HON’BLE MR.JUSTICE R.SUBHASH REDDY Writ Petition No.26979 of 2011 Date: November 1, 2011 Between: M/s.MBS Jewellers Pvt. Ltd … Petitioner And State Bank of India, Institutional Banking Division, Hyderabad Main Branch, Bank Street, Koti, Hyderabad, rep. by its Assistant General Manager and 2 others … Respondents Order: This writ petition is filed seeking mandamus declaring the action of the respondents in seeking to encash the bank guarantees furnished by the petitioner, which are setout in the annexure to the petition, as illegal, arbitrary and contrary to the, terms of the sanction letter and also the letter dated 12.09.2011 issued by the 1st respondent- Bank. 2. Petitioner is a company incorporated under the Companies Act, 1956 and is engaged in the business of manufacturing, purchase and sale of gold ornaments, bullion gold, precious stones, imitation jewellery etc. At the request of the petitioner, the 1st respondent-Bank has extended credit facility under “Metal Gold Scheme” for 1500 kgs. of gold equivalent to Rs.270 crores for its business purpose as per the terms and conditions stipulated in the letter of sanction dated 28.05.2010. The terms of sanction were subsequently modified; same is accepted by the petitioner. As per the original terms and conditions, the credit facility is covered by 110 per cent of the bank guarantee issued by the banks acceptable to the 1st respondent-Bank or 110 per cent of TDRs (Term Deposit Receipts) to be placed with the 1st respondent- Bank with lien over them. As per the terms of the sanction letter and the agreement entered into by the petitioner, it has to repay each gold withdrawal within a maximum period of 180 days from the date of disbursement of gold or five days before the expiry of the bank guarantees whichever is earlier on the pre-determined due date in cash at the prevailing rate, which includes international price of gold plus relevant tax and other charges. The petitioner, represented by its Managing Director has executed master-agreement and loan agreement on 28.05.2010. The credit facility was to be covered by 110 per cent of bank guarantee, but subsequently the same was reduced to 105 per cent. When there was request for reduction of margin to 102 per cent, the same was not accepted by the respondents and it was also informed to the petitioner by letter dated 02.06.2011. 3. Pursuant to letters of sanction and agreement, petitioner has availed the Metal Gold Loan facility by drawing 447 kgs. of gold from the 1st respondent-Bank and furnished bank guarantees given by the 2nd and 3rd respondent-Banks, as set out in the annexure to the writ petition for an amount of Rs.103 crores. In view of fluctuations in the gold/bullion market, as there was shortfall of the margin money, the 1st respondent-Bank, through letter dated 02.06.2011, intimated the petitioner to replenish the margin by depositing Rs.6.00 crores in the margin account immediately. The request was reiterated by further letter dated 04.08.2011 requesting the petitioner to maintain the margin, on day-to-day basis as gold rates are fluctuating in international market and the petitioner was also cautioned about taking steps for invocation of bank guarantees. In response to the communication sent by the 1st respondent-Bank, the petitioner has addressed letters dated 11.08.2011 and 15.09.2011 promising to make the entire payment but failed to comply the same and replenish the margin as required under the terms of the agreement. 4. When the petitioner failed to comply its promise of payment and replenish the margin within a period of 180 days from the date of withdrawal with regard to disbursement of gold, the 1st respondent-bank addressed to respondents 2 and 3-Banks. One such letter dated 12.09.2011 is placed on record by the petitioner. In the aforesaid letter, the 2nd respondent was addressed by the 1st respondent stating that the petitioner has not closed the Metal Gold Loan at their branch and the 2nd respondent was requested to contact the applicant and arrange for extension of validity of the bank guarantees. In the same letter, it was communicated that if there is no possibility of extending the bank guarantees, the said letter be treated as invocation of bank guarantees. When such letters were addressed to respondents 2 and 3, the petitioner approached this court and filed this writ petition. 5. While issuing notice before admission, this court granted interim stay of encashment of bank guarantees for a limited period. At this stage, counter-affidavit is filed along with a petition to vacate the interim order; as such the writ petition itself is heard and being disposed of by this order. 6. It is the case of the petitioner that as the bank guarantees were already extended, in absence of violation of terms and conditions of sanction and agreement, or the terms relating to furnishing of bank guarantees, steps are being taken by the respondents for invocation of bank guarantees illegally. 7. I have heard Sri Vedula Venkataramana, learned senior counsel appearing for Sri J.Prabhakar-Advocate- on-record and Sri M.Narender Reddy for the 1st respondent-Bank. 8. It is submitted by the learned counsel for the petitioner that in spite of extension of bank guarantees in terms of the agreement entered into with the 1st respondent-Bank, steps are being taken to invoke the bank guarantees without any valid reason. It is further contended that even in the letters addressed by the 1st respondent-Bank, which are filed along with the counter- affidavit, no default is alleged; in that view of the matter, there is no justification for invoking the bank guarantees. In support of his submissions, learned counsel placed reliance on a judgment of the Hon’ble Supreme Court in Hindustan Construction Co. Ltd., v. State of Bihar and others[1]. 