Vikramajit Sen, J.
1. A legal nodus of considerable interest and import has arisen in this case; whether a third party can invoke the moratorium available under Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter referred to as `SICA'). The Plaintiff has filed a suit for the recovery of Rs.87,99,121.00 under Order xxxvII of the CPC against the Bank of India (as Defendant Nos. 1 and 2 `the Bank' for short) and HILTON Rubbers Ltd. (Defendant No. 3 `HILTON' for short). HILTON had placed several purchase orders for nylon and polyster fabrics on the Plaintiff in February and March, 1999 and on instructions of HILTON, the Bank had opened Irrevocable Letters of Credit for the payment of the material supplied against the aforementioned purchase orders. Payments were to be made by the Bank within ninety days from the date of dispatch 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 Credits. 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 Letter of Credits 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 Tubes Ltd. v. State Industrial & Investment Corporation Limited and Anr., has been relied upon by Mr. Mata, learned counsel for the Bank, to buttress the contention that the present proceedings ought not to continue any further. The Bank has prayed for the grant of Leave to Defend the suit in IA No. 1069/2000 in which it has controverter the charge of fabrication of documents. It has been submitted, inter alia, that the Bank has no knowledge about the transactions between the Plaintiff and HILTON; and that it is bound only to discharge its contractual duties in the matter of the establishment and payment under Letters of Credit. In pointing out discrepancies in the Letter of Credit the Bank has acted on its commercial judgment in accordance with its contractual rights. It has been averred that a Letter of Credit is a contract between the Bank and the Plaintiff, and waiver of discrepancies by HILTON would be inefficacious against the Bank. It has been pleaded that the Bank is obliged to make payment strictly in conformity with the terms of engagement contained in the Letter of Credit but the contentions seem to me to be to the contrary. After filing this application the Bank has also preferred IA No. 12902/2000 under Section 22(1) of SICA praying for the stay of proceedings.
3. Section 22(1) of SICA reads as under:
"22. Suspension of legal proceedings, contract, 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 and no suit for the recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans or advance granted to the industrial company shall lie or be proceeded with further, except with the consent of the Board or, as the case may be , the Appellate Authority."
4. In the Maharashtra Tubes Ltd. 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:
"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 the BIFR for the revival and rehabilitation of the sick industrial company. The words `or the like' which follow the words `execution' and `distress' are clearly intended to convey that the properties of the sick industrial company shall not be made the subject matter of coercive action of similar quality and characteristic till the BIFR finally disposes of the reference made under section 15 of the said enactment. The legislature has advisedly used an omnibus expression `the like' as it could not have conceived of all possible coercive measures that may be taken against a sick undertaking. The action contemplated by section 29 of the 1951 Act is undoubtedly a coercive measure directed at the take over of the management and property of the industrial concern and confers a further right on the Financial Corporation to transfer by way of lease or sale of properties of the said concern and any such transfer effected by the Financial Corporation would vest in the transferee all rights in or to the transferred property as if the transfer was made by the owner of the property. So also under the said provision the Financial Corporation will have the same rights and powers with respect to goods manufactured or produced wholly or partly from goods forming part of the security held by it as it had with respect to the original goods. It is, therefore, obvious on a plain reading of section 29 of the 1951 Act that it permits coercive action against the defaulting industrial concern of the type which would be taken in execution or distress proceedings; the only difference being that in the latter case the concerned party would have to use the forum prescribed by law for the purpose of securing attachment and sale of property of the defaulting industrial concern whereas in the case of a Financial Corporation that right is conferred on the creditor corporation itself which is permitted to takeover the management and possession of the properties and deal with them as if it were the owner of the properties. If the corporation is permitted to resort to the provision of section 29 of the 1951 Act while proceedings under sections 15 to 19 of the 1985 Act are pending it will render the entire process nugatory. In such a situation the law merely expects the corporation and for that matter any other creditor to obtain the consent of the BIFR or, as the case may be, the Appellate Authority 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.
