Madura Coats Limited vs Bank Of India And Anr.
2003 Latest Caselaw 416 Del

JUDGMENT

Vikramajit Sen, J.

1. A legal nodus of considerable interest and import has arisen in this case; whether a third party can invoke the moratorium available under Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter referred to as `SICA'). The Plaintiff has filed a suit for the recovery of Rs.87,99,121.00 under Order xxxvII of the CPC against the Bank of India (as Defendant Nos. 1 and 2 `the Bank' for short) and HILTON Rubbers Ltd. (Defendant No. 3 `HILTON' for short). HILTON had placed several purchase orders for nylon and polyster fabrics on the Plaintiff in February and March, 1999 and on instructions of HILTON, the Bank had opened Irrevocable Letters of Credit for the payment of the material supplied against the aforementioned purchase orders. Payments were to be made by the Bank within ninety days from the date of dispatch in respect of 100% of the invoice value, but this was not done, ostensibly because of some discrepancies in the documentation. It is alleged by the Plaintiff that the Bank has fabricated letters in this context (this allegation seems to have been fortified by the Plaintiff's Bankers namely State Bank of India), in order to circumvent their monetary obligations established under the Irrevocable Letters of Credits. However, one payment of Rs.10,45,612/- was released by the Bank against a particular Letter of Credit dated 24.3.1999. A prevaricatory stance has been adopted by the Bank in respect of the notice dated 7.9.1999. The Plaintiff has asserted that but for the Letter of Credits it would not have effected supplies to HILTON. The Plaintiff had unsuccessfully invoked the extraordinary writ jurisdiction of this Court in CWP No. 5894/1999. So far as HILTON is concerned, it has placed on record the factum of its having been declared sick under Section 3(1)(o) of SICA. It appears that the Bank has been directed to work out a package under Sections 17(2) and 18 of the SICA, in the public interest.

2. The decision in Maharashtra Tubes Ltd. v. State Industrial & Investment Corporation Limited and Anr., has been relied upon by Mr. Mata, learned counsel for the Bank, to buttress the contention that the present proceedings ought not to continue any further. The Bank has prayed for the grant of Leave to Defend the suit in IA No. 1069/2000 in which it has controverter the charge of fabrication of documents. It has been submitted, inter alia, that the Bank has no knowledge about the transactions between the Plaintiff and HILTON; and that it is bound only to discharge its contractual duties in the matter of the establishment and payment under Letters of Credit. In pointing out discrepancies in the Letter of Credit the Bank has acted on its commercial judgment in accordance with its contractual rights. It has been averred that a Letter of Credit is a contract between the Bank and the Plaintiff, and waiver of discrepancies by HILTON would be inefficacious against the Bank. It has been pleaded that the Bank is obliged to make payment strictly in conformity with the terms of engagement contained in the Letter of Credit but the contentions seem to me to be to the contrary. After filing this application the Bank has also preferred IA No. 12902/2000 under Section 22(1) of SICA praying for the stay of proceedings.

3. Section 22(1) of SICA reads as under:

"22. Suspension of legal proceedings, contract, etc. -- (1) Where in respect of an industrial company, an inquiry under section 16 is pending or any scheme referred to under section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under section 25 relating to an industrial company is pending, then, notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or other law, no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver in respect thereof and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company shall lie or be proceeded with further, except with the consent of the Board or, as the case may be , the Appellate Authority."

 4. In the Maharashtra Tubes Ltd.  case (supra) the Apex Court has opined that the provisions of the State Financial Corporation Act, 1951 would be  subservient to those contained in SICA.    If that  be so, the  immediate  conclusion which  one would rush to would be  that,  a fortiori, a  Letter of Credit should also come within the mantle of  the moratorium.   On careful cogitation and reflection however, the  factual matrix  is  essentially dissimilar.    In that  case  it  was observed as under: 
   

  "Section  22(1) shorn of the irrelevant  part  provides  that  where an appeal under section 25 relating to an industrial company is pending, then, notwithstanding  anything contained in any other law,  no proceedings   for the  winding up of the industrial company or for  execution, distress or the like against  any of the properties of the industrial company or for  appointment of  a  Receiver in  respect thereof shall lie or be  proceeded  with further, except with the consent of the  BIFR or, as the  case may be, the  Appellate  Authority.   The purposes    and object of this   provision is clearly to await the  outcome of the reference made to the BIFR for the  revival and  rehabilitation of the   sick industrial company.  The words  `or the  like' which follow the   words `execution'  and  `distress' are clearly intended to convey that the properties  of the sick  industrial  company shall not be  made the  subject matter of coercive  action of similar  quality and  characteristic till  the BIFR  finally disposes  of the reference  made  under section  15 of the said  enactment.  The legislature has advisedly used  an  omnibus  expression  `the like' as it  could not have   conceived  of all possible coercive  measures   that   may be  taken against   a  sick undertaking.  The  action  contemplated by section 29 of the 1951 Act  is undoubtedly a  coercive  measure   directed  at the  take over of the management  and   property of the industrial concern and   confers  a   further right on the  Financial Corporation to  transfer by way of lease or  sale  of  properties  of the    said   concern and  any such   transfer  effected by the Financial Corporation would vest in the    transferee all  rights  in or to the   transferred property as if the   transfer was  made by the owner   of the  property.  So also  under the   said  provision   the  Financial Corporation will have the  same rights  and powers  with  respect to  goods   manufactured or produced  wholly or  partly from goods   forming part of the    security held by it as it had  with  respect to the  original goods.  It is,  therefore,  obvious  on  a   plain reading of section 29 of the 1951 Act that  it permits coercive  action against the   defaulting industrial concern of the type  which would be taken in execution or  distress  proceedings; the  only difference  being  that in the latter case the  concerned  party  would   have to use  the forum  prescribed by law for the purpose of  securing   attachment and  sale of  property of the defaulting  industrial  concern  whereas in the  case of  a   Financial Corporation that right is  conferred on  the  creditor corporation itself which is  permitted to takeover the  management  and  possession of the properties  and  deal with  them as if it were the owner  of the properties.  If the  corporation is permitted to resort  to the provision of section 29 of the  1951 Act while proceedings  under sections 15 to 19 of the  1985 Act are pending it will render the  entire  process nugatory.  In such a  situation the law  merely expects the  corporation and  for that matter any other creditor to obtain the consent  of the BIFR or, as the  case may be, the Appellate Authority to proceed   against the  industrial concern.  The law has  not left them without a  remedy.  We  are, therefore, of the opinion that the  word  `proceedings'  in  section 22(1) cannot be  given  a   narrow or restricted meaning to  limit the  same to legal proceedings.  Such a    narrow meaning would run counter to the  scheme of the law  and  frustrate the very object and  purpose of section 22(1) of the  1985 Act. 
 

