Hindustan Photo Films ... vs Vyasa Bank
2007 Latest Caselaw 1391 Del

JUDGMENT

Sanjay Kishan Kaul, J.

1. The plaintiff, a limited company duly incorporated and registered under the Companies Act, 1956, has filed the present suit for recovery of Rs.50.00 lacs along with interest and costs against the defendant bank under the provisions of Order 37 of the Code of Civil Procedure, 1908 (hereinafter referred to as the said Code).

2. The plaintiff is a Government company which is engaged inter alia, in the business of manufacture and sale of Photo Sensitised Products. The plaintiff appointed one M/s Anu Enterprises as its stockists in respect of Graphic Art Products and Still Photo Products on 30.7.1984 and 1.8.1984. The agreements were initially for a period of 5 years and were renewed in 1989 for a further period of 5 years. The agreements were on a 'Principal to Principal' basis and M/s Anu Enterprises was entitled to credit period and to a trade discount on product value in addition to commission in view of the said agreements. In order to avail of such credit facility, M/s Anu Enterprises was required to furnish bank guarantee/Revolving Letter of Credit/Insurance Guarantee to the plaintiff.

3. The present disputes relates to three such bank guarantees issued by the defendant in favor of the plaintiff which are as under:

7(i) BG No.11/88 dated 31.8.1988, extended up to 30.8.94, for Rs.10 lakhs (Ex.P-1).

(ii) BG No.59/89 dated 26.6.90, extended up to 25.6.94, for Rs.20 lakhs (Ex.P-7).

(iii) BG No.126/90 dated 29.8.90, extended up to 28.8.94, for Rs.20 lakhs (Ex.P-14).

4. The three bank guarantees in question are unconditional bank guarantees and identically worded. In order to appreciate the controversy, it would be suffice to reproduce one of the three bank guarantees (Ex.P-1), the other bank guarantees being Ex.P-7 and Ex.P-14.

This guarantee executed by The Vysya Bank Limited (name of the Bank) having its Head Office at Bangalore (hereinafter called the Bank) in favor of M/s Hindustan Photo Films Manufacturing Company Limited, a company incorporated under the Companies Act, 1956 and having its registered Office at Indu Nagar, Ootacamund-5 and also having a Sales Office at Delhi (hereinafter called the company).

WHEREAS the company in the course of its business supplies Photographic/X-Ray goods like Indu Bromide Paper, Roll Films, Dia Positive Films, Graphic Art Films, document Copying Paper/medical X-Ray films, Industrial X-Ray, Processing Chemicals to M/s Anu Enterprises having its place of business at 3448-52, Delhi Chambers, Delhi Gate, New Delhi-110 002 (hereinafter called the Buyer).

WHEREAS the company requires the buyer to obtain the goods required for the buyer's business on cash and carry basis.

WHEREAS the buyer has requested the company to accord credit facilities for very short temporary durations not exceeding 45 days and also facilities for issue of cheques against supplies for the meeting of the business exigencies as extended to the stockists from time to time.

WHEREAS the company has agreed to extend to the buyer such facility / facilities at its absolute discretion on condition of the Bank securing the due performance of the agreement by the buyer to meet the bills of the company by furnishing a guarantee irrevocably and unconditionally guaranteeing to pay the company such amounts as may be demanded by the company from the bank as outstanding and due from the buyer.

WHEREAS the Bank, in consideration of the fact that the buyer is its customer and in consideration of the company affording credit facilities and cheque issue facilities to the buyer its sole discretion hereby irrevocably and unconditionally guarantee that the bank would pay the company such amounts as the company may call upon the Bank to pay as being due and outstanding to the company from the buyer on account of supplies of goods made to the buyer by the company from time to time.

The Bank hereby agrees that the company will be entitled to enforce the guarantee herein contained from time to time by making a written demand on the Bank for the sum/sums claimed as due from the buyer and that the Bank shall take as conclusive evidence the said demand and make the payment thereof forthwith not withstanding the fact that there might be any dispute between the buyer and the company in respect of or any of

The Bank further agrees that this will be containing guarantee in respect of all transactions relating to supply of goods by the Company to the Buyer during the period of the guarantee which is from 31st AUG 1988 to 30 AUG 1989 and that this guarantee will remain in force as long as any amount is outstanding from the buyer to the Company in respect of transactions concluded during the said period and a demand thereof has been made to the Bank.

