T.S. Doabia, J.
1. Plea of fraud has been highlighted at the time of argument. The manner in which this plea has been projected has not been pleaded in the plaint. As a matter of fact, the appellant wants an inference of fraud to be drawn even though there is no express mention regarding this in the plaint. This appears to be the reason for rejection of prayer for interim injunction. There were two suits and consequently two appeals have been preferred.
2. The dispute in two appeals is with regard to the same and similar controversy.
3. The appellant figured as a plaintiff in two suits seeking permanent injunction. An application under Order 39, Rules 1 and 2 of the Code of Civil Procedure, 1908 (hereinafter referred to as the 'Code') was also filed. As noticed above, injunction was declined by the Court below. This has led to the filing of two Miscellaneous Appeals.
4. The facts for the purpose of this appeal be noticed. These have been taken from Miscellaneous Appeal No. 2/ 95. But before I do so one fact needs to be brought on record. As there was a dispute with regard to question of payment and non-payment a suggestion was given to reconcile the accounts. Case was adjourned for two weeks. However, instead of narrowing the gap the rift widened. Parties wanted to enlarge the scope of the litigation. There was complete failure to bring them to a meeting point. As such, I have proceeded to decide the matter on the basis of the facts which were pleaded before the trial Court. These are as under:--The appellant is a Joint Sector Limited Company, incorporated under the Indian Companies Act, 1956. According to it, Government of Madhya Pra-desh, Nationalised Banks and Financial Institutions are shareholders. Their share holding is over 70%. Raw material used to be purchased from the defendant-Steel Authority of India, Ltd. (hereinafter referred to as the defendant-respondent). In the course of business dealing with the defendant, two bank guarantees were given. These are 36 of 1989 and 17 of 1993. The first bank guarantee is the subject-matter of Miscellaneous Appeal No. 1 and the second is the subject-matter of Miscellaneous Appeal No. 2 of 1995. These bank guarantees were kept alive from time to time. Bank Guarantee No. 36 of 1989 was to expire on 31-12-1994, whereas Bank Guarantee No. 17 of 1993 was to expire on 30-11-1994.
5. The facts as pleaded in the plaint and in the application under Order XXXIV, Rules 1 and 2 of the Code be noticed. It is stated that the defendant floated a scheme known as 'Time Bound Supply Scheme' (hereinafter also referred to as 'TBSS'). It is further stated that the bank guarantees were furnished by the appellant. State Bank of Indore is the guarantor. This was in lieu of earnest-money which was required to be deposited for the supplies to be made under the above TBSS Scheme. It is the case of the appellant that bank guarantees were kept in force with a view to see that the claims and liabilities arising under the supply made under TBSS Scheme are fully settled. It may, however, be seen that this fact is not borne out from the contents of the bank guarantees. For facility of reference, the relevant paragraphs of the bank guarantee No. 17 of 1993 be noted. These are as under:--
'3. In consideration of your agreeing to make supply or supplies of Iron and Steel Materials (hereinafter referred to as 'the said goods') to our client M/s. AVM Tubes Limited, 24-B, Krishnapuri, P.B. No. 1, Residency Road, Morar, Gwalior 'in terms of your policy of 'Long Term Contract under Time Bound Supply Scheme' as per your Distribution Sl. No. 803, vide your reference No. S-2(1)/89 dated 14-6-89 and our clients Application Reference No. AVN/GWR/ 4617/1 dated 31-7-1989 and your subsequent offer against our clients above application duly accepted and confirmed by our said client. We guarantee that due payment by our said client to you of all money that may become payable by our said client to you for or in relation to the said goods as despatched or delivered by you against the above contract including any loss, damage, compensation, costs, applicable taxes and duties, charges, interest and other expenses payable by our said client in consequence of any breach by them for any of their obligations against the 'Long Terms Contract' under TBSS referred above.
4. We, State Bank of Indore, Morar Branch, Gwalior at the request of M/s. AVN Tubes Limited, undertake to pay to your goodselves, on demand and without demur or protest and without reference to the client, immediately on receipt of (a) your letter stating that the client has failed to pay the amount up to Rs. 17,00,000/- (Rs. Seventeen Lacs only) due from him as price and interest and other charges, and your pre-receipted claims for the said amount against the 'Long Term Contract' under TBSS obligations as referred above in para 4.'
It is the further case of the appellant that another scheme was also floated by defendant. This scheme is 'Long Term Contract Scheme' and after June, 1992 supplies were made under the above scheme and not TBSS. Scheme. It is also the case of the appellant that the act of the defendant in invoking the guarantees is not bona fide. The plea of fraud has been set up. It is said that all payments have been made and that it is in fact the defendants who are to pay a sum of about Rs. fifty-two lakhs to the appellant. According to the appellant as payment has already been made, the act of the defendant in invoking the guarantee falls within the term 'fraud' enabling it to bring its case in the exceptions carved out in various judicial pronouncements of Supreme Court of India.
