Hella Infra Market Private ... vs Reserve Bank Of India And 2 Others
2022 Latest Caselaw 5269 Tel

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                                                                                   Dr. GRR ,J
                                                            W.P. Nos.21932 and 28909 of 2021



              THE HON'BLE Dr. JUSTICE G. RADHA RANI

              WRIT PETITION Nos. 21932 and 28909 OF 2021



COMMON ORDER:


1.    Writ Petition No.21932 of 2021 is filed by the petitioners to issue a Writ

of Mandamus declaring the inaction of the respondent Nos.2 and 3 being the

scheduled public sector banks under the RBI Act, 1934 in refusing to act on

their promise and failure to discharge their obligations under the Bank

Guarantees bearing No. 12821IGL0002621, 12821IGL0002721,

12821IGL0003321, 12821IGL0003421, 12821IGL0003521 as illegal, arbitrary,

unjust and unconstitutional and in gross violation of statutory obligations under

Section 6(1)(e) of the Banking Regulation Act, 1949, Section 126 of the

Contract Act, 1872, Principles of Natural Justice and Article 14 of the

Constitution of India inspite of several requests made including vide legal

notices dated 11.08.2021 and consequentially to direct the respondent No.1 to

initiate necessary action against respondent Nos. 2 and 3 for illegally reneging

on their statutory obligations.

2. Writ Petition No.28909 of 2021 is filed to issue a Writ of Mandamus

declaring the action of the Respondents No.2 and 3 being Scheduled Public

Sector Bank under the RBI Act, 1934 by unilaterally closing the Bank

Dr. GRR ,J W.P. Nos.21932 and 28909 of 2021

Guarantees as returned bearing No.128220IGFIN0048 128220IGFIN0049

128220IGFIN0051 128220IGFIN0053 128220IGFIN0054 128220IGFIN0055

12821IGL0000121 12821IGL0001821 12821IGL0002821 128211GL0003221

and 128220IGFIN0046 as illegal, arbitrary, unjust and unconstitutional and in

gross violation of statutory obligation under Section 6(1)(e) of the Banking

Regulation Act 1949, Section 126 of the Contract Act 1872, Principles of

Natural Justice, Article 14 of the Constitution of India inspite of several requests

made including vide Legal Notice dated 11.08.2021 and consequentially to

direct the Respondent Nos.2 and 3 to reopen the 11 Bank Guarantees as returned

and also to direct the Respondent No.1 to initiate necessary action against

Respondents Nos.2 and 3 for illegally reneging on their statutory obligations.

3. Heard Sri S.Niranjan Reddy, learned senior counsel representing

Sri D. Narender Naik, learned counsel for the petitioners and the learned

counsel for respondent No.1, Sri S. Ravi, learned senior counsel appearing for

respondent Nos. 2 and 3 and the learned counsel for respondent No.4.

4. The learned senior counsel for the petitioners submitted that the petitioner

was a technology company involved in construction and real estate procurement

of material for their projects and third party projects. The 2nd respondent was a