The Bank further agrees that the payments hereby contemplated shall be made by the Bank to the Company at its Sales Office at Pragati Tower, 26, Rajendra Place, New Delhi-110 008. Notwithstanding what is stated above the maximum liability of the Bank hereunder is limited to Rs.10 Lakh (rupees Ten Lakh only) and this guarantee shall be valid up to 30 AUG 1989.

It is further agreed that unless a demand in writing is made or a suit is filed for the enforcement of any of the claims covered by this guarantee before the expiry of three months from the date of termination hereof the guarantee shall lapse and the Bank will be released and discharged from all liabilities hereunder.

This Bank Guarantee is dated on 31 AUG 1988 and issued by vysya Bank Limited, E-34, 1st Floor, Connaught Place, New Delhi-110 001.

5. The aforesaid bank guarantees were extended from time to time and it is the case of the plaintiff that M/s Anu Enterprises failed to clear its dues. Even the Bills of exchange (Hundies) accepted for payment by M/s Anu Enterprises and discounted by Citi Bank were dishonoured and despite M/s Anu Enterprises being called upon to pay the amount, the outstanding grew to more than Rs.1.50 crores in 1993.

6. It is in the aforesaid circumstances that the plaintiff vide its letter dated 1.9.1993 (Ex.P-18) invoked all the aforesaid three bank guarantees, calling upon the defendant to pay a total sum of Rs.50.00 lacs. However, the amounts were not remitted by the defendant and instead the defendant addressed a letter to the plaintiff dated 13.9.1993 (Ex.P-19) in the following terms:

Reg: Bank guarantee on account of M/s Anu Enterprises

Referring to above, please furnish us the following information:

1. Value of stocks supplied by you to M/s Anu Enterprises.

2. Payments made by the party to you for the supplies made by you.

3. The details of overdue in respect of the value of stocks supplied by you.

4. In the overdue you may also mention the dates of supply of goods for which payment was not made.

5. You are also requested to furnish us overdues, if any as on date in respect of the captioned party.

The information may be furnished to us at the earliest.

7. It is the case of the plaintiff that the defendant was not entitled to claim any such information but was liable to honour the bank guarantees being unconditional in nature. Further, a letter dated 17.9.1993 (Ex.P-20) was also issued by the defendant informing the plaintiff that since the bank guarantees were issued through the Registered Office of the plaintiff, the demand should be made from that office and not from the Sales Office as made vide letter dated 1.9.1993 (Ex.P-18). It is the case of the plaintiff that this was wholly unnecessary and, thus, sent a telex message dated 20.9.1993 (Ex.P-21) to that effect. The plaintiff, in order to avoid any controversy on this account, also sent a demand through its Registered Office dated 11.10.1993 (Ex.P-22). None-the-less the payment was not made. Instead, a reply through counsel dated 20.12.1993 (Ex.P-24) was received stating that the bank was not willing to honour the bank guarantees until and unless accounts were reconciled between the plaintiff and M/s Anu Enterprises. The result was that the present suit has been filed for the recovery of Rs.50.00 lacs along with pendente lite and future interest @18% per annum and costs.

8. The defendant entered appearance and filed an application for leave to defend. Conditional leave was granted to the defendant in terms of the order dated 9.7.1997 subject to the deposit of the entire amount of Rs.50.00 lacs. This amount was so deposited and is now lying in an FDR with the Registrar of this Court.

9. The defendant in its written statement has stated that in terms of the clause of the bank guarantee, only goods for a specific period were to be covered and during that period no default was communicated to the defendant nor was any demand made. The defendant also sought to rely on the communication of the plaintiff to M/s Anu Enterprises dated 13.6.1991 (Ex.D-1) to the effect that the goods will be issued on 'cash and carry' basis only and this was stated to be a variation of the agreements between the plaintiff and M/s Anu Enterprises leading to the discharge of the obligation of the defendant bank. A further plea raised by the defendant is that no amount due to the plaintiff was specified and in any case reconciliation of accounts had to take place. Lastly, it is pleaded that the bank did not have adequate security to cover the bank guarantee of M/s Anu Enterprises.

