of the goods and that does not permit of the any dispute with the buyer as to the performance of the contract of sale being used as a ground for non-payment or reduction or deferment of payment". "To this general statement of principle as to the contractual obligations of the confirming bank to the seller, there is one established exception: that is, where the seller, for the purpose of drawing on the credit, fraudulently presents to the confirming bank documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue. Although there does not appear among the English authorities any case in which this exception has been applied, it is well established in the American cases, of which the leading or 'landmark' case is Sztejn v. Henry Schroder Banking Corp., [ 1941] 3 1 NYS 2d 631. This judgment of the New York Court of Appeals was referred to with approval by the English Court of Appeal in Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. [1978] 1 All E.R. 979 (1978) QB 159 though this was actually a case about a performance bond under which a bank assumes obligation to a buyer analogous to those assumed by a confirming bank to the seller under a documentary credit. The exception for fraud on the part of the beneficiary seeking to avail himself of the credit is a clear application to the maxim ex trupi cause non oritur actio or if plain English is to be preferred, 'fraud unravels all', the courts will not allow their process to be used by a dishonest person to carry out a fraud."13
Dr.GRR,J WP No.16927 of 2021
17. The learned senior counsel for the respondents also relied upon the judgment of the High Court of Calcutta in AIMS India Private Ltd., and others v. Indian Bank and others7 on the ground that a writ is not maintainable in the matters of Bank Guarantees as there is no public law element involved in it and it arises out of a contract, wherein it was held that:
"The claim of the petitioner is essentially a money claim. The bank guarantee is a contract between the bankers and the beneficiary. Although the same had been furnished at the instance of the petitioner, it cannot be said that the agreement was a tripartite one".
"This bench was also recently in A.C. Roy and Ors. v. Union of India and Ors. reported in MANU/WB/0035/1995: AIR1995Cal246 relying upon a large number of Supreme Court decisions, decisions of this court as also Patna High Court, enter alia, held that a dispute under a bank guarantee is a private dispute and the same does not involve any public element and, thus no writ is maintainable".
"It was held- "Right to enforce bank guarantee arises out of a contract qua-contract".
"There is no public law element involved in it".
"Thus a writ will not issue in the matter of enforcement of bank guarantee unless there exists a public law element."
18. The learned senior counsel further submitted that the Respondent Bank was a Government of India Undertaking and is honouring various bank guarantees issued from time to time if the said bank guarantees were in order.
In the present case, as fraud was involved and the matter was under investigation by the CCS-EOW, Cyberabad and unless the investigation was completed, the respondent bank was not in a position to take a decision on the subject matter of the invocation of the bank guarantee, as the same would cause 7 1997 (4) SCC 237 14 Dr.GRR,J WP No.16927 of 2021 irretrievable injustice to the Respondent Bank and prayed to dismiss the writ petition.
19. As seen from the facts of this case, the Bank issued bank guarantee bearing No. 128220IGFIN0033 dated 29.09.2020 for a period of one year for an amount of Rs. 3,15,00,000/- in favor of the petitioner. The respondent bank alleged that the petitioner vide letter dated 06.10.2020 released / returned the said bank guarantee to the respondent bank and on the basis of the said letter and receipt of the bank guarantee, the respondent bank reversed/ closed the bank guarantee on 06.10.2020; to its shock and surprise, the respondent bank received an e-mail dated 12.07.2021 from the petitioner invoking the bank guarantee demanding for payment of the entire bank guarantee amount. The contention of the respondent bank was that bank filed a complaint prior to invocation of the alleged bank guarantee, the original bank guarantee had been returned by the beneficiary and they had already reversed / closed the bank guarantee in their books and there was no existing liability in their books. Their contention was that there was no proof that the bank guarantee held by the petitioner was original and it was possible that he could have been defrauded by the borrower who might have handed over the fabricated bank guarantee to the petitioner and returned the original bank guarantee to the bank along with covering letter of the petitioner; as original and covering letter (Written Instructions) had been received by the bank from the beneficiary, the bank had 15 Dr.GRR,J WP No.16927 of 2021 closed the bank guarantee. The bank was also suspecting that the alleged contracts between the borrower and the beneficiaries (Petitioner) were non- existent and no real work had been allotted by the petitioner to the borrower, the bank had been induced by the petitioner and the borrower by fraud and misrepresentation to issue the bank guarantee at the first instance to a non- existing contract and it could be an alternate financial arrangement. The contention of the bank was that the very bank guarantee issued by the respondent bank was a voidable agreement under Section 17, 18 and 19 of the Indian Contract Act and in view of the same, the bank had issued a supplementary complaint dated 07.09.2021 requesting the authorities to investigate into the said matter and to determine who was holding the original bank guarantee and whether or not the contracts entered in between the petitioner and the borrower were genuine or not and any material had been supplied for the alleged advancement / mobilization of bank guarantees executed by the parties.
20. The learned senior counsel for the respondent bank further contended that the writ was bad for non joinder of necessary parties that is the borrower with whom the petitioner had entered into the alleged agreement.
21. As the matter is under investigation and as it was alleged that the bank received a letter dated 06.06.2020 from the petitioner and on the basis of the 16 Dr.GRR,J WP No.16927 of 2021 said letter and on receipt of the alleged original bank guarantee, the bank released / returned the said bank guarantee on 06.10.2020 and the petitioner vide e-mail dated 12.07.2021 invoked the bank guarantee No. 128220IGFIN0033 for payment of entire bank guarantee amount, it was necessary for the investigating agency to determine as to which was the original bank guarantee. When there were disputed questions of facts which shall be investigated and as the respondent was suspecting that the contract between the borrower and the beneficiaries was non-existent and lodged a supplementary complaint dated 07.09.2021 and the petitioner in contra was suspecting that he was cheated by M/s. Kompass Infrastructure Private Ltd., in coalition with the bank officials, no direction can be given to the bank authorities to remit the proceeds of bank guarantee No.128220IGFIN0033 in favor of the petitioner.
22. In the result, the writ petition is dismissed. No order as to costs.
Miscellaneous Petitions pending, if any, shall stand closed.
_____________________ Dr. G. RADHA RANI, J Date: 26.10.2022 NSK