                    ......... 
 

  The High Court  was    considerably  influenced by the fact that the appellant   company owed  crores   of rupees to banks    and  felt that so far as  such  creditors  are concerned,  different considerations may  come into play but the High Court with    respect  failed  to  appreciate that the  1985 Act was enacted  primarily to assist sick industrial undertakings   which inter alia  failed to meet their  financial  obligations.  It is, therefore, difficult to accept the view of the High Court that  where  the  creditors of  a   sick  industrial  concern  happen to be  Banks  or  State  Financial Corporations  different   considerations would come into play.   It must be  realised that in the modern  industrial  environment large industries  are   generally financed by banks and   statutory corporations created specially for that purpose  and if they are permitted to resort to  independent   action   in  total  disregard  of the  pending  inquiry  under sections  15 to 19  of the  1985 Act the  entire  exercise under the said  provisions  would be  rendered nugatory by the  time the    BIFR is  able to  evolve   a   scheme  of revival or  rehabilitation of sick industrial  concern by the  simple  device of the  Financial Corporation resorting to  section 29 of the  1951  Act.  We are, therefore,  of the opinion that  where     an inquiry is pending under section 16/17  or  an appeal is pending under section 25 of the  1985 Act there should be   cessation of the  coercive   activities of the type  mentioned in section 22(1) to permit the BIFR to consider   what  remedial  measures  it should take  with    respect to the sick  industrial company.   The expression `proceedings' in section 22(1), therefore,  cannot be  confined  to  legal proceedings  understood  in the narrow  sense of  proceedings  in  a  Court of law  or  a  legal   tribunal for  attachment  and  sale or the  debtor's  property."  
 

 5. In Deputy Commercial Tax Officer and others,  v. Corromandal Pharmaceuticals  and  others,  the Hon'ble Supreme Court had  considered   its  previous   decisions  in  Gram Panchayat  v. Shree Vallabh Glass Works Limited,  as well as Maharashtra  Tubes Limited (supra).   These   decisions were   distinguished   on the   premise  that  in those    cases   the  liability  of the  sick  company which had    arisen for the   first  time    after the   date of  scheme sanctioned  by Board of Industrial  and Financial  Reconstruction ( BIFR).     The   Court  observed that  "the  language of Section 22 is of   wide  import regarding suspension of legal proceedings   from the  moment an inquiry is  started, till after the   implementation of the  scheme or  the disposal of  an appeal under Section 25 it will be  reasonable to    hold that the bar  or embargo envisaged in Section  22(1) can apply  only  to such of those  dues   reckoned or  included in the  sanctioned  scheme.    Such amounts   like sales  tax, etc. which the  sick industrial company is  enabled to collect  after the  date   of the   sanctioned scheme  legitimately belonging   to the Revenue, cannot be and  could not have been intended to be  covered within Section 22  of the  Act".    The judgments   in  Shree Vallabh Glass Works (supra) as well as  Corromandal's case (supra) were reflected  upon   in Tata Davy Limited v. State of Orissa and others,    the Company had   relied  on the  former case whereas  the State  had   relied on the later case.  The Bench   favored   the  earlier   view in Shree Vallabah Glass works (supra).    It held  that - "In  the larger  interest  of the industrial health of the nation, Section 22 of the Central Act requires all creditors seeking to  recover their dues  from sick industrial companies  in  respect of whom an  inquiry under Section 16 is pending  or  a   scheme is under preparation or  consideration or has been sanctioned, to obtain the  consent of the Board to such   recovery.  If such consent is not secured and the recovery is  deferred,  the  creditors' remedy is  protected for the period of deferment and is, by reason of Section 22(5), excluded   in the computation of the period of limitation.   ....  Therefore the  State  cannot  recover the  arrears of  sales   tax  from the   appellant company without first  seeking   the consent of the  said  Board in this  behalf".       The Corromandal view  has  been followed by R.C. Lahoti, J., as his  Lordship then was,  in Sirmor Sudburg Auto Limited  v.  Kuldip Singh Lamba, [1998] 91 Comp Case  727 and  by   a  Division Bench of the Calcutta High Court in Taulis Pharma Limted v. Bengal Immunity Limited, [2002] 108 Comp Case 237 and by a  Single Judge of the  Calcutta High Court in  Fort William Industries Limited  v.  Usha Bentron Limited, [2002] 108 Comp Case 176 and  a  Single Judge of this Court in the Cement Corporation of India v. Manohar Basin, .   A  dichotomy appears to exist  in the  views of the Hon'ble Supreme Court insofar  as  the  company's   liability    post  registration  under  SICA is  concerned.   In my analysis, however,  the possibility  of two opinions of the Apex Court will have no bearing in this   case. 
 

 6. The conundrum which  has   arisen in the present   case   was   cogitated  upon by  a  Bench   of three Judges in M/s. Patheja Bros. Forgings  & Stamping  and Anr. v.  I.C.I.C.I. Ltd. & Ors, .   In that  case the Hon'ble Supreme Court  perceived the query  to be  whether  Section 22 of SICA covers   a  suit   against the guarantor of a   loan  or    advance that has been granted to the  concerned industrial company.    The Court   took note of   the  decision  of    the  Division Bench in Madalsa  International Ltd., Mumbai  and  others, v. Central Bank  of  India, Bombay, AIR 1998 Bombay 247 where it had  been held  that     the  provisions of  Section 22 would not extend to guarantors, but  which  decision  has  not been  specifically overruled.  The Bench  observed  as under: - 
   

    " 7.  .... the relevant  words    are   : "no suit .... for the enforcement .... of any guarantee in respect of any loans or advance  granted to the industrial  company" shall  lie without the consent of the Board  or the Appellate Authority.  The words are crystal clear. There is no ambiguity therein.  It must, therefore, be  held that no suit for the enforcement of  a guarantee in respect of a  loan or  advance granted to the concerned industrial company will lie or can be proceeded with or without the sanction  of the Board or the  Appellate Authority under the  said Act.   
 

 8.   It is not possible to read the relevant  words in Section 22 as meaning that    only  a suit  against  the industrial    company will  not lie without  such consent.  There is no requirement in Section 22, as  analysed above, that, to be  covered thereby,  a  suit for the enforcement of  a  guarantee in respect of  a  loan or  advance to the   industrial   company should  be    against the  industrial company. 
 

  ...... 
 