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 specially for that purpose and if they are permitted to resort to independent action in total disregard of the pending inquiry under sections 15 to 19 of the 1985 Act the entire exercise under the said provisions would be rendered nugatory by the time the BIFR is able to evolve a scheme of revival or rehabilitation of sick industrial concern by the simple device of the Financial Corporation resorting to section 29 of the 1951 Act. We are, therefore, of the opinion that where an inquiry is pending under section 16/17 or an appeal is pending under section 25 of the 1985 Act there should be cessation of the coercive activities of the type mentioned in section 22(1) to permit the BIFR to consider what remedial measures it should take with respect to the sick industrial company. The expression `proceedings' in section 22(1), therefore, cannot be confined to legal proceedings understood in the narrow sense of proceedings in a Court of law or a legal tribunal for attachment and sale or the debtor's property."
5. In Deputy Commercial Tax Officer and others, v. Corromandal Pharmaceuticals and others, the Hon'ble Supreme Court had considered its previous decisions in Gram Panchayat v. Shree Vallabh Glass Works Limited, as well as Maharashtra Tubes Limited (supra). These decisions were distinguished on the premise that in those cases the liability of the sick company which had arisen for the first time after the date of scheme sanctioned by Board of Industrial and Financial Reconstruction ( BIFR). The Court observed that "the language of Section 22 is of wide import regarding suspension of legal proceedings from the moment an inquiry is started, till after the implementation of the scheme or the disposal of an appeal under Section 25 it will be reasonable to hold that the bar or embargo envisaged in Section 22(1) can apply only to such of those dues reckoned or included in the sanctioned scheme. Such amounts like sales tax, etc. which the sick industrial company is enabled to collect after the date of the sanctioned scheme legitimately belonging to the Revenue, cannot be and could not have been intended to be covered within Section 22 of the Act". The judgments in Shree Vallabh Glass Works (supra) as well as Corromandal's case (supra) were reflected upon in Tata Davy Limited v. State of Orissa and others, the Company had relied on the former case whereas the State had relied on the later case. The Bench favored the earlier view in Shree Vallabah Glass works (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 Limited v. Kuldip Singh Lamba,  91 Comp Case 727 and by a Division Bench of the Calcutta High Court in Taulis Pharma Limted v. Bengal Immunity Limited,  108 Comp Case 237 and by a Single Judge of the Calcutta High Court in Fort William Industries Limited v. Usha Bentron Limited,  108 Comp Case 176 and a Single Judge of this Court in the Cement Corporation of India v. Manohar Basin, . A dichotomy appears to exist in the views of the Hon'ble Supreme Court insofar as the company's liability post registration under SICA is concerned. In my analysis, however, the possibility of two opinions of the Apex Court will have no bearing in this case.
6. The conundrum which has arisen in the present case was cogitated upon by a Bench of three Judges in M/s. Patheja Bros. Forgings & Stamping and Anr. v. I.C.I.C.I. Ltd. & Ors, . In that case the Hon'ble Supreme Court perceived the query to be whether Section 22 of SICA covers a suit against the guarantor of a loan or advance that has been granted to the concerned industrial company. The Court took note of the decision of the Division Bench in Madalsa International Ltd., Mumbai and others, v. Central Bank of India, Bombay, AIR 1998 Bombay 247 where it had been held that the provisions of Section 22 would not extend to guarantors, but which decision has not been specifically overruled. The Bench observed as under: -
" 7. .... the relevant words are : "no suit .... for the enforcement .... of any guarantee in respect of any loans or advance granted to the industrial company" shall lie without the consent of the Board or the Appellate Authority. The words are crystal clear. There is no ambiguity therein. It must, therefore, be held that no suit for the enforcement of a guarantee in respect of a loan or advance granted to the concerned industrial company will lie or can be proceeded with or without the sanction of the Board or the Appellate Authority under the said Act.
8. It is not possible to read the relevant words in Section 22 as meaning that only a suit against the industrial company will not lie without such consent. There is no requirement in Section 22, as analysed above, that, to be covered thereby, a suit for the enforcement of a guarantee in respect of a loan or advance to the industrial company should be against the industrial company.
12. We have analysed the relevant words in Section 22 and found that they are clear and unambiguous and that they provide that no suit for the enforcement of a guarantee in respect of any loan or advance granted to the concerned industrial company will lie or can be proceeded 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."
7. After the decision in Patheja Brothers 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. Canara Bank & Ors., ).
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 case (supra) would apply only once the Scheme is formulated, and this event is yet to happen.
