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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 ..... de by the Bank 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 reference made to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thority 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 corporations created speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. v. Bengal Immunity Ltd. [2002] 108 Comp. Cas. 2372 and by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded 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 in Corromandal Pharmaceuticals' case (supra) would apply only once the Scheme is formulated, and this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 succeeds, will have to be decisively established. Clearly, a mere apprehension that the other party will not be able to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 an order in writing, whether it is practicable for the company to make its net worth exceed the accumulated losses within a reasonable time. If thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver 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 K.S. Paripoornan, K. Venkataswami and B.N. Kirpal, JJ. in the case Dwarikesh Sugar Industries Ltd. v. Prem Heavy Engg. Works (P.) Ltd. JT 1997 (5) SC 416. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 irrevocable. The engagement may be either an agreement to honour or a statement that the bank or other person is authorized to honour. Commercial letter. Type of letter of credit used by buyer of mer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fective.' 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 credit. If the seller has complied with the terms of the letter of credit, however, there is an absolute obligation upon the banker to pay irrespective of any disputes there may be between the buyer and the seller as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ablished 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 Ltd. 1922-1 KB 318 the King's Bench held that the refusal of the defendants bank to take and pay for the particular bills on presentation of the proper documents constituted a repudiation of the contract as a whole and that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spite 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 3891 : "4. This is an application based on a letter of credit. The settled legal position is that a letter of credit constitutes sole contract with the banker and its authorising the bank issuing letter of credit has no concern with any question that may arise between the seller and the purchaser of goods in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omebody 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 guarantee, the obligation of banks appears to be the same. If documentary credits are irrevocable and independent, the banks must pay when demand is made. Since the bank pledges its own credit involving its reputation, it has no defence except in the case of fraud. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. 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 the Apex Court held that the Federal Bank, namely, the paying or negotiating (intermediary) Bank would be entitled to reimbursements from the Bank of Maharashtra. In this Judgment the Apex Court also affirmed the Judgment of the Division Bench of the Bombay High Court authored by M.B. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 called upon in the event of a failure to effect recoveries from the principal debtor. In the case of a Letter of Credit the Bank issuing it is liable independent of the party at whose instance the Letter of Credit was issued. 17. Mr. Mata had drawn attention to Article 2 of UCP 500 but I find it to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the Buyer may be able to avail of a moratorium on payment of its debts, such events would have no nexus or bearing on the liability or assurance of payment which is intrinsic to any and every Letter of Credit. 18. Mr. Mata has also attempted to favorably draw a distinction between fund based and non-fund based letter of credit/guarantees. Like in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 person in respect of whose default the guarantee is given is called the 'principal debtor', and the person to whom the guarantee is given is called the 'creditor'." I may also clarify that all bank guarantees would not necessarily fall under section 126 of the Contract Act. This determination would be dependant upon the sundry terms contained in the bank guarantee. It is section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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