 12.    We  have  analysed the relevant  words in Section 22 and found that    they  are clear and   unambiguous and that they provide that no suit for the enforcement  of a  guarantee in respect of any loan or  advance granted to the   concerned industrial company will lie or can be  proceeded with or without the consent of  the Board or the Appellate Authority.  When the words  of  a  legislation are  clear, the court must give effect to them as they stand and cannot demur on the  ground that the legislature must have intended otherwise."  
 

 7. After  the  decision  in Patheja Brothers case (supra) there is no room   for debate   before me  that the   ambit   of Section 22 of SICA extends   even to  third  parties  who have   acted  as guarantors in respect of  loans or advances or   debts  incurred by an  industrial  company  in respect of  which  an inquiry   has been registered under Section 16 of SICA (see also Real Value Appliances Ltd. Canara   Bank & Ors., ).   Therefore,  it is   not  open  to  consider the argument that  since the Bank is not  `sick' as contemplated  by SICA, the suit   should   continue  against  it even if it  relates  to   a guarantee extended by a third party.  For this  very  reason it is also  irrelevant   that the Bank is  not   an industrial  company as  envisaged  in SICA.    There, however,  appears  to be    substance in the  contention of Mr.  Mata that the   decision in Corromandal case (supra) would  apply only  once the   Scheme is  formulated,  and  this  event is yet to happen. 
 

 8. It would also be   relevant    to  recount the   decision of the Hon'ble Supreme Court  in U.P. State Sugar Corporation v. M/s. Sumac International Limited,  where  the  circumstances   in which the   invocation of  a   Bank Guarantee or payments   made  pursuant  thereto   could be interdicted,  had been Restated.  While  spelling  out the  essentials of  fraud and/or irretrievable injustice in this   context,  the Apex Court also returned  the  following   observations:- 
   

  "12  The  law relating to invocation  of such  bank  guarantees  is by  now  well   settled.    When   in   the  course   of commercial  dealings  an   unconditional bank guarantee is given or accepted, the  beneficiary  is entitled to realize such a   bank  guarantee  in  terms   thereof   irrespective  of  any pending  disputes.   The  bank  giving  such a  guarantee  is   bound  to  honour  it as per  its  terms   irrespective  of  any dispute raised  by   its  customer.   The   very  purpose  of  giving  such  a   bank  guarantee  would   otherwise  be  defeated.  The  courts  should,  therefore, be slow in  granting   an    injunction   to    restrain    the  realization  of  such a bank  guarantee.    The  courts  have  carved out  only  two  exceptions.   A fraud in connection with such  a bank guarantee would vitiate the  very   foundation   of   such   a   bank   guarantee.   Hence  if there is  such  a  fraud  of which the beneficiary seeks to   take  advantage,  he can  be  restrained   from  doing  so.  The  second  exception   relates  to  cases  where  allowing  the   encashment  of  an   unconditional  bank   guarantee  would result in irretrievable   harm  or injustice to one of the parties    concerned.   Since in most cases payment    of  money  under such a  bank  guarantee   would  adversely affect the bank and its                    customer at whose instance the guarantee   is   given,   the   harm  or   injustice contemplated  under this head must be of  such  an  exceptional and  irretrievable     nature  as  would override the terms  of   the  guarantee and the adverse effect of  such   an  injunction on   commercial  dealings   in  the   country.   The  two   grounds  are not necessarily  connected,  though both may coexist in some cases. 
 

 ....... 
 

 14.  On  the question of  irretrievable injury  which is the second exception to  the rule against granting of injunctions when  unconditional bank guarantees  are     sought  to be realised the court said in   the  above  case that the  irretrievable   injury must be of the kind which was the subject-matter  of  the decision in  the   Itek  Corpn.   case, 566 Fed Supp  1210.   In  that case an exporter in USA entered  into  an  agreement  with  the  Imperial Government  of Iran and sought an  order   terminating  its  liability on stand  by  letters  of credit issued by an American    Bank  in  favor of an Iranian  Bank  as  part  of  the contract.  The relief  was    sought  on  account  of  the   situation created  after  the  Iranian  revolution  when  the American Government  cancelled  the  export licenses in relation to Iran and  the Iranian Government had forcibly taken  52 American citizens as hostages.   The US  Government   had  blocked  all  Iranian assets under the jurisdiction of United  States  and  had  cancelled  the   export  contract.  The Court upheld  the  contention  of  the  exporter  that  any  claim  for damages against the purchaser  if  decreed by the Amercian Courts would not be  executable in Iran under  these  circumstances  and  realisation  of  the    bank  guarantee/letters of credit  would cause irreparable harm to the plaintiff.  This contention was upheld.  To avail of this  exception, therefore,  exceptional circumstances  which make it  impossible   for  the guarantor to reimburse  himself  if  he ultimately succeeds, will have to be  decisively established.  Clearly,  a  mere  apprehension that the other  party  will  not be able to pay, is not enough.   In  Itek  case  (supra)   there  was   a  certainty  on  this   issue.   Secondly,   there  was good reason, in that case  for  the  Court  to be prima facie  satisfied    that  the guarantors i.e.  the bank  and  its  customer would be found entitled to  receive   the  amount   paid  under  the   guarantee. 
 

 15. Our  attention  was invited  to  a   number  of  decisions on this  issue  --    among  them, to Larsen & Toubro Ltd.  v.  Maharashtra  SEB,    and   Hindustan  Steel   Workers  Construction Ltd.  v.  G.S.  Atwal & Co.  (Engineers)  (P)  Ltd.,  as  also  to National  Thermal Power Corpn.  Ltd.  v. Flowmore  (P)  Ltd., .  The  latest  decision is in the case  of    State   of  Maharashtra   v.    National Construction Co.,  where   this Court has summed up the position by  stating:  
           "The    rule      is    well   established that a bank issuing  a  guarantee  is not concerned  with  the  underlying  contract  between  the  parties   to  the  contract. The duty of the bank  under  a performance  guarantee   is  created  by   the  document  itself.  Once the documents are   in  order  the bank giving the  guarantee  must honour the same   and  make   payment  ordinarily  unless  there is an  allegation   of  fraud  or  the  like.   The  courts   will   not   interfere   directly   or   indirectly   to  withhold  payment,    otherwise  trust  in commerce internal and  international  would   be   irreparably  damaged.  But that  does  not mean that the parties to  the   underlying  contract  cannot settle the disputes with   respect   to   allegations   of  breach    by     resorting   to  litigation  or  arbitration  as stipulated  in   the contract.      The remedy arising ex contractu  is  not barred and the cause of  action   for   the    same   is   independent  of enforcement  of  the guarantee."  
 

                      The   other  recent   decision  is   in  Hindustan  Steelworks  Construction  Ltd.   v. Tarapore & Co., .  
 

