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TMI Blog2003 (4) TMI 400X X X X Extracts X X X X X X X X Extracts X X X X ..... ank within ninety days from the date of despatch in respect of 100% of the invoice value, but this was not done, ostensibly because of some discrepancies in the documentation. It is alleged by the Plaintiff that the Bank has fabricated letters in this context (this allegation seems to have been fortified by the Plaintiff s Bankers namely State Bank of India), in order to circumvent their monetary obligations established under the Irrevocable Letters of Credit. However, one payment of Rs. 10,45,612 was released by the Bank against a particular Letter of Credit dated 24-3-1999. A prevaricatory stance has been adopted by the Bank in respect of the notice dated 7-9-1999. The Plaintiff has asserted that but for the Letters of Credit it would not have effected supplies to HILTON. The Plaintiff had unsuccessfully invoked the extraordinary writ jurisdiction of this Court in CWP No. 5894/1999. So far as HILTON is concerned, it has placed on record the factum of its having been declared sick under section 3(1)( o ) of SICA. It appears that the Bank has been directed to work out a package under sections 17(2) and 18 of the SICA, in the public interest. 2. The decision in Maharashtra Tube ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcept with the consent of the Board or, as the case may be, the appellate authority." 4. In the Maharashtra Tubes Ltd. s case ( supra ) the Apex Court has opined that the provisions of the State Financial Corporation Act, 1951 would be subservient to those contained in SICA. If that be so, the immediate conclusion which one would rush to would be that, a fortiori, a Letter of Credit should also come within the mantle of the moratorium. On careful cogitation and reflection however, the factual matrix is essentially dissimilar. In that case it was observed as under : "10. ....Section 22(1) shorn of the irrelevant part provides that where an appeal under section 25 relating to an industrial company is pending, then, notwithstanding anything contained in any other law, no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for appointment of a receiver in respect thereof shall lie or be proceeded with further, except with the consent of the BIFR or, as the case may be, the appellate authority. The purposes and object of this provision is clearly to await the outcome of the ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellate authority to proceed against the industrial concern. The law has not left them without a remedy. We are, therefore, of the opinion that the word proceedings in section 22(1) cannot be given a narrow or restricted meaning to limit the same to legal proceedings. Such a narrow meaning would run counter to the scheme of the law and frustrate the very object and purpose of section 22(1) of the 1985 Act. 11. to 13.****** 14. ...The High Court was considerably influenced by the fact that the appellant company owed crores of rupees to banks and felt that so far as such creditors are concerned, different considerations may come into play but the High Court with respect failed to appreciate that the 1985 Act was enacted primarily to assist sick industrial undertakings which inter alia failed to meet their financial obligations. It is, therefore, difficult to accept the view of the High Court that where the creditors of a sick industrial concern happen to be banks or State Financial Corporations different considerations would come into play. It must be realised that in the modern industrial environment large industries are generally financed by banks and statutory corporat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 997] 6 SCC 669 1 , the Company had relied on the former case whereas the State had relied on the latter case. The Bench favoured the earlier view in Shree Vallabh Glass Works Ltd. s case ( supra ). It held that - "In the larger interest of the industrial health of the nation, section 22 of the Central Act requires all creditors seeking to recover their dues from sick industrial companies in respect of whom an inquiry under section 16 is pending or a scheme is under preparation or consideration or has been sanctioned, to obtain the consent of the Board to such recovery. If such consent is not secured and the recovery is deferred, the creditors remedy is protected for the period of deferment and is, by reason of section 22(5), excluded in the computation of the period of limitation.... Therefore, the State cannot recover the arrears of sales tax from the appellant company without first seeking the consent of the said Board in this behalf". The Corromandal view has been followed by R.C. Lahoti, J., as his Lordship then was, in Sirmor Sudburg Auto Ltd. v. Kuldip Singh Lamba [1998] 91 Comp. Cas. 727 (Delhi) and by a Division Bench of the Calcutta High Court in Taulis Pharma Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny loan or advance granted to the concerned industrial company will lie or can be proceeded with or without the consent of the Board or the appellate authority. When the words of a legislation are clear, the court must give effect to them as they stand and cannot demur on