8. It would also be relevant to recount the decision of the Hon'ble Supreme Court in U.P. State Sugar Corporation v. M/s. Sumac International Limited, where the circumstances in which the invocation of a Bank Guarantee or payments made pursuant thereto could be interdicted, had been Restated. While spelling out the essentials of fraud and/or irretrievable injustice in this context, the Apex Court also returned the following observations:-
"12 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 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. The two grounds are not necessarily connected, though both may coexist in some cases.
14. On the question of irretrievable injury which is the second exception to the rule against granting of injunctions when unconditional bank guarantees are sought to be realised the court said in the above case that the irretrievable injury must be of the kind which was the subject-matter of the decision in the Itek Corpn. case, 566 Fed Supp 1210. In that case 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 favor 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 licenses 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 Amercian 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 pay, is not enough. In Itek case (supra) there was a certainty on this issue. Secondly, there was good reason, in that case for the Court to be prima facie satisfied that the guarantors i.e. the bank and its customer would be found entitled to receive the amount paid under the guarantee.
15. Our attention was invited to a number of decisions on this issue -- among them, to Larsen & Toubro Ltd. v. Maharashtra SEB, and Hindustan Steel Workers Construction Ltd. v.
G.S. Atwal & Co. (Engineers) (P) Ltd., as also to National Thermal Power Corpn. Ltd. v. Flowmore (P) Ltd., . The latest decision is in the case of State of
Maharashtra v. National Construction Co., where
this Court has summed up the position by stating:
"The rule is well established that a bank issuing a guarantee is not concerned with the underlying contract between the parties to the contract. The duty of the bank under a performance guarantee is created by the document itself. Once the documents are in order the bank giving the guarantee must honour the same and make payment ordinarily unless there is an allegation of fraud or the like. The courts will not interfere directly or indirectly to withhold payment, otherwise trust in commerce internal and international would be irreparably damaged. But that does not mean that the parties to the underlying contract cannot settle the disputes with respect to allegations of breach by resorting to litigation or arbitration as stipulated in the contract. The remedy arising ex contractu is not barred and the cause of action for the same is independent of enforcement of the guarantee."
The other recent decision is in Hindustan Steelworks Construction Ltd. v. Tarapore & Co., .
16. Clearly, therefore, the existence of any dispute between the parties to the contract is not a ground for issuing an injunction to restrain the enforcement of bank guarantees. There must be a fraud in connection with the bank guarantee.
17. Before us, however, in the course of argument. Learned Advocate for the respondent urged for the first time that in this case, there would be irretrievable injustice to the respondent if the bank guarantees are allowed to be realised because the appellant is a sick industrial company in respect of which a reference is pending before the Board for Industrial and Financial 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 i 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 on 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 this is practicable, then the Board shall give such company the opportunity to make its net worth exceed the accumulated losses. Under sub-section (3) of Section 17 if the Board decides that this is not practicable within a reasonable time, it may adopt measures specified in Section 18 and provide for a scheme for appropriate measures in relation to that company. There can, therefore, be no presumption that the company will, in no circumstance, be able to discharge its obligations.
18. Under Section 22 on which the respondent relies, where in respect of an industrial company, an inquiry under Section 16 is pending, or any scheme under Section 17 is under preparation or a sanctioned scheme is under implementation or when and appeal under Section 25 is pending, then 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 the appointment of a receiver in respect thereof can be proceeded with; and no suit for the recovery of money or for the enforcement of any security against the industrial company shall lie or be proceeded with except with the consent of the Board or, as the case may be, the Appellate Authority. The respondent contends that its right to realise its claim, if established, would be affected by reason of Section 22 of the said Act. There is no material before us to show that the appellant-company cannot make its net worth positive. No scheme has been framed under the said Act so far. Even under Section 22 there is no absolute bar against any suit for the recovery of money . The suit cannot be proceeded with except with the consent of the Board or the Appellate Authority. Therefore, in an appropriate case, the Board or the Appellate Authority is entitled to give its consent to such a claim being proceeded with. This is not a situation of the kind envisaged in the case of Itek Corporation (supra) where there was no possibility whatsoever of recovery of any amount from the purchaser. In the present case, there is a good possibility of such recovery. In any case, learned counsel for the appellant has, on instructions, very fairly stated that the appellant-company undertakes to earmark the amounts realised from the bank guarantees in question for the purpose of recovery of claims, if any, which the respondent may ultimately be found to be entitled to recover from the appellant. Any scheme which the Board may frame under the said At 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 Corporation 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 favor 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 Engineering Works (P) Ltd. & Anr., . It is clear that the Apex Court has spoken in one voice and with unanimity, on this aspect of the law.