 16.  Clearly, therefore, the existence of  any  dispute  between  the   parties  to   the   contract  is  not  a  ground  for  issuing  an   injunction to restrain the enforcement of bank  guarantees.    There  must  be   a  fraud   in  connection with the bank guarantee. 
 

 17.   Before   us, however, in the course of   argument. Learned  Advocate for the  respondent  urged for the first time  that in this   case, there   would be  irretrievable  injustice to the  respondent   if the bank guarantees are allowed to be realised  because the appellant  is  a    sick industrial company   in respect of which a   reference is pending before the Board for Industrial and Financial Reconstruction under the Sick Industrial Companies  (Special Provisions) Act, 1985.   The respondent  contends that even if it succeeds before the   Arbitrator it will not be able to  realise   its  claim  from the  appellant.  The mere  fact that  a   reference under the Sick Industrial Companies (Special Provisions) Act, 1985 is pending before the Board, is in our view,  not sufficient to bring the  case i the  ambit of the "irretrievable injustice" exception.    Under the  scheme  of the   said    Act the Board is   required to make such inquiry as it may deem fit  for determining whether any industrial company has become  a sick industrial company.  Under Section 16(4) where  the Board deems it fit to   make an inquiry or to cause  an inquiry to be made in this  connection, it may appoint on or more persons to be   special directors for  safeguarding   the    financial and other interests of the company or  in the  public  interest.  Under Section 17 after making  an inquiry, if the Board is  satisfied  that   a   company has    become  a  sick industrial company, the Board may  then decide, by an order in writing, whether it is   practicable for  the company to make    its net worth exceed the  accumulated  losses  within   a   reasonable time. If this is  practicable, then  the  Board shall give such  company the  opportunity  to make its   net worth  exceed the  accumulated  losses.  Under sub-section (3) of Section 17 if the Board  decides that this is not practicable within a   reasonable time,  it may adopt measures  specified in Section 18 and provide for  a    scheme for  appropriate  measures  in relation to that  company.  There   can, therefore,  be no presumption that the  company will, in no circumstance, be able to discharge its obligations. 
 

 18. Under Section 22 on which the  respondent relies, where in   respect of an  industrial company, an inquiry under Section 16 is pending, or any scheme under Section 17  is under preparation or   a   sanctioned scheme is under implementation or when and appeal under Section 25 is pending,  then no proceedings for the winding up of the industrial company or for  execution, distress or   the like against  any of the properties of the industrial company or the appointment of a   receiver in respect thereof can be  proceeded with; and no suit for the recovery of money or for the enforcement  of any security against the industrial company shall lie or  be proceeded with except with the  consent of the Board or, as the case may be,  the Appellate Authority.  The  respondent  contends  that its right to realise its  claim, if  established,  would be   affected by reason of Section 22 of the said Act.    There is no   material before us  to show that the appellant-company cannot make   its net worth positive.  No scheme  has been framed  under the said Act so far.  Even under Section 22  there is    no absolute bar against any suit for the recovery of money  .  The suit cannot be  proceeded with  except   with the    consent of the Board or the Appellate Authority.    Therefore,  in an appropriate case,  the Board or   the Appellate Authority is entitled to   give its   consent to such a   claim being proceeded  with.  This is not  a  situation of the kind envisaged  in the   case   of   Itek Corporation (supra) where  there   was  no possibility whatsoever  of recovery of any amount from the  purchaser.  In the present case,  there is  a good possibility of such recovery.   In  any case, learned  counsel for the  appellant has,  on instructions, very fairly stated that the appellant-company undertakes to  earmark the amounts   realised from the bank guarantees in question  for  the purpose of recovery of claims, if any, which   the  respondent  may  ultimately be  found to be    entitled to  recover   from the  appellant.  Any scheme  which the Board  may frame under the   said At  will be subject to this  undertaking given by the  appellant to set apart  the amounts  realised  under the bank guarantees in question for meeting  any validly adjudicated claims of the  respondent against the  appellant under or   arising from the  said  contract.   If any scheme is  required to be   framed, the Board  shall take into  account this  undertaking, while  framing the scheme."  
 

 9.  In  U.P.   State Sugar Corporation case  (supra),    the  arguments raised to support the continuance of  the   injunction  were that the beneficiary had terminated the  contract  on  the incorrect ground that time was of  the    essence  of the contract, and that the chances of making  any  recovery  if  it succeeded in the  Arbitration  was  illusory since the fortunes of the rival company now lay  in  the  hands  of BIFR.  These arguments did  not  find  favor  with  the Bench which was constituted  by  M.M. Punchi  and  Sujata  Manohar JJ.   These  passages  were   relied  upon by a Bench of the Supreme Court  comprising K.S. Paripoornan,  K.  Venkataswami and B.N.   Kirpal, JJ.   in  the case Dwarikesh Sugar Industries  Ltd.   v. Prem  Heavy Engineering Works (P) Ltd.  & Anr., .  It is clear that the Apex Court has spoken  in  one voice and with unanimity, on this aspect of  the  law.   
 

 10.  S.C.   Aggarwal  and  G.T.    Nanavati,  JJ,  who decided  the disputes raised in the Hindustan Steelworks Case   (supra),  after   considering  several   previous   decisions  of the Apex Court including U.P.  Cooperative Federation  Ltd.  V.  Singh Consultants & Engineers  (P) Ltd.   (1988)  SCC  174,   General  Electric   Technical  Services Co.  Inc.  V.  Punj Sons (P) Ltd. ,  Larsen & Tubro Ltd.  Vs.  MSEB  and  Hindustan  Steel  Works  Construction  Ltd.   Vs.   G.S.   Atwal & Co.   held as follows: 
    "We  are, therefore, of the opinion that   the  correct  position  of law  is  that  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.    In  this case fraud has not been pleaded  and the relief for injunction was sought  by  the  contractor/Respondent 1 on  the  ground  that  special  equities  or  the   special   circumstances of   the   case                    required  it.  The special circumstances  and/or  special equities which have been   pleaded in this case are that there is a  serious  dispute  on the question as  to  who   has   committed   breach  of   the   contract,  that  the  contractor  has  a counter-claim  against   the  appellant,  that  the  disputes between the  parties  have  been  referred to the  arbitrators  and that no amount can be said to be due    and  payable  by the contractor  to  the   appellant  till the arbitrators  declare    their  award.   In  our  opinion,  these   factors  are not sufficient to make this  case  an  exceptional   case  justifying    interference    by     restraining   the   appellant   from  enforcing   the   bank    guarantees.    The  High    Court   was,  therefore,  not right in restraining the  appellant   from  enforcing   the   bank   guarantees".  
 