9. On the other hand, it is submitted by the learned counsel for the 1st respondent-Bank that as per the terms of sanction, the revised terms and the terms of agreement entered into by the petitioner, as revised, credit facility is extended on condition of maintaining 105 per cent of bank guarantee and the payments were to be made within a maximum period of 180 days of disbursement of gold or five days before the expiry of the bank guarantee period whichever is earlier, but the petitioner has failed to comply the said terms and conditions. It is submitted that in spite of specific letters addressed to the petitioner to maintain the margin in terms of the agreement entered into by it and though the 1st respondent-bank has addressed the petitioner to comply the same, the petitioner failed to replenish the margins as required; as such, respondents 2 and 3-Banks were addressed for invocation of bank guarantees by the 1st respondent-Bank. It is further submitted that as per the terms, the bank guarantees are unconditional ones; therefore it cannot be said that there are no valid reasons for invocation of bank guarantees by the 1st respondent-Bank. Learned counsel, in support of his submissions, relied on the following judgments of the Hon’ble Supreme Court: Himadri Chemicals Industries Ltd., v. Coal Tar Refining Co.[2], Vinitec Electronics Private Ltd. v. HCL Infosystems Ltd.[3] a n d Mahatma Gandhi Sahakara Sakkare Karkhane v. National Heavy Engg. Coop. Ltd. and another[4]. 10. Having heard the learned counsel for the parties, I have perused the terms of agreement and the bank guarantees furnished by the petitioner while availing the credit facility under the Metal Gold Scheme from the 1st respondent-bank. 11. A perusal of the terms of sanction, as revised, would make it clear that credit facility is extended to the petitioner under the Metal Gold Scheme under certain conditions. As per the contractual obligation as per the master agreement and also terms of sanction, it is evident that the petitioner has agreed to repay each gold loan withdrawal within a maximum period of 180 days from the date of disbursement of gold and also agreed to cover the credit facility by way of bank guarantee to the extent of 105 per cent of the credit. As per the revised terms of sanction, which were communicated vide letter dated 20.05.2011, it is clear that each gold withdrawal is to be repaid within a maximum period of 180 days from the date of disbursement of gold or five days before the expiry of the bank guarantees period whichever is earlier. In the letter dated 02.06.2011, which is communicated to the petitioner, the petitioner was informed that the margins as on the date were 101.41 per cent, as against sanctioned terms of 105 per cent; as such the petitioner was requested to replenish the margin by depositing Rs.6.00 crores into the margin account immediately. Even in the letter dated 04.08.2011 addressed to the petitioner by the 1st respondent-Bank; the petitioner was reminded to maintain the margin on day-to-day basis as gold rates are fluctuating in the international market. Petitioner was also cautioned for invocation of bank guarantees, failing to replenish the margin as requested. As per the original terms of sanction, as communicated to the petitioner vide letter dated 28.05.2010, it is clearly indicated that in the event of failure to provide margin/additional collateral security as demanded by the Bank from time to time or failure to provide proof of underlying exposure or erosion of underlying provided, Bank reserves right to terminate the said deals without further notice. It is also to be noticed that in response to the letters addressed by the 1st respondent-Bank to replenish the margin in view of fluctuation of gold rate in international market, the petitioner addressed a letter, which is received by the 1st respondent-Bank on 15.09.2011, seeking time to replenish the margin. In spite of the same, the petitioner did not comply the promise made by it and did not replenish the margin. I have also perused the terms of the bank guarantees which are furnished by the 2nd and 3rd respondent-Banks. A perusal of the same would make it clear that respondents 2 and 3-Banks have given guarantee with regard to due performance of the terms and conditions contained in the sanction letter and undertook to pay the guaranteed amount without any contest, demur or prejudice and the said guarantees furnished in favour of the 1st respondent-Bank which are given by respondents 2 and 3-Banks are absolute and unconditional ones. In the letters which are addressed for invocation of bank guarantees it is clearly stated that the petitioner has not adjusted the dues under the Metal Gold Scheme at their branch; as such they have sent proposals for invocation of bank guarantees. In view of the said clear recitals and the letters addressed by respondents 2 and 3-Banks, stating that the petitioner has not replenished the margins and not paying the dues within a period of 180 days as promised with regard to gold withdrawals, it cannot be said that there is no violation of terms and conditions by the petitioner. The petitioner, having obtained a huge credit facility from the 1st respondent-Bank, has clearly failed to comply the terms and conditions by not replenishing the margins as required by the 1st respondent-Bank. In fact, the petitioner itself agreed to make good the difference and sought time, but when respondents 2 and 3-Banks were addressed by the 1st respondent-Bank for invocation of bank guarantees, the petitioner moved this court to stall the invocation of bank guarantees. 