2006 (11) TMI 336 - HC - Companies Law

Issues Involved:
1. Applicability of Section 22 of the Sick Industrial Companies (Special Provisions) Act (SICA) to the encashment of a bank guarantee.
2. Entitlement of the plaintiff to the claimed amount and the applicable rate of interest.

Issue-Wise Detailed Analysis:

Issue 1: Applicability of Section 22 of SICA to the Encashment of a Bank Guarantee

7.2 The court first set out the provisions of Section 22(1) of SICA, which states that no proceedings for the enforcement of any security against an industrial company or any guarantee in respect of any loans or advances granted to the industrial company shall lie or be proceeded with further, except with the consent of the Board or the Appellate Authority.

7.3 The court noted that Montari Industries Limited was referred to the Board for Industrial and Financial Reconstruction (BIFR), and thus, no suit for the recovery of money or enforcement of any security against an industrial company would lie without the consent of the Board.

7.4 The plaintiff contended that the claim was against the defendant bank and not the industrial company, making Section 22(1) inapplicable.

8 The central question was whether Section 22(1) of SICA applied to the proceedings for encashment of the bank guarantee against the defendant bank.

9 The plaintiff emphasized undisputed facts, including the execution and irrevocability of the bank guarantee by the defendant bank and the failure of Montari Industries Limited to pay the invoices within 30 days.

10 The plaintiff argued that the bank guarantee was not in respect of any loan or advance granted to Montari Industries Limited, and thus, Section 22(1) did not bar the suit.

11 The plaintiff further contended that bank guarantees are autonomous contracts, imposing an absolute obligation on the bank to fulfill the guarantee, as established in Syndicate Bank v. Vijay Kumar.

12 The court referred to the Supreme Court's decision in Patheja Brothers Forgings & Stamping v. ICICI Ltd., which held that no suit for the enforcement of a guarantee in respect of a loan or advance granted to an industrial company would lie without the consent of the Board.

13 The court also cited Kailash Nath Aggarwal v. Pardeshiya Industrial & Investment Corpn. of Uttar Pradesh Ltd., which distinguished between suits and proceedings and held that Section 22(1) only prohibits recovery against the industrial company.

15 The plaintiff argued that the bank guarantee in question was not in respect of a loan or advance granted to Montari Industries Limited, making the suit maintainable without the Board's consent.

16 The court distinguished the current case from Chandan Capital Services v. Mid East India Ltd., where the guarantee was in respect of a loan or advance.

17 The court referred to LML Ltd. v. Saraswati Trading Co. Ltd., which held that a suit for enforcement of a guarantee not in respect of a loan or advance was not barred by Section 22 of SICA.

19 The court also cited Ved Prakash Agarwal v. Rama Petrochemicals Ltd., where the Bombay High Court held that the protection under Section 22(1) applies only if the guarantee is in respect of a loan or advance granted to the industrial company.

21 The defendant's counsel argued for a broad interpretation of Section 22 to align with the remedial objective of SICA.

25 The court concluded that the transaction in question was not a loan or advance but a commercial transaction, and the guarantee was not in respect of any loan or advance extended to Montari Industries Limited. Therefore, the suit was maintainable without the Board's consent.

26 Issue No. 1 was decided in favor of the plaintiff.

Issue 2: Entitlement of the Plaintiff to the Claimed Amount and the Applicable Rate of Interest

27 With Issue No. 1 decided in favor of the plaintiff, the court addressed the amount to which the plaintiff was entitled and the applicable rate of interest.

28 The plaintiff claimed Rs. 40,83,759.82 with further interest on the principal sum of Rs. 33,36,792.10 at 18% per annum. The defendant did not specifically deny the calculation of the claimed amount.

29 The plaintiff provided affidavits stating that there were no RBI directives on the rate of interest, and banks could fix their own prime lending rates. The State Bank of India's prime lending rates varied from 11% to 10.25% during the relevant period.

30 The plaintiff calculated the amount due as Rs. 65,46,735.77, but conceded that the bank guarantee limited the liability to Rs. 50,00,000 inclusive of interest.

31 The court decreed Rs. 50,00,000 inclusive of interest in favor of the plaintiff, with further interest at 10% per annum from the date of the suit till the decree and 6% per annum from the decree till payment.

32 The suit was disposed of accordingly.

33 Parties were left to bear their own costs.

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