Siti Energy Limited & Anr vs Petroleum And Natural Gas ...
2016 Latest Caselaw 749 Del

*      IN THE HIGH COURT OF DELHI AT NEW DELHI
                                        Pronounced on: 2nd February, 2016
+      W.P.(C) 125/2016
       SITI ENERGY LIMITED & ANR                  ..... Petitioners
                     Through    Mr. Parag P. Tripathi, Sr. Advocate
                     with Mr. Buddy A. Ranganadhan, Mr. D.V. Ragho
                     Jamsy & Ms. Anasuya Choudhary, Advocates

                       Versus

       PETROLEUM AND NATURAL
       GAS REGULATORY BOARD & ANR              ..... Respondents
                    Through: Mr. Prashant Bezboruah, Adv.for R-1
                    Mr.Manik Dogra, CGSC for Union of India
       CORAM:
       HON'BLE THE CHIEF JUSTICE
       HON'BLE MR. JUSTICE JAYANT NATH


                                   JUDGMENT

G. ROHINI, CHIEF JUSTICE:

C.M. 570/2016(stay)

1. The main writ petition has been filed challenging the validity of the Regulations 7 and 18 of the Petroleu0m and Natural Gas Regulatory Board (Authorizing Entities to Lay, Build, Operate or Expand City or Local Natural Gas Distribution Networks) Regulations, 2008.

2. We have directed the respondents to file their response and the main petition now stands posted to 28.03.2016.

3. So far as the present miscellaneous application is concerned, the prayer is to stay encashment of bank guarantee furnished by the petitioners

and further to restrain the respondent No.1 from implementation of the conditions stipulated in the authorization letter dated 30.11.2012 till the disposal of the writ petition.

4. We have heard Sh.Parag P.Tripathi, the learned senior counsel appearing for the petitioners as well as the learned counsel appearing for the respondent No.1/Petroleum and Natural Gas Regulatory Board.

5. For proper appreciation of the controversy involved, it is necessary for us to trace in brief the facts leading to the filing of the present case.

6. The petitioner No.1 is a company involved in operations of laying and construction and distribution of gas through City Gas Distribution (CGD) network whereas the petitioner No.2 is the shareholder/Director of the said company. It is pleaded that the petitioner No.1 (hereinafter referred to as the „petitioner company‟) is conducting its operations at Moradabad, U.P. pursuant to the No Objection Certificate dated 07.03.2006 issued by the Uttar Pradesh State Industrial Development Corporation (UPSIDC) for development of gas distribution pipelines in the city of Moradabad.

7. The Petroleum and Natural Gas Regulatory Board Act, 2006 (hereinafter referred to as „the Act‟) has been enacted with an object to provide for establishment of Petroleum and Natural Gas Regulatory Board to regulate the refining, processing, storage, transportation, distribution, marketing and sale of petroleum, petroleum products and natural gas in all parts of the country and to promote competitive markets and for matters connected therewith or incidental thereto.

8. The provisions of the Act have come into force, except Section 16, w.e.f. 01.10.2007. In terms of Section 3(1) of the Act, the Central Government has established the Petroleum and Natural Gas Regulatory

Board (hereinafter referred to as „PNGRB‟). Pursuant to the Press Note dated 31.10.2007 issued by PNGRB stating that the entities which have initiated the activities of laying, building, operating, etc. of a city or local natural gas distribution network prior to 01.10.2007 without any authorization by the Central Government have to apply for authorization under the provisions of the Act and in the meantime they are required not to undertake any such new or incremental activity without obtaining authorization and calling upon for information from such entities in the prescribed proforma, the petitioner company submitted the details of its existing project to PNGRB specifically mentioning that they have completed 70% of the CGD network in the city of Moradabad.

9. In exercise of the powers conferred by Section 61 of the Act, PNGRB made Petroleum and Natural Gas Regulatory Board (Authorizing Entities to Lay, Build, Operate or Expand City or Local Natural Gas Distribution Networks) Regulations, 2008 (hereinafter referred to as „the Authorizing Regulations‟) vide notification dated 19.03.2008. As per Regulation 18 of the Authorizing Regulations, an entity laying, building, operating or expanding a CGD network at any time before the appointed day but not duly authorized to do so by the Central Government, shall apply immediately for obtaining an authorization in the prescribed form.

