Home » Bank Guarantees » Proceedings under BIFR and their effect on invocation of a Bank Guarantee

Proceedings under BIFR and their effect on invocation of a Bank Guarantee

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Sumantra Sinha

The Sick Industrial Companies (Special Provisions) Act, 1985 (‘Act’) was a special legislation enacted in public interest with the objects of securing timely detection of sick and potentially sick companies and enforcement of remedial measures in respect of such companies. Under the provisions of the Act, the Board for Industrial and Financial Reconstruction (‘BIFR’) has been empowered to take appropriate measures for revival and rehabilitation of potentially sick industrial undertakings and for liquidation of non-viable companies.

Section 22 of the Act provides for protection to the sick company from the legal proceedings, both pending and future, if an inquiry in respect of the sick company is pending before the BIFR. Further, the protection under Section 22(1) of the Act becomes applicable no sooner than the registration of the reference by the BIFR. Though the judicial interpretation was meant to give constructive and meaningful interpretations to the provisions of the Act, the courts still could not check the misuse of the Act and its ‘usage as per convenience’.

The purpose of this article is to analyze whether the invocation of a bank guarantee is covered under the purview of Section 22 of the Act. Concurrently, we shall also try to understand whether the beneficiary of a guarantee is restrained from invoking the guarantee against the party which has been declared as sick by the BIFR.

Several High Courts are of the view that a mere invocation of a bank guarantee or letter of credit is not barred by Section 22 [Murablack India Ltd. v. UBS AG and Ors. [2003] 115 CompCas 210 (Bom), Madura Coats Limited v. Bank of India and Anr., [2003] 116 CompCas 291 (Delhi), Dyna Lamps and Glass Works v Union of India, [2003] 115 Comp Cas 401 (Mad)].

The Supreme Court has taken conflicting views in two judgements (although they do not directly address the issue of bank guarantees and deal instead with corporate/ personal guarantees).

In Patheja Bros. v. ICICI [(2006) 13 SCC 322], where the issues was a suit against a guarantor of a company registered with BIFR (as opposed to only invocation of a bank guarantee), the Supreme Court held that ‘the relevant words in Section 22 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.’

In Kailash Nath Agarwal v. Pradeshiya Industrial (2003) 4 SCC 305, considering invocation of and proceedings against personal guarantors, the Supreme Court held that the word ‘proceeding’ in the first part could not be extended to include ‘suits’ in the second part of Section 22(1). The position has been clarified by the Supreme Court in Zenith Steel Tubes and Industries Ltd. and Anr. v. SICOM Limited [(2008) 1 SCC 533] wherein Justice Altamas Kabir has noted this difference and referred the matter to a larger bench for final adjudication.

The above analysis indicates that the scope of Section 22 of the Act is very wide, which in a way promotes the practice of turning an operationally fit company into a sick unit. Further, it may be noted that none of the Supreme Court cases deal with Bank Guarantees and Letters of Credit, which is essentially a contract of guarantee and has the unique character of not being reliant on the underlying transaction and payment of which can only be refused in extraordinary circumstances.

Therefore, it may still be possible to invoke a bank guarantee and require payment from the bank even if the company is registered with the BIFR. However, given the contradictions in the views of the Supreme Court, considerable uncertainty does exist.

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