 11. The only  remaining  question  is whether   a  Letter of Credit  will fall in the  same genre as of  a Guarantee.   In Osborn's Concise  Law Dictionary (Seventh Edition) the  term `letter of  credit' has been defined as  "an authority by one person to another  to  draw   cheques or bills of  exchange (with or  without  a   limit  as   to   amount) upon him,  with an  undertaking to honour the  drafts  on presentation."    In the New Lexicon Websters  Dictionary this term has  been   explained   as  "a  letter addressed by a   banker to an agent authorising  the  agent   to give  credit,  within stated  limits, to  the  bearer    named in the letter; and    a   letter  from a  banker to  a   client  authorising him to claim  credit from the banker's   agent."   Blacks Law Dictionary contains a lengthy and elaborate definition in these terms: 
   

  "Letter of  credit.  A  written instrument, addressed by one person to another, requesting the latter to give  credit to the person in whose  favor it is  drawn.  A   letter of  credit is in the nature of  a   negotiable  instrument,  and is  a  letter whereby a  person requests    another to advance money or give credit to a third   person, and  promises  to  repay  person making  advancement.  A  letter authorizing one person to pay  money or extend  credit to another  on the  credit  of the writer. 
 

  An  engagement by a bank or other person made at the  request of a   customer  that the issuer  will honor drafts or other demands for payment upon compliance with the conditions  specified in the credit.        A  credit may be  either revocable or irrevocable.   The  engagement  may be either  an agreement to honor or   a   statement that the bank or other person is authorized to honor. 
 

 Commercial  letter.  Type of    letter of credit  used by buyer of  merchandise who sends it to bank in district in which he  is    to buy and seller  then presents  his bill of   sale, etc. to obtain payment. 
 

 Confirmed letter.   Type of  letter of credit in which   local bank gives its  guarantee that  seller's  draft will be  honored if the bank which issued  letter  falls  to   honor it. 
 

 Export letter.  Type of letter of  credit   forwarded to  seller or exporter  advising  him that  a  credit has been established  in his favor by a  foreign bank and further consenting  to honor the seller's  or exporter's  draft for  the goods."  
 

 12. This  aspect of the law has been   elaborately and perspicuously   explained in the  decision of the Hon'ble Supreme Court in M/s. Tarapore and Co., Madras . M/s. V/O Tractor export Moscow and  another,  thus - 
   

  "6.  The scope of an irrevocable  letter  of credit is  explained thus in Halsbury's Laws of England (Vol.34, Paragraph 319 at page 185): 

"It is often made a condition of a mercantile contract that the buyer shall pay for the goods by means of a confirmed credit, and it is then the duty of the buyer to procure his bank, known as the issuing or originating bank, to issue an irrevocable credit in favor of the seller by which the bank undertakes to the seller, either directly or through another bank in the seller's country known as the correspondent or negotiating bank, to accept drafts drawn upon it for the price of the goods, against tender by the seller of the shipping documents. The contractual relationship between the issuing bank and the buyer is defined by the terms of the agreement between them under which the letter opening the credit is issued; and as between the seller and the bank, the issue of the credit duly notified to the seller creates a new contractual nexus and renders the bank directly liable to the seller to pay the purchase price or to accept the bill of exchange upon tender of the documents. The contract thus created between the seller and the bank is separate from, although ancillary to, the original contract between the buyer and the seller, by reason of the bank's undertaking to the seller, which is absolute. Thus the bank is not entitled to rely upon terms of the contract between the buyer and the seller which might permit the buyer to reject the goods and to refuse payment therefor; and, conversely, the buyer is not entitled to an injunction restraining the seller from dealing with the letter of credit if the goods are defective."

Chalmers on "Bills of Exchange" explains the legal position in these words"

"The modern commercial credit serves to interpose between a buyer and seller a third person of un-questioned solvency, almost invariably a banker of international repute; the banker on the instructions of the buyer issues the letter of credit and thereby undertakes to act as paymaster upon the seller performing the conditions set out in it. A letter of credit may be in any one of a number of specialised forms and contains the undertaking of the banker to honour all bills of exchange drawn there under. It can hardly be over-emphasised that the banker is not bound or entitled to honour such bills of exchange unless they, and such accompanying documents as may be required there under, are in exact compliance with the terms of the credit. Such documents must be scrutanised with meticulous care, the maxim de minimis non curat lex cannot be invoked where payment is made by the letter of credit. If the seller has complied with the terms of the letter of credit, however, there is an absolute obligation upon the banker to pay irrespective of any disputes there may be between the buyer and the seller as to whether the goods are up to contract or not"

Similar are the views expressed in `Practice and Law of Banking' by H.B. Sheldon, "the Law of Bankers Commercial Credits" by H.C. Gutteridge, "the Law relating to Commercial Letters of Credit" by A.G. Devis' "the Law Relating to Bankers' Letters of Credit" by B.C. Mitra and in several other text books read to us by Mr. Mohan Kumaramangalam, learned Counsel for the Russian Firm. The legal position as set out above was not controverter by Mr. M.C. Satalvad, learned Counsel for the Indian Firm. So far as the Bank of India is concerned it admitted its liability to honour the letter of credit and expressed its willingness to abide by its terms. It took the same position before the High Court.

........

10. A case somewhat similar to the one before us came up for consideration before the Queens Bench Division in England in Hamzeh Walas and Sons v. British Imex Industries Ltd., 1958-2 QB 127. Therein the plaintiffs, a Jordanian firm contracted to purchase from the defendants, a British firm, a large quantity of reinforced steel rods, to be delivered in two installments. Payment was to be effected by opening in favor of the defendants of two confirmed letters of credit with the Midland Bank Ltd., in London, one in respect of each installment. The letters of credit were duly opened and the first was realised by the defendants on the delivery of the first installment. The plaintiffs complained that that installment was defective and sought an injunction to bar the defendants from realizing the second letter of credit. Donovan, J., the Trial Judge refused the application. In appeal Jenkins, Sellers and Pearce L., JJ. Confirmed the decision of the Trial Judge. In the course of his judgment Jenkins, L.J., who spoke for the Court observed thus:

"We have been referred to a number of authorities, and it seems to be plain enough that the opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods, which imposes upon the banker an absolute obligation to pay, irrespective of any dispute there may be between the parties as to whether the goods are up to contract or not. An elaborate commercial system has been built up on the footing that bankers' confirmed credits are of that character, and, in my judgment, it would be wrong for this Court in the present case to interfere with that established practice.