10. On consideration of the information furnished by the petitioner company pursuant to the press note dated 30.10.2007, PNGRB by letter dated 31.03.2008 advised the petitioner company to apply immediately for authorization as per the Authorizing Regulations. Accordingly, the petitioner company on 09.08.2008 submitted its application for grant of authorization for CGD network being operated by it in Moradabad.

11. Subsequently, the petitioner company by application dated 24.12.2010 sought permission to carry out incremental capital works relating to local natural gas distribution network in Moradabad. Having considered the same, PNGRB by proceedings dated 25.01.2011 granted a provisional No Objection Certificate (NOC) for urgent capital works specified therein. It appears that subsequently by letter dated 28.05.2012, PNGRB directed the petitioner company to provide a Performance Bank Guarantee for a sum of Rs.2 crores and in compliance with the same the petitioner company furnished the Performance Bank Guarantee dated 11.06.2012 for Rs.2 crores by way of security for due observance and performance of the terms and conditions of grant of authorization. By letter dated 13.06.2012, the petitioner company while enclosing the original Bank Guarantee informed PNGRB their consent to the terms and conditions stipulated in the letter dated 28.05.2012 of PNGRB and also mentioned that it shall abide by the rules and regulations framed under the Act.

12. Thereafter on 30.11.2012, PNGRB granted authorization to the petitioner for CGD network development under Regulation 18(1) of the Authorizing Regulations for the Geographical area of Moradabad subject to the terms and conditions specified in Schedule „D‟ format annexed thereto. While specifying the project milestones for each year, it was also made clear in the letter of authorization that marketing exclusivity is granted to the petitioner company for a period of 5 years from the date of authorization. By letter dated 04.12.2012, the petitioner company accepted the grant of authorization issued by PNGRB and agreed to comply with all the terms and conditions subject to which the authorization has been granted.

13. However, by letter dated 22.07.2013, the petitioner company

requested PNGRB to revise the targets/project milestones in view of the various reasons explained therein. There was a series of exchange of letters followed by a meeting held between the officials of PNGRB and the petitioner company on 31.03.2014 regarding the status of achievement of the project milestones for the Geographical area of Moradabad in which it was expressed by PNGRB that the performance of the petitioner company was highly disappointing and there were no encouraging future prospects within the framework of its existing model and advised the petitioner company to present the reworked model within 6 months.

14. The further meeting between PNGRB and the petitioner company took place on 30.10.2014 regarding the status of achievement of project milestones for the CGD network in the Geographical area of Moradabad in which PNGRB advised the petitioner company to intensity their marketing efforts and tap the potential of industries available in Moradabad.

15. Since the validity of the Performance Bank Guarantee furnished by the petitioner was about to expire on 10.06.2015, the petitioner company has extended the same by a period of another two years i.e. upto 10.06.2017 and conveyed the same to PNGRB by letter dated 21.05.2015. It appears that the petitioner company has been submitting its quarterly reports to PNGRB and another meeting took place between PNGRB and the petitioner company on 31.07.2015 regarding the status of achievement of project milestones for CGD network in Moradabad. Upon reviewing the financial performance of the petitioner company, PNGRB expressed that it has to consider action under the provisions of Regulation 16 of the Authorizing Regulations and directed the petitioner company to submit the relevant business plan with physical and financial milestones. It appears that the

petitioner company has furnished the details and on consideration of the same, PNGRB by letter dated 21.09.2015 informed the petitioner company that it was found that the petitioner company was nowhere close to achieving the targets stipulated in the terms and conditions specified in the authorization letter and the physical progress remains grossly unsatisfactory as per the latest reports furnished by the petitioner company and, therefore, in accordance with the terms and conditions of the authorization letter and Regulation 16(1)(c)(i) of the Authorizing Regulations, PNGRB has come to the conclusion that the terms and conditions of the authorization have been breached with respect to laying infrastructure and providing PNG domestic connections. Accordingly, in terms of the provisions of the Authorizing Regulations, 25% of the performance bank guarantee amounting to Rs.50 lakhs is being encashed from the Performance Bank Guarantee furnished by the petitioner and the petitioner was directed to make good the encashed Performance Bank Guarantee within 2 weeks.