6. Before noticing the further contentions of the appellant, the case projected by defendant may also be noticed. The assertion of the appellant made in para 5 of the plaint as well as in the application under Order XXXIX, Rules 1 and 2 of the Code that the entire payment has been made is denied. It has been specifically stated by the defendant that the appellant-Company has not adhered to the financial discipline and has not made the payment. The plaint has been placed on record as Annexure A/7. The reply given by the defendant has been placed on record as Ahnexure A/11. It has been categorically stated that the appellant-Company has not made the payment for the goods supplied under the TBSS Scheme. These supplies are said to have been made in the month of August, 1994. It was on account of the failure to make the payment that the guarantees were invoked. It is the positive case of the defendants that the supplies were made under the TBSS Scheme and the guarantees have been invoked properly. A counter-affidavit was filed by, the appellant. It is not the case of the appellant-Company that the version given in the reply to the application under Order XXXIX, Rules I and 2 regarding non-payment is incorrect. All that has been stated in the affidavit dated 21st December, 1994 is that the invoices to which reference has been made in the reply of the defendant pertain to those supplies which were made under a scheme known as 'Long Term Contract'. It would be useful to note what the company has stated in the plaint and the affidavit.
ENGLISH TRANSLATION OF RELEVANT PARAS OF THE PLAINT OF CIVIL SUIT No. 57-A/94, AVN TUBES LTD. V. STEEL AUTHORITY OF INDIA AND STATE BANK OF INDORE AS FURNISHED BY THE APPELLANT'S COUNSEL IS AS UNDER :
Para 5.
The plaintiff made entire payment to the defendant No. 1 payable on account of all the goods purchased under the said long term contract scheme. No amount is payable by the plaintiff-Company to the defendant in respect of the goods supplied under the said scheme.
Para 9.
That, it is evident from the clause No. 4 of the disputed Bank Guarantee that the defendant No. 1 shall have to give a letter to the defendant No. 2, prior to 30-11-1994 com-pulsorily mentioning therein that the amount due (mentioned the amount) payable by the plaintiff-Company to the defendant No. 1, under the long term contract, has not been paid, therefore, the defendant No. 2 should pay such amount to the defendant No. 1 under the disputed bank guarantee. As per the said clause, it shall also be compulsory to mention the bifurcations of the amount so demanded, such as amount on account of price of goods, interest and other charges. The defendants are restricted from encashing the disputed bank guarantee against the said contract. It is clarified again that no balance '' amount is payable in respect of any supply made under the long term contract referred to in para No. 3 of the plaint. It is also clarified that the defendant No. 1 has not written any letter to defendant No. 2, till 30-11-1994, for encashment of the bank guarantee in compliance of the necessary conditions, enumerated in Clause 4 of the disputed bank guarantee. Even if any such letter is produced before your Honour in furture, by the defendants, such letter would be a concocted and fraudulent document. The encashment of the disputed bank guarantee is time barred.
Para 10.
That, the defendant No. 2 is trying to snatch limited funds fraudulently, arbitrarily and illegally from the plaintiff-Company, which is already short of funds. With these mala fide intention they want to distress the funds and property of the plaintiff-Company and for this the defendant No. 1 has started the proceedings for encashment of the disputed bank guarantee by tendering letter dated 16-11-1994 to the defendant No. 2, bank on 26-11-1994 without mentioning any cause and without clearly stating the amounts of (sic) receivable. It is clarified that no proceedings can be started or if started, then cannot be proceeded further, under Section 22 of the said Act (Sick Industrial Companies, Special Provision Act, 1985, for recovery of any amount from the plaintiff-Company without prior permission of the BIFR as the order dt. 6-10-94 by BIFR is in force. Thus, the proceedings for recovery of the amount of the disputed bank guarantee by defendant No. 1 from the defendant No. 2 is against law and invalid. The intention of the said Act is to restrain the said proceedings and if such proceedings are not restrained, then such proceedings shall violate the provisions of the said Act, Law and against the principles of natural justice.
Extract from affidavit.
'(b) The said invoices all relates to the annual contract with quarterly supplies under the July, 1992 annual contract scheme of defendant No. 1. It is submitted that the bank guarantees in question both relate to the TBSS 1989 (Time Bound Supply Scheme of SAIL-1989 series long term contract), which scheme lapsed in 1990-91 and has been followed by other schemes and policies, viz. TBSS 1991, TBSS 1991-92, TBSS 1992-93 and 1992 July Annual Contracts. It is submitted that there are no amounts due and owing by the plaintiff-Company to the defendant No. 1 under the TBSS 1989. It is further submitted that the defendant No. 1 has failed to set out its case and claims against TBSS 1989.'
As noticed above, the claim of the defendant is that the supplies made under TBSS has remained unpaid. It is further pleaded that these supplies were made under TBSS Scheme for which the bank guarantees were submitted. The invoices for these supplies are placed on record. For facility of reference, one of invoices dealing with these may be noticed. This reads as under:
'STEEL AUTHORITY OFINDIA, LIMITED CENTRAL MARKETING ORGANISATION. BRANCH SALES OFFICE.
CHALLAN CUM INVOICE
*** ***
***
Challan details
Invoice details
*** ***
Dt/- 26-8-1994
TC NO :
Cut/ Bend :
NO /NO
Packing Details :
Number :
1
Weight (II) :
0.000
Type :
BARE
Packet number :
Dt. 26/8/94.
