2003 (4) TMI 400 - HC - Companies Law

Summary

Issues Involved:
1. Whether a third party can invoke the moratorium available under the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA).
2. Whether the Bank of India is liable for payments under the Letters of Credit issued in favor of the Plaintiff.
3. The applicability of Section 22(1) of SICA in staying proceedings against the Bank.
4. The distinction between Letters of Credit and Bank Guarantees in the context of SICA.
5. The relevance of discrepancies in documentation and the Bank's obligations under the Letters of Credit.
6. The implications of the Plaintiff's previous unsuccessful writ petition.
7. The impact of HILTON being declared a sick company under SICA on the Bank's liability.

Issue-Wise Detailed Analysis:

1. Whether a third party can invoke the moratorium available under SICA:
The court examined whether the Bank of India, as a third party, could invoke the moratorium under SICA due to HILTON's status as a sick company. The judgment referenced the decision in Maharashtra Tubes Ltd. v. State Industrial & Investment Corpn. of Maharashtra Ltd., emphasizing that the provisions of SICA are paramount over other laws. The court concluded that the moratorium under Section 22(1) of SICA extends to third parties, including guarantors, as established in Patheja Bros. Forgings & Stamping v. I.C.I.C.I. Ltd. The court stated, "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 without the consent of the Board or the appellate authority."

2. Whether the Bank of India is liable for payments under the Letters of Credit issued in favor of the Plaintiff:
The court held that the Letters of Credit constituted an independent obligation of the Bank, separate from the underlying contract between the Plaintiff and HILTON. The court cited several precedents, including U.P. Cooperative Federation Ltd. v. Singh Consultants & Engineers (P.) Ltd., which established that a letter of credit is an instrument of payment independent of the underlying transaction. The court noted, "the Bank issuing it is liable independent of the party at whose instance the Letter of Credit was issued."

3. The applicability of Section 22(1) of SICA in staying proceedings against the Bank:
The court analyzed Section 22(1) of SICA, which suspends legal proceedings against a sick industrial company. It concluded that this suspension did not apply to the Bank's obligations under the Letters of Credit, as these obligations were independent of HILTON's status. The court stated, "the liability of the Bank is circumscribed by the Letter of Credit itself."

4. The distinction between Letters of Credit and Bank Guarantees in the context of SICA:
The court distinguished between Letters of Credit and Bank Guarantees, noting that while both involve the bank's commitment, a Letter of Credit is an independent payment obligation. The court referenced the decision in United Commercial Bank v. Bank of India, which emphasized the independent nature of Letters of Credit. The court concluded, "a letter of credit is an instrument of payment in itself, having no linkage with the party at whose instance it has been issued."

5. The relevance of discrepancies in documentation and the Bank's obligations under the Letters of Credit:
The court found that the Bank's obligation to honor the Letters of Credit was not negated by discrepancies in documentation, as these discrepancies were not substantial. The court referenced the decision in U.P. State Sugar Corpn. v. Sumac International Ltd., which held that banks must honor Letters of Credit if the documents presented comply with the terms of the credit. The court stated, "the Bank is obliged to make payment strictly in conformity with the terms of engagement contained in the Letter of Credit."

6. The implications of the Plaintiff's previous unsuccessful writ petition:
The court noted that the Plaintiff's previous writ petition was unsuccessful but did not find this relevant to the current proceedings. The court focused on the independent nature of the Letters of Credit and the Bank's obligations under them.

7. The impact of HILTON being declared a sick company under SICA on the Bank's liability:
The court concluded that HILTON's status as a sick company did not affect the Bank's liability under the Letters of Credit. The court emphasized that the Bank's obligations were independent of HILTON's financial status. The court stated, "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."

Conclusion:
The court decreed in favor of the Plaintiff, holding the Bank liable for the sum of Rs. 87,99,121 with interest. The suit against Defendant No. 3 (HILTON) was dismissed without prejudice to any pending legal action or the Bank's right to recover sums from HILTON. The court emphasized the independent nature of the Letters of Credit and the Bank's obligation to honor them regardless of HILTON's status under SICA.