Dr. GRR ,J W.P. Nos.21932 and 28909 of 2021

scheduled public sector commercial bank and the 3rd respondent was the branch

office of the second respondent in Madhapur, Hyderabad. The respondent Nos. 2

and 3 had undertaken applications and issued bank guarantees to the petitioner

on behalf of respondent No.4. The respondents 1 to 3 were performing public

functions and were squarely covered under Article 12 of the Constitution of

India. The respondent Nos. 2 and 3 derive their powers to give guarantees from

Section 6(1)(e) of the Banking Regulation Act, 1949. The respondent No.4,

Kompass Infrastructure Private Limited approached the petitioner to provide

various construction materials on credit terms. In furtherance of such

understanding, respondent Nos. 2 and 3 promised the petitioner that the

obligations of respondent No. 4 would be performed failing which the

respondent Nos. 2 and 3 being public sector schedule banks under RBI Act,

1934 had taken upon themselves to make good the statutory promise and

payment obligation. Had it not been for the solemn promise and guarantee

given by the respondent Nos.2 and 3, the petitioner would not have entered into

contract with respondent No.4. Solely on the basis of the guarantee by

respondent Nos. 2 and 3, the petitioner extended credit facility to respondent

No.4. The respondent Nos. 2 and 3 issued sixteen (16) bank guarantees, out of

which five (05) bank guarantees for an amount of Rs.7,15,00,000/- were live and

eleven (11) bank guarantees for an amount of Rs. 16,61,58,250/- were illegally

closed. The validity and issuance of the bank guarantees was confirmed by

Dr. GRR ,J W.P. Nos.21932 and 28909 of 2021

respondent Nos. 2 & 3 vide SFMS message (Mechanism suggested by RBI to

confirm validity of a bank guarantee). As per clause No.4 of the bank

guarantee, it was expressly mentioned that the guarantee should be irrevocable.

As per clause No.6 of the bank guarantee, it was specifically mentioned that the

respondent Nos. 2 and 3 would undertake not to revoke the bank guarantee

except with the previous consent of the petitioner. On 05.07.2021, the petitioner

invoked the live bank guarantees aggregated to a sum of Rs.7,15,00,000/- and

requested respondent No.3 to make the payment to the petitioner as per its

obligations under the bank guarantee. But till date respondent No.3 had not

acted in furtherance of its obligation under the said bank guarantees and the

petitioner had not received the amounts as promised by the scheduled bank i.e.,

respondent Nos. 2 and 3. Besides the aforesaid five (05) live bank guarantees

which were pending encashment, the petitioner had also invoked eleven (11)

illegally closed bank guarantees and on 13.07.2021 produced eleven (11)

original bank guarantees. However, as a rude shock to the petitioner in response

to the petitioner's letter of invocation dated 05.07.2021 and 06.07.2021, a reply

was issued vide letter dated 06.07.2021 that in respect of eleven (11) bank

guarantees amounting to Rs.16,61,58,250/-, as per the records of the branch, the

said bank guarantees were returned along with a covering letter. The petitioner

had never returned the said bank guarantees and the original bank guarantees

issued by the bank were in possession of the petitioner. It was a clear indication

Dr. GRR ,J W.P. Nos.21932 and 28909 of 2021

of conspiracy and collusion among the respondent Nos. 2 and 3 and the officials

of respondent No.4 to commit criminal breach of trust, especially when all the

sixteen (16) original bank guarantees were with the petitioner. All sixteen (16)

original bank guarantees were shown to officers of the respondent No.2 at the

branch and they duly verified the same.

4.1 On 13.07.2021, the petitioner was informed to come to the branch of

respondent No.3 along with the bank guarantees. The petitioner's representative

arrived at Hyderabad from Mumbai on the said date at 05.00 PM along with all

the original bank guarantees. The respondent No.3 and their audit team verified

all the originals. But till date, the petitioner had not received the amount. The

petitioner was made to run from pillar to post from Head Office to Branch

Office and to several offices of respondent Nos. 2 and 3. Inspite of going

through so much trouble, there was no response from respondent Nos. 2 and 3.

4.2 It was further submitted that upon enquiry, the petitioner was informed

that respondent No.3, employees of respondent No.2 and officials of respondent

No.4 had colluded and closed sixteen (16) bank guarantees without any notice

and intimation to the petitioner and a police complaint was filed vide FIR No.

791/2021 dated 08.07.2021 before Madhapur Guttala P.S., Cyberabad. The said

complaint was registered in respect of the illegally closed bank guarantees. No

Dr. GRR ,J W.P. Nos.21932 and 28909 of 2021

further details were provided by the respondent Nos. 2 and 3 and no payment

was made inspite of the fact that the petitioner had brought all the 21 original

bank guarantees for verification and officers of the respondent Nos. 2 and 3

were fully satisfied after verifying the original bank guarantees. Admittedly, the

ongoing investigation was only in respect of the illegally closed bank guarantees

and not in respect of the live bank guarantees. The respondent Nos. 2 and 3

were under obligation to fulfill the promise made otherwise such illegal

omissions would squarely amount to arbitrary and illegal actions colored with

malafides. Notwithstanding the enquiries and pending police investigation, the

respondent Nos. 2 and 3 were under an immediate obligation to release the

amounts against the bank guarantees which had been submitted for encashment.

The petitioner was restricting his claim to the live bank guarantees (5 in No.) for

Rs.7,15,00,000/- and reserves all his rights to pursue his remedies in relation to

the illegally closed bank guarantees (11 in No.) for Rs. 16,61,58,250/-. The

petitioner had given more than two months notice and requested the respondent

Nos. 2 and 3 to comply with their promise and obligations but they continued to

ignore the petitioner's request. The respondent Nos. 2 and 3 had not disputed

the petitioner's claim under the live bank guarantees for Rs. 7,15,00,000/- in any

way till date. The petitioner issued a legal notice dated 11.08.2021 calling upon

respondent No. 2 to immediately process and encash the sixteen (16) bank

guarantees for a total sum of Rs. 23,76,58,250/- but the respondent Nos. 2 and 3

Dr. GRR ,J W.P. Nos.21932 and 28909 of 2021

had not replied to the same. Having given adequate opportunity to the

respondent No.2, the petitioner addressed a letter to the Reserve Bank of India

i.e., respondent No.1 to direct the respondent Nos. 2 and 3 to act in accordance

with good banking practices and to comply with its obligations. The

Respondent No.1 had not taken action. The failure of the respondent Nos. 2 and

3 to act in accordance with the terms and conditions of the bank guarantees was

causing grave and irreparable harm and injury.

4.3 He also relied upon the judgment of the Hon'ble Apex Court in the case

of ABL International Limited v. Export Credit Guarantee Corporation of

India Limited1, wherein it was held that:

"It is clear from the above observations of this Court, once the State or an instrumentality of the State is a party of the contract, it has an obligation in law to act fairly, justly and reasonably which is the requirement of Article 14 of the Constitution of India. Therefore, if by the impugned repudiation of the claim of the appellants the first respondent as on instrumentality of the State has acted in contravention of the above said requirement of Article 14, then we have no hesitation in holding that a writ court can issue suitable directions to set right the arbitrary actions of the first respondent".

5. The learned senior counsel Sri. S. Ravi representing the respondent Nos. 2

and 3 submitted that the prayer in the writ petition was completely different with

the prayer sought for by the learned counsel for the petitioners as there was no

prayer in the writ petition even to honor the bank guarantees.

(2004) 3 SCC 553

Dr. GRR ,J W.P. Nos.21932 and 28909 of 2021

5.1 He further submitted that the respondent No. 4 was enjoying the credit

facilities from erstwhile Andhra Bank, Madhapur Brach which was

amalgamated with Union Bank of India w.e.f. 01.04.2020. At the request of the

said borrower, the respondent banks sanctioned credit facilities vide sanction

letter dated 05.09.2020 subject to terms and conditions mentioned in the

sanction letter. The respondent bank issued Bank Guarantees for an amount of

Rs.15,00,00,000/- and Secured Overdraft limit of Rs.3,26,00,000/- in total

Rs.18,26,00,000/-. The respondent bank also issued some other bank guarantees

on behalf of the borrower. While the matter stood thus one M/s. OFB Tech. Pvt.

Limited vide e-mail dated 23.06.2021 requested the respondent to confirm

issuance of Bank Guarantee No.128211GL0003821 dated 24.06.2021 for Rs.

2,00,00,000/- with expiry date 23.06.2022. The respondent bank sent reply

stating that the said Bank Guarantee number did not exist and it was not issued

by their branch. On 01.07.2021, the branch had again received e-mail from M/s.

OFB Tech. Pvt. Limited to confirm the Bank Guarantee referred above and the

respondent reiterated that the said bank guarantee was not issued by their

branch. The said M/s. OFB Tech. Pvt. Limited filed a writ petition before the

High Court at New Delhi. In the light of the said development, suspecting

fraud, the respondent bank lodged a complaint dated 08.07.2021 with Station

House Officer, Madhapur, Hyderabad against the said borrower and its

directors. The Station House Officer, Madhapur registered FIR No. 791 of 2021

Dr. GRR ,J W.P. Nos.21932 and 28909 of 2021

under Section 406, 420, 465, 467, 468 and 471 read with Section 120 of IPC and

took up investigation. During the course of investigation, the said case was

transferred to Central Crime Station, Economic Offences Wing, Hyderabad and

the investigation was pending. The respondent bank also lodged supplementary

complaint dated 07.09.2021 and the same was acknowledged by the CCS-EOW

on 08.09.2021. The respondent bank suspected that there might be nexus in

between the borrower and the beneficiaries to de-fraud the bank and requested

the CCS-EOW to investigate into the matter whether the contracts which were

awarded by the above beneficiaries to the borrower were genuine business

transactions and whether the said beneficiaries had parted money to the

borrower by way of mobilization advance, etc., and whether the borrower had

received the material from the beneficiaries who were supposed to supply the

material to the borrowers. The respondent bank was also having an

apprehension whether the said beneficiaries were holding genuine bank

guarantees issued by the bank or fabricated bank guarantees and therefore

requested the CCS-EOW to call for the original bank guarantees from the

beneficiaries and refer the matter to forensic lab to decide the genuineness of the

said bank guarantees.

5.2 The learned counsel for respondent Nos. 2 and 3 further submitted that

CCS-EOW issued notice to the concerned parties including the beneficiaries

Dr. GRR ,J W.P. Nos.21932 and 28909 of 2021

referred in the complaint / FIR No. 791 of 2021 under Section 91/160 of Cr.P.C.

and also issued a notice dated 10.08.2021 to the petitioners to appear before the

investigating officer along with the original bank guarantees and relevant

documents and witnesses to examine. The learned counsel further submitted

that the respondent Nos. 2 and 3 strongly suspected that the alleged contract

between the petitioner and the borrower was a non-existing one and no real

work had been allotted by the borrower to the petitioner. The respondent bank

had been induced by the petitioner and borrower by fraud and misrepresentation

to issue the bank guarantee at the first instance to a non-existing contract and the

very bank guarantee issued by the respondent bank was a voidable agreement

under Sections 17, 18 and 19 of the Indian Contract Act and it did not need to be

honoured by the bank. The above transaction would require deep investigation

by the police / investigating agency to find the roots of the fraud and to

investigate whether the beneficiary had obtained the bank guarantees with the

sole purpose of defaulting and whether the borrower and beneficiary had forged

/ fabricated and returned the bank guarantees and were trying to obtain unlawful

gain by invoking a returned bank guarantee. As the above matter was under

investigation by competent authority, any order passed in favor of the petitioner

during investigation would have far reaching consequences on the investigation

and the same would also cause irretrievable injustice to the respondent bank.

The investigating agency / police were required to investigate the persons

Dr. GRR ,J W.P. Nos.21932 and 28909 of 2021

involved in the above fraud and to determine whether there was any nexus

between the borrower and the beneficiaries and whether the beneficiaries had

really paid the mobilization advance, supplied material, etc., to the borrower and

need to determine which bank guarantee was original and genuine as per the

forensic report. Unless the investigation was completed, the respondent bank

was not in a position to take a decision on the subject matter of invocation of the

bank guarantee as the same would cause irretrievable injustice to the respondent

bank and prayed to dismiss the writ petition.

6. The learned counsel for respondent No.1 submitted that the writ petition

was not maintainable against Reserve Bank of India either in law or on facts of

the case. Reserve Bank of India from time to time had issued various guidelines

and regulatory instructions with respect to bank guarantees as contained in

Master Circular on Guarantees and Co-acceptances dated 09.11.2021. The said

instructions would provide an enabling framework for the issuance of the bank

guarantees by banks in terms of approved policy. The bank guarantees shall

also comply with the general principles of the Indian Contract Act, 1872. The

bank guarantees were structured according to the terms of agreement with

security, maturity and purpose. The terms to be incorporated in the bank

guarantee were decided mutually between the parties i.e., applicant, bank and

beneficiary. In a de-regulated credit environment, being a regulator to banks, it

Dr. GRR ,J W.P. Nos.21932 and 28909 of 2021

was neither advisable nor feasible for Reserve Bank of India to prescribe

granular details in structuring a guarantee. It was for the concerned parties to

formulate the same, subject to the provisions of the Indian Contract Act. An

enabling framework would also be provided by the Reserve Bank of India. All

customers of the banks were provided with a grievance redressal mechanism in

case, they were aggrieved by non-compliance with the directions or guidelines

issued by Reserve Bank of India. Unless the dispute involved adjudication of

disputed question of facts or law, in case of violation of regulatory prescription

of the Reserve Bank, the customers of the banks could approach the grievance

redressal mechanism provided by the Reserve Bank of India for redressal of

grievance against the banks. There were no specific averments against Reserve

Bank of India. The petitioner could not expect regulatory guidelines on the

terms and conditions required to be incorporated in the bank guarantee. The

petitioner could not call upon the High Court to issue Writ of Mandamus against

the Reserve Bank of India for the relief sought for in the writ petition and prayed

to dismiss the writ petition against the respondent No.1 with costs.

7. The learned counsel for respondent No.4 submitted that only on the office

objections, the respondent No.4 was made as a party to the writ petition. No

relief was claimed against respondent No.4, as such respondent No.4 had not

Dr. GRR ,J W.P. Nos.21932 and 28909 of 2021

even filed any counter and contended that a writ petition was not maintainable

when fraud was alleged and prayed to dismiss the writ petition.

8. The learned counsel for the petitioners on the other hand contended that

the respondent No.3 bank had lodged a complaint against its own client that is

M/s. Kompass Infrastructure Private Ltd., and its directors, it would, by no

stretch of imagination, prevent the bank from making good on its guarantee and

delivering on its promise. It was shocking to know that the bank had only issued

bank guarantees and till date had not suffered any loss of a single rupee since it

had reneged on its solemn undertaking and guarantee. The said M/s. Kompass

Infrastructure Private Ltd. had undertaken its business contracts by availing

credit facilities from the petitioner. Ultimately, it was the petitioner, who had

suffered loss of approximately Rs. 25,00,00,000/- because of the coalition

between the bank and M/s. Kompass Infrastructure Private Ltd. It was even

more shocking to note that bank had filed complaint on 08.07.2021 and

registered an FIR No.791 of 2021 against M/s. Kompass Infrastructure Private

Ltd., and its director but not against its own officers who colluded and conspired

with M/s. Kompass Infrastructure Private Ltd., and played fraud on the

petitioner causing the petitioner to suffer gross monitory loss. The petitioner

was made a victim of cheating and breach of trust and would reserve his right to

file a police complaint against the officers and management of the bank.

Dr. GRR ,J W.P. Nos.21932 and 28909 of 2021

8.1 He further contended that the bank after filing the writ petition only with a

malafide and malicious intent to avoid making the payment under the bank

guarantees (both closed and live) filed a supplementary complaint dated

07.09.2021. The pending FIR and investigation had nothing to do with the

petitioner and the same was between the bank and its client i.e., borrower. The

original bank guarantees were still with the petitioner and the bank had no right

to withhold payment in gross violation of Reserve Bank of India guidelines. It

was incorrect to state that there might be some nexus between the petitioner and

respondent No.4. On the contrary, it was the respondent Nos. 3 and 4 who had

colluded and conspired with each other to deprive the petitioner of its money.

8.2 He further contended that on one hand bank had granted bank guarantees

to the petitioner and other parties to a tune of Rs. 60,00,00,000/- . The

beneficiaries included Central Government undertakings, National Small

Industries Corporation Limited, Hindustan Petroleum Corporation Limited. The

bank could not make baseless allegations against the beneficiaries / real victims.

The petitioner was suffering huge loss due to the non-payment of the bank

guarantees. Mere pendency of investigation would not prevent the bank to

avoid payment under the guarantees.

9. The learned Senior Counsel for respondents 2 and 3 further submitted that

the Banks usually would honour the various bank guarantees issued from time to

Dr. GRR ,J W.P. Nos.21932 and 28909 of 2021

time, if the said bank guarantees were in order. In the present case, as fraud was

suspected and as the matter was under investigation by the CCS-EOW,

Cyberabad, unless the investigation was completed, the respondent bank was not

in a position to take a decision on the subject matter of the invocation of the

bank guarantee.

10. Perused the record. As per the Master Circular issued by the Reserve

Bank of India on 09.11.2021 pertaining to payment of invoked guarantees, it

was stated that:

"Where guarantees are invoked, payment should be made to the beneficiaries without delay and demur. An appropriate procedure for ensuring such immediate honoring of guarantees should be laid down so that there is no delay on the pretext that legal advice of approval of higher authorities is being obtained".

"Delays on the part of banks in honoring the guarantees when invoked tend to erode the value of the bank guarantees, the sanctity of the scheme of guarantees and image of banks. It also provides an opportunity to parties to take recourse to courts and obtain injunction orders. In the case of guarantees in favor of government departments, this not only delays the revenue collection efforts but also gives an erroneous impression that banks are actively in collusion with the parties, which tarnishes the image of the banking system".

"There should be an effective system to ensure that the persons on whose behalf the guarantees are issued will be in a position to perform their obligations in the case of performance guarantees and honor their commitments out of their own resources, as and when needed, in the case of financial guarantees".

11. The learned counsel for the petitioner also relied upon several judgments

of the Hon'ble Apex Court. In this regard, he relied upon the judgment of the

Dr. GRR ,J W.P. Nos.21932 and 28909 of 2021

Hon'ble Apex Court in Standard Chartered Bank v. Heavy Engineering

Corporation Limited and another2, wherein it was held that:

"As per the precedents laid down by this Court, the question of law is no more res integra and is well settled that the bank guarantee is an independent contract between the bank and beneficiary and bank is always obliged to honor its guarantee as long as it is an unconditional and irrevocable one. At the same time, the dispute between the beneficiary and the party at whose instance the bank has given the guarantee is immaterial and is of no consequence and only two exceptions to the rule have been carved out. The first is when there is a fraud of which the Bank has notice and a fraud of the beneficiary from which it seeks to benefit. The second exception to the general rule of non-intervention is such when there is an "irretrievable injury" or "irretrievable injustice" that would occur to the bank".

12. He also relied upon the judgment of the Hon'ble Apex Court in Ansal

Engineering Projects Limited v. Tehri Hydro Development Corporation

Limited3, wherein a three-judge bench of the Hon'ble Apex Court held that:

"It is settled law that bank guarantee is an independent and distinct contract between the bank and the beneficiary and is not qualified by the underlying transaction and the validity of the primary contract between the person at whose instance the bank guarantee was given and the beneficiary. Unless fraud or special equity exists, is pleaded and prime facie established by strong evidence as a triable issue, the beneficiary cannot be restrained from encashing the bank guarantee even if dispute between the beneficiary and the person at whose instance the bank guarantee was given by the Bank, had arisen in performance of the contract or execution of the Works undertaken in furtherance thereof. The bank unconditionally and irrevocably promised to pay, on demand, the amount of liability undertaken in the guarantee without any demur or dispute in terms of the bank guarantee. The object behind is to inculcate respect for free flow of commerce and trade and faith in the commercial banking transactions unhedged by pending disputes between the beneficiary and the contractor".

2020 (13) SCC 574

1996 5 SCC 450

Dr. GRR ,J W.P. Nos.21932 and 28909 of 2021

13. He also relied upon the judgment of the Hon'ble Apex Court in

Hindustan Corporation Limited v. State of Bihar4, wherein a two-judge

bench of the Hon'ble Apex Court held that:

"What is important, therefore, is that the Bank Guarantee should be in unequivocal terms, unconditional and recite that the amount would be paid without demur or objection and irrespective of any dispute that might have cropped up or might have been pending between the beneficiary under the Bank Guarantee or the person on whose behalf the Guarantee was furnished. The terms of the Bank Guarantee are, therefore, extremely material. Since the Bank Guarantee represents an independent contract between the Bank and the beneficiary, both the parties would be bound by the terms thereof. The invocation, therefore, will have to be in accordance with the terms of the Bank Guarantee; or else, the invocation itself would be bad."

14. He also relied upon the judgment of the Hon'ble Apex Court in SBI v.

Mula Sahakari Sakhar Karkhana Limited5, wherein a two-judge bench of the

Hon'ble Apex Court held that:

"It is beyond any cavil that a bank guarantee must be construed on its own terms. It is considered to be a separate transaction". "If a construction, as was suggested by Mr. Naphade, is to be accepted, it would also be open to a banker to put forward a case that absolute and unequivocal bank guarantee should be read as a conditional one having regard to circumstances attending thereto. It is, to our mind, impermissible in law."

15. The settled position in law that emerges from the precedents of this Court

is that the bank guarantee is an independent contract between bank and the

beneficiary and the bank is always obliged to honor its guarantee as long as it is

an unconditional and irrevocable one. The dispute between the beneficiary and

(1999) 8 SCC 436

(2006) 6 SCC 293

Dr. GRR ,J W.P. Nos.21932 and 28909 of 2021

the party at whose instance the bank has given the guarantee is immaterial and is

of no consequence. The exceptions to this rule is when there is a clear case of

fraud, irretrievable injustice or special equities. The Court ordinarily should not

interfere with the invocation or encashment of the bank guarantee so long as the

invocation is in terms of the bank guarantee.

16. He also relied upon the judgment of the Hon'ble Apex Court in Bank of

India v. Nangia Constructions (I) Pvt. Ltd., and others6 wherein it was held

that:

"It is unfortunate that a nationalized bank is finding excuses for refusing to make the payment on totally untenable and frivolous grounds. The Division Bench was fully justified in making observations regarding the conduct of the nationalized bank. The entire trust, faith and confidence of people depend on the conduct and credibility of the nationalized bank. In the present day world, the national and international commercial transactions largely depend on bank guarantees. In case the banks are permitted to dishonour their commitments by adopting such subterfuges, the entire commercial and business transactions will come to a grinding halt. This principle has been reiterated in large number of cases by this court. We do not deem it appropriate to burden this judgment by reiterating all those judgments".

17. He also relied upon the judgment of the Hon'ble Apex Court in Uttar

Pradesh Federation Ltd., v. Singh Consultants and Engineering (P) Ltd.7,

wherein, while explaining the salient features of letter of credit, it was held

that:

"The letter of credit has been developed over hundreds of years of international trade. It was most commonly used in conjunction with the sale

AIR 2008 SC 2906

(1998) 1 SCC 174

Dr. GRR ,J W.P. Nos.21932 and 28909 of 2021

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) receives payment from issuing bank when he presents a demand as per terms of the documents. The bank must pay if the documents are in order and the terms of credit are satisfied. The bank, however, was not allowed to determine whether the seller had actually shipped the goods or whether the goods conformed to the requirements of the contract. Any dispute between the buyer and the seller must be settled between themselves. The Courts, however, carved out an exception to this rule of absolute independence. The Courts held that if there has been "fraud in the transaction" the bank could dishonour beneficiary's demand for payment. The Courts have generally permitted dishonour only on the fraud of the beneficiary, not the fraud of somebody else."

18. The learned senior counsel for the respondents also relied upon the same

judgment on the ground that 'fraud unravels all.' It was held that:

"The whole commercial purpose for which the system of confirmed irrevocable documentary credits has been developed in international trade is to give to the seller an assured right to be paid before he parts with control of the goods and that does not permit of any dispute with the buyer as to the performance of the contract of sale being used as a ground for non-payment or reduction or deferment of payment". "To this general statement of principle as to the contractual obligations of the confirming bank to the seller, there is one established exception: that is, where the seller, for the purpose of drawing on the credit, fraudulently presents to the confirming bank documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue. Although there does not appear among the English authorities any case in which this exception has been applied, it is well established in the American cases, of which the leading or 'landmark' case is Sztejn v. Henry Schroder Banking Corp., [ 1941] 3 1 NYS 2d 631. This judgment of the New York Court of Appeals was referred to with approval by the English Court of Appeal in Edward Owen Engineering Ltd. v. Barclays Bank International Ltd. [1978] 1 All E.R. 979 (1978) QB 159 though this was actually a case about a performance bond under which a bank assumes obligation to a buyer analogous to those assumed by a confirming bank to the seller under a documentary credit. The exception for fraud on the part of the beneficiary seeking to avail himself of the credit is a clear application to the maxim ex trupi cause non oritur actio or if plain English is to be preferred, 'fraud

Dr. GRR ,J W.P. Nos.21932 and 28909 of 2021

unravels all', the courts will not allow their process to be used by a dishonest person to carry out a fraud."

19. The learned senior counsel for the respondents also relied upon the

judgment of the High Court of Calcutta in AIMS India Private Ltd., and

others v. Indian Bank and others8 on the ground that a writ was not

maintainable in the matters of Bank Guarantees as there was no public law

element involved in it and it would arise out of a contract. It was held therein

that:

"The claim of the petitioner is essentially a money claim. The bank guarantee is a contract between the bankers and the beneficiary. Although the same had been furnished at the instance of the petitioner, it cannot be said that the agreement was a tripartite one".

