Posted On by &filed under Delhi High Court, High Court.


Delhi High Court
Dcw Home Products vs Gujarat Heavy Chemicals Ltd. & … on 11 September, 2000
Equivalent citations: 2000 (55) DRJ 362
Author: S Agarwal
Bench: S Agarwal


ORDER

S.K. Agarwal, J.

1. The plaintiff has filed the suit for a decree of declaration and permanent injunction praying that the first defendant be restrained from invoking/encashing two bank guarantees dated 17th February, 2000 executed by the second defendant towards the workers dues until the completion/transfer of the lease in favour of the first defendant by the Government of Tamil Nadu in terms of the agreement between them. The plaintiff has also filed an application under Order 39, Rules 1 and 2 of the Code of Civil Procedure, 1908 (for short the CPC) for grant of ex parte ad interim injunction restraining defendant No. 1 from invoking/encashing the said two bank guarantees. The first defendant has filed the reply to the application opposing the same, inter alia, on the grounds that suit itself is not maintainable as essential conditions for claiming such injunction against encashment of Bank Guarantees namely, fraud or irretrievable loss and injury are not made out. The second and third defendants have not contested the application.

2. Briefly stated the facts are: that on 9.10.1998, a Memorandum of Understanding (MoU), was made by plaintiff – DCW Home Products Ltd (herein-after referred to as the Vendor) and the first defendant – Gujarat Heavy Chemicals Ltd. (hereinafter referred to as the Buyer) whereby the Vendor agreed to sell its salt manufacturing unit in Tamil Nadu and the business
to the first defendant along with all its movable and immovable assets, for lumpsum consideration of Rs. 450 lacs. Under the MoU, on 23.10.1998 a sum of Rs. 45 lacs was paid by the Buyer to the Vendor leaving a balance of Rs. 405 lakhs. There is no dispute about this. Thereafter on 17th February, 1999 sale agreement for transfer of business of the salt unit was executed between the plaintiff (Vendor), the third defendant, DCW Ltd. (confirming
party – co-Vendor) and the first defendant (the Buyer) with some changes with regard to the schedule of payments of the said sale consideration of Rs. 450 lakhs. Clause 13.2, inter-alia, provided deductions under two heads out of the balance of Rs. 405 lakhs: (a) towards the payment to be made by the Buyer to the Vendors’ creditors as detailed in the Schedule V and (b)
Rs. 24,67,758/- paid as advance by the Buyer to the Vendors for settling the contractor’s dues, thus leaving the net balance of Rs. 3,28,24,242/-, which was agreed to be paid by the Buyer on completion. Admittedly, full sale consideration was received by the Vendors and the business of the salt manufacturing unit was transferred to the Buyer but the lease of the land
of the salt manufacturing unit is yet to be transferred in the name of the buyer by the Government of Tamil Nadu. It was agreed that in the eventuality of the lease of the salt unit not being transferred by the Government of Tamil Nadu in favour of the buyer, the business of the salt unit would revert back to the Vendors and the sale consideration of Rs. 450 lakhs would be refunded by the Vendors to the Buyer. Clause 14 of the agreement provided that Vendors shall secure for the Buyer an unconditional and irrecoverable bank guarantee securing payment of Rs. 450 lacs (total sale consideration) to the Buyer, in this eventuality.

3. Clause 15.1 of the sale agreement further provided that liability on account of Salary, Provident Fund, Gratuity, Leave Encashment, Superannuation and other dues etc. of the employees up to the date of the transfer shall be that of the Vendors to the extent of Rs. 60,46,000/-., as detailed in Schedule VII. The payment of this amount was secured by the Vendors by another unconditional Bank Guarantee in favour of the Buyer which could be
encashed in the event the Vendors do not settle the dues of the employees/contract workers at the time of “completion/transfer of lease” in favour of the Buyer. It is pleaded that the first defendant (Buyer) paid an amount of Rs. 18,61,561/- to the employees/contract workers but the Vendors did not make the payment of this amount to the Buyer claiming that under
clause 15.1 of the agreement, the lease of the salt unit in favour of the Buyer by the Government of Tamil Nadu, was not effected. Therefore, the right to claim such payment under the agreement had not accrued in favour of the Buyer.