There is this to be remembered, too. A vendor of goods selling against a confirmed letter of credit is selling under the assurance that nothing will prevent him from receiving the price. That is of no mean advantage when goods manufactured in one country are being sold in another. It is, furthermore, to be observed that vendors are often reselling goods bought from third parties. When they are doing that, and when they are being paid by a confirmed letter of credit, their practice is - and I think it was followed by the defendants in this case--to finance the payments necessary to be made to their suppliers against the letter of credit. That system of financing these operations, as I see it, would break down completely if a dispute as between the vendor and the purchaser was to have the effect of "freezing" if I may use that expression the sum in respect of which the letter of credit was opened."

In Urquhart Lindsay and Co. Ltd. v. Eastern Bank Ltd., 1922-1 KB 318 the King's Bench held that the refusal of the defendants bank to take and pay for the particular bills on presentation of the proper documents constituted a repudiation of the contract as a whole and that the plaintiffs were entitled to damages arising from such a breach. It may be noted that in that case the price quoted in the invoices was objected to by the buyer and he had notified his objection to the bank. But under the terms of the letter of credit the bank was required to make payments on the basis of the invoices tendered by the seller. The court held that if the buyers had an enforceable claim that adjustment must be made by way of refund by the seller and not by the way of retention by the buyer.

11. Similar opinions have been expressed by the American Courts. The leading American case on the subject is Dulien Steel Products Inc., of Washington v. Bankers Trust Co., Federal Reporter 2nd Series, 298 p.836. The facts of that case are as follows:

The plaintiffs, Dulien Steel Products Inc., of Washington, contracted to sell steel scrap to the European Iron and Steel Company. The transaction was put through M/s. Marco Polo Group Project, Ltd. who were entitled to commission for arranging the transaction. For the payment of the commission to Marco Polo, plaintiffs procured an irrevocable letter of credit from Seattle First National Bank. As desired by Marco Polo this letter of credit was opened in favor of one Sica. The defendant-bankers confirmed that letter of credit. The credit stipulated for payment against (1) a receipt of Sica for the amount of the credit and (2) a notification of Seattle Bank to the defendants that the plaintiffs had negotiated documents evidencing the shipment of the goods. Sica tendered the stipulated receipt and Seattle Bank informed the defendants that the Dulien had negotiated documentary drafts. Meanwhile after further negotiations between the plaintiffs and the vendees the price of the goods sold was reduced and consequently the commission payable to Marco Polo stood reduced but the defendants were not informed of this fact. Only after notifying the defendants about the negotiation of the drafts drawn under the contract of sale, the Seattle Bank informed the defendants about the changes underlying the transaction and asked them not to pay Sica the full amount of the credit. The defendants were also informed that Sica was merely a nominee of Marco Polo and has no rights of his own to the sum of the credit. Sica, however, claimed payment of the full amount of the credit. The defendants asked further instructions from Seattle Bank but despite Seattle Bank's instructions decided to comply with Sica's request. After informing Seattle Bank of their intention, they paid Sica the full amount of the credit. Plaintiffs thereupon brought an action in the District Court of New York for the recovery of the moneys paid to Sica. The action was dismissed by the trial Court and that decision was affirmed by the Court of Appeals. That decision establishes the well known principle that the letter of credit is independent of and unqualified by the contract of sale or underlying transaction. The autonomy of an irrevocable letter of credit is entitled to protection. As a rule Courts refrain from interfering with that autonomy."

13. On first principles, the Hon'ble Supreme Court has made the following observations in respect of letters of credit in Hira Lall and Sons and Others v. Lakshmi Commercial Bank, :

"This is an application based on a letter of credit. The settled legal position is that a letter of credit constitutes sole contract with the banker and its authorising the bank issuing letter of credit has no concern with any question that may arise between the seller and the purchaser of goods in respect of the purchase price; that there should, however, be strict compliance both by the customer at whose instance letter of credit was issued and by the banker, with his instructions; that in a claim on letter of credit, defense of fraud or apprehension of irretrievable injustice or non-compliance with instructions could also be raised. All such defenses could be urged or agitated before the Tribunal by the petitioner and on a decision by it, an appeal also could be filed."

14. For reasons that I find difficult to comprehend, counsel for the parties did not consider it necessary to refer to the decision of the Hon'ble Supreme Court in U.P. Coop. Federation Ltd. v. Singh Consultants & Engineers (P) Ltd., in which the law pertaining to Letters of Credit has been dealt in some detail. Similarly learned counsel for the parties did not also consider it worthwhile to cite the decision of the Apex Court in Federal Bank Limited v. V.M. Jog Engineering Limited and others, (2001) 1 SCC 663. I find the following paragraphs in the judgment of the U.P. Coop. Federation case (supra) to be extremely instructive:-

" 45. 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 prior to their delivery. The Bank's letter of credit came into existence to bridge this gap. In such transactions, the seller (beneficiary) received 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.

46 . It was perhaps for the first time the said exception of fraud to the rule of absolute independence of the letter of credit has been applied by Shientag, J. in the American case of Sztejn v. J. Henry Schroder Banking Corporation (31 NYS 2d 631). Mr. Sztejn wanted to buy some bristles from India and so he entered into a deal with an Indian seller to sell him a quantity. The issuing Bank issued a letter of credit to the Indian seller that provided that, upon receipt of appropriate documents, the bank would pay for the shipment. Somehow, Mr. Sztejn discovered that the shipment made was not crates of bristles, but creates of worthless material and rubbish. He went to his bank which probably informed him that the letter of credit was an independent undertaking of the bank and it must pay.

.......

53. Whether it is a traditional letter of credit or a new device like performance bond or performance guarantee, the obligation of banks appears to be the same. If documentary credits are irrevocable and independent, the banks must pay when demand is made. Since the bank pledges its own credit involving its reputation, it has no defense except in the case of fraud. The bank's obligations of course should not be extended to protect the unscrupulous seller, that is, the seller who is responsible for the fraud. But, the banker must be sure of his ground before declining to pay. The nature of the fraud that the courts talk about is fraud of an egregious nature as to vitiate the entire underlying transaction. It is fraud of the beneficiary, not the fraud of somebody else. If the bank detects with a minimal investigation the fraudulent action of the seller, the payment could be refused. The bank cannot be compelled to honour the credit in such cases. But it may be very difficult for the bank to take a decision on the alleged fraudulent action. In such cases, it would be proper for the bank to ask the buyer to approach the court for an injunction."

