EMC Limited & Anr. Vs. Power Grid Corporation of India & Ors. - This court is therefore inclined to accept the submission made on behalf of the petitioners that the invocation of a bank guarantee is an action for recovery against the Corporate Debtor which comes within the fold of section 14 prohibiting any action to foreclose, recover or enforce any security interest created by the Corporate Debtor. [14(1)(c)]

High Court Calcutta (10.08.2022) in EMC Limited & Anr. Vs. Power Grid Corporation of India & Ors.  [WPA 14603 of 2022] held that;

• This court is therefore inclined to accept the submission made on behalf of the petitioners that the invocation of a bank guarantee is an action for recovery against the Corporate Debtor which comes within the fold of section 14 prohibiting any action to foreclose, recover or enforce any security interest created by the Corporate Debtor. [14(1)(c)] 

 

Excerpts of the order;

The petitioner no. 1 company was awarded several contracts pursuant to being successful in a tender floated by the respondent no. 1 Power Grid Corporation of India Limited. The four projects were for erection of a transmission line and supply totaling to eight contracts. The petitioner no. 1 furnished performance bank guarantees through its bankers, respondent nos. 2 and 3. The bank guarantees were renewed from time to time and continued to remain

valid and subsisting as on the date of filing the writ petition. The petitioner was not able to stick to the project schedule by reason of financial stress and approached Larson & Toubro Limited and KEC International Limited to complete the balance part of the work on behalf of the petitioner. A tripartite agreement between the petitioner no. 1, L & T and Power Grid was entered into on 31.10.2018 and petitioner no. 1, KEC & Power Grid was entered into on 27.11.2018 for completing the remaining work. 

 

The bank guarantees were invoked on 29.06.2022.

 

The petitioners pray for a mandamus on the respondents particularly the Central Bank of India and the State Bank of India from giving any effect to the bank guarantee invocation documents and for restraining the respondent no. 1 Power Grid to invoke the bank guarantees furnished by the petitioners. 

 

The respondent no. 1 Power Grid raises a point of maintainability on the lack of jurisdiction of this court to entertain the writ petition. Hence, this point is being decided first. According to the learned counsel appearing for the respondent no. 1, respondent nos. 1 and 2 are situated outside the jurisdiction of this court and the work was executed in Rajasthan. Counsel submits that the contract provided that all correspondences were to be addressed to the Project Manager in New Delhi and the bank guarantees were to be submitted to the Corporate Engineering Department of the respondent no. 1 in Gurgaon. It is also submitted that clause 45 of the General Conditions of Contract and the amendment to the Special Conditions of Contract provide for arbitration in the event of any dispute under the contract. The arbitration is also to be held in New Delhi. Counsel submits that only the registered office of the petitioner and the respondent no. 3 are within jurisdiction which cannot confer jurisdiction on this court to entertain the matter. 

 

Learned counsel appearing for the petitioners disputes the above position.

 

The question whether this court has jurisdiction to entertain this writ petition is decided in favour of the petitioners for the following reasons. First, the respondent nos. 2 and 3 are the Central Bank of India and the State Bank of India both situated within the jurisdiction of this court. The petitioners are also within the jurisdiction of this court and the bank guarantees in question were invoked within the jurisdiction of this court. Article 226 (2) of the Constitution of India provides that the power conferred on the High Court to issue directions, orders or writs to any Government, authority or person may also be exercised by the High Court in relation to the territories within which the cause of action, wholly or in part, arises for the exercise of such power, notwithstanding that the seat of such Government is outside the territories which fall within the jurisdiction of the High Court. The invocation of the bank guarantees furnished by the petitioners within the jurisdiction of this court is undoubtedly the trigger for filing the present writ petition. The petitioner no. 1 who is within the jurisdiction of this court has been impacted by such invocation. This fact itself confers jurisdiction on this court to exercise the power under Article 226 (1) subject to the Court being satisfied that the petitioners have made out a case for the relief envisaged under Article 226(1).

 

With regard to the merits of the dispute, certain events are of significance. The petitioner no. 1 was admitted to Corporate Insolvency Resolution Process (CIRP) by an order of the National Company Law Tribunal on 12.11.2018. The respondent no. 1 Power Grid issued the completion certificate to the petitioner in respect of the work done on 09.12. 2019. 

 

A further completion certificate was issued by Power Grid on 20.03.2020. The Defect Liability Period in relation to the contract expired on 28.11.2020 and 08.05.2021. The bank guarantees were invoked on 29.06.2022 after more than two-and-half years from the date on which the first completion certificate was issued by Power Grid. Clause 27.8 of the Special Conditions of Contract provide that the Defect Liability Period would stand extended if the facilities or any part cannot be used by reason of such defect or making good such defect. Significantly, there is no material on record to show that Power Grid complained of any defect or the petitioner’s failure to make good such defect. The fact that the petitioner no. 1 renewed the bank guarantees and kept them subsisting does not assist Power Grid by reason of a letter of Power Grid dated 04.05.2022 calling upon the Bank to extend the bank guarantees. The content of the letter reflects that the petitioner was  forced to renew the bank guarantees on the threat of invocation.

 

The law restraining invocation of bank guarantees is well settled. The court before which a petitioner comes with a prayer for restraint or invocation must be satisfied that the matter involves special equities for the court to intervene. The consideration of special equities is in addition to fraud and irretrievable inquiry. The special equities in the present matter arise from the following facts.