4. On 5.6.2000, while issuing summons in the suit and notice in the application, an ex parte ad-interim injunction was granted directing that “till the next date, the bank guarantees both dated 17.2.2000 be not encashed”. On 14.7.2000 learned counsel for the plaintiff stated that the Bank Guarantees in question would be kept alive pending further orders of this court.

5. I have heard learned counsel for the parties and have been taken through the record.

6. Learned counsel for the plaintiff, referring to recital of the Bank Guarantee and Clause 15.1 of the agreement, argued that the liability of the Vendors has not yet arisen; that they would become liable to pay only when the lease of the unit in favour of the Buyer is transferred by the Government of Tamil Nadu and not earlier and in this regard reliance was placed on the Supreme Court decision in Hindustan Construction Company Limited Vs. State of Bihar and Others . Learned counsel for the first defendant argued that as per the settled law, bank guarantee is an independent contract between the bank and the beneficiary; that there is
no allegation of fraud or irretrievable injury in the suit and that the suit itself is not maintainable, therefore, the ex parte injunction is not liable to be extended.

7. In order to appreciate the rival contentions, reference to clause 15.1 of the sale agreement in pursuance of which the bank guarantees in question were obtained and executed would be necessary. The same reads as under :

“15.1. The liability on account of Salary, Provident Fund, Gratuity, Leave Encashment, Superannuation, other such dues, etc., of the employees upto the date of transfer shall be that of the Vendor/Co-Vendor as per separate statement of accounts Schedule VII issued by the Vendor/Co-Vendor. Confirmation in this regard of each individual employee and the same counter-signed and confirmed by the individual employees and the Vendor/Co-Vendor shall be provided to the Buyer by the Vendor/Co-Vendor. The total
amount, thus, payable to the extent of Rs. 60,46,000/- detailed in Schedule VII annexed herewith shall be secured by the Vendor/Co-Vendor by way of an unconditional Bank Guarantee of the said amount in favour the Buyer. The Buyer shall be free to encash the said guarantee in the event the Vendor/Co-Vendor do not settle the dues of the employees contract workers at the time of completion/transfer of Lease in favour of the Buyer.

8. The Schedule VII referred to above in clause 15.1 reads as under:-

 

  S C H E D U L E VII 
 Vedaranium 
 Outstanding payents to be secured against Bank Guarantees
                                         Rs. lacs
     Gratuity Permanent       19.96
     Harvesting               29.23     49.19
     Leave pay                          2.88
     Bonus 1998-99
     (Permanent & Harvesting)           9.95
        
                                        62.02

 

9. The amount mentioned in clause 15.1 (Schedule VII) were secured by two unconditional Bank Guarantee executed by the second defendant (bank) in favour of the first defendant (Buyer) for Rs. 57,55,000/- and for Rs. 4,46,645/-. Clauses of both these bank guarantees are identical, which read as under:-

“THIS GUARANTEE is being executed on this 17th day of January, 2000 by Global Trust Bank Limited acting through their Bandra Branch, Mumbai (hereinafter called the `Guarantor’) in favour of M/s. Gujarat Heavy Chemicals Limited, a company incorporated under the Companies Act, 1956 and having its registered office at Bhikubhai Chambers, 1st Floor, Swastik Society, Opp. Punjabi Hall, Navrangpura, Ahmedabad – 380 009 (hereinafter called “GHCL”).