10. S.C. Aggarwal and G.T. Nanavati, JJ, who decided the disputes raised in the Hindustan Steelworks Case (supra), after considering several previous decisions of the Apex Court including U.P. Cooperative Federation Ltd. V. Singh Consultants & Engineers (P) Ltd. (1988) SCC 174, General Electric Technical Services Co. Inc. V. Punj Sons (P) Ltd. , Larsen & Tubro Ltd. Vs. MSEB and
Hindustan Steel Works Construction Ltd. Vs. G.S. Atwal & Co. held as follows:
"We are, therefore, of the opinion that the correct position of law is that commitment of banks must be honoured free from interference by the courts and it is only in exceptional cases, that is to say, in case of fraud or in a case where irretrievable injustice would be done if bank guarantee is allowed to be encashed, the court should interfere. In this case fraud has not been pleaded and the relief for injunction was sought by the contractor/Respondent 1 on the ground that special equities or the special circumstances of the case required it. The special circumstances and/or special equities which have been pleaded in this case are that there is a serious dispute on the question as to who has committed breach of the contract, that the contractor has a counter-claim against the appellant, that the disputes between the parties have been referred to the arbitrators and that no amount can be said to be due and payable by the contractor to the appellant till the arbitrators declare their award. In our opinion, these factors are not sufficient to make this case an exceptional case justifying interference by restraining the appellant from enforcing the bank guarantees. The High Court was, therefore, not right in restraining the appellant from enforcing the bank guarantees".
11. The only remaining question is whether a Letter of Credit will fall in the same genre as of a Guarantee. In Osborn's Concise Law Dictionary (Seventh Edition) the term `letter of credit' has been defined as "an authority by one person to another to draw cheques or bills of exchange (with or without a limit as to amount) upon him, with an undertaking to honour the drafts on presentation." In the New Lexicon Websters Dictionary this term has been explained as "a letter addressed by a banker 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 favor 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 honor 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 honor or a statement that the bank or other person is authorized to honor.
Commercial letter. Type of letter of credit used by buyer of merchandise who sends it to bank in district in which he is to buy and seller then presents his bill of sale, etc. to obtain payment.
Confirmed letter. Type of letter of credit in which local bank gives its guarantee that seller's draft will be honored if the bank which issued letter falls to honor it.
Export letter. Type of letter of credit forwarded to seller or exporter advising him that a credit has been established in his favor by a foreign bank and further consenting to honor the seller's or exporter's draft for the goods."
12. This aspect of the law has been elaborately and perspicuously explained in the decision of the Hon'ble Supreme Court in M/s. Tarapore and Co., Madras . M/s. V/O Tractor export Moscow and another, thus -
"6. The scope of an irrevocable letter of credit is explained thus in Halsbury's Laws of England (Vol.34, Paragraph 319 at page 185):
"It is often made a condition of a mercantile contract that the buyer shall pay for the goods by means of a confirmed credit, and it is then the duty of the buyer to procure his bank, known as the issuing or originating bank, to issue an irrevocable credit in favor of the seller by which the bank undertakes to the seller, either directly or through another bank in the seller's country known as the correspondent or negotiating bank, to accept drafts drawn upon it for the price of the goods, against tender by the seller of the shipping documents. The contractual relationship between the issuing bank and the buyer is defined by the terms of the agreement between them under which the letter opening the credit is issued; and as between the seller and the bank, the issue of the credit duly notified to the seller creates a new contractual nexus and renders the bank directly liable to the seller to pay the purchase price or to accept the bill of exchange upon tender of the documents. The contract thus created between the seller and the bank is separate from, although ancillary to, the original contract between the buyer and the seller, by reason of the bank's undertaking to the seller, which is absolute. Thus the bank is not entitled to rely upon terms of the contract between the buyer and the seller which might permit the buyer to reject the goods and to refuse payment therefor; and, conversely, the buyer is not entitled to an injunction restraining the seller from dealing with the letter of credit if the goods are defective."