the ground that the Legislature must have intended otherwise." (pp. 256-258) 7. After the decision in Patheja Bros. Forgings Stamping s case ( supra ) there is no room for debate before me that the ambit of section 22 of SICA extends even to third parties who have acted as guarantors in respect of loans or advances or debts incurred by an industrial company in respect of which an inquiry has been registered under section 16 of SICA ( see also Real Value Appliances Ltd. v. Canara Bank JT 1998 (3) SC 715). Therefore, it is not open to consider the argument that since the Bank is not sick as contemplated by SICA, the suit should continue against it even if it relates to a guarantee extended by a third party. For this very reason it is also irrelevant that the Bank is not an industrial company as envisaged in SICA. There, however, appears to be substance in the contention of Mr. Mata that the decision i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the kind which was the subject-matter of the decision in the Itek Corpn. case, 566 Fed Supp. 1210. In that case an exporter in USA entered into an agreement with the Imperial Government of Iran and sought an order terminating its liability on stand by letters of credit issued by an American Bank in favour of an Iranian Bank as part of the contract. The relief was sought on account of the situation created after the Iranian revolution when the American Government cancelled the export licences in relation to Iran and the Iranian Government had forcibly taken 52 American citizens as hostages. The US Government had blocked all Iranian assets under the jurisdiction of United States and had cancelled the export contract. The Court upheld the contention of the exporter that any claim for damages against the purchaser if decreed by the American Courts would not be executable in Iran under these circumstances and realisation of the bank guarantee/letters of credit would cause irreparable harm to the plaintiff. This contention was upheld. To avail of this exception, therefore, exceptional circumstances which make it impossible for the guarantor to reimburse himself if he ultimately succe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ealised because the appellant is a sick industrial company in respect of which a reference is pending before the Board for Industrial and Financial Reconstruction under the Sick Industrial Companies (Special Provisions) Act, 1985. The respondent contends that even if it succeeds before the Arbitrator it will not be able to realise its claim from the appellant. The mere fact that a reference under the Sick Industrial Companies (Special Provisions) Act, 1985 is pending before the Board, is in our view, not sufficient to bring the case in the ambit of the "irretrievable injustice" exception. Under the scheme of the said Act the Board is required to make such inquiry as it may deem fit for determining whether any industrial company has become a sick industrial company. Under section 16(4) where the Board deems it fit to make an inquiry or to cause an inquiry to be made in this connection, it may appoint one or more persons to be special directors for safeguarding the financial and other interests of the company or in the public interest. Under section 17 after making an inquiry, if the Board is satisfied that a company has become a sick industrial company, the Board may then decide, by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d from the bank guarantees in question for the purpose of recovery of claims, if any, which the respondent may ultimately be found to be entitled to recover from the appellant. Any scheme which the Board may frame under the said Act will be subject to this undertaking given by the appellant to set apart the amounts realised under the bank guarantees in question for meeting any validly adjudicated claims of the respondent against the appellant under or arising from the said contract. If any scheme is required to be framed, the Board shall take into account this undertaking, while framing the scheme." 9. In U.P. State Sugar Corpn. s case ( supra ), the arguments raised to support the continuance of the injunction were that the beneficiary had terminated the contract on the incorrect ground that time was of the essence of the contract, and that the chances of making any recovery if it succeeded in the Arbitration was illusory since the fortunes of the rival company now lay in the hands of BIFR. These arguments did not find favour with the Bench which was constituted by M.M. Punchi and Sujata Manohar, JJ. These passages were relied upon by a Bench of the Supreme Court comprising ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a limit as to amount) upon him, with an undertaking to honour the drafts on presentation." In the New Lexicon Websters Dictionary this term has been explained as "a letter addressed by a banker to an agent authorising the agent to give credit, within stated limits, to the bearer named in the letter; and a letter from a banker to a client authorising him to claim credit from the banker s agent." Blacks Law Dictionary contains a lengthy and elaborate definition in these terms : "Letter of credit. A written instrument, addressed by one person to another, requesting the latter to give credit to the person in whose favour it is drawn. A letter of credit is in the nature of a negotiable instrument, and is a letter whereby a person requests another to advance money or give credit to a third person, and promises to repay person making advancement. A letter authorizing one person to pay money or extend credit to another on the credit of the writer. An engagement by a bank or other person made at the request of a customer that the issuer will honour drafts or other demands for payment upon compliance with the conditions specified in the credit. A credit may be either revocable or irr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... permit the buyer to reject the goods and to refuse payment therefor; and, conversely, the buyer is not entitled to an injunction restraining the seller from dealing with the letter of credit if the goods are defective. Chalmers on Bills of Exchange explains the legal position in these words: The modern commercial credit serves to interpose between a buyer and seller a third person of un-questioned solvency, almost invariably a banker of international repute; the banker on the instructions of the buyer issues the letter of credit and thereby undertakes to act as paymaster upon the seller performing the conditions set out in it. A letter of credit may be in any one of a number of specialised forms and contains the undertaking of the banker to honour all bills of exchange drawn thereunder. It can hardly be over-emphasised that the banker is not bound or entitled to honour such bills of exchange unless they, and such accompanying documents as may be required thereunder, are in exact compliance with the terms of the credit. Such documents must be scrutinised with the meticulous care, the maxim de minimis non curat lex cannot be invoked where payment is made by the letter of cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. An elaborate commercial system has been built up on the footing that bankers confirmed credits are of that character, and, in my judgment, it would be wrong for this Court in the present case to interfere with that established practice. It may also be remembered that a vendor of goods selling against a confirmed letter of credit is selling under the assurance that nothing will prevent him from receiving the price. That is of no mean advantage when goods manufactured in one country are being sold in another. It is, furthermore, to be observed that vendors are often reselling goods bought from third parties. When they are doing that, and when they are being paid by a confirmed letter of credit, their practice is - and I think it was followed by the defendants in this case - to finance the payments necessary to be made to their suppliers against the letter of credit. That system of financing these operations, as I see it, would break down completely if a dispute as between the vendor and the purchaser was to have the effect of freezing if I may use that expression the sum in respect of which the letter of credit was opened. In Urquhart Lindsay Co. Ltd. v. Eastern Bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that sica was merely a nominee of Marco Polo and has no rights of his own to the sum of the credit. Sica, however, claimed payment of the full amount of the credit. The defendants asked further instructions from Seattle Bank but despite Seattle Bank s instructions decided to comply with Sica s request. After informing Seattle Bank of their intention, they paid Sica the full amount of the credit. Plaintiffs thereupon brought an action in the District Court of New York for the recovery of the moneys paid to Sica. The action was dismissed by the trial Court and that decision was affirmed by the Court of Appeals. That decision establishes the well known principle that the letter of credit is independent of and unqualified by the contract of sale or underlying transaction. The autonomy of an irrevocable letter of credit is entitled to protection. As a rule Courts refrain from interfering with that autonomy." (pp. 895-896) 13. On first principles, the Hon ble Supreme Court has made the following observations in respect of letters of credit in Hira Lall Sons v. Lakshmi Commercial Bank [2002] 6 SCC 389 1 : "4. This is an application based on a letter of credit. The settled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his rule of absolute independence. The courts held that if there has been fraud in the transaction the bank could dishonour beneficiary s demand for payment. The courts have generally permitted dishonour only on the fraud of the beneficiary, not the fraud of somebody else. 46. It was perhaps for the first time the said exception of fraud to the rule of absolute independence of the letter of credit has been applied by Shientag, J. in the American case of Sztejn v. J. Henry Schroder Banking Corporation 31 NYS 2d 631. Mr. Sztejn wanted to buy some bristles from India and so he entered into a deal with an Indian seller to sell him a quantity. The issuing bank issued a letter of credit to the Indian seller that provided that, upon receipt of appropriate documents, the bank would pay for the shipment. Somehow, Mr. Sztejn discovered that the shipment made was not creates