WHEREAS GHCL, has entered into a MOU dated 9th October, 1998 with M/s. DCW Home Products Limited, having its Registered Office at 645, Anna Salai, Thousand Lights, hennai-600 006 (hereinafter called the “Seller”)

AND WHEREAS M/s. DCW Home Products Ltd. (Seller.) on request of GHCL, has agreed to provide an unconditional and irrevocable Bank Guarantee to GHCL for an amount of Rs. 7,55,000/- (Rupees Fifty Seven lacs Fifty Five Thousand only) towards liabilities on account of dues to the employees i.e., gratuity, leave salary, bonus payable to the employees as provided in the agreement pertaining to Vedaraniam.

NOW THIS DEED OF GUARANTEE, witnessed as follows:-

1. The amount of this guarantee shall be Rs. 57,55,000/- (Rupees Fifty Seven lac Fifty Five Thousand only).

2. We do hereby guarantee and undertake to pay unconditionally to GHCL immediately on demand in writing any or all moneys claimed by GHCL under this guarantee without any demure, recourse or without any reference to the Seller.

3. This guarantee shall be operative and claim payable unconditionally without reference to applicant at Global Trust Bank Limited.

4. This guarantee shall remain in force upto 3 months from the date of issue of this Bank guarantee.

5. Unless a demand or claims under this guarantee is made on us in writing on or before 16.4.2000, all rights of GHCL under this guarantee shall be forfeited and we shall be relieved and discharged from liabilities hereunder.

6. This guarantee shall not be determined or affected by the liquidation or winding up, dissolution or change in the constitution or insolvency of the Seller or of the antor but shall in all respects and for all purpose be binding and operative until payment of all moneys payable to GHCL.

7. Notwithstanding anything contained herein.

(i) Our liability under this Bank Guarantee shall not exceed Rs. 57,55,000/- (Rupees Fifty Seven Lac Fifty Five Thousand only).

(ii) This Bank Guarantee shall be valid upto 16.4.2000.

(iii) We are liable to pay the guaranteed amount or any party thereof under this Bank Guarantee only and only if you serve upon us a written claim or demand on or before 16.4.2000.

10. The above noted two unconditional and irrevocable bank guarantees were executed by the bank – defendant No.2, in favour of the Buyer to secure payment towards the liabilities of the plaintiff; amount payable to the employees i.e. gratuity, leave salary, bonus payable to the employees. Clause 15.1 of the agreement provided that the Buyer shall be free to
encash the bank guarantee in the event the Vendor/Co-Vendor do not settle the dues of the employees/contract workers at the time of “completion/transfer” of lease in favour of the Buyer. The operative portion of clause 15.1 provides:

“The Buyer shall be free to encash the said guarantee in the event the Vendor/Co-Vendor do not settle the dues of the employees/contract workers at the time of completion/transfer of the lease in favour of the Buyer.”

11. The stroke, a vertical or oblique line, is a grammatical sign to
indicate the two alternatives. The stroke (/) between the expression completion/transfer” indicates that it envisaged two alternative situations. One, the “completion” and other the “transfer of the lease”. The completion is defined in the agreement itself to mean completion of transaction including the sale and purchase of assets in the salt works. Admittedly, the entire amount of sale consideration of Rs. 450 lacs has already been received by the Vendors. The liability on account of salary, provident fund, gratuity, leave encashment, superannuation and other dues of the employees payable by the Vendors were quantified in Schedule VII. The sale and purchase of the business of the salt manufacturing unit stood completed on the date when the possession of the said salt unit was handed over by the Vendors and full nsideration was accepted by them. Thus, the first stage envisaged in the clause 15.1 was reached. If the payment to the workers/employees, for the period the salt unit was with the Vendors, was to be held up until transfer of lease, there was no necessity of providing the other alternative. It would have been enough to say that this amount would become payable on ransfer of the lease of the salt unit in favour of the Buyer by the Government of Tamil Nadu and not arlier. It could not have been possible because statutory payments towards us/Gratuity/Provident Fund etc. could not wait till the lease is transferred in the name of
the Buyer. It is admittedly the liability of the Vendors who have already received full sale consideration. Under the facts and circumstances of the case, these payments could not wait up till that stage.