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 there under. 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 there under, are in exact compliance with the terms of the credit. Such documents must be scrutanised with 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 to whether the goods are up to contract or not"
Similar are the views expressed in `Practice and Law of Banking' by H.B. Sheldon, "the Law of Bankers Commercial Credits" by H.C. Gutteridge, "the Law relating to Commercial Letters of Credit" by A.G. Devis' "the Law Relating to Bankers' Letters of Credit" by B.C. Mitra and in several other text books read to us by Mr. Mohan Kumaramangalam, learned Counsel for the Russian Firm. The legal position as set out above was not controverter by Mr. M.C. Satalvad, learned Counsel for the Indian Firm. So far as the Bank of India is concerned it admitted its liability to honour the letter of credit and expressed its willingness to abide by its terms. It took the same position before the High Court.
10. A case somewhat similar to the one before us came up for consideration before the Queens Bench Division in England in Hamzeh Walas and Sons v. British Imex Industries Ltd., 1958-2 QB 127. Therein the plaintiffs, a Jordanian firm contracted to purchase from the defendants, a British firm, a large quantity of reinforced steel rods, to be delivered in two installments. Payment was to be effected by opening in favor of the defendants of two confirmed letters of credit with the Midland Bank Ltd., in London, one in respect of each installment. The letters of credit were duly opened and the first was realised by the defendants on the delivery of the first installment. The plaintiffs complained that that installment was defective and sought an injunction to bar the defendants from realizing the second letter of credit. Donovan, J., the Trial Judge refused the application. In appeal Jenkins, Sellers and Pearce L., JJ. Confirmed the decision of the Trial Judge. In the course of his judgment Jenkins, L.J., who spoke for the Court observed thus:
"We have been referred to a number of authorities, and it seems to be plain enough that the opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods, which imposes upon the banker an absolute obligation to pay, irrespective of any dispute there may be between the parties as to whether the goods are up to contract or not. An elaborate commercial system has been built up on the footing that bankers' confirmed credits are of that character, and, in my judgment, it would be wrong for this Court in the present case to interfere with that established practice.
There is this to be remembered, too. 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 and 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 plaintiffs were entitled to damages arising from such a breach. It may be noted that in that case the price quoted in the invoices was objected to by the buyer and he had notified his objection to the bank. But under the terms of the letter of credit the bank was required to make payments on the basis of the invoices tendered by the seller. The court held that if the buyers had an enforceable claim that adjustment must be made by way of refund by the seller and not by the way of retention by the buyer.
11. Similar opinions have been expressed by the American Courts. The leading American case on the subject is Dulien Steel Products Inc., of Washington v. Bankers Trust Co., Federal Reporter 2nd Series, 298 p.836. The facts of that case are as follows:
The plaintiffs, Dulien Steel Products Inc., of Washington, contracted to sell steel scrap to the European Iron and Steel Company. The transaction was put through M/s. Marco Polo Group Project, Ltd. who were entitled to commission for arranging the transaction. For the payment of the commission to Marco Polo, plaintiffs procured an irrevocable letter of credit from Seattle First National Bank. As desired by Marco Polo this letter of credit was opened in favor of one Sica. The defendant-bankers confirmed that letter of credit. The credit stipulated for payment against (1) a receipt of Sica for the amount of the credit and (2) a notification of Seattle Bank to the defendants that the plaintiffs had negotiated documents evidencing the shipment of the goods. Sica tendered the stipulated receipt and Seattle Bank informed the defendants that the Dulien had negotiated documentary drafts. Meanwhile after further negotiations between the plaintiffs and the vendees the price of the goods sold was reduced and consequently the commission payable to Marco Polo stood reduced but the defendants were not informed of this fact. Only after notifying the defendants about the negotiation of the drafts drawn under the contract of sale, the Seattle Bank informed the defendants about the changes underlying the transaction and asked them not to pay Sica the full amount of the credit. The defendants were also informed that Sica was merely a nominee of Marco Polo and has no rights of his own to the sum of the credit. Sica, however, claimed payment of the full amount of the credit. The defendants asked further instructions from Seattle Bank but despite 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."