12. Though learned counsel for the petitioner has relied on the judgment in the case of Hindustan Construction Co. Ltd (1 supra), the same would not render any assistance in support of his arguments. In the said judgment, the Supreme Court has held that amount covered by the guarantee is payable only if obligations under the contract are not fulfilled by contract or there is misappropriation. It is further held therein that bank guarantee is not unconditional and unequivocal in terms and cannot be invoked unilaterally. The terms of sanction while extending credit facility and whether the bank guarantees are conditional or unconditional depend on facts of each case. Having regard to the terms of sanction, as revised by the 1st respondent-Bank and agreement entered into by the petitioner, in this case, it cannot be said that the petitioner has not violated the terms of sanction so as not to invoke the bank guarantees. Even the bank guarantee agreements are unconditional ones; in that view of the matter the said judgment relied on by the learned counsel would be of no help to the petitioner. Further, in the case of Himadri Chemicals (2 supra), the Supreme Court has held that courts should be slow in granting an order of injunction to restrain the realisation of bank guarantee or a letter of credit. In the said judgment, even two exceptions were indicated for grant of an order of injunction. But the facts of the present case will not fall in any of the two exceptions. Further, in the case of Vinitec Electronics (3 supra), the Supreme Court, at paragraph-11, held as under: The law relating to invocation of bank guarantees is by now well settled by a catena of decisions of this Court. The bank guarantees which provided that they are payable by the guarantor on demand is considered to be an un- conditional bank guarantee. When in the course of commercial dealings, unconditional guarantees have been given or accepted the beneficiary is entitled to realize such a bank guarantee in terms thereof irrespective of any pending disputes. In U.P. State Sugar Corporation v. Sumac International Ltd. MANU/SC/0380/1997 : AIR1997SC1644, this Court observed that: 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 over ride 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. 13. Further, in the case of Mahatma Gandhi Sahakra Sakkare (4 supra), the Supreme Court, at paragraphs-22 and 28 held as under: “We do not propose to burden this judgment of ours with various other authoritative pronouncements on this very subject. In the present case the respondent in its application filed under Section 9 of the Arbitration and Conciliation Act, 1996 in the district court, Bidar mostly highlighted as to how the very vital conditions of the agreement have been breached by the appellant herein by not arranging the funds at the proper time. It is alleged that the appellant did not even complete their obligation in respect of providing storage facilities for valuable goods etc. It is specifically alleged that required funds were not available with the appellant. On account of non availability of funds there were two halts of nine months and five months during the execution of the project from 03.12.2001 to 14.08.2002 and from 14.08.2002 to 10.01.2003. It is further alleged that the appellant failed to arrange for all the pre-requisites. It is not necessary for the purpose of disposal of this appeal to notice all the allegations and averments filed by the respondents except to note that the main thrust of the allegation relate to alleged breach of the conditions of the agreement by the appellant. It was further contended that the bank guarantees were conditional bank guarantees and not unconditional. We have referred to the substance of the allegations only to highlight that no factual foundation as such has been laid in the pleadings as regards the allegation of fraud. In fact there is no serious allegation of any fraud except using the word "fraud". It is also not stated as to how irreparable loss would be caused in case the appellant is allowed to encash the bank guarantee. The only two exceptions, namely fraud and irretrievable injury based on which injunction could be granted restraining encashment of bank guarantee are singularly absent in the pleadings. Once it is held that the bank guarantee furnished by the banker is an unconditional one, the appellant in our considered opinion cannot be restrained from encashing the bank guarantee on the ground that a serious dispute had arisen between the parties and on the allegations of breach of terms and conditions of the agreement entered between the parties.” 14. From the aforesaid judgments, it is clear that when bank guarantees furnished are unconditional and irrevocable ones and when it is clear from the material placed before this court that the petitioner has failed to comply the terms of sanction and the agreed terms as per the agreement, the 1st respondent-Bank has rightly addressed respondents 2 and 3-Banks for invocation of the bank guarantees. The judgments relied on by the learned counsel for the 1st respondent (2 to 4 supra) totally support the case of the respondents. 15. For the foregoing reasons, the writ petition must fail and is accordingly dismissed. No costs. ___________________ (R.SUBHASH REDDY, J) November 1, 2011 MRR [1] AIR 1999 SC 3710(1) [2] (2007) 8 SCC 110 [3] (2008) 1 SCC 544 [4] (2007) 6 SCC 470