12. It is true that the agreement provides that in case the Government of Tamil Nadu does not transfer the lease of the salt unit in favour of the Buyer, the entire unit would revert to the Vendors and they would be liable to return the entire sale consideration. This amount is also secured by a separate Bank Guarantee but this has no bearing on the liability of the
Vendors to make good the payments made by the Buyer to the workers/employees towards their onus/provident fund/gratuity etc. for and on behalf of
the Vendors. Therefore, the argument of the learned counsel of the plain-

tiff that the Vendors would become liable to pay the dues of the workers
only on the transfer of the lease in favour of the Buyer, is not acceptable.

13. Law with regard to the grant of injunctions against the encashment of bank guarantees is now well settled by several authoritative pronouncements of the Apex Court. In Uttar Pradesh State Sugar Corporation Vs. Sumac International Limited, the Supreme Court held:-

“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 fraud in connection with such a bank guarantee would vitiate the very foundation of such a bank guarantee. Hence, if there is such a fraud of which the beneficiary seeks to take the advantage, he can be restrained from doing so. The second exception relates to cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. Since in most cases payment of money under such a bank guarantee would adversely affect the bank and its customer at whose instance the guarantee is given, the harm or injustice contemplated
under this head must be of such an exceptional and irretrievable nature as would override the terms of the guarantee and the adverse effect of such an injunction on commercial dealings in the country.”

14. While dealing with the question of fraud it has been held that fraud has to be an established fraud. The following observations of Sir John Donaldson, M.R. in Bolivinter Oil SAVs. Chase Manhattan Sank ,(1984) 1 All FR 351 CA were approved:

…The wholly exceptional case where an injunction may be granted is where it is proved that the bank knows that any demand for payment already made or which may thereafter be made will clearly be fraudulent. But the evidence must be clear, both as to the 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 discharged”.

15. In this case there is no allegation of fraud, irretrievable harm or injustice. The terms of the bank guarantee are clear and unambiguous. The recital portion of the bank guarantee only refers to the MOU and the Agreement. The recital is in the nature of preamble showing the circumstances under which the bank guarantees were being secured. The bank guarantees start with “Now this deed of guarantee witnesseth as follows”. By clause 2 of the bank guarantee, the bank undertook to provide to the first defendant – GHCL, the amount under the bank guarantee without any demu*, resource without reference to the seller. Clause 3 of bank guarantee provided that the guarantee shall be operative and claim payable unconditionally without reference to the applicant (the plaintiff) by the Global Trust Bank.

16. The facts of the case in Hindustan Construction Company Limited’s case (supra) relied upon by the learned counsel for the plaintiff, were entirely different. The terms of the bank guarantee were held to be conditional upon the happening of a particular eventuality. That eventality having not happened, it was held that the invocation of the bank guarantee itself was not proper. However in the present case recital of the bank guarantee reveals that it referred to MoU dated 9th October, 1998 to indicate the background under which the same was secured by the Vendors in favour of the Buyer. Under clause 2, the bank unconditionally undertook to pay to the Buyer immediately on demand in writing all moneys claimed by GHCL the beneficiary (first defendant), under the guarantee, without any demur,
recourse or without any reference to the seller. Clause 3 of the bank guarantee further clarified that the guarantee shall be operative and the claim payable unconditionally without reference to the applicant (Vendors) by the bank. The bank guarantee represents an independent contract between the bank and the beneficiary and both the parties are bound by the terms.

17. For the foregoing reasons the plaintiff has failed to make out any case for continuing the ad interim injunction, restraining the first defendant, its employees, agents, servants etc. from encashing/invoking the bank guarantee dated 17.2.2000 issued by the bank/second defendant. Therefore, ex-parte interim injunction dated 5.6.2000 in favour of the plaintiff is vacated. It may be mentioned here that on 14.7.2000 the plaintiff undertook to keep the bank guarantees alive. Accordingly, the plaintiff is directed to keep the bank guarantees alive till further orders of the court.

18. With the above directions the application is disposed of. No order as to costs.


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