On May 17, 2019, the Calcutta High Court (“Court”) passed an order in the case of Sun Pharmaceuticals Industries Ltd. & Anr. v. State Bank of India & Ors. (CS 39 of 2019).
Facts in Brief
SBI, the lead consortium bank, had lent money to Gujarat NRE Coke Limited (“GNRE). Upon default by GNRE, SBI auctioned the mortgaged windmill assets of GNRE, which was purchased by the plaintiffs. The contract between the parties was contingent on receiving no objection certificates from all the lenders of GNRE (“NoCs”), within 60 (sixty) days. The plaintiffs were also required to pay 25% (twenty five percent) of the purchase price and issue bank guarantee for the remaining 75% (seventy five percent) (amounting to Rs. 135 crores) in favour of SBI , which they did vide two bank guarantees issued by the defendant banks (“bank guarantees”). The said NoCs were not obtained within 60 (sixty) days and while awaiting for the same, SBI informed the plaintiffs that the petition under Section 10 of the IBC, 2016 filed by GNRE had been admitted, and a moratorium had been declared on the sale/disposal of assets of GNRE. The plaintiffs then decided to terminate the contract and asked for a refund of the advance and the bank guarantees. SBI refused to do so, and hence the plaintiffs approached the Court.
Arguments
The defendant argued that, as per section 5 of the Indian Contract Act, 1872, the plaintiffs’ proposal to purchase the wind mill fructified into a binding contract and hence the plaintiffs could not withdraw from the proposal. They further argued that the Court should not interfere with invocation of an unconditional irrevocable bank guarantee unless the invocation is against the terms of the guarantee or if there is any fraud. The plaintiffs however, argued that since a moratorium had been declared on the assets of GNRE, SBI no longer had the power to sell the windmill, thus making the contract impossible to perform. They further contended that suppression of the fact that GNRE was under CIRP, amounts to fraud and thereby the bank guarantee cannot be invoked.
Issue:
Whether the plaintiffs are entitled to an order restraining SBI from invoking the two bank guarantees or to an order restraining the defendant banks from making payment under the bank guarantees?
Judgment and Analysis
The Court held that the bank guarantees were not unconditional as they were a part of the consideration for the windmills. The bank guarantees could be invoked only if sale of the assets in question was completed in favour of the plaintiffs. Since there was delay on the part of SBI to fulfil their obligation under the contract, the Court held that there was sufficient justification for the plaintiffs to repudiate the contract. Furthermore, in view of the moratorium imposed on the assets of GNRE, there was frustration of the contract, and it became impossible to perform. The Court further stated:
“What is important to note is that at no point of time, the property in the assets in question was transferred to the plaintiffs. As such, the plaintiffs were not, nor now are, under any obligation to pay the price of the said goods to SBI. As I have noted above, the bank guarantees in the present case are not the run of the mill bank guarantees issued to ensure performance of some obligation or as security for mobilization advance. These two bank guarantees were meant to be part of price of the goods that were to be sold to the plaintiffs. … Indeed, it would be preposterous to suggest that even without transferring the title to the goods in question to and in favour of the plaintiffs, SBI could demand or recover the price thereof from the plaintiffs.”
Reiterating the settled position of law, the Court stated that ordinarily the Courts would not interfere with the operation of an unconditional irrevocable bank guarantee, unless there was serious fraud by the beneficiary of the bank guarantee and the bank had notice of such fraud, or where special equity exists in favour of the person at whose instance the bank guarantee had been issued. Regarding ‘special equity’, the Court held:
“To my mind, special equity can be said to exist in favour of a person at whose instance a bank guarantee has been issued if the facts and circumstances are such that invocation and encashment of the bank guarantee by the beneficiary would shock the conscience of the Court; would be iniquitous, grossly unfair and unjust. It is a situation where judicial conscience feels that unless the Court interferes, gross injustice would be done to the party seeking an order restraining operation of a bank guarantee.”
As for fraud on the part of SBI, the Court held:
“On 23 March, 2017 the Board of Directors of GNRE resolved to approach the NCLT under Section 10 of the IBC. It is hard to believe that SBI was not aware of such resolution, being the leader of the consortium of banks which had lent and advanced substantial sums of money to GNRE. In any event, SBI was a party to the application filed by GNRE before the NCLT on 7 April, 2017 when the application was admitted and moratorium was declared under Section 14 of the IBC. …. Nothing could be produced on behalf of SBI to demonstrate that prior to obtaining extension of the bank guarantees SBI had apprised the plaintiffs of the NCLT proceedings and the moratorium. This in my view, amounts to gross suppression of extremely material facts amounting to fraud.”
Coming to the facts of the case, the Court decided that SBI could not encash the bank guarantees which represented 75% (seventy five percent) of the consideration amount, without effecting the sale and subsequently not being in a position to effect the sale. The plaintiffs had made out a strong prima facie case of fraud and special equity. Therefore, the Court ordered SBI to not encash the bank guarantees. However, the plaintiffs were also ordered to keep the bank guarantees alive till the disposal of the suit.
Download Pdf
7A, 7th Floor, Tower C, Max House,
Okhla Industrial Area, Phase 3,
New Delhi – 110020
The rules of the Bar Council of India do not permit advocates to solicit work or advertise in any manner. This website has been created only for informational purposes and is not intended to constitute solicitation, invitation, advertisement or inducement of any sort whatsoever from us or any of our members to solicit any work in any manner. By clicking on 'Agree' below, you acknowledge and confirm the following:
a) there has been no solicitation, invitation, advertisement or inducement of any sort whatsoever from us or any of our members to solicit any work through this website;
b) you are desirous of obtaining further information about us on your own accord and for your use;
c) no information or material provided on this website is to be construed as a legal opinion and use of this website will not create any lawyer-client relationship;
d) while reasonable care has been taken in ensuring the accuracy of the contents of the website, Argus Partners shall not be responsible for the results of any actions taken on the basis of information provided in this website or for any error or omission in the website; and
e) in cases where the user has any legal issues, the user must seek independent legal advice.