16. Aggrieved by the same, the main writ petition has been filed contending inter alia that though Section 16 of PNGRB Act which provides that no entity shall lay, build, operate or expand any city or local natural gas distribution network without obtaining authorization under the Act, the proviso carved out an exemption to the entities which have already been laying or expanding natural gas distribution network immediately before the appointed day and also provided that such entities shall be deemed to have authorization under the Act. It is contended that though the petitioner company is an existing entity and is deemed to be authorized under Section 16 of the Act, PNGRB had called upon the petitioner company to apply for authorization and while granting such authorization had unlawfully

mandated the petitioner company to achieve certain targets. The said action of PNGRB purportedly in terms of Regulations 18 of Authorising Regulations, being contrary to Section 16 of the Act is without jurisdiction, arbitrary and illegal. It is also contended that Regulation 18 of Authorising Regulations itself is beyond the scope of Section 16 of the Act and thus it is liable to be struck down being ultra vires the Act.

17. Referring to another set of Regulations made by PNGRB under the Act, viz., PNGRB (Exclusivity for City or Local Natural Gas Distribution Network) Regulations, 2008 (for short „Exclusivity Regulations‟) under which Regulation 6 empowers PNGRB to provide for exclusivity to an entity proposing to lay, build, operate or expand a CGD network from the purview of common carrier or contract carrier for a period of five years from the date of authorization, it is further contended that the said Regulation 6 is beyond the scope of Section 20(iv) of the Act and thus ultra vires and consequently, the "marketing exclusivity" granted by PNGRB under the authorisation letter dated 30.11.2012 purportedly under Regulation 6 of Exclusivity Regulations is also illegal and without jurisdiction.

18. The further contention is that Regulation 7 of the Authorising Regulations as amended in 2014 which empowers PNGRB to fix targets on PNG connections is arbitrary and violative of Article 14 of the Constitution of India since the same amount to conditions in the form of sales targets involving an uncontrollable element. Fixation of such targets is therefore arbitrary and bad in law, apart from imposing an unreasonable restriction on the right of the petitioner company to carry on business.

19. Thus, it is contended that the authorisation letter dated 30.11.2012 itself is in contravention of the provisions of the Act and consequently, the

conditions imposed therein are unenforceable.

20. Shri Parag P.Tripathi, the learned senior counsel appearing for the petitioners, while submitting that though PNGRB Act has come into force with effect from 03.04.2006, Section 16 of the said Act has come into force only on 15.7.2010 and the Authorizing Regulations were made by PNGRB in the interregnum on 19.3.2008, contended that the Authorizing Regulations are beyond the purport of Section 16 of the Act and thus ultra vires. Therefore, according to the learned senior counsel the letter of authorization granted to the petitioner by PNGRB imposing performance conditions is without jurisdiction and the terms and conditions specified therein are unenforceable.

21. Having regard to the admitted fact that the petitioner company is an existing entity which was laying and building CGD network before the appointed day, it is contended by the learned senior counsel that PNGRB cannot mandate the petitioner to apply for authorization in terms of the Regulation 18 of the Authorizing Regulations much less compel the petitioner to meet the targets fixed. The learned senior counsel contended that the authorization letter dated 30.11.2012 itself being ultra vires the Act, PNGRB cannot enforce the same by resorting to partial encashment of the performance bank guarantee furnished by the petitioner company. It is also contended that PNGRB, therefore, cannot be allowed to compel the petitioner company to meet the targets and on that ground there cannot be any further encashment of the performance bank guarantee.