13. On first principles, the Hon'ble Supreme Court has made the following observations in respect of letters of credit in Hira Lall and Sons and Others v. Lakshmi Commercial Bank, :
"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 of the purchase price; that there should, however, be strict compliance both by the customer at whose instance letter of credit was issued and by the banker, with his instructions; that in a claim on letter of credit, defense of fraud or apprehension of irretrievable injustice or non-compliance with instructions could also be raised. All such defenses could be urged or agitated before the Tribunal by the petitioner and on a decision by it, an appeal also could be filed."
14. For reasons that I find difficult to comprehend, counsel for the parties did not consider it necessary to refer to the decision of the Hon'ble Supreme Court in U.P. Coop. Federation Ltd. v. Singh Consultants & Engineers (P) Ltd., in which the law pertaining to Letters of Credit has been dealt in some detail. Similarly learned counsel for the parties did not also consider it worthwhile to cite the decision of the Apex Court in Federal Bank Limited v. V.M. Jog Engineering Limited and others, (2001) 1 SCC 663. I find the following paragraphs in the judgment of the U.P. Coop. Federation case (supra) to be extremely instructive:-
" 45. The letter of credit has been developed over hundreds of years of international trade. It was most commonly used in conjunction with the sale of goods between geographically distant parties. It was intended to facilitate the transfer of goods between distant and unfamiliar buyer and seller. It was found difficult for the seller to rely upon the credit of an unknown customer. It was also found difficult for a buyer to pay for goods prior to their delivery. The Bank's letter of credit came into existence to bridge this gap. In such transactions, the seller (beneficiary) received payment from issuing bank when he presents a demand as per terms of the documents. The bank must pay if the documents are in order and the terms of credit are satisfied. The bank, however, was not allowed to determine whether the seller had actually shipped the goods or whether the goods conformed to the requirements of the contract. Any dispute between the buyer and the seller must be settled between themselves. The courts, however, carved out an exception to this rule of absolute independence. The courts held that if there has been fraud in the transaction the bank could dishonour beneficiary's demand for payment. The courts have generally permitted dishonour only on the fraud of the beneficiary, not the fraud of somebody 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 crates 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.
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 defense except in the case of fraud. The bank's obligations of course should not be extended to protect the unscrupulous seller, that is, the seller who is responsible for the fraud. But, the banker must be sure of his ground before declining to pay. The nature of the fraud that the courts talk about is fraud of an egregious nature as to vitiate the entire underlying transaction. It is fraud of the beneficiary, not the fraud of somebody else. If the bank detects with a minimal investigation the fraudulent action of the seller, the payment could be refused. The bank cannot be compelled to honour the credit in such cases. But it may be very difficult for the bank to take a decision on the alleged fraudulent action. In such cases, it would be proper for the bank to ask the buyer to approach the court for an injunction."
15. In the Federal Bank case (supra) the Apex Court had in similar vein recorded the following enunciation:-
" In several judgments of this Court, it has been held that courts ought not to grant injunction to restrain encashment of bank guarantees or letters of credit. Two exceptions have been mentioned - (i) fraud, and (ii) irretrievable damage. If the plaintiff is prima facie able to establish that the case comes within these two exceptions, temporary injunction under Order 39 Rule 1 CPC can be issued. It has also been held that the contract of the bank guarantee or the letter of credit is independent of the main contract between the seller and the buyer. This is also clear from Articles 3 and 4 of UCP (1983 Revision). In case of an irrevocable bank guarantee or letter of credit the buyer cannot obtain injunction against the banker on the ground that there was a breach of the contract by the seller. The bank is to honour the demand for encashment if the seller prima facie complies with the terms of bank guarantee or the letter of credit, namely, if the seller produces the documents enumerated in the bank guarantee or the letter of credit. If the bank is satisfied on the face of the documents that they are in conformity with the list of documents mentioned in the bank guarantee or the letter of credit and there is no discrepancy, it is bound to honour the demand of the seller for encashment. While doing so it must take reasonable care. It is not permissible for the bank to refuse payment on the ground that the buyer is claiming that there is a breach of contract. 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. Shah, J., as his Lordship then was, in Virgo Steels v. Bank of Rajasthan Ltd. & others, AIR 1998 Bombay 82 . In that case UCO Bank had issued a Letter of Credit at its request, on the foundation of which the Bank of Rajasthan Limited had made disbursements. The Bank of Rajasthan had sought confirmation from the UCO Bank, and had received it. The Division Bench found it irrelevant that some officers of the UCO Bank had committed fraud. It affirmed the Order of the Single Judge refusing to grant unconditional Leave to Defend to UCO Bank. The Division Bench also referred to a Circular of the Reserve Bank of India dated April 1, 1992 in which it recommended the honouring of Letter of Credit even where the transaction involved a conspiracy between the beneficiary and the constituents. The RBI had opined that "if the bills drawn under LCs are not honoured, it will adversely affect the character of LCs and the relative bills as an accepted means of payment. This could also affect the credibility of the entire payment mechanism through banks and affect the image of the Banks".