Tariff Classification : 7209.30
0.00 (88 IC: 0.00 Other: 0.00)
Value
132101.96
1910.98
0.00
0.00
0.00
0.00
Invoice Val. :
134012.94
PRE-TAX TOT :
246640.83
SALES TAX :
0.00
SUBTOTAL :
246640.83
TURNOVER TAX :
0.00
GROSS AMOUNT :
246641.00
7. There is, however, no dispute with regard to the fact that the guarantees were in force when they were invoked by the 'Steel Authority of India Ltd., vide letters/An-nexures A-6 and A-6A. These read as under;
Annexure A-6
MOTI MAHAL ROAD,
GWALIOR-474007
Ref. No. SAIL/GWL/94-95
Dated 2-12-1994.
By Hand.
To,
The Branch Manager,
State Bank of Indore,
Morar,
Gwalior
---------
Dear Sir,
Sub
: Bank Guarantee No.BG 17/93 dt. 01-12-93 issued in our favour for an amount of Rs. 17,00,000/-.
This refers to the Bank Guarantee No. BG 17/93 dt. 1-12-93 under reference issued in our favour for an amount of Rs. 17,00,000/-.
We hereby invoke the Bank Guarantee and demand of you the payment of a sum of Rs. 17,00,000/- (Rs. Seventeen lacs) only covered under the Guarantee under reference. The said amount may be said the (sic) across the counter.
The original Bank Guarantee and extension thereof are enclosed for the needful at your end.
Thanking you,
Yours faithfully,
for Steel Authority of India Ltd.
Sd/- R. Lalit,
Branch Manager.
Annexure A-6 A
MOTI MAHAL ROAD,
GWALIOR-474007
Ref. No. SAIL/GWL./94-95.
Dated 2-12-1994.
Hand delivery.
Chief Manager,
State Bank of Indore,
Morar Branch,
Gwaiior.
Sub : BG No. 17/93 for Rs. 17 lacs
issued in our favour by you.
Dear Sir,
Please refer to your letter dated 30-11-94 received by us on 1-12-94, on the above subject. As M/s. AVN Tubes Ltd. have failed to fulfil the obligations against the long term contract under TBSS with the Company, we hereby invoke the aforesaid Bank Guarantee and demand of you the payment of a sum of Rs. 17,00,000/- (Rupees Seventeen Lacs only) covered under the Bank Guarantee under reference.
We are enclosing herewith pre-receipt of Rs. 17 lacs (Rupees seventeen Ides only) as required by above para of the said BG. You are now requested to please release the payment immediately.
Thanking you,
Yours faithfully,
For Steel Authority of India Ltd.
Sd/-R. Lalit,
Bank Manager.
As to what material difference is there between the two is not discernible. However, as the Bank was about to honour the guarantee and make the payment, two suits out of which these appeals have arisen were filed. The trial Court, as noticed above refused to grant the injunction. This has led to the filing of the present appeals.
8. The arguments which have been raised on behalf of the Company are:
(i) that the defendant has not invoked the bank guarantees in strict compliance with the terms thereof,
(ii) that this is a clear case of fraud inasmuch as the payment which is said to be got made by invoking the bank guarantees has already been made,
(iii) that the guarantees is with regard to the Scheme known as TBSS Scheme and the sale transaction regarding which the payment is being made are not under this scheme,
(iv) that the TBSS Scheme came to an end in June, 1982 and any transaction of sale or purchase thereafter would not be governed by the guarantee;
(v) that the unit in question has been declared as a sick unit and, therefore, in view of the provisions contained in the Sick Industrial Companies (Special Provisions) Act, 1985, the bank cannot invoke the bank guarantees.
9. Before dealing with the various arguments raised by the learned counsel appearing for the appellant-Company, it would be apt to notice the law dealing with the bank guarantees. The law with this regard has been made crystal-clear by several English and American decisions. Judgments pronounced by the Supreme Court of India have further crystallised the position. Some of these principles are:
(i) A banker issuing or confirming an irrevocable credit duly undertakes to honour it or to reimburse in respect thereof by the paying or negotiating intermediate Banker and the credit is thus in the hands of the beneficiary binding against the Banker.
(ii) The credit contract is independent of the sales contract on which it is based unless the sale contract is in some measure incorporated in credit contract.
(iii) A seller of goods relying on an instrument creating Bank's liability believes that he has the direct obligation of issuing Bank running in his favour enforceable by him against that Bank.
(iv) Banks are not concerned with the Sales Contract or the Goods if it were otherwise, credit business would be impossible.
(v) Unless documents tendered under a credit are in accordance with those for which the credit calls and which are embodied in the promise of the paying or negotiating banker, the beneficiary cannot claim against the paying Bankers duty to refuse payment.
(vi) The documents must be those called for and not documents which are almost the same or which will be just the same as well.
(vii) The banker is not called upon to know or interpret trade customs and terms. Where a mandate is ambiguous and a paying banker acts in a reasonable way in pursuance of it, he is protected. But this general rule cannot be stretched so far as to protect a banker who pays against documents describing goods in terms which are similar to, but not exactly the same as those stipulated in the credit.
(viii) The description of the goods in the relative bill of lading must be the same as the description in the letter of credit. That is, 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.
10. The above principles can be spelt out from Uniforms Customs and Practices for Documentary Credits; Gutterudge and Meg-raj's Law of Bankers Commercial Credit, 6th Edn., page 21 and Halsbury's Laws of England, 4th Edn., Volume III, para 142, page No. 106.