of bristles, but creates of worthless material and rubbish. He went to his bank which probably informed him that the letter of credit was an independent undertaking of the bank and it must pay. 47 to 51****** 53. Whether it is a traditional letter of credit or a new device like performance bond or performance gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e letter of credit and there is no discrepancy, it is bound to honour the demand of the seller for encashment. While doing so it must take reasonable care. It is not permissible for the bank to refuse payment on the ground that the buyer is claiming that there is a breach of contract. Nor can the bank try to decide this question of breach at that stage and refused payment to the seller. Its obligation under the document having nothing to do with any dispute as to breach of contract between the seller and the buyer." The Federal Bank was the negotiating Bank on behalf of Bank of Maharashtra which was the author of the Letter of Credit. The relation between the two Banks was held to be that of principal and agent. The Federal Bank had sent copies of the documents received by it from the seller to the issuing banker, namely, Bank of Maharashtra. The latter took an inordinate time to respond and in the meanwhile, strictly in conformity with the Letter of Credit, Federal Bank paid out moneys to the Seller. It was subsequently discovered that the Seller had allegedly committed a forgery on the documents. Nevertheless, since there was no infraction of the terms of the Letter of Credit t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are given or imposed by it, in the absence of the appropriate provisions in the letter of credit. The banker owes a duty to the buyer to ensure that the documents tendered by the sellers under a credit are complied with those for which the credit calls and which are embodied in terms of paying or negotiating bank. The description of the goods in the relative bill of exchange must be the same as the description in the letter of credit, that it, the goods themselves must in each case be described in identical terms, even though the goods differently described in the two documents are, in fact, the same. It is the description of the goods that is all important and if the description is not identical it is the paying bank s duty to refuse payment." (p. 766) A reading of the judgment will also disclose that while there is a close affinity between a Bank Guarantee and a Letter of Credit, there is nonetheless a significant distinction between them. Where the SICA comes into play this distinction assumes great importance. In the case of a Bank Guarantee does the party who has received financial and pecuniary benefits remains the principal debtor. Essentially the guarantor would be calle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment - to pay at sight; ii. if the Credit provides for deferred payment - to pay on the maturity date(s) determinable in accordance with the stipulations of the Credit; iii. if the Credit provides for acceptance : a. by the Issuing Bank - to accept Draft(s) drawn by the Beneficiary on the Issuing Bank and pay them at maturity, or b. by another drawee bank - to accept and pay at maturity Draft(s) drawn by the Beneficiary on the Issuing Bank in the event the drawee bank stipulated in the Credit does not accept Draft(s) drawn on it, or to pay Draft(s) accepted but not paid by such drawee bank at maturity; iv. If the Credit provides for negotiations - to pay without recourse to drawers and/or bona fide holders, Draft(s) drawn by the Beneficiary and/or document(s) presented under the Credit. A Credit should not be issued available by Draft(s) on the Applicant. If the Credit nevertheless calls for Draft(s) on the Applicant, banks will consider such Draft(s) as an additional document(s). All these Articles in fact clearly the independent nature of a Letter of Credit. The failure to effect recoveries from the Buyer has no relevance and it stands to reason that where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t whose instance it has been issued. If this is the correct understanding of the law then it would be of no consequence whatsoever that HILTON had come under the protective mantle of SICA at any time after the issuance of the Letter of Credit. Since there is no term excusing or exonerating the Bank from making payment on the occurrence of such an event, the liability of the Bank is circumscribed by the Letter of Credit itself. If any defences are to be found they must be located in the Letter of Credit itself. This is the distinction between the case at hand and Patheja Bros case ( supra ) where ICICI had filed a suit against Patheja Brothers to recover the amounts of loan extended to it and guaranteed by the third party. The terms of the guarantees are not readily available from the decision of the Hon ble Supreme Court in Patheja Bros. case ( supra ) and I would presume that it would fall in the genre envisaged in section 126 of the Contract Act, 1872. This section states that "a contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The persons who gives a guarantee is called the surety ; the per ..... 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