10. The issues were framed on 12.2.2001 as under:

1. Whether the plaintiff supplied any goods on credit to Anu Enterprises under BG No.11/88 during its currency i.e. 31.8.88 to 30.8.89 and not paid for by M/s Anu Enterprises? OPP

2. Whether the plaintiff supplied any goods on credit to Anu Enterprises under BG No.59/89 during its currency i.e. 26.6.89 to 25.6.90 and not paid for by M/s Anu Enterprises? OPP

3. Whether the plaintiff supplied any goods on credit to M/s Anu Enterprises under BG No.126/90 during its currency i.e. 29.8.90 to 28.8.91 and not paid for by M/s Anu Enterprises? OPP

4. Whether the plaintiff varied the terms of the agreement with M/s Anu Enterprises without the knowledge and consent of the defendant thereby discharging the guarantees? OPP

5. Whether the acknowledgment dated 24.5.93 is a forgery and fabrication committed by the plaintiff? OPP

6. To what amount if any is the plaintiff entitled to recover from the defendant? OPP 7. Relief

11. The plaintiff examined Mr. N.Sivan, Manager, as PW-1, who deposed to the facts of the case as set out in the plaint and also proved the relevant documents. In the cross-examination of the said witness, he has deposed that a ledger used to be maintained in respect of the value of goods supplied and that the plaintiff had filed a suit for recovery of Rs.2.5 crores against M/s Anu Enterprises. The value of goods supplied are stated to be within the limits of the bank guarantees and despite the letter of the Chairman-cum-Managing Director of the plaintiff dated 14.9.1993 (Ex.D-2), the matter could not be resolved. The witness has clarified that the claim against M/s Anu Enterprises was much larger as there are also other bank guarantees furnished through the State Bank of Mysore.

12. The defendant examined Mr.Ram Khanna, Proprietor of M/s Anu Enterprises as DW-1. The said witness had sought to state that the demand for the bank guarantees amounts made by the plaintiff was mala fide and not natural in the course of business as M/s Anu Enterprises was not liable to pay the amount. The witness has also stated that the bank guarantees have expired on the dates specified therein and again referred to the letter dated 13.6.1991 (Ex.D-1). No other witness was examined on behalf of the bank.

13. I have heard learned Counsel for the parties who have taken me through the pleadings and the documents and the findings arrived at on the issues are set out hereinafter.

14. The onus of all these issues was on the plaintiff. The defendant has not even examined the witness of the bank in support of its case. The only witness examined is the Proprietor of M/s Anu Enterprises.

15. It cannot be lost sight of that the present suit is for recovery of the amount under the bank guarantees. As to how much goods were supplied, whether there was any dispute between the plaintiff and M/s Anu Enterprises, are wholly irrelevant factors insofar as the determination of the liability of the defendant to the plaintiff is concerned. A bare reading of the bank guarantees reproduced hereinabove would show that the same are unconditional in nature. The plaintiff has been made the sole judge to determine as to what was the amount payable to the plaintiff. The expression used is 'on its sole discretion hereby irrevocably and unconditionally guarantees'. The amount to be paid is as 'such company may call upon the bank to pay as being due and outstanding to the company from the buyer on account of supplies of goods made to the buyer by the company from time to time'. Thus, what the plaintiff was required to do was to call upon the defendant and intimate to it that there were dues outstanding towards the supplies made to M/s Anu Enterprises and the amounts under the bank guarantees ought to be paid. Such supplies were to cover the period 'from time to time'. Such demand had to be made in writing.

16. Another aspect set out in the bank guarantees is that it is not for the bank to question as to whether the amount is payable or not. It is in these circumstances that the expression used in the bank guarantees is 'the bank shall take as conclusive evidence the said demand and make the payment thereof forthwith notwithstanding the fact that there might be any dispute between the buyer and the company in respect of or any of the amounts claimed'. Thus, it was not the function of the bank to question or go into the issue of any reconciliation of accounts between the plaintiff and M/s Anu Enterprises.