 

The petitioner no. 1 was admitted to CIRP on 12.11.2018. By an order dated 20.04.2022, the CIRP of the first petitioner was continued. The order dated 20.04.2022 provides that the Corporate Debtor (petitioner no. 1) is a viable going concern with about 400 employees and workmen. The order further records that there is every chance of a successful resolution of the Corporate Debtor and to facilitate this revival, the entire period consumed in the CIRP from inviting Expressions of Interest till the date of passing of orders in this application is excluded. The NCLT was of the view that this would grant sufficient time to the petitioners for a limited reboot of the CIRP from the stage of issue of invitations for Expressions of Interest. It hence appears that the petitioner no. 1 entered into a second cycle of CIRP with a chance of revival and resuming its operations. The bank guarantees were invoked 2 months after the petitioner no. 1 entered into the second CIRP. The invocation of the bank guarantees would, without doubt, result in frustration of the lease of life given to the petitioner no. 1 and may even result in the petitioner going into liquidation. The residuary jurisdiction conferred by the IBC on the NCLT was discussed in Gujarat Urja Vikas Nigam Limited vs. Amit Gupta; (2021) 7 SCC 209. The second factor is that the bank guarantees have been invoked after completion of the project as reflected in the completion certificates dated 9.12.2019 and 20.03.2020. Admittedly, the line towers which were constructed by the petitioners, have been energized and have been performing since 2019 and 2020 and there is no documented default of the same on the part of the petitioners. The invocation has also been made after expiration of the Defect Liability Period on 28.11.2020 / 8.05.2021.

 

The bank guarantees provide that they shall remain in force and be valid from the date of issue until 60 days beyond the Defect Liability Period of the facilities.

 

The other significant factor which has not been explained by Power Grid is the invocation of paying for a sum of Rs. 55 crores as against a total claim of Rs. 14.79 crores. The claim/demand was made on account of liquated damages and were far beyond the Defect Liability Period. There is also no evidence of the petitioners failing to perform the contract and the delay was also waived by Power Grid by entering into the tripartite agreement dated 31.10.2018 and 27.11.2018. This agreement provided for Power Grid permitting the petitioner no. 1 to have the contract completed through Larson & Toubro & KEC International.

 

Moreover, the bank guarantees were also invoked during the continuance of the CIRP. Section 14 of The Insolvency and Bankruptcy Code, 2016 provides for moratorium from the date of commencement of the CIRP till the date of approval of the resolution plan in respect of, inter alia, any action to recover or enforce any security interest created by the Corporate Debtor (petitioner no. 1 before the court). Although, counsel appearing for Power Grid relies on section 14(3)(b) to urge that the enforcement of a guarantee is outside the scope of section 14, it is relevant to state that section 14(3)(b) was brought into the IBC by way of an amendment on 6.06.2018 for preventing the misuse of section 14 with reference to personal guarantors. Section 14 (3)(b) applies to personal and corporate guarantees given to secure the loans advanced to a Corporate Debtor which is different and distinct from a bank guarantee which is pursuant to a contract between the Corporate debtor and the contracting party. The particular words used in the amended section 14(3)(b) also indicate that the guarantee contemplated is a specie different to that of a bank guarantee.

 

State Bank of India vs. V. Ramakrishnan; (2018) 17 SCC 394 limits the operation of section 14 to a personal guarantor. This court is therefore inclined to accept the submission made on behalf of the petitioners that the invocation of a bank guarantee is an action for recovery against the Corporate Debtor which comes within the fold of section 14 prohibiting any action to foreclose, recover or enforce any security interest created by the Corporate Debtor. [14(1)(c)] 

 

On a combined assessment of the above factors, this Court is of the view that Special Equities exist for passing an appropriate order of restraint against invocation of the bank guarantees. 

 

Standard Chartered Bank vs. Heavy Engineering Corporation; (2020) 13 SCC 574 supports a proposition that Courts should be slow in granting an order of injunction to restrain the realisation of a bank guarantee or a letter of creditor. However, the Supreme Court came to a specific finding that none of the exceptions to the rule namely, fraud, irretrievable injustice and special equities were present in that case to justify the Courts interference with the invocation and encashment of the bank guarantee. The decision in Shri K. Jayaram vs. Bangalore Development Authority pronounced on 8th December, 2021 has been cited for the proposition that since the jurisdiction exercised by a High Court under Article 226 is extraordinary, equitable and discretionary, it is imperative that the petitioner approaching the writ Court must come with clean hands and put forward all facts before the Court without concealing anything. This proposition cannot be faulted and must hold true for every litigant seeking an equitable remedy. However, the principle must also be made applicable to the particular facts of each case. The allegation of suppression made by Power Grid is with reference to the reason for extension of bank guarantee namely, pending issues on the settlement of liquidated damages. The alleged suppression also relates to certain documents not being disclosed in the writ petition with reference to the claim for liquidated damages raised by Power Grid.

 

Upon considering the nature of information alleged to have been suppressed, this Court is of the view that disclosure of the documents with regard to the defect liability period, the reason for extension of bank guarantee or the claim for liquidated damages would not have made a material difference to the view of the Court for the reasons as stated above. These documents can well be brought on record on affidavits and considered at the time of hearing of the matter. On a prima facie assessment of the matter however, the petitioner has established a case for interim protection. 

 

Notably, although Power Grid contends that the General Conditions of Contract and the Special Conditions of Contract as amended contains a clause for arbitration of any dispute under the contract, Power Grid/respondent no. 1 has not taken any steps to initiate arbitration or file any suit for that matter for realisation of any claim for liquidated damages or otherwise.

 

In view of the above reasons, there shall be a restraint on the respondent no. 1 as well as on

respondent nos. 2 and 3 from invoking the bank guarantees of the first petitioner or from realising any amounts in pursuance to the bank guarantees furnished by the petitioner no. 1.

 

Affidavit-in-opposition within three weeks, reply within a week thereafter. List this matter after four weeks.

 

Urgent Photostat certified copies of this order, if applied for, be supplied to the respective parties upon fulfillment of requisite formalities.

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