11. Thus, a letter of credit constitutes the sole contract with the Banker and the bank issuing the letter of credit has no concern with any question that may arise between the seller and the purchaser of the goods. This view was expressed in English, Scottish and Australian Bank Ltd. v. Bank of South Africa, 1922 (13) -LJ ILR 21. The obligation of the Bank is absolute and when documents are presented the bank has to accept the same. The fulfilment of the term of the sales contract is a matter for the seller and the buyer alone. This principle can be spelt from the decision reported as State v. Hambro's Bank of Northern Commerce, 1922 (10) LIL Rep 529 (CA). The banker must accept and pay for the document irrespective of any defence which there may be to a claim under the contract of sale and that such a defence is solely a matter to be sorted out between the buyer and the seller. This was so held on Urguhart, Lindsay and Co. Ltd. v. Eastern Bank Ltd., (1922) 1 KB 318. It is also settled that the commercial trading must go on solemn guarantee either based on a letter of credit or bank guarantee irrespective of any dispute between the contracting parties. It is immaterial whether or not the goods were up to contract and the fact remains that the banks cannot be absolved of their responsibility to meet the obligations. Hamzeh Malas & Sons v. British Imex Industries Ltd. (1958) 2 QB 127, supports above conclusions. Again it is an accepted principle that only in exceptional cases the Court is to interfere with the machinery of irrevocable obligations assumed by Banks. As a matter of fact in confirmed letter of credit the Banks are only concerned to ensure that the terms of its mandate and confirmation has been complied with and it is in no way concerned with any contractual dispute which might arise between the buyers and sellers. R. D. Harbottle (Mercantile) Ltd. v. National Westminster Bank Ltd., (1977) 2 All ER 862. A performance guarantee is similarly to a confirmed letter of credit and, therefore, where a Bank has given a performance guarantee it is required to honour the guarantee according to the terms and is not concerned whether either party to the contract which underlay the guarantee was in default. See, Edward Owen Engineering Ltd. v. Barclays Bank International Ltd., (1977) 3 WLR 764 : (1978) 1 All ER 976. In United City Merchants Investments Ltd. v. Royal Bank of Canada, (1982) 2 All ER 720, it was said that the whole commercial purpose for which the system of confirmed irrevocable documentary credit have been developed in international trade was to give the seller of goods an assured right to be paid before they parted with the control of goods without risk of payment being refused or reduced because of a dispute with the buyer. Thus, it (is) well settled by judicial precedent and commercial convention that an elaborate commercial system has been built up on the footing of a confirmed letter of credit and this constitute a bargain between the banker and vendor of the goods. This bargain imposes upon the Banker an absolute obligation to pay irrespective of any dispute there might be between the parties whether or not the goods were up to contract. The system of confirmed letter of credit which has now been judicially equated with Bank guarantee is to be allowed to have full sway and there has to be minimum most interference by the Courts. This legal principle was held to be a great importance by the Supreme Court of India in the case of Tarapore & Co., Madras v. Tractoro Export Moscow, 1969(1) SCC 233 : (1969) 2 SCR 920 : (AIR 1970 SC 891). It was observed that this system is the life and blood of international trade. It was further observed that if interference is permitted in the matter of enforcement of these banking transactions then this would have serious repercussions jeopardising the international trade. What was found to be of great significance and importance in the matter of International Trade was found to be equally important in the matter of conducting internal trade in this country. The Courts have reiterated that the autonomy of an irrevocable letter of credit was entitled to full protection and except in very rare and exceptional circumstances, Courts should not interfere with this autonomy. What was said with regard to International Trade would 'fortiori' apply to Bank guarantees because around bank guarantee revolves majority of the internal trade transactions in this country. In modern commercial transactions, various devices are used to ensure performance by the contracting parties. The traditional letter of credit has taken a new meaning. They are also known as stand-by letter of credits, performance bond and guarantee bond are other devices increasingly adopted in commercial transactions. The Courts have treated such documents as analogous to letter of credit. The later decision of Supreme Court of India are reported as United Commercial Bank v. Bank of India, AIR 1981 SC 1426; Centax International Ltd. v. Vinner Impas Inc., (1986) 4 SCC 136 : (AIR 1986 SC 1924); U.P. Cooperative Federation Ltd. v. Singh Consultants & Engineers (P) Ltd.,(1988) 1 SCC 174; The State Trading Corporation of India Ltd. v. Jainsons Clothing Corpn., AIR 1994 SC 2778; GEC Tech. Service Co. Inc. v. Punj Sons (P) Ltd., AIR 1991 SC 1994.
12. The general principle thus is that a banker is bound to honour a letter of credit, stand-by letters of credit, performance bond and bank guarantees on their face value. The exceptions to he above rule are few and may be noticed. These exceptions arise when there is a fraud or when there is failure to comply with the letter of credit or when the documents are defective. The Bank's duty to the seller is vitiated if there is fraud on the part of the seller otherwise the Bank remains under a duty to pay the amount of the credit to the seller even if the documents presented although confirming on their face with the terms of the credit nevertheless contained a statement of material fact that was not true. Again unless documents tendered under a credit are in accordance with those for which a credit is called and which are embodied in the promise of intermediary or issuing banker, the beneficiary cannot claim against him and it is the Banker's duty to refuse payment. The Banker may not be bound or obliged to honour the bills of exchange drawn by the seller if they are not in exact compliance with the terms of credit. The nature of the fraud that the Courts talk about is the fraud of an 'egregious nature' as to vitiate the entire underlying transaction. It is the fraud of the beneficiary and not fraud of somebody else. The Bank cannot be compelled to honour the credit in such cases. An irrevocable commitment either in the form of confirmed Bank Guarantee or irrevocable letter of credit cannot be interfered with except in a case of fraud or a case of irretrievable injustice has been made out. This is the well settled principle of law, and in order to restrain the operation either of irrevocable letter of credit or of confirmed letter of credit or a bank guarantee, there should be a serious dispute. A fraud like any other charge of a criminal proceeding must be established beyond reasonable doubt, A finding as to fraud cannot be based on suspicion and conjectures. See Narayanan Chettyar v. Official Assignee, High Court Rangoon, AIR 1941 PC 93, GEC Tech Services Co. Inc.'s case (AIR 1991 SC 1994) (supra); Texmaco Ltd. v. State Bank of India, AIR 1979 Cal 44.
13. Thus an exception to the general rule is that the Bank should not pay under the letter of credit or similar documents where it knows that the request for payment is made fraudulently or in circumstances when there is no right to payment. Injunction may be granted in the case of obvious fraud. The above concept is based on the elementary principle that a person who despatches the goods in reliance on a letter of credit must do so in exact compliance with the term. It is also elementary to say that Bank is not bound to honour drafts presented to it under a letter of credit unless those drafts with the accompanying documents are in strict accord with the credit as opened. It is both common ground and common sense that in such a transaction the accepting Bank can only indemnify if the conditions on which it is authorised to accept are in the matter of accompanying documents strictly observed. See English, Scottish and Australian Bank Ltd.'s case (1922(13) LT LR Rep 21) (supra). The refusal to pay when the bill of lading did not describe the goods in those terms in which they were specified were held to be valid in Rayner v. Hambros Bank Ltd., (1943) 1 KB 37. Where the documents accepted were defective the liability under the letter of credit was held to be not there in the cases reported as-- Bank Melli Iran v. Barclays Bank, 1951 (2) LI LR 367 and Lamborn v. Lake Shore Banking Co., 1921 (196) App Divn 504. A party who is entitled to drafts against a letter of credit must strictly observe the terms and conditions under which the credit is to become available and if hedoes not, the Bank can refuse to honour his draft. In these circumstances, there may be no cause of action against the Bank. The bank has the power and is subject to the limitation which are given and imposed by the customer's authority. See Laudasi v. American Exchange Bank, (1924) 239 NY 234.
Special equities also represent situation where the non-grant of injunction would lead to a situation which could not be retrieved. See Hiam and Rambath v. Matsas & Matsas, 1966 (2) Lyoyds List Law Reports 495. As cited above the another exception to the rule is where fraud by one of the parties to the underlying contract has been established and the Bank has notice of the fraud. See Edward Owen Eng. Ltd.'s case (1977 (3) WLR 764) and UCPFS's case. In the absence of special equities arising out of a particular situation which might entitle the parties on whose behalf guarantee is given to an injunction restraining the Bank in performance of Bank guarantee and in the absence of clear fraud the Bank must pay to the party in whose favour the guarantee is given on demand if so stipulated and whether the terms are such have to be found out from the performance guarantee as such.
14. From the perusal of the judgments referred to above, it becomes apparent that the appellant can succeed only if it can show that the invocation is not in strict compliance with the letter and spirit of the bank guarantees. The appellant can again succeed if it can successfully prove the plea of fraud. According to the appellant, payment has already been made and if payment is sought again for the same transaction for which payment has already been received, then it would be a clear case of fraud. For this proposition, reliance has been placed specifically on Svenska Handelsbanken v. M/s. Indian Charge Chrome, AIR 1994 SC 626. Relevant paras are as under (Paras 86-87):--
'Mr. Venugopal then referred us to the decision of Berger, J. In Handerson v. Canadian Imperial Bank of Commerce and Peat Marwick Ltd., 40 British Columbia Law Reports 318. Here again the facts were peculiar. The plaintiff arranged an irrevocable letter of credit to fulfil his obligation to purchase 20 episodes of two television shows from a production company. Although the shows were never produced and the production company went ino bankruptcy, the receiver of the seller made demand upon the bank for payment under the letter of credit and the plaintiff brought an application for an interlocutory injunction to stop the bank from making payment. The Court granted the interim injunction and held that the letter of credit is independent of the primary contract of sale between the buyer and the seller. The issuing bank agreed to pay upon presentation of documents, not goods. There is an exception to this rule; the bank should not pay under the credit where it knows that the request for payment is made fraudulently in circumstances when there is no right to payment. The case fell within this exception. The bank had been put in knowledge of the fact shows had not been produced and, therefore, the receiver was not entitled to the proceeds. It will be noticed that this decision is based on obvious fraud and this view was given by Barger, J. after considering the case of Sartein v. J. Henry Schroder Banking Corp., (1941) 31 NY Supp 2(d) 631 at 633.
A decision of New York Supreme Court in NMC Enterprises, Inc. v. Columbia Broadcasting System, Inc., 14 UCC Reporting Service 1427 was also referred to by Mr. . Venugopal. Here again Fein, J. observed that preliminary injunctive relief will be granted, restraining bank from honouring a letter of credit, where a prima facie showing has been made of fraud in the underline transaction and the plaintiff has further shown that it may be irreparably injured if the relief is not granted.'
15. As plea of fraud is the only plausible plea on which the appellant could succeed, this be examined. The case of the appellant is that payment has been made. The stand is sought to be spelled out from para 5 of the plaint and also para 5 of the application under Order XXXIX, Rules 1 and 2, C.P.C. This was controverted by the defendant. A further affidavit, as noticed above, was filed. The contents of these have been reproduced above. In the affidavit stand taken by the plaintiff is that the item regarding which payment is being claimed not under TBSS Scheme and, therefore, the guarantees cannot be invoked. It is not the case of the plaintiff-appellant that payment has been made. The case is that payment should not be claimed by invoking the bank guarantees because supplies have not be made under TBSS Scheme, Thus to say that the plaintiff/appellant has made the payment and the defendant is claiming double payment is incorrect. The plea of double payment is not there. As noticed above, the plea is that supplies are not under TBSS Scheme and, therefore, guarantees cannot be invoked. The plea taken by the appellant in the plaint or in the application under Order XXXIX, Rules 1 and 2, C.P.C. or in the later affidavit filed in the Court below does not support the case of double payment.
16. It would not be out of place to mention that the appellants are claiming that some amount is in fact payable by the defendant and that it has not taken note of these counter-claims. Some of these items are as under:--
EXCESS AMOUNTCHARGED/DEBITED BY SAIL
UP to 31-3-1994.
1.
Freight wrongly charged
201667.40
2.
-do-
45839.60
3.
-do-
106643.00
4.
Excess price charged
39651.00
5.
EMD forfeited
384195.00
6.
Penalty wrongly charged
223007.43
7.
-do-
62350.00
8.
C.S.T. wrongly charged
255385.76
9.
Oiling extra charged
3034077.00
10.
Weight difference
82400.00
(Cost of material shortsupplied)
Total 'A'
4435216.19
From 1-4-1994
1.
Interest charged
392488.00
2.
Excess amount chargedsupply made (21-4-94 to 30-9-94) against annual booking contract
390143.71
Total 'B'
782631.71
Total 'A' + 'B' =
5217847.90
So, the case of the appellant-Company is that if the counter-claim raised by it are taken into account, then no payment is due to the defendant. This is entirely different from saying that payment has been made. A case of counter-claim is not equivalent to a plea that payment has been made. As such, the assertion made in this regard cannot be taken cognizance of.
17. The next argument of the appellant-Company is that the guarantees cannot be invoked because payment is not being sought with regard to supplies which were made under the TBBS Scheme. This again is an agrument which is apparently wrong. The invoices have been placed on the record and these indicate that the supplies were made under the TBBS and, therefore, the assertion made by the appellant-Company in this regard also cannot be accepted.
18. The argument of the learned counsel for the appellant that the TBBS came to an end in the year 1992 and,' therefore, no supplies were made under the Scheme cannot accepted. A bare reading of the bank guarantees indicate that these were given qua supplies to be made under the TBSS Scheme. The fact that one guarantee was given in 1993, i.e. after June, 1992 and the other was kept alive falsifies the case of the appellant that TBSS Scheme came to an end.
19. Thus, I am of the view that the appellant-Company has not been able to substantiate its claim of fraud. This is because :
(i) such a plea is not found in express terms in the plaint.
(ii) the plea that TBSS Scheme came to an end in June, 1992 has not been established, the fact that the one bank guarantee was given much later i.e. after June, 1992 and the other was kept alive shows that the scheme was in existence and the supplies were made under the TBSS Scheme.
(iii) the claim of the plaintiff that they have made the payment and that the defendants are seeking payment for the second time has not been established.
(iv) the appellant-Company is seeking adjustment made by way of counter-claim. This plea is in contra-distinction to the plea of payment having already been made.
(v) the claim of the plaintiffs does not come within the well established exceptions carved out by the Supreme Court of India.
As such, the plaintiff-appellant cannot succeed on the plea of fraud or other pleas.
20. The argument with regard to the company being a sick company and, therefore, bank guarantees cannot be invoked may also be examined.
21. The enactment on which reliance is being placed in this regard is Sick Industrial Companies (Special Provisions) Act, 1985. The Company is said to have been declared sick within the meaning of Section 3(1)(o) and Section 17(3) of the Act. It is further stated that steps have been taken with a view to rehabilitate the Company under Sections 17 and 18. It is argued that no action can be taken which would amount to realisation by way of distress execution or any other action which is akin to it. For this reliance has been placed on the words 'or the like' as occurring in Section 22 after the words 'execution distress'. Reliance is being placed on Section 22 of the 'Act. For facility, this provision be noted. It reads as under :
'22. Suspension of legal proceedings, contracts, etc.-- (1) Where, in respect of an industrial company, an inquiry under Section 16 is pending or any scheme referred to under Section 17 is under preparation or consideration or a sanctioned scheme is under implementation or where an appeal under Section 25 relating to an industrial company is pending then notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or 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 the appointment of a receiver in respect thereof shall lie or be proceeded with further, except with the consent of the Board or, as the case may be, the Appellate Authority.'
22. The argument of the learned counsel for the appellant is that the steps by way of execution distress or the like cannot be taken against the company. The learned counsel was clear that the invocation of guarantees does not fall within the term of execution as also distress and, therefore, he laid all emphasis on the words 'or the like'.
23. What is meant by execution or distress. These terms have been defined in Legal Glossary, as under :
'Execution : (1) the action of execution (a document) or for carrying into effect, (2) the action of executing a death sentence, (3) the infliction of capital punishment.
Distress : (1) anguish or affliction affecting the body, spirit or community, (2) the legal seizure and detention of chattel to satisfy out of the proceeds of its sale, some debt or claim, especially unpaid rent.'
In Black's Law Dictionary, the terms have been defind as under :
'Execution : Carrying out some act or course of conduct to its completion. Completion of an act. Putting into force. The completion, fulfilment or perfection of anything, or carrying it into operation and effect
Distress : A common-law right of landlord, now regulated by statute, to seize a tenant's goods and chattels in a non-judicial proceeding to satisfy an arrears of rent.'
Some of the decisions on which reliance has been placed by the counsel for the appellant be also noticed.
Shri Chamundi Mopeds Ltd. v. Church of South India Trust Association, (1992) 75 Com Cas 440 : (AIR 1992 SC 1439) is the first case on which reliance has been placed. In this case, eviction proceedings were initiated by the landlord against the tenant company. The argument raised was that eviction proceedings cannot be initiated against a sick com-pany as these proceedings would be covered by term 'proceedings for execution, distress or the like' against the properties of the sick industrial company. The Supreme Court examined the provisions of Section 22 of the Act and concluded that the plea of the company that the case fell within the provisions of Section 22 was not made out. It was observed as under (Paras 11 and 12 of AIR):
'In this regard, it may be mentioned that the following proceedings only are automatically suspended under Section 22(1) of the Act :
(1) proceedings for winding up of the sick industrial company;
(2) proceedings for execution, distress or the like against the properties of the sick industrial company; and
(3) proceedings for the appointment of areceiver.
Eviction proceedings initiated by a landlord against a tenant company would not fall in categories 1 and 3 referred to above. The question is whether they fall in category 2. It has been urged by learned counsel for the appellant-company that such proceedings fall in category 2 since they are proceedings against the property of the sick industrial company. The submission is that the leasehold right of the appellant-company in the premises leased out to it is property and since the eviction proceedings would result in the appellant-company being deprived of the said property, the said proceedings would be covered by category 2. We also unable to agree. The second category contemplates proceedings for execution, distress or the like against any other properties of the industrial company. The words 'or the like' have to be construed with reference to the preceding words, namely 'for execution, distress' which means that the proceedings which are contemplated in this category are proceedings whereby recovery of dues is sought to be made by way of execution, distress or similar process against the property of the company. Proceedings for eviction instituted by a landlord against a tenant who happens to be a sick industrial company cannot, in our opinion, be regarded as falling in this category. We may, in this context, point out that as indicated in the preamble; the Act has been enacted to make special provisions with a view to securing the timely detection of sick and potentially sick companies owning industrial undertakings, the speedy determination by a Board of experts of the preventive, ameliorative, remedial and other measures which need to be taken with respect to such companies and the expeditious enforcement of the measures so determined. The provision regarding suspension of legal proceedings contained in Section 22(1) seeks to advance the object of the Act by ensuring that a proceeding having an effect on the working or the finances of a sick industrial company shall not be instituted or continued during the period the matter is under-consideration before the Board or the Appellate Authority or a sanctioned scheme is under implementation, without the consent of the- Board or the Appellate Authority. It could not be the intention of Parliament in enacling the said provision to aggravate the financial difficulties of a sick industrial company while the said matter were pending before the Board or the Appellate Authority by enabling a sick industrial company to continue to incur further liabilities during this period. This would be the consequence if Sub-section (1) of Section 22 is construed to bring about suspension of proceedings for eviction instituted by a landlord against a sick industrial company which has ceased to enjoy the protection of the relevant rent law on account of default in payment of rent. It would also mean that the landlord of such a company must continue to suffer a loss by permitting the tenant (sick industrial company) to occupy the premises even though it is not in a position to pay the rent. Such an intention cannot be imputed to Parliament. We are therefore, of the view that Section 22(1) does not cover a proceeding instituted by a landlord against a sick industrial company for the eviction of the premises let out to it.'
