In Adhunik Power and Natural Resources Limited Vs. Central Coalfields Limited, the Jharkhand High Court said Bank Guarantee furnished by an independent juristic entity couldnot have been invoked for realization of the outstanding dues of a separate juristic entity. The judgments relied upon by the learned counsel for the Respondent CCL and the petitioner as well on the scope of interference in the matters of irrevocable and unconditional Bank Guarantee, do not leave any scope of doubt, so far as the principles relating to interference in invocation of Bank Guarantee are concerned.
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.
In Himadri Chemicals Industries Ltd. v. Coal Tar Refining Company, this court summarized the principles for grant of refusal to grant of injunction to restrain the enforcement of a bank guarantee or a letter of credit in the following manner :
“14…(i) While dealing with an application for injunction in the course of commercial dealings, and when an unconditional bank guarantee or letter of credit is given or accepted, the Beneficiary is entitled to realize such a bank guarantee or a letter of credit in terms thereof irrespective of any pending disputes relating to the terms of the contract.
(ii) The bank giving such guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer.
(iii) The courts should be slow in granting an order of injunction to restrain the realization of a bank guarantee or a letter of credit.
(iv) Since a bank guarantee or a letter of credit is an independent and a separate contract and is absolute in nature, the existence of any dispute between the parties to the contract is not a ground for issuing an order of injunction to restrain enforcement of bank guarantees or letters of credit.
(v) Fraud of an egregious nature which would vitiate the very foundation of such a bank guarantee or letter of credit and the beneficiary seeks to take advantage of the situation.
(vi) Allowing encashment of an unconditional bank Guarantee or a Letter of Credit would result in irretrievable harm or injustice to one of the parties concerned.
What flows from the aforesaid proposition of law is that irrespective of a dispute between the beneficiary and the party at whose instance the bank has given the guarantee, bank is obliged to honour its guarantee as long as it is an unconditional and irrevocable one. But but what about a case, where on the face of the admitted facts, there is no dispute between the beneficiary and the party at whose instance the bank guarantee has been issued. In such a scenario and in the absence of knowledge of a fraud, action of the bank to honour its guarantee may not be susceptible to question, as it is obliged to honour the unconditional and irