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1998 Supreme(Ker) 157
Judges : K.K.USHA,K.S.RADHAKRISHNAN
Sattar - Appellant
Versus
Mrs.Kuruvilla - Respondent
Case No : A.S. No. 349 of 1988 & Cross Objection
Decided On : 04/06/1998
Advocates Appeared :
M.A. Manhu & V.V. Narayanan For Appellants M.P.R. Nair, Devan Ramachandran, George K. Joseph, K.N. Narayana Pillai, V.P.K. Panicker, Shibu Joseph & Chakkappan Kalliath For Respondents
An unconditional and irrevocable bank guarantee creates a separate cause of action and can be enforced independently of the underlying contract. The failure to honour such a bank guarantee is illegal and in clear violation of its terms and conditions.
Headnote:
Bank Guarantee - Recovery of Amount - Bank Guarantee Act, Section 5 - The court examined the terms of the bank guarantee to decide whether it is unconditional and irrevocable. The bank guarantee was found to be unconditional and irrevocable, and the bank was legally obliged to honour it without going into the question of whether the beneficiaries had complied with their part of the agreement. The court also found that the suit was not barred by limitation as the bank guarantee was valid until a specific date. The court emphasized that the bank guarantee created a separate cause of action and could be enforced independently of the underlying contract. The court held that the failure to honour the bank guarantee was illegal and in clear violation of its terms and conditions.
Fact of the Case:
Plaintiffs, former directors of a company, sought recovery of an amount with interest from defendants, including a bank, based on a bank guarantee. The defendants alleged non-compliance with the terms of the agreement and the expiry of the bank guarantee.
Finding of the Court:
The court found that the bank guarantee was unconditional and irrevocable, and the bank was legally obliged to honour it. The court also held that the suit was not barred by limitation and emphasized that the bank guarantee created a separate cause of action.
Issues: The main issue was the enforceability of the bank guarantee, with the defendants alleging non-compliance with the agreement and the expiry of the bank guarantee.
Ratio Decidendi: The court emphasized that an unconditional and irrevocable bank guarantee could be enforced without going into the question of compliance with the underlying agreement. The court also highlighted that the bank guarantee created a separate cause of action and could be enforced independently of the underlying contract.
Final Decision: The court declared that the plaintiffs were entitled to have the bank guarantee encashed with interest and allowed the appeal in favor of the plaintiffs.
K.S. Radhakrishnan, J.
Plaintiffs are the appellants. Suit was instituted for recovery of an amount of Rs. 10 lakhs with interest at the rate of 18 % per annum from the ate of the suit till realisation from the defendants jointly and severally. The relief sought for in the plaint is primarily based on the Bank guarantee, Ext. A3, dated 12.3.1981.
2. While the suit was pending, first plaintiff died and his legal representatives, plaintiffs 4 to 6 were impleaded as per order in I. A. No. 3995 of 1986. Defendants 4 and 5 represent the State Bank of India, the successors of the erstwhile Bank of Cochin Ltd. who executed a Bank Guarantee at the instance of Dl to D3 in favour of the plaintiffs. Even though it is stated in the plaint that the amount is sought to be recovered jointly and severally from the defendants, counsel for the plaintiffs maintained the stand that he is mainly concerned with enforceability of the Bank guarantee executed by the erstwhile Bank of Cochin Ltd., now the State Bank of India.
3. Short facts which are necessary for the disposal of the appeal are as follows. Plaintiffs were erstwhile Directors of a private limited company by name, Premier Steels Private Limited. While the plaintiffs were running the said company, husbands of defendants 1 to 3 negotiated with the plaintiffs for the purchase of the shares of the company as a running concern for a sum of Rs. 15 lakhs. During the course of finalization of the negotiations, they requested that they may be relieved of paying the entire sale consideration in a lump, and payment of the purchase value of the shares be deferred to be paid in instalments. This was agreed to by the plaintiffs. An advance of Rs. 50,000/- was paid towards final settlement of the negotiations. This amount was advanced by cheque by one L.K. Prabhu, husband of the second defendant at the instance of defendants 1 to 3.
4. An agreement of sale, Ext. A2 was later executed for the purchase of the shares of the company by the defendants 1 to 3 for a sum of Rs. 15 lakhs as a sale consideration free from all encumbrances. As per the terms of agreement, defendants 1 to 3 have to pay the sum of Rs. 4.5 lakhs on execution of the agreement and balance of Rs. 10 lakhs to be paid by defendants to 1 to 3 in instalments at the rate of Rs. 25,000/- per month, and such payment was to commence three months after the reconstitution of the Board of Directors. Simultaneous with the execution of the agreement, plaintiffs 1 to 3 transferred 55% of the shares of the company to defendants 1 to 3 and their nominees to enable them to have complete control over the company and assume management and to enable them to raise a loan of Rs. 5 lakhs from the Bank of Cochin Ltd. Trichur Branch. This was done to enable the defendants 1 to 3 to pay off Rs. 4.5 lakhs to the plaintiffs as per the terms of the agreement, and to re-pay an amount of Rs. 50,000/- to the husband of the second defendant, who had paid it as advance.
5. Defendants 1 to 3 accordingly raised an amount of Rs. 4.5 lakhs on the assets of the company and paid Rs. 4.5 lakhs to the plaintiffs and Rs. 50,000/- to L.K. Prabhu. Board of Directors was later reconstituted on 12.8.1981 and consequently, instalments were liable to be paid by defendants 1 to 3 from 12.12.1981. Furnishing a bank guarantee for the balance consideration of Rs. 10 lakhs payable from 12.12.1981 was a specific term of the agreement. Defendants 1 to 3 then secured a bank guarantee dated 12.8.1981 for Rs. 10 lakhs from the Bank of Cochin Ltd., Ernakulam the predecessor-in-interest of defendants 4 and 5, and furnished the same to plaintiffs. As per the agreements, defendants 1 to 3 assumed control of the company as a running concern from 7.8.1981 onwards.
6. Plaintiffs submit that defendants 1 to 3 failed to pay the instalment amounts and kept the instalments in arrears inspite of repeated demands made by them for paying off the instalment amounts and for getting remaining shares. Acco