17. It is not in dispute that the bank guarantees were extended from time to time and were still in force. The amendment letters have been proved on record and specify that the amendment is an integral part of the bank guarantees. For convenience of reference, one of such extension letters, being Ex.P-8 dated 22.6.1990, is reproduced as under:

Reg: Extension of our guarantee No.59/89 dt.26.6.89 for Rs.20.00 lacs favoring yourselves executed on behalf of M/s Anu Enterprises, Delhi.

At the request of M/s Anu Enterprises, Delhi, the captioned Guarantee is hereby extended as under:

1. The validity period of the above Bank guarantee is extended up to 25.6.91.

Notwithstanding anything contained hereinbefore, our liability under this guarantee is restricted to Rs.20.00 lacs (Rs.Twenty lacs only). Our guarantee shall remain in force until 25.6.91. Unless a demand or claim under the guarantee is made on us in writing on or before 25.6.91, all your rights under this guarantee shall be forfeited and we shall be relieved and discharged from all liabilities there under.

All other terms and conditions of the guarantee shall remain unchanged.

Please treat this amendment as an integral part of the original guarantee to which it should be attached and returned to us as and when the guarantee is returned duly cancelled for deletion in our records.

18. The aforesaid shows that the terms and conditions of the bank guarantee were to continue to remain in force.

19. The plaintiff invoked the bank guarantees vide letter dated 1.9.1993 (Ex.P-18), which reads as under:

Sub: Invoking of Bank Guarantees - reg.

Ref: BG Nos. 11/88 dt.31.8.88 extended up to 30.8.94 for Rs. 10.00 lakhs

BG Nos. 59/89 dt.26.6.89 extended up to 25.6.94 for Rs. 20.00 lakhs

BG Nos. 126/90 dt.29.8.90 extended up to 29.8.94 for Rs. 20.00 lakhs

Please refer to the above captioned Bank Guarantees provided by you in our favor to your client M/s Anu Enterprise, 3448-52, Delhi Chambers, Delhi Gate, New Delhi-110 002. As the party, i.e. M/s Anu Enterprises has not paid the outstanding dues, we request you to please invoke the Bank Guarantees referred to above and favor us with the payment of Rs.50 lakhs per Bankers' Cheque / Pay Order immediately. The original Bank Guarantees duly extended has been retained in this office and will be released duly discharged after getting the payment or after hearing from you. Please note any delay in payment the invoked BG amount will attract penal interest @25%.

By a copy of this letter we are informing your Head Office accordingly.

Please acknowledge the receipt of this letter and favor us with an early payment.

20. In response to the aforesaid letter, the bank sent a letter dated 13.9.1993 (Ex.P-19), extracted above.

21. A reading of the aforesaid communication shows that while the plaintiff invoked the bank guarantees on the ground of amounts due from M/s Anu Enterprises, the defendant bank started demanding the basis for the same. In fact, the bank has acted on a presumption as if it had to reconcile the accounts between the plaintiff and M/s Anu Enterprises before the bank guarantees can be honoured. Not only that, a plea was also raised by the bank in terms of the letter dated 17.9.1993 (Ex.P-20) that the demand should be sent by the Registered Office and not by the Sales office. This was objected to by the plaintiff vide the telex message dated 20.9.1993 (Ex.P-21), but in any case, the subsequent demand vide letter dated 11.10.1993 (Ex.P-22) was sent through the Registered Office.

22. In my considered view, the very premise on which the defendant bank has proceeded is faulty since the aspect sought to be examined by the defendant did not fall within the purview of what was required to be so examined for payment of the bank guarantee. It has already been stated that the bank guarantees were unconditional and were payable on demand to the plaintiff being made the sole judge of the amounts being due. The invocation was clearly in terms of the bank guarantees.

23. The legal position in respect of the aforesaid is absolutely clear in view of various pronouncements of the Apex Court. In this behalf, a reference may be made to the judgment in I.T.C. Limited v. Debts Recovery Appellate Tribunal . It was observed that it is well settled that the question whether the goods were supplied by the appellant or not is not for the bank. The Court took note of the observations in U.P. Cooperative Federation Ltd. v. Singh Consultants & Engineers to the effect that the bank must pay if the documents are in order and the terms of the credit are satisfied. The Courts have generally permitted dishonour on the fraud of the beneficiary and not on the fraud of someone else. The observations in Edward Owen v. Barclays Bank International (1978) 1 ALL ER 976 that the bank cannot refuse payment merely because according to it, the claim was dishonest or suspicious or appeared to be a sharp practice but it must be established to be a fraud. Thus, there is a very limited scope on which the bank could have declined to pay the amounts due under the bank guarantees.

