2020 (1) TMI 1607 - HC - Insolvency and Bankruptcy

Legality of invocation of Bank Guarantee - fraudulent or not - tri-partite agreements - seeking grant a decree of permanent injunction restraining defendant No.1 from invoking/enforcing the Bank Guarantee - HELD THAT - Once the Court below had found that the Bank Guarantees furnished by the 1st respondent to the appellant are irrevocable, that they were rightly invoked under Ex.P39 and such invocation does not amount to fraud, the Court below ought to have rejected both the applications and denied relief to the 1st respondent. The law relating to invocation of Bank Guarantees is well settled. In Himadri Chemicals Industries Ltd. Vs. Coal Tar Refining Co. 2007 (8) TMI 704 - SUPREME COURT , the Supreme Court had summarized the principles for grant or refusal to grant an injunction restraining the enforcement of a Bank Guarantee or letter of credit, holding that Since a bank guarantee or a letter of credit is an independent and a separate contract and is absolute in nature, the existence of any dispute between the parties to the contract is not a ground for issuing an order of injunction to restrain enforcement of bank guarantees or letters of credit. Having perused the contents of the plaint filed by the 1st respondent in the instant case, it is found that the allegations therein do not constitute prima facie a plea of egregious fraud and at best amount to an alleged breach of contract by the appellant. As pointed out already even the Court below had observed that invocation of Bank Guarantees does not amount to fraud - It cannot also be said that by mere invocation of Bank Guarantees, any irretrievable harm or injustice would be caused to the 1st respondent. Even if the amount covered by the Bank Guarantees is paid to the 4th respondent, which is one of the creditors of the appellant, if the 1st respondent were to succeed in the suit or in the arbitration proceedings, it can still recover the amount from the 4th respondent, which is a public sector financial institution. Appeal allowed.

Issues Involved:
1. Fraudulent invocation of Bank Guarantees.
2. Interim injunction against the invocation of Bank Guarantees.
3. Prima facie case for the existence of triable issues.
4. Balance of convenience and irreparable loss.
5. Legal principles regarding the invocation of Bank Guarantees.

Detailed Analysis:

1. Fraudulent Invocation of Bank Guarantees:
The central issue in the suit was whether the appellant's invocation of two Bank Guarantees was fraudulent, illegal, and void. The plaintiff contended that the appellant fraudulently invoked the Bank Guarantees through letters dated 18.10.2019, despite an agreement on 16.05.2018 indicating that the Bank Guarantees would be returned. The appellant denied these allegations, asserting that the invocation was due to the non-performance of contractual obligations by the plaintiff.

2. Interim Injunction Against the Invocation of Bank Guarantees:
The plaintiff sought an interim injunction to restrain the appellant from invoking the Bank Guarantees until the disposal of the suit. The Court below granted ad interim injunctions, restraining the appellant from continuing the invocation process, provided the plaintiff kept the Bank Guarantees alive. The appellant argued that the injunction applications should be dismissed as infructuous since the Bank Guarantees had already been invoked before the suit was filed.

3. Prima Facie Case for the Existence of Triable Issues:
The Court below concluded that there was a prima facie case for the existence of triable issues based on the minutes of the meeting dated 16.05.2018, which indicated an agreement to return the Bank Guarantees. However, the appellant contended that the last sentence of the minutes suggested that the issue of return was to be further discussed, indicating no unequivocal agreement to return the Bank Guarantees.

4. Balance of Convenience and Irreparable Loss:
The Court below held that the balance of convenience favored the plaintiff, as the invocation of the Bank Guarantees would result in the amount being paid to the appellant's creditors, making it difficult for the plaintiff to recover the money. The Court concluded that irreparable loss would be caused to the plaintiff if the injunction was not granted. The appellant argued that the invocation of the Bank Guarantees would not cause irretrievable harm, as the plaintiff could still recover the amount from the 4th respondent, a public sector financial institution, if successful in the suit or arbitration proceedings.

5. Legal Principles Regarding the Invocation of Bank Guarantees:
The judgment emphasized the well-settled legal principles regarding the invocation of Bank Guarantees. The Supreme Court's decision in Himadri Chemicals Industries Ltd. Vs. Coal Tar Refining Co. was cited, summarizing that:
- The beneficiary is entitled to realize the Bank Guarantee irrespective of pending disputes.
- The bank must honor the guarantee as per its terms.
- Courts should be slow in granting injunctions against the realization of Bank Guarantees.
- Fraud must be of an egregious nature to vitiate the Bank Guarantee.
- Mere breach of contract is insufficient to justify an injunction.

The Court found that the allegations in the plaint did not constitute egregious fraud but rather an alleged breach of contract. It concluded that the invocation of the Bank Guarantees did not amount to fraud and that no irretrievable harm or injustice would be caused to the plaintiff by the invocation.

Conclusion:
The High Court allowed the appeals, setting aside the orders of the Court below granting interim injunctions. It dismissed the applications for interim relief, holding that the invocation of the Bank Guarantees was proper and did not constitute fraud. The Court reiterated the principles governing the invocation of Bank Guarantees and found that the plaintiff's allegations did not meet the threshold for granting an injunction.

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