16. Even in its most recent judgment the Apex Court has relied on its earlier judgment in United Commercial Bank v. Bank of India & Others, , as has been succinctly condensed in the first Head Note of the Report which reads thus:
"The opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods which imposes on the banker an absolute obligation to pay. A banker issuing or confirming an irrevocable credit usually undertakes to honour drafts negotiated, or to reimburse in respect of drafts paid, by the paying or negotiating intermediate banker and the credit is thus in the hands of the beneficiary binding against the banker. A letter of credit constitute the sole contract with the banker and a bank issuing or confirming a letter of credit is not concerned with the underlying contract between the buyer an seller. Duties of a bank under a letter of credit are created by the document itself, but in any case it has the power and is subject to the limitations which are given or imposed by it, in the absence of the appropriate provisions in the letter of credit. The banker owes a duty to the buyer to ensure that the documents tendered by the sellers under a credit are complied with those for which the credit calls and which are embodied in terms of paying or negotiating bank The description of the goods in the relative bill of exchange must be the same description in the letter of credit, that it, the goods themselves must in each 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.
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 be of no avail to the Bank. Articles 2, 3 and 9 of UCP 500 are reproduced for facility of reference:
Meaning of Credit
For the purposes of these Articles, the expressions "Documentary Credit(s)" and "Standby Letter(s) of Credit" (hereinafter referred to as "Credit(s)"), mean any arrangement, however named or described, whereby a bank (the " Issuing Bank") acting at the request and on the instructions of a customer (the "Applicant") or on its own behalf,
(i) is to make a payment to or to the order of a third party (the "Beneficiary"), or is to accept and pay bills of exchange (Draft(s) drawn by the Beneficiary,
(ii) authorises another bank to effect such payment, or to accept and pay such bills of exchange (Draft(s)),
(iii) Authorises another bank to negotiate against stipulated document(s) provided that the terms and conditions of the Credit are complied with.
For the purpose of these Articles, branches of a bank in different countries are considered another bank.
Credits v. Contracts
a. Credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the Credit. Consequently, the undertaking of a bank to pay, accept and pay Draft(s) or negotiate and/or to fulfill any other obligation under the Credit, is not subject to claims or defenses by the Applicant resulting from his relationships with the Issuing Bank or the Beneficiary.
b. A Beneficiary can in no case avail himself of the contractual relationship existing between the banks or between the Applicant and the Issuing Bank.
Liability of Issuing and Confirming Banks
a. An irrevocable Credit constitutes a definite undertaking of the Issuing Bank, provided that the stipulated documents are presented to the Nominated Bank or to the Issuing Bank and that the terms and conditions of the credit are complied with:
i. if the Credit provides for sight payment - to pay at sight;
ii. if the Credit provides for deferred payment - to pay on the maturity date(s) determinable in accordance with the stipulations of the Credit;
iii. if the Credit provides for acceptance:
a. by the Issuing Bank - to accept Draft(s) drawn by the Beneficiary on the Issuing Bank and pay them at maturity,
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 clarify 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 letters of credit/guarantees. Like in the case of a fraud committed within a particular Bank, the question of whether a letter of credit is fund based or non-fund based would be wholly irrelevant from the perspective of the beneficiary, unless the letter of credit itself specifies which of these two categories it falls in, and what steps are necessary for ensuring the release of payment to the beneficiary. If the Bank has been imprudent or rash in opening a Letter of Credit without obtaining, earmarking and reserving for itself necessary funds corresponding to the value of the Letter of Credit issued by the Bank, it will have to suffer the consequences of its negligence. Claims in respect of the Letter of Credit are the liability of the Bank and ought not to be confused with that of its constituent.