24. Learned Counsel for the plaintiff has also drawn the attention of this Court to the observations made in Dwarikesh Sugar Industries Ltd. v. Prem Heavy Engineering Works (P) Ltd. and Anr. where the observations made in U.P. State Sugar Corporation v. Sumac International Ltd. were referred to. The real plea which was available to the defendant was only in the eventuality of a fraud, which is neither pleaded nor proved. In fact, no issue on this aspect has, at all, been framed.

25. Learned Counsel for the plaintiff also points out that in a similar bank guarantee issued in respect of the same party by the State Bank of Mysore, the suit was decreed, being Suit No.1044/96, Hindustan Photo Film Manufacturing Co. Ltd. v. State Bank of Mysore, decided on 21.4.1998 where even leave to defend was not granted.

26. I am, thus, of the considered view that the aspects sought to be raised by the defendant are wholly irrelevant insofar as the obligation of the bank to pay the amounts demanded by the plaintiff under the bank guarantees is concerned. It has already been stated that it is not possible to accept the plea of learned Counsel for the defendant that it is only the goods supplied during the initial period of bank guarantees which could be covered by the bank guarantees since when the bank guarantees were extended for different periods of time, all conditions, as set out in the bank guarantees, were sought to be made applicable even for the extended period. There is no dispute about the extension of the bank guarantees.

27. The plea raised by learned Counsel for the defendant in respect of the letter dated 13.6.1991 (Ex.P-19) is also not sustainable for the reason that the obligation of the defendant bank under the bank guarantees cannot be absolved merely because after a stage of time, possibly owing to the not too credible financial position of M/s Anu Enterprises, delivery of goods was sought to be made only against cash. The fact remains that goods were supplied on credit covered by the bank guarantees which remain unpaid, according to the plaintiff. There can be no question of any variation of the terms which form the basis of the issuance of the bank guarantees.

28. The plaintiff has made the demand clearly stating that the amount is due. It has also been clarified by communications referred to aforesaid that the amount was more than the amount of the bank guarantees. In this behalf, the demand was made vide legal notice dated 3.1.1994 wherein the amounts due under the bank guarantees have also been set out as the measure of abundant caution (Ex.P-30). The defendant is not to consider the reconciliation of accounts between the plaintiff & M/s Anu Enterprises in view of the clear stipulation in the bank guarantees that such aspects are not relevant for purposes of invocation and payment of bank guarantees. Even the last plea raised on behalf of the bank that there has been lack of adequate security cover is an aspect for the bank to have examined before issuing the bank guarantees and the plaintiff is not concerned with the same.

29. I am, thus, of the considered view that there is no ground on which the defendant could have withheld the payment from the plaintiff under the bank guarantees.

ISSUE NO.5.

30. The letter dated 24.5.1993 acknowledges the dues by M/s Anu Enterprises was not proved on record and only an averment made in this behalf. The issue is answered accordingly.

ISSUE NO.6.

31. In view of there being no defense to the requirement of the defendant to pay the bank guarantees, the plaintiff is held entitled to the amount of Rs.50.00 lacs which ought to have been paid by the defendant to the plaintiff. The plaintiff is also held entitled to pendente lite and future interest @12% per annum, simple interest.

ISSUE NO.7 - RELIEF

32. A decree is passed in favor of the plaintiff and against the defendant for a sum of Rs.50.00 lacs along with simple interest @12% per annum for pendente lite and future period. The plaintiff is also entitled to costs. Decree sheet be drawn up accordingly.

33. In terms of the order dated 9.7.1997 while granting leave to defend, the principal amount has already been deposited by the defendant bank in this Court in an FDR. On maturity, the total FDR amount would be released to the plaintiff, to be adjusted against the amount payable under the decree.

34. The bill of costs is taken on record, to be included as part of calculation of costs under the decree.