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2023 Supreme(Bom) 892
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
N.J. Jamadar, J.
Axis Bank – Appellant
Versus
Bank Of Baroda – Respondent
Summons For Judgment No. 2 of 2021, Commercial Summary Suit No. 123 of 2020
Decided On : 17-02-2023
Shyam Kapadia, Advocate, Pranvi Jain, Advocate, Dhurve Lilahar, Advocate, Ashish Kamat, Advocate, Harsh Moorjani, Advocate, Nishit Dhruva, Advocate, Prakash Shinde, Advocate, Niyati Merchant, Advocate, Ash Dhruva, Advocate, Harsh Sheth, Advocate
The main legal point established in the judgment is the need for decisive evidence of fraud and irretrievable injustice to restrain the invocation of a bank guarantee and the entitlement to unconditional leave to defend the suit based on the exceptional and extraordinary nature of the alleged fraud and irretrievable injustice.
Headnote:
Bank Guarantee - Recovery of Loan - Gold Metal Loan - Gold Metal Loan Agreement - Bank Guarantee No.51011BGIS170040, No.51011BGIS170044, No.51011BGIS170046 - [Hindustan Steelworks Construction Ltd. vs. Tarapore and Co. and Anr., (1996) 5 Supreme Court Cases 34, U.P.State Sugar Corporation vs. Sumac International Ltd., (1997) 1 Supreme Court Cases 568, Dwarikesh Sugar Industries Ltd. vs. Prem Heavy Engineering Works (P) Ltd. And Anr., (1997) 6 Supreme Court Cases 450, Andhra Pradesh Pollution Control Board vs. CCL Products (India) Limited, (2019) 20 Scc 669, B.L. Kashyap and Sons Limited vs. JMS Steels and Power Corporation and Another, (2022) 3 SCC 294, State Bank of Hyderabad Vs. Rabo Bank, (2015) 10 SCC 521] - The court discussed the nature of obligation under a bank guarantee, exceptions for restraining the invocation of bank guarantee, and the circumstances justifying interference with enforcement of an unconditional and irretrievable bank guarantee. The court emphasized the need for decisive evidence of fraud and irretrievable injustice to restrain the invocation of a bank guarantee. The court also highlighted the legal principles governing the grant of leave to defend in a summary suit.
Fact of the Case:
The plaintiff sought recovery of a loan along with interest from the defendant banking company, based on bank guarantees issued in connection with a Gold Metal Loan to M/s. Nakshatra. The defendant contended that the transaction was vitiated by fraud and sought unconditional leave to defend the suit.
Finding of the Court:
The court found that the invocation of the bank guarantees was justifiable, but the defendant was entitled to unconditional leave to defend the suit based on the exceptional and extraordinary nature of the alleged fraud and irretrievable injustice. The court emphasized the need for decisive evidence of fraud and irretrievable injustice to restrain the invocation of a bank guarantee.
Issues: The main issue revolved around the justifiability of the invocation of the bank guarantees and the defendant's entitlement to unconditional leave to defend the suit based on the alleged fraud and irretrievable injustice.
Ratio Decidendi: The court held that the defendant was entitled to unconditional leave to defend the suit based on the exceptional and extraordinary nature of the alleged fraud and irretrievable injustice. The court emphasized the need for decisive evidence of fraud and irretrievable injustice to restrain the invocation of a bank guarantee.
Final Decision: The defendant was granted unconditional leave to defend the suit, and the summons for judgment was dismissed. The defendant was required to file a written statement within 30 days, and the pre-trial formalities were to be completed within two months thereafter.
JUDGMENT
1. This commercial division summary suit is instituted for recovery of a sum of Rs.8,56,00,000.00 alongwith interest at the rate of 17.40% p.a. from 26/2/2018, the date the bank guarantees, which form the basis of the suit, were invoked.
2. The plaintiff and defendant are the banking companies. Initial transaction was between the plaintiff and Vijaya Bank, which merged with the defendant, under an amalgamation scheme with effect from 1/4/2019.
3. The material averments in the plaint can be summarised as under:
(a) On 9/11/2016, the plaintiff had sanctioned a Gold Metal Loan to the tune of Rs.100.00 Crores to M/s. Nakshatra Brand Ltd. (M/s. Nakshatra) in accordance with terms and conditions incorporated therein. One of the term was that M/s. Nakshatra would secure the loan by furnishing a Bank Guarantee covering 110% margin of the limit under the loan. At the request of M/s Nakshatra on 15/5/2017 the defendant Viajaya Bank, issued Bank Guarantee No.51011BGIS170040, for or a sum of Rs.2,83,00,000.00 towards security of the gold loan sanctioned by the plaintiff equivalent to the notional international price of 10 kg. gold to M/s. Nakshtra. The issuance of the said bank guarantee was acknowledged and confirmed by the defendant vide confirmation letter 16/5/2017 bearing No.MRO/PLANNING/BG-CONF/1702/2017. Likewise, two more bank guarantees bearing No.51011BGIS170044 dtd. 1/6/2017 for a sum of Rs.2,84,00,000.00 and No.51011BGIS170046 dtd. 27/6/2017 for a sum of Rs.2,89,00,000.00 were issued by the defendant.
(b) Under the bank guarantees the liability of the defendant Bank was irrevocable and unconditional. The defendant agreed to pay to the plaintiff merely on demand the amount covered by the bank guarantees without any contest demur or protest. It was expressly provided that a demand by the plaintiff shall be conclusive as regards the amount due and payable by the defendant under said bank guarantees.
(c) The bank guarantees were duly extended.
(d) Pursuant to the drawdown request of M/s. Nakshatra dtd. 8/11/2017, 30/11/2017 and 21/12/2017, the plaintiff delivered 30 kg. gold metal under invoices dtd. 26/2/2018. An amount of Rs.9,18,50,615.00, equivalent to the notional international price of 30 kg. gold was utilized by M/s. Nakshatra. Debit notes were raised against M/s. Nakshatra. However, M/s. Nakshatra committed default in repayment of the loan amount on due date and thus committed breach of the terms of the loan agreement. (e) The plaintiff was thus constrained to invoke the bank guarantees. By letter dtd. 26/2/2018, the plaintiff in exercise of its rights under the bank guarantees invoked the guarantees and called upon the defendant to make payment thereunder. As there was no response, the plaintiff issued a reminder on 7/3/2018. In response thereto, vide letter dtd. 12/3/2018, the defendant wrongfully alluded to a "fraud element" and unjustifiably sought additional information and documents from the plaintiff in complete derogation of its absolute and unconditional obligation under the bank guarantees. There was an exchange of correspondence between the plaintiff and the defendant. However, the defendant failed to honour the guarantees. Hence this suit to recover the amount covered by the bank guarantees alongwith interest thereon.
4. Upon service of writ of summons, the defendant entered appearance. Thereupon, the plaintiff took out the summons for judgment. An affidavit-in-reply is filed by the defendant seeking an unconditional leave to defend the suit.
5. The defendant contends that it is entitled to an unconditional leave to defend the suit as substantial and triable issues arise in the context of an egregious fraud which vitiated the entire transaction. An endeavour was made to demonstrate that the present case is of exceptional and extraordinary nature in as much as M/s. Nakshatra and its promoters/directors are investigated by several law enforcement agencies for having committed a systematic fraud. The Union of