22. We have also heard the learned counsel appearing for PNGRB.

23. Whether Regulation 18 of the Authorizing Regulations runs contrary to the deeming clause under the proviso to Section 16 of the Act and

whether PNGRB is empowered to stipulate the project milestones in exercise of the powers conferred under Regulation 18 are the larger issues which require consideration in the main petition. The facts borne out of the record in the present case make it clear that the petitioner company was made known the terms and conditions subject to which the authorisation for CGD network development was proposed to be issued by PNGRB. The terms and conditions included fixation of year wise targets and marketing exclusivity for a period of five years. The petitioner company had unconditionally agreed for the said terms and conditions and furnished the performance bank guarantee for due observance and performance of the said terms and conditions. By that time Section 16 of the Act has already been notified. In these circumstances, the contention of the petitioner company that its consent cannot confer jurisdiction on PNGRB to act contrary to law, also needs deeper consideration after giving an opportunity to PNGRB to file its counter affidavit. We, therefore, do not wish to express any opinion on those issues at this stage.

24. The relief sought in the present application is to restrain PNGRB from encashing performance bank guarantee furnished by the petitioner company till the disposal of the writ petition and at this stage, we are only concerned with the question as to whether such a relief can be granted in favour of the petitioners.

25. The law relating to invocation of bank guarantees is no longer res integra. The law is well settled that the interference by the Courts is permissible only where the invocation of the bank guarantee is against the terms of the guarantee or if there is any fraud. In the absence of the same, the bank is liable to pay the guaranteed amount without any demur

whatsoever and the bank is bound to honour the guarantee irrespective of any dispute raised by its customer since a bank guarantee is an independent and a separate contract. It is also a well settled principle that fraud, if any, must be of an egregious nature, which would vitiate the very foundation of such a bank guarantee and the beneficiary seeks to take advantage of the situation. Allowing encashment of bank guarantee would result in irretrievable harm or injustice to one of the parties concerned has also been recognized by the Courts as a justifiable ground for interference, however, the harm or injustice contemplated must be of such an a exceptional and irretrievable nature as would override the terms of the guarantee [vide U.P. Cooperative Federation Ltd. vs. Singh Consultants and Engineers (P) Ltd. (1988) 1 SCC 174; Vinitec Electronics Private Ltd. vs. HCL Infosystems Ltd. (2008) 1 SCC 544; Himadri Chemicals Industries Ltd. vs. Coal Tar Refining Company (2007) 8 SCC 110; Mahatama Gandhi Sahakra Sakkare Karkhane vs. National Heavy Engg. Coop. Ltd. (2007) 6 SCC

470.] In a recent decision M/s. Adani Agri Fresh Ltd. vs. Mahboob Sharif & Ors. (2015) SCC OnLine SC 1302, the Supreme Court while reiterating the principles of law laid down in the above decisions further explained that the fraud, if any, must be of an egregious nature as to vitiate the underline transaction.

26. The present case, according to us, does not fall under any of the exceptions identified by the Courts. It is not a case of fraud of which the bank has notice and a fraud of the beneficiary from which it seeks to benefit much less there are any special equities in favour of granting stay of invocation of bank guarantee. The only submission of the learned senior counsel appearing for the petitioners is that the action of PNGRB in insisting

upon furnishing bank guarantee, itself being contrary to Section 16 of the Act, the same would also amount to a valid ground to restrain PNGRB from encashing bank guarantee. As mentioned above, whether the action of the PNGRB in fixing the targets and calling upon the petitioner company to furnish bank guarantee for due performance of the terms and conditions of letter of authorization, in the facts and circumstances of the present case, can be treated as illegal and without authority, is a larger issue which can be decided only after giving an opportunity to PNGRB to file its response. We do not find any special equities in favour of the petitioner to grant an ad interim stay as prayed for. In fact, the performance bank guarantee furnished by the petitioner company has already been encashed in part to the tune of Rs. 50 lakhs. It may be true that the petitioner company is required to make good the same, however, we are unable to hold that the same would cause any irretrievable injury or irretrievable injustice to the petitioner company.

27. We, therefore, decline to grant the interim stay as prayed for. However, we make it clear that any steps taken by PNGRB pursuant to the impugned letter dated 21.09.2015 including encashment of the performance bank guarantees furnished by the petitioner company shall be subject to the result of the writ petition.

28. CM No.570/2016 is accordingly disposed of.

CHIEF JUSTICE

JAYANT NATH, J FEBRUARY 02, 2016 'anb/pmc'