2019 (2) TMI 1453 - HC - Companies Law

Injunction restraining encashment of Bank Guarantees (BGs) and the objection of the defendants to the subject jurisdiction of this Court to entertain these suits - delayed the receipt of payment under the BBG by nearly over three months. HELD THAT - As the Civil Court of Original Jurisdiction to be not having jurisdiction to entertain the dispute subject matter of the present suits. Resultantly, the plaints in the suits are liable to be rejected. What emerges on going through all the documents is that the plaintiff, after submitting the resolution plans and after the same were approved by the CoC, has had second thought and/or was not in a position to furnish PBG and started making counter- offer, of conversion of BBG into PBG and opening of an Escrow Account for the balance amount of the PBG and which was not acceptable to the RP/CoC who, after giving sufficient latitude to the plaintiff have invoked the BGs. It cannot also be lost sight of that in the whole process, considerable time, out of the time bound schedule in terms of the Code for the resolution process, has been wasted and wastage of which time may ultimately result in the possibility of Castex and ARGL Limited being restructured ceasing to exist and being inevitably required to be liquidated, all at the cost of the creditors thereof and wastage of the stressed assets of the said two companies. The loss caused by such conduct of the plaintiff is thus mammoth, having adverse consequences on all the creditors and shareholders of the said two companies and also on the economy of the country and to remedy which, the code was enacted. The NCLT is best equipped to also deal with apportionment of the amount of the BBGs in proper account. The present case thus also falls in the category of cases envisaged in SAW Pipes Ltd. 2003 (4) TMI 438 - SUPREME COURT OF INDIA where loss caused on account of delays in construction of say, a public road, though does not cause loss to any individual or person or company in particular but causes loss to the residents of the country and which is unmeasurable and in which regard a pre-estimate is permitted to be forfeited without proof of any loss. The loss likely to be caused by the conduct of the plaintiff similarly, is to the country as a whole and thus the amount of the BBGs which the plaintiff was required to furnish to ensure that the plaintiff, after furnishing resolution plan does not withdraw, as the plaintiff has done, though not expressly but by conduct, qualifies as a genuine pre-estimate of the loss. On merits also thus, I do not find the plaintiff entitled to a restraint against encashment/payment under the BG. However since this Court has been found to be not having subject jurisdiction to entertain the suits, the plaint in both the suits is rejected. The plaintiff, by instituting the suits has delayed the receipt of payment under the BBG by nearly over three months. The law requires Courts to, while vacating the interim injunction, balance the equities. Though I am refraining from directing the plaintiff to reimburse SBI with interest on the amounts of the BGs but burden the plaintiff in each of the suits with costs of ₹ 25,00,000/- considering the expense incurred by the defendants in contesting the suits including by engaging senior counsels. The plaintiff is directed to pay the said costs to SBI within four weeks of today.

Issues Involved:
1. Jurisdiction of the Civil Court to entertain the suits.
2. Entitlement of the plaintiff to interim injunction restraining encashment of Bank Guarantees (BGs).
3. Validity of the invocation of the BGs by the defendants.
4. Applicability of the Insolvency and Bankruptcy Code, 2016 (Code) to the disputes.

Issue-wise Detailed Analysis:

1. Jurisdiction of the Civil Court to entertain the suits:
The primary contention was whether the Civil Court has jurisdiction to entertain disputes arising under the Insolvency and Bankruptcy Code, 2016. The defendants argued that the Code provides exclusive jurisdiction to the National Company Law Tribunal (NCLT) for matters related to insolvency resolution, as per Sections 60(5)(c), 63, and 231 of the Code. The plaintiff countered that the BGs were not part of the insolvency proceedings and thus fell under the jurisdiction of the Civil Court.

The Court concluded that it lacked jurisdiction over the subject matter, as the disputes arose out of or in relation to insolvency resolution. The Code expressly bars the jurisdiction of Civil Courts in such matters. The Court emphasized that the entire transaction, including the BGs, was within the ambit of the Code, and allowing Civil Courts to entertain such disputes would undermine the objectives of the Code.

2. Entitlement of the plaintiff to interim injunction restraining encashment of BGs:
The plaintiff sought an interim injunction to restrain the encashment of BGs, arguing that the invocation was not in terms of the BGs and that there was no fraud or irretrievable harm. The defendants argued that the BGs were unconditional and that the plaintiff had failed to submit the required Performance Bank Guarantees (PBGs), justifying the invocation.

The Court found that the BGs were unequivocally, irrevocably, and unconditionally payable on demand. The invocation by the State Bank of India (SBI) was in the prescribed format and terms of the BGs. The Court held that the plaintiff failed to demonstrate any fraud of an egregious nature or irretrievable harm, which are the only grounds for restraining payment under unconditional BGs.

3. Validity of the invocation of the BGs by the defendants:
The plaintiff argued that the conditions for the event of forfeiture had not been met, and thus the invocation was invalid. The defendants maintained that the plaintiff's failure to furnish the PBGs constituted a valid ground for invocation.

The Court determined that the invocation was valid and in accordance with the terms of the BGs. The BGs' format required no additional proof beyond the demand letter, which was duly provided by SBI. The Court rejected the plaintiff's contention that the invocation was not justified, as the BGs were unconditional and the plaintiff had agreed to the terms.

4. Applicability of the Insolvency and Bankruptcy Code, 2016 (Code) to the disputes:
The defendants argued that the disputes were intrinsically linked to the insolvency resolution process under the Code, which provides a comprehensive framework for such matters. The plaintiff contended that the BGs were independent contracts not governed by the Code.

The Court held that the disputes were indeed related to the insolvency resolution process and fell under the exclusive jurisdiction of the NCLT. The Code's objective is to provide a unified and expedited insolvency resolution process, and allowing Civil Courts to adjudicate such disputes would contravene this purpose.

Conclusion:
The Court concluded that it did not have jurisdiction to entertain the suits, as the disputes arose out of the insolvency resolution process governed by the Code. The invocation of the BGs by SBI was found to be valid and in accordance with the terms of the BGs. The plaintiff was not entitled to an interim injunction, and the plaints were rejected. The plaintiff was directed to pay costs to SBI for delaying the receipt of payment under the BGs.

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