24. This decision thus would not come to the rescue of the appellant.
25. The next decision on which reliance is being placed by the appellant-company is Punjab United Forge v. Hisdustan Hydraulics (P) Ltd., (1992) 75 Com Cas 316 (Punj & Har). In this a suit had been decreed against the petitioner-company. The petitioner-company filed an appeal. The appeal was dismissed. Execution proceedings were initiated. Meanwhile, the company was declared as a sick unit under the aforementioned Act. Ashok Bhan, J. observing that the provisions of the aforementioned Act would be attracted. It was observed as under :
'Section 22 of the Act came into force with effect from May 15, 1987. An appeal against the decree was filed by the judgment-debtor on March 29, 1988. The judgment-debtor-company was declared a sick unit on March 3, 1989. Firstly, the petitioner could not take this objection in the ground of appeal as it was declared a sick unit on March 3, 1989 i.e. almost one year after the filing of the appeal against the decree and secondly, it is immaterial as to whether such a ground was taken in the grounds of appeal or not or as to whether the change in law, i.e. regarding the enactment of the Sick Industrial Companies (Special Provisions) Act, 1985, was brought to the notice of the appellate Court. A reading of the objections and Section 22 of the Act (reproduced in the earlier) brings out the mandate of Legislature. The executing Court has failed to appreciate the said mandate which is clear and prohibits the continuance of any proceedings for winding up execution, distress or the like against any of the properties of company which has been declared a sick unit under the Sick Industrial Companies (Special Provisions) Act, 1985. Section 22 of the Act has a tion obstante clause and says that :--
.....notwithstanding anything contained in the Companies Act, 1956(1 of 1956) or any other law or the memorandum and articles of association of the industrial company or any other instrument having effect under the said Act or 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 the appointment of a receiver in respect thereof shall lie or be proceeded with further except with the consent of the Board or, as the case may be, the appellate authority.
Thus, it places a bar on the filing or continuation of any proceedings in the nature of winding up, execution, distress etc. against any of the properties of the company and under the circumstances it was mandatory for the executing Court to have given effect to the mandate of Section 22(1) quoted above which it has failed to do.'
The above case has no parrallel with this case. Its ratio is not attracted with this case.
26. Himalaya Rubber Products Limited v. The Board For Industrial and Financial Reconstruction, (1993) 76 Com Cas 281 (Cal) is another decision on which reliance has been placed. In this case, the company was declared as a sick unit. It was not being issued 'C' certificate under the West Bengal Sales Tax Laws. The Court formed an opinion that withholding of 'C' Certificate would be covered by Section 22(1) of the Act. It was observed as under :--
'In the circumstances it would appear that for the purposes of Section 22(1) of the 1985 Act, withholding of the Sales Tax declaration forms on account of non-payment of arrears of sales tax dues is a similar process such as execution and distress. It follows that the sales tax authorities cannot in such circumstances withhold such forms except with the consent of the BIFR. It is made clear however that the withholding of declaration forms on any other ground is not being considered in this judgment.
Therefore, it is directed that the sales tax authorities will not withhold the declaration forms on account of non-payment of arrears of sales tax dues. The sales tax authorities will however be at liberty to make an application to the BIFR for its consent to the withholding of sales tax declaration forms under the 1956 Act.'
The ratio of this case is again not attracted to the facts of this case.
27. In Andhra Cement Co. Ltd. v. A.P. State Electricity Board, (1991) 75 Com Cas 454 : (AIR 1991 Andh Pra 269), action of the Electricity Board to disconnect the electricity connection was held to be an act which would not fall within the provisions of the aforementioned Act. At page 467 (of Com Cas) : (At Pp. 277-78 of AIR) it was observed as under :--
'If the electricity board had resorted to asuit for recovery or execution of a decree oraction by distress or the like for recovery ofarrears due to it, against the properties of thecompany, it could be said that Section 22(1) isattracted. Non-supply of further goods undera contract cannot, in our view, be equatedwith the kind of proceeding contemplated bySection 22(1). Further the words 'against theproperties' of the company clearly imply thatthe action must be against the property of thecompany non-supply of goods in futurecannot amount to action against the propertyof the company.'
I am of the view that the ratio of the decision in the above cases is not attracted to this case. This decision goes against the appellant. The argument that proceedings were not initiated against the company by the Electricity Board was held to be a factor which would go against it.
28. Maharashtra Tubes Ltd. v. State Industrial and Investment Corporation of Maharashtra Ltd., 1993 CC 803 (sic) : (1993 AIR SCW 991) is the last decision on which reliance has been placed. In this case the Supreme Court observed that proceedings initiated by the State Financial Corporation under Section 29 of the State Financial Corporation Act, would also fall within the purview of the Act. This proposition is entirely different.
29. In my opinion, none of the judgments on which reliance has been placed by the plaintiff are attracted to the facts of this case. It is pertinent to note that proceedings are to be taken against the Company. In this case, legal proceedings have not been initiated against the Company and on the other hand it is the Company which has resorted to some legal action. Thus, I am of the view that the provisions of the 1985 Act would not be attracted to the facts of this case, Merely because the appellant's Company is to be put in a tight financial situation by invoking the guarantees is no ground to bring the appellant within the scope of Section 22 of the 1985 Act.
30. Thus, I am of the view that neither the plea of fraud comes to the rescue of the appellant nor does 1985 Act brings it within its protective umbrella which might put the sick unit on to artificial respiration.
31. The defendants have taken a positive stand that payment was due for the supplies made under TBSS Scheme, which were made in the month of August, 1994. The stand of the appellant is not that the payment was made, but the stand is taken that some claims are overdue and, these should have not been honoured. Details of the claim have been indicated. These are yet to be settled. Merely raising a claim by the appellant-Company would not amount to and is not equal to the claim having been established. The plea that TBSS Scheme has lapsed stands falsified by the very fact that one Bank Guarantee was issued after 1992 and the other was kept alive. As such, I do not find any merit in these two appeals and these are dismissed, with costs. Costs Rs. 1,000/- in each case.