1982 (10) TMI 134 - SC - Companies Law

Whether the whole of ₹ 50,000 should be demanded or any lesser sum should be demanded from the bank was entirely within the choice of the Electricity Board? Held that - Appeal allowed. The bank has, therefore, to pay the amount due under the letter of guarantee given by it to the Electricity Board. On such payment it is open to the bank to have recourse to the securities given by the company in liquidation for the purpose of the issue of the letter of guarantee. The Electricity Board is not concerned with what the bank does in order to reimburse itself after making payment of the amount guaranteed by it. It is the responsibility of the bank to deal with the securities held by it in accordance with law. It was not, however, open to the company judge to make any order under the Companies Act prohibiting the Electricity Board from realising the amount guaranteed by the bank as this had nothing to do with the assets of the company in liquidation, The order of the company judge and the judgment of the Division Bench in appeal are, therefore, liable to be set aside and they are accordingly set aside.

Summary

Issues:
- Interpretation of bank guarantee in the context of liquidation proceedings
- Effect of liquidation on the rights of the creditor to recover from the bank under the guarantee
- Liability of the bank under the terms of the guarantee
- Applicability of the Indian Contract Act in determining the liability of the surety
- Distinction between contracts of guarantee and indemnity
- Authority of the Electricity Board to recover the guaranteed amount from the bank

Analysis:

The case involved an appeal by the Maharashtra State Electricity Board against a judgment of the High Court of Kerala regarding the recovery of a guaranteed amount from a bank in the context of liquidation proceedings of a company. The appellant had entered into contracts with the company in liquidation, which provided for a bank guarantee of Rs. 50,000 to be furnished by the company. The bank guarantee was unconditional and allowed the Electricity Board to demand payment from the bank within 48 hours without proving any default by the company. The guarantee was not affected by the liquidation proceedings of the company. The Court emphasized that the liability of the bank under the guarantee was absolute and unconditional, as per the terms of the contract. The Court also highlighted that the bank's liability as a guarantor was co-extensive with that of the principal debtor, unless otherwise provided in the contract, as per the Indian Contract Act.

The Court clarified that the bank's obligation to pay the guaranteed amount was independent of any default by the company in liquidation and was not affected by the company's liquidation status. The Court distinguished between contracts of guarantee and indemnity, emphasizing the absolute nature of the bank's liability under the guarantee. The Court cited legal precedents to support its interpretation of the bank's liability under the guarantee, emphasizing that the bank had to honor the guarantee without relying on the company's liquidation status to evade payment. The Court held that the Electricity Board was entitled to recover the guaranteed amount from the bank and that the company's liquidation did not absolve the bank of its liability under the guarantee.

In conclusion, the Court allowed the appeal filed by the Electricity Board, setting aside the orders of the lower courts that restrained the Board from realizing the guaranteed amount from the bank. The Court highlighted that both the Electricity Board and the company in liquidation retained their rights and liabilities under the supply contracts, and any amounts recovered under the guarantee would need to be dealt with in accordance with the terms of those contracts. The Court emphasized that the bank's obligation under the guarantee was separate from the assets of the company in liquidation, and the Electricity Board was entitled to recover the guaranteed amount without hindrance.