15. In the Federal Bank case (supra) the Apex Court had in similar vein recorded the following enunciation:-

" In several judgments of this Court, it has been held that courts ought not to grant injunction to restrain encashment of bank guarantees or letters of credit. Two exceptions have been mentioned - (i) fraud, and (ii) irretrievable damage. If the plaintiff is prima facie able to establish that the case comes within these two exceptions, temporary injunction under Order 39 Rule 1 CPC can be issued. It has also been held that the contract of the bank guarantee or the letter of credit is independent of the main contract between the seller and the buyer. This is also clear from Articles 3 and 4 of UCP (1983 Revision). In case of an irrevocable bank guarantee or letter of credit the buyer cannot obtain injunction against the banker on the ground that there was a breach of the contract by the seller. The bank is to honour the demand for encashment if the seller prima facie complies with the terms of bank guarantee or the letter of credit, namely, if the seller produces the documents enumerated in the bank guarantee or the letter of credit. If the bank is satisfied on the face of the documents that they are in conformity with the list of documents mentioned in the bank guarantee or the letter of credit and there is no discrepancy, it is bound to honour the demand of the seller for encashment. While doing so it must take reasonable care. It is not permissible for the bank to refuse payment on the ground that the buyer is claiming that there is a breach of contract. Nor can the bank try to decide this question of breach at that stage and refused payment to the seller. Its obligation under the document having nothing to do with any dispute as to breach of contract between the seller and the buyer."

The Federal Bank was the negotiating Bank on behalf of Bank of Maharashtra which was the author of the Letter of Credit. The relation between the two Banks was held to be that of principal and agent. The Federal Bank had sent copies of the documents received by it from the seller to the issuing banker, namely, Bank of Maharashtra. The latter took an inordinate time to respond and in the meanwhile, strictly in conformity with the Letter of Credit, Federal Bank paid out moneys to the Seller. It was subsequently discovered that the Seller had allegedly committed a forgery on the documents. Nevertheless, since there was no infraction of the terms of the Letter of Credit the Apex Court held that the Federal Bank, namely, the paying or negotiating (intermediary) Bank would be entitled to reimbursements from the Bank of Maharashtra. In this Judgment the Apex Court also affirmed the Judgment of the Division Bench of the Bombay High Court authored by M.B. Shah, J., as his Lordship then was, in Virgo Steels v. Bank of Rajasthan Ltd. & others, AIR 1998 Bombay 82 . In that case UCO Bank had issued a Letter of Credit at its request, on the foundation of which the Bank of Rajasthan Limited had made disbursements. The Bank of Rajasthan had sought confirmation from the UCO Bank, and had received it. The Division Bench found it irrelevant that some officers of the UCO Bank had committed fraud. It affirmed the Order of the Single Judge refusing to grant unconditional Leave to Defend to UCO Bank. The Division Bench also referred to a Circular of the Reserve Bank of India dated April 1, 1992 in which it recommended the honouring of Letter of Credit even where the transaction involved a conspiracy between the beneficiary and the constituents. The RBI had opined that "if the bills drawn under LCs are not honoured, it will adversely affect the character of LCs and the relative bills as an accepted means of payment. This could also affect the credibility of the entire payment mechanism through banks and affect the image of the Banks".

 16.     Even in its most  recent  judgment the Apex Court  has    relied   on its  earlier  judgment in United Commercial Bank v.  Bank  of India  & Others, ,  as  has been succinctly  condensed in the  first Head Note of the Report  which reads thus: 
   

  "The  opening  of  a  confirmed  letter of  credit constitutes   a bargain between  the banker and the vendor of the goods which imposes on the banker  an   absolute  obligation to pay.   A banker issuing or  confirming an irrevocable  credit  usually undertakes  to honour drafts  negotiated, or to  reimburse in    respect of  drafts paid, by the paying or negotiating  intermediate banker  and  the  credit is  thus in   the hands of the beneficiary  binding   against the banker.   A   letter of credit  constitute  the sole  contract with the banker and  a  bank   issuing  or  confirming  a  letter of  credit is not concerned  with the  underlying  contract between the buyer an seller.  Duties  of  a  bank under  a  letter of  credit  are  created by the  document  itself, but in any  case it has the   power and is subject to  the  limitations which are  given or  imposed by it, in the  absence of the appropriate  provisions in the letter   of  credit.  The banker owes  a duty to the buyer to ensure that the documents tendered by the   sellers  under    a   credit  are  complied  with  those  for which the  credit   calls  and    which are embodied in terms of paying or  negotiating bank    The  description of the goods in the relative bill of  exchange must be the  same description in the letter   of credit, that it, the goods   themselves must in each be  described  in identical terms, even though the goods   differently described in  the two   documents are, in fact, the  same.  It is the  description of the goods  that is  all important and if the  description  is not identical it is the paying bank's  duty to refuse payment.      
 

 A  reading  of the judgment will also disclose that while   there is   a   close affinity between a  Bank Guarantee and  a  Letter of Credit, there is   nonetheless a  significant distinction between them.     Where the   SICA comes  into play this  distinction assumes   great  importance.   In the  case of    a Bank Guarantee  does   the  party  who has    received financial and pecuniary benefits remains the principal debtor.  Essentially the guarantor would be  called upon in the  event of   a failure  to effect recoveries from the principal debtor.    In the  case of  a   Letter of Credit the Bank issuing   it  is  liable   independent of the party at whose   instance  the Letter of Credit    was  issued.  
 

  17.    Mr. Mata  had   drawn  attention  to  Article 2 of  UCP 500  but I  find it to be  of no avail to the Bank.   Articles  2, 3   and  9 of UCP 500  are reproduced   for facility of reference: 
   

  "Article 2  
 

 Meaning of Credit  
 

  For the purposes of these  Articles, the expressions "Documentary  Credit(s)" and "Standby Letter(s)  of  Credit" (hereinafter referred to as "Credit(s)"), mean any  arrangement, however named or described, whereby a bank (the  " Issuing Bank")  acting at the request and on the instructions of a customer (the "Applicant") or on its own behalf, 
   

 (i)  is to make a payment to or to the order of a third party (the "Beneficiary"), or is to accept and pay bills of exchange (Draft(s) drawn by the Beneficiary, 
 

  or  
 

 (ii) authorises another bank to effect such payment, or to accept and pay such bills of exchange (Draft(s)),  
 

  or  
 

 (iii) Authorises another bank to negotiate against stipulated document(s) provided that the terms and conditions of the Credit are complied with.  
 

      For the purpose of these Articles, branches of a bank in different countries are considered another bank. 
 

 Article 3  
 

 Credits v. Contracts  
   

a. Credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the Credit. Consequently, the undertaking of a bank to pay, accept and pay Draft(s) or negotiate and/or to fulfill any other obligation under the Credit, is not subject to claims or defenses by the Applicant resulting from his relationships with the Issuing Bank or the Beneficiary.

b. A Beneficiary can in no case avail himself of the contractual relationship existing between the banks or between the Applicant and the Issuing Bank.