19. In any event, as observed in Royal Bank of Scotland plc. v. Cassa Di Risparmio Delle Provincie Lombard, (1993) Financial Times 21-01-1992 (CA), it must be recognised that (UCP) terms do not constitute a statutory code. As the title makes clear, they constitute a formulation of customs and practices, which the parties to a letter of credit can incorporate into their contracts by reference,. If it is found that the parties have explicitly agreed to such a term, then the search need go no further, since any contrary provision in UCP must yield to the parties' expressed intention. It will also be of advantage to refer to the decision in Bankers Trust Co. v. State Bank of India, (1991) 2 Lloyd's Rep 443 in which it was held that the Bankers Trust was barred from refusing or objecting documents in question because it had taken an unreasonable and inordinate time to examine and reject them. This is apposite to the facts of the present case since it is the Plaintiff's assertion that the Bank had failed to respond to even its legal notice.
20. From the reference to the various decisions of the Apex Court the legal principle which can be distilled is that a letter of credit is an instrument of payment in itself, having no linkage with the party at whose instance it has been issued. If this is the correct understanding of the law then it would be of no consequence whatsoever that HILTON had come under the protective mantle of SICA at any time after the issuance of the Letter of Credit. Since there is no term excusing or exonerating the Bank from making payment on the occurrence of such an event, the liability of the Bank is circumscribed by the Letter of Credit itself. If any defenses 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 Brothers 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 Bors. 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 the Section 124 of the Contract Act which is of relevance to the present case as it defines a contract of indemnity to be a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person. Upon the execution of the letter of credit the Plaintiff had no reason to look towards HILTON at all. In consonance with the terms of the Letter of Credit, on furnishing the necessary documents mentioned in the Letter of Credit itself, the Plaintiff could have rested assured of payment. The mischief so far as the Bank is concerned appears to be that it had negligently or fraudulently issued the Letter of Credit without taking the precaution of ensuring that it was fund based. The factum of HILTON now receiving the protection of SICA may result in a financial loss to the Bank but it has itself to blame for it. Well entrenched mercantile methods cannot be modified to suit or give succor to the negligent Bank.
21. In these circumstances, since there is no allegation of any irregularity committed by the Plaintiff in so far as the invocation of the Letters of Credit is concerned, Leave to Defend the suit is declined to the Bank. The suit is decreed in favor of the Plaintiff and against Defendants 1 and 2 for the sum of Rs.87,99,121/- together with interest thereon at the rate of nine per cent per annum from the date of the institution of the suit till the realisation of the decretal amount. The Plaintiff shall be entitled to recover its costs from these Defendants.
22. The benefit of SICA will have to be extended to Defendant No. 3 and the suit should in normal circumstances be stayed in respect of this Defendant. For this reason I find it unnecessary to return a finding on the question of whether the amount covered by the suit is within the contemplation of the winding-up petition filed in the Punjab & Haryana High Court and/or whether it was shown as a contingent liability and/or whether it was beyond or post registration under SICA. However, since the liability of the Bank is de hors and not connected in any manner with Defendant No. 3 it will be contradictory and incongruent to hold the Bank liable along with this Defendant. Conversely stated, if Defendant No. 3 is liable under the Letter of Credit, the Bank would be competent to claim the moratorium under SICA. For this reason the suit is dismissed against Defendant No. 3 without prejudice to any pending legal action and also without prejudice to any action that the Bank may initiate against Defendant No. 3 for the recovery of sums paid out by the Bank as a consequence of this decree and/or its liability under the Letters of Credit which are the subject matter of this suit.
23. The decree sheet be drawn up accordingly.
24. All the pending applications also stand disposed of in the above terms.