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TMI Blog2024 (8) TMI 669X X X X Extracts X X X X X X X X Extracts X X X X ..... n ble Supreme Court has noticed the amendment made in Section 14(3) and has also noted the Report of the Insolvency Law Committee dated 26.03.2018 in consequence of which amendments were made in Section 14(3). The Committee in its Report has opined that Assets of the surety are separate from those of the Corporate Debtor and proceeding against the Corporate Debtor may not be seriously impacted by the actions against Assets of third parties like sureties. Thus, it is well settled that Section 14 in no manner impact the right of the Appellant to invoke the Bank Guarantee during pendency of the Moratorium and in the present case, it was during currency of the Moratorium 30.10.2019, the Guarantee was invoked. The observation made by the Adjudicating Authority that reading of Clauses of Performance Bank Guarantee does not give the impression of it being unconditional. There is no dispute between the parties that Mechanical Completion Certificate, the date for Mechanical Completion as per the Contract was 23.08.2018 and Certificate was issued as specifying the date of Mechanical Completion as 31.01.2019 - When the Contractor does not complete the Contract within the period specified, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tee as security for punctual, proper and Contract performance of the obligations under the Contract. Performance Bank Guarantee of an amount of ₹47,72,34,933/- was issued by the State Bank of India in favour of the Appellant. iv. Under the Contract with Respondent No. 1 agreed date for Mechanical Completion was 23.03.2018. Appellant issued a Mechanical Completion Certificate with a Mechanical Completion date of 31.01.2019. v. On 08.03.2019, the Corporate Insolvency Resolution Process (`CIRP ) was initiated against the Respondent No. 1 by the Adjudicating Authority. vi. On 26.08.2019, certain leakage was detected in the LNG Tanks. vii. Appellant communicated the Respondent No. 1 vide email dated 26.08.2019 and asked the Respondent No. 1 to inspect the site. viii. Respondent No. 1 send communication denying its obligation. ix. On 30.10.2019, Appellant invoked the Performance Bank Guarantee by issuing a letter due to persistent and fundamental breaches of the Contract, which included the failure to achieve Mechanical Completion within the agreed time and failure to inspect and repair a serious leakage in the LNG Tank, which arose during the Defects Liability Period. x. On 13.11. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pearing for Respondent No. 2. 4. Learned Counsel for the Appellant, Mr. Krishnendu Dutta challenging the Order impugned submits that the Performance Bank Guarantee given by the State Bank of India in favour of the Appellant was irrevocable and unconditional Performance Bank Guarantee. Respondent No. 1 had to complete the work and agreed date of Mechanical Completion is 23.03.2018, whereas, according to the Certificate issued Mechanical Completion date was 31.01.2019, i.e., the delay of 10 months. It is submitted that during the Defect Liability Period emails were sent to Respondent No. 1 on 26.08.2019 to inspect the leakage in the tank, which was refused by Respondent No. 1. The Respondent No. 1 has breached the obligation under the Contract. The Appellant was constrained to invoke the Performance Bank Guarantee on 30.10.2019. The Application which was filed by the RP on 13.11.2019 for restraining the Appellant from taking steps towards encashment of the Performance Bank Guarantee was not maintainable. Adjudicating Authority lack jurisdiction to determine the legality of the invocation of the Performance Bank Guarantee and to adjudicate the underlying Contractual disputes between t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Counsel for the Appellant in support of his submissions has placed reliance on various Judgments of the Hon ble Supreme Court and this Tribunal. We shall refer to it by considering the submission in detail. 8. Learned Sr. Counsel Mr. Sunil Fernandes appearing for the Respondent submits that the Adjudicating Authority has ample jurisdiction to adjudicate the Application filed by the RP being I.A. No. 2478/2019. It is submitted that the Adjudicating Authority has considered the similar Application filed by the RP with regard to pertaining the Bank Guarantee and passed Orders, deciding the issues pertaining to Bank Guarantee of IOCL, GAIL, and Triveni-Mersens, hence it is now open for the Appellant to contend that Adjudicating Authority has no jurisdiction to examine the issue of invocation of Performance Bank Guarantee. Orders passed by the Adjudicating Authority in IOCL, GAIL and PLL have not been interfered with by Appellate Tribunal. Learned Counsel submitted Order dated 18.02.2022, in Triveni-Mersens is fully applicable in the facts of the present case. In case of Triveni-Mersens the Adjudicating Authority held that once MCC is issued then Bank Guarantee has to be discharged. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ike to cite relevant clauses of the agreement which took place between the parties. Clause 6.4.1.4 of General Conditions- Contents (GCC) is as follows: 6.4.1.4 PERFORMANCE BANK GUARANTEE 6.4.1.4.1 Within thirty (30) calendar days of the Effective Date of the Contract and before any payment whatsoever, the Contractor shall provide the Employer, at the address given in the Form of Agreement, with security for the Contractor's punctual, proper and correct performance of the Contractor's obligations under the Contract by means of an unconditional and Irrevocable bank guarantee. The bank guarantee shall be issued by a scheduled Indian bank acceptable to the Employer and shall be in the English language and shall use the words used in Attachment 7 to these General Conditions. The amount of the bank guarantee shall be equal to ten per cent (10%) of the Contract Price and shall be in the same currency as the Contract Price. Such Bank Guarantee shall be valid until thirty (30) months of Defect Liability Period plus three (3) months after. Contractor shall bear the cost of providing the bank guarantee for such period. 