Article 9

Liability of Issuing and Confirming Banks

a. An irrevocable Credit constitutes a definite undertaking of the Issuing Bank, provided that the stipulated documents are presented to the Nominated Bank or to the Issuing Bank and that the terms and conditions of the credit are complied with:

i. if the Credit provides for sight payment - to pay at sight;

ii. if the Credit provides for deferred payment - to pay on the maturity date(s) determinable in accordance with the stipulations of the Credit;

iii. if the Credit provides for acceptance:

a. by the Issuing Bank - to accept Draft(s) drawn by the Beneficiary on the Issuing Bank and pay them at maturity,

or

b. by another drawee bank - to accept and pay at maturity Draft(s) drawn by the Beneficiary on the Issuing Bank in the event the drawee bank stipulated in the Credit does not accept Draft(s) drawn on it, or to pay Draft(s) accepted but not paid by such drawee bank at maturity;

iv. If the Credit provides for negotiations - to pay without recourse to drawers and/or bona fide holders, Draft(s) drawn by the Beneficiary and/or document(s) presented under the Credit. A Credit should not be issued available by Draft(s) on the Applicant. If the Credit nevertheless calls for Draft(s) on the Applicant, banks will consider such Draft(s) as an additional document(s).

All these Articles in fact clarify the independent nature of a Letter of Credit. The failure to effect recoveries from the Buyer has no relevance and it stands to reason that where the Buyer may be able to avail of a moratorium on payment of its debts, such events would have no nexus or bearing on the liability or assurance of payment which is intrinsic to any and every Letter of Credit.

18. Mr. Mata has also attempted to favorably draw a distinction between fund based and non-fund based letters of credit/guarantees. Like in the case of a fraud committed within a particular Bank, the question of whether a letter of credit is fund based or non-fund based would be wholly irrelevant from the perspective of the beneficiary, unless the letter of credit itself specifies which of these two categories it falls in, and what steps are necessary for ensuring the release of payment to the beneficiary. If the Bank has been imprudent or rash in opening a Letter of Credit without obtaining, earmarking and reserving for itself necessary funds corresponding to the value of the Letter of Credit issued by the Bank, it will have to suffer the consequences of its negligence. Claims in respect of the Letter of Credit are the liability of the Bank and ought not to be confused with that of its constituent.

19. In any event, as observed in Royal Bank of Scotland plc. v. Cassa Di Risparmio Delle Provincie Lombard, (1993) Financial Times 21-01-1992 (CA), it must be recognised that (UCP) terms do not constitute a statutory code. As the title makes clear, they constitute a formulation of customs and practices, which the parties to a letter of credit can incorporate into their contracts by reference,. If it is found that the parties have explicitly agreed to such a term, then the search need go no further, since any contrary provision in UCP must yield to the parties' expressed intention. It will also be of advantage to refer to the decision in Bankers Trust Co. v. State Bank of India, (1991) 2 Lloyd's Rep 443 in which it was held that the Bankers Trust was barred from refusing or objecting documents in question because it had taken an unreasonable and inordinate time to examine and reject them. This is apposite to the facts of the present case since it is the Plaintiff's assertion that the Bank had failed to respond to even its legal notice.

20. From the reference to the various decisions of the Apex Court the legal principle which can be distilled is that a letter of credit is an instrument of payment in itself, having no linkage with the party at whose instance it has been issued. If this is the correct understanding of the law then it would be of no consequence whatsoever that HILTON had come under the protective mantle of SICA at any time after the issuance of the Letter of Credit. Since there is no term excusing or exonerating the Bank from making payment on the occurrence of such an event, the liability of the Bank is circumscribed by the Letter of Credit itself. If any defenses are to be found they must be located in the Letter of Credit itself. This is the distinction between the case at hand and Patheja Brothers case (supra) where ICICI had filed a suit against Patheja Brothers to recover the amounts of loan extended to it and guaranteed by the third party. The terms of the guarantees are not readily available from the decision of the Hon'ble Supreme Court in Patheja Bors. case (supra) and I would presume that it would fall in the genre envisaged in Section 126 of the Contract Act, 1872. This Section states that "a "contract of guarantee" is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The persons who gives a guarantee is called the "surety"; the person in respect of whose default the guarantee is given is called the "principal debtor", and the person to whom the guarantee is given is called the "creditor". " I may also clarify that all bank guarantees would not necessarily fall under Section 126 of the Contract Act. This determination would be dependant upon the sundry terms contained in the bank guarantee. It is the Section 124 of the Contract Act which is of relevance to the present case as it defines a contract of indemnity to be a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person. Upon the execution of the letter of credit the Plaintiff had no reason to look towards HILTON at all. In consonance with the terms of the Letter of Credit, on furnishing the necessary documents mentioned in the Letter of Credit itself, the Plaintiff could have rested assured of payment. The mischief so far as the Bank is concerned appears to be that it had negligently or fraudulently issued the Letter of Credit without taking the precaution of ensuring that it was fund based. The factum of HILTON now receiving the protection of SICA may result in a financial loss to the Bank but it has itself to blame for it. Well entrenched mercantile methods cannot be modified to suit or give succor to the negligent Bank.

21. In these circumstances, since there is no allegation of any irregularity committed by the Plaintiff in so far as the invocation of the Letters of Credit is concerned, Leave to Defend the suit is declined to the Bank. The suit is decreed in favor of the Plaintiff and against Defendants 1 and 2 for the sum of Rs.87,99,121/- together with interest thereon at the rate of nine per cent per annum from the date of the institution of the suit till the realisation of the decretal amount. The Plaintiff shall be entitled to recover its costs from these Defendants.

22. The benefit of SICA will have to be extended to Defendant No. 3 and the suit should in normal circumstances be stayed in respect of this Defendant. For this reason I find it unnecessary to return a finding on the question of whether the amount covered by the suit is within the contemplation of the winding-up petition filed in the Punjab & Haryana High Court and/or whether it was shown as a contingent liability and/or whether it was beyond or post registration under SICA. However, since the liability of the Bank is de hors and not connected in any manner with Defendant No. 3 it will be contradictory and incongruent to hold the Bank liable along with this Defendant. Conversely stated, if Defendant No. 3 is liable under the Letter of Credit, the Bank would be competent to claim the moratorium under SICA. For this reason the suit is dismissed against Defendant No. 3 without prejudice to any pending legal action and also without prejudice to any action that the Bank may initiate against Defendant No. 3 for the recovery of sums paid out by the Bank as a consequence of this decree and/or its liability under the Letters of Credit which are the subject matter of this suit.

23. The decree sheet be drawn up accordingly.

24. All the pending applications also stand disposed of in the above terms.