"This bench was also recently in A.C. Roy and Ors. v. Union of India and Ors. reported in MANU/WB/0035/1995: AIR1995Cal246 relying upon a large number of Supreme Court decisions, decisions of this court as also Patna High Court, enter alia, held that a dispute under a bank guarantee is a private dispute and the same does not involve any public element and, thus no writ is maintainable".

"It was held- "Right to enforce bank guarantee arises out of a contract qua- contract".

"There is no public law element involved in it".

"Thus a writ will not issue in the matter of enforcement of bank guarantee unless there exists a public law element."

20. As seen from the facts of the case, the bank issued 5 Bank Guarantees for

a total amount of Rs.7,15,00,000 i.e, B.G. No.12821IGL0002621 dated

17.04.2021 for an amount of Rs.1,07,50,000, B.G. No. 12821IGL0002721 dated

23.04.2021 for an amount of Rs.92,50,000, B.G. No. 12821IGL0003321 dated

1997 (4) SCC 237

Dr. GRR ,J W.P. Nos.21932 and 28909 of 2021

20.05.2021 for an amount of Rs.2,15,00,000, B.G No. 12821IGL0003421 dated

07.06.2021 for an amount of Rs.1,50,00,000, B.G, No.12821IGL0003521 dated

07.06.2021 for an amount of Rs.1,50,00,000, for a period of one year in favour

of the petitioner and the bank also issued 11 Bank Guarantees for a sum of

Rs.16,61,58,250/-, total 16 bank guarantees for a total sum of Rs.23,76,58,250/-

in favour of the petitioner. The respondent bank had closed 11 Bank Guarantees

for a sum of Rs.16,61,58,250/- and the other 5 Bank Guarantees for an amount

of Rs.7,15,00,000 are live. The contention of the respondent bank was that one

M/s.OFB Tech. Private Limited inquired about bank guarantee for Rs.2.00

Crores and it sent a reply stating that the said Bank Guarantee did not exist and

it was not issued by their branch but the said M/s OFB Tech. Private Limited

filed a writ petition before the High Court at New Delhi, suspecting foul play the

bank lodged a complaint and the matter was under investigation. The bank also

issued a supplementary complaint on 07.09.2021 requesting the authorities to

investigate into the said matter and to determine who was holding the original

bank guarantee and whether or not the contracts entered between the petitioner

and the beneficiary were genuine or not and had any material being supplied for

the alleged advancement/ mobilization of bank guarantee executed by the

parties.

Dr. GRR ,J W.P. Nos.21932 and 28909 of 2021

21. Thus the bank was suspecting that the alleged contracts between the

borrower and the beneficiaries were non-existent and no real work had been

allotted by the petitioners to the borrower and that it was induced by the

petitioners and the borrower by fraud and misrepresentation to issue the bank

guarantees at the first instance to a non-existent contract. The contention of the

bank was that if the contract was non-existent, then the bank guarantees issued

by the respondent bank would become voidable under Sections 17, 18 and 19 of

the Indian Contract Act.

22. The record would also disclose that the petitioners had also filed a

complaint before the Banking Ombudsman.

23. When the matters were under investigation and fraud was alleged and the

investigating authorities had to investigate the persons involved in the said fraud

and whether there was any nexus in between the borrower and the beneficiaries

and whether the beneficiaries had really paid the mobilization advance etc. to

the borrower and had to determine which bank guarantee was original and

genuine as per the forensic report and all the parties were suspecting each other

and were contending that they were cheated by others and a supplementary

complaint was lodged by the respondent bank seeking to investigate the role of

the petitioners in the said fraud, it is considered not fit to issue any directions to

the bank to honour both the closed and live bank guarantees.

Dr. GRR ,J W.P. Nos.21932 and 28909 of 2021

24. In the result, the Writ Petition is dismissed. No order as to costs.

Miscellaneous Petitions pending, if any, shall stand closed.

_____________________ Dr. G. RADHA RANI, J Date: 26.10.2022 NSK

Dr. GRR ,J W.P. Nos.21932 and 28909 of 2021

17.