6.4.1.4.2 Upon successful completion of the first (1) year of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 1. (g) Pass such further and other directions as this Hon ble Adjudicating Authority may deem fit and expedient. 13. Adjudicating Authority on the I.A. after hearing the parties passed an Interim Order on the same date, restraining the encashing of Performance Bank Guarantee. 14. We have perused the Order dated 30.10.2023 passed by the Adjudicating Authority. Adjudicating Authority in the Order has noticed the respective submissions of the Parties and also referred to the Orders passed by the Adjudicating Authority in IAs filed by the RP of M/s. Punj Lloyd Ltd. against the GAIL India Ltd, against IOCL and against the Order passed in the Application and in Application filed in Mersens USA case. Adjudicating Authority has also referred to the various Judgments of the Hon ble Supreme Court which has been relied by the Counsel for the Parties. The entire discussion in the Judgment is contained in Paragraphs 43 to 45 prior to which, Adjudicating Authority has only noted respective submissions and Clauses of the Agreement between the parties. Adjudicating Authority further has also in Paragraph 33 has come to the opinion that Performance Bank Guarantee does not give the impression o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or, hence the Guarantee could not be invoked. 17. The issue as to invocation of Performance Bank Guarantee during the period of Moratorium is now well settled. It is useful to refer to definition of Section 3(31) which define Security Interest . The proviso of Section 3(31) makes it clear that Security Interest shall not include Performance Bank Guarantee. Section 3(31) is as follows: 3. Definitions. In this Code, unless the context otherwise requires,-- (31) security interest means right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person : Provided that security interest shall not include a performance guarantee ; 18. Section 14(3) was amended by Act 26/2018 with effect from 06.06.2018. Section 14(3) clearly excluded security in a Contract of Guarantee to Corporate Debtor from the Application of Section 14(1). Section 14(3) provides as follows: 14. Moratorium (3) The provisions of sub-sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter of Guarantee as follows: ..This letter of guarantee is issued in the following terms: 1. The Bank unconditionally and irrevocable guarantees, as a primary obligation and not as a surely, to pay to MHI on its first written demand, without any right of sell off, counter claim or dispute whatsoever by the Bank or the Contractor or any other party, the amount that MHI may from time to time claim not exceeding the maximum aggregate amount of INR Forty Seven crores seventy two lakhs thirty four thousand nine hundred thirty three (INR 47,72,34,933) 2. No change in the work to be executed under the Contract, shall release the Bank from any liability under this letter of guarantee unless notified otherwise. 3. This letter of guarantee shall be maintained in the full maximum aggregate amount from the date of issuance until the earliest of the following (hereinafter called the expiry date ): (a) The Bank has paid to MHI the maximum aggregate amount for which it is liable hereunder; or (b) By sixty (60) months and fifteen (15) days from the Effective Date of the Contract i.e. 23-August-2020. 4. Upon successful completion of the first (1st) year of the Defect Liability Period, the Bank sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a letter of credit in terms thereof irrespective of any pending disputes relating to the terms of the Contract. (ii) The bank giving such guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. (iii) The courts should be slow in granting an order of injunction to restrain the realisation of a bank guarantee or a letter of credit. (iv) 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. (v) Fraud of an egregious nature which would vitiate the very foundation of such a bank guarantee or letter of credit and the beneficiary seeks to take advantage of the situation. (vi) Allowing encashment of an unconditional bank guarantee or a letter of credit would result in irretrievable harm or injustice to one of the parties concerned. 24. Another Judgment which was relied before the Adjudicating Authority was Judgment of the Hon ble Supreme Court in the matter of `Standard Chartered Bank Vs. `Heavy Engineering C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to prevent irretrievable injustice to the parties. (emphasis supplied) 20. A bank guarantee constitutes an independent Contract. In Hindustan Construction Co. Ltd. v. State of Bihar [Hindustan Construction Co. Ltd. v. State of Bihar, (1999) 8 SCC 436], a two-Judge Bench of this Court formulated the condition upon which the invocation of the bank guarantee depends in the following terms: (SCC p. 442, para 9) 9. What is important, therefore, is that the bank guarantee should be in unequivocal terms, unconditional and recite that the amount would be paid without demur or objection and irrespective of any dispute that might have cropped up or might have been pending between the beneficiary under the bank guarantee or the person on whose behalf the guarantee was furnished. The terms of the bank guarantee are, therefore, extremely material. Since the bank guarantee represents an independent Contract between the bank and the beneficiary, both the parties would be bound by the terms thereof. The invocation, therefore, will have to be in accordance with the terms of the bank guarantee, or else, the invocation itself would be bad. 21. The same principle was followed in SBI v. Mula Sahakari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spute 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. (v) Fraud of an egregious nature which would vitiate the very foundation of such a bank guarantee or letter of credit and the beneficiary seeks to take advantage of the situation. (vi) Allowing encashment of an unconditional bank guarantee or a letter of credit would result in irretrievable harm or injustice to one of the parties concerned. 23. The settled position in law that emerges from the precedents of this Court is that the bank guarantee is an independent Contract between bank and the beneficiary and the bank is always obliged to honour its guarantee as long as it is an unconditional and irrevocable one. The dispute between the beneficiary and the party at whose instance the bank has given the guarantee is immaterial and is of no consequence. There are, however, exceptions to this rule when there is a clear case of fraud, irretrievable injustice or special equities. The Court ordinarily should not interfere with the invocation or encashment of the bank guarantee so long as the invocation is in terms of the bank guarante ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent has committed any breach of the terms and conditions of the agreement. The bank guarantees further provide that the right of the purchaser to recover from the guarantor any amount shall not be affected or suspended by reason of any disputes that may have been raised by the respondent with regard to its liability or on the ground that proceedings are pending before any Tribunal, Arbitrator or Court with regard to such dispute. The guarantor shall immediately pay the guaranteed amount to the appellant-purchasers on demand. 12. The law relating to invocation of such bank guarantees is by now well settled. When in the course of commercial dealings an unconditional bank guarantee is given or accepted, the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. The bank giving such a guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer. The very purpose of giving such a bank guarantee would otherwise be defeated. The courts should, therefore, be slow in granting an injunction to restrain the realization of such a bank guarantee. The courts have carved out only two exceptions. A frau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact of fraud and as to the bank's knowledge. It would certainly not normally be sufficient that this rests on the uncorroborated statement of the customer, for irreparable damage can be done to a bank's credit in the relatively brief time which must elapse between the granting of such an injunction and an application by the bank to have it charged. This Court set aside an injunction granted by the High Court to restrain the realisation of the bank guarantee. 27. It was submitted before the Hon ble Supreme Court that the Company is a sick Company, hence it will suffer irretrievable injury which argument was considered and rejected. In Paragraph 17 of the Judgment following was held: 17. Before us, however, in the course of argument, the learned advocate for the respondent urged for the first time that in this case there would be irretrievable injustice to the respondent if the bank guarantees are allowed to be realised 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the extent of any loss that may have been sustained by the Electricity Board owing to any default on the part of the supplier of goods i.e. the Company in liquidation. The liability is absolute and unconditional. The fact that the Company in liquidation i.e. the principal debtor has gone into liquidation also would not have any effect on the liability of the Bank i.e. the guarantor. Under Section 128 of the Indian Contract Act, the liability of the surety is coextensive with that of the principal debtor unless it is otherwise provided by the Contract. A surety is no doubt discharged under Section 134 of the Indian Contract Act by any Contract between the creditor and the principal debtor by which the principal debtor is released or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor. But a discharge which the principal debtor may secure by operation of law in bankruptcy (or in liquidation proceedings in the case of a company) does not absolve the surety of his liability (see Jagannath Ganeshram Agarwala v. Shivnarayan Bhagirath [AIR 1940 Bom 247 : ILR 1940 Bom 387 : 42 Bom LR 451] ; see also In re Fitzgeorge Ex parte Robso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Contractor against the invocation of the Bank Guarantee was not to be looked into when the Bank Guarantee is unconditional and irrevocable. But to satisfy ourselves, we have looked into the above aspects also. There is no dispute between the parties that Mechanical Completion Certificate, the date for Mechanical Completion as per the Contract was 23.08.2018 and Certificate was issued as specifying the date of Mechanical Completion as 31.01.2019. Adjudicating Authority itself noticed the aforesaid dates in Paragraph 42 of the Judgment and has observed that it is delayed for certain period. When the Contractor does not complete the Contract within the period specified, it cannot be said that Contractor has complied the terms and conditions of the Contract. In the letter invoking the Bank Guarantee, it was clearly stated by the Appellant that Contractor has not perform his obligation in accordance with the Contract was advised of such failure and did not cure the failure within the time period allowed for in the Contract. When it is an admitted fact that Contractor did not complete the Contract as per the Mechanical Completion Certificate it is not open to hold that there is no def ..... X X X X Extracts X X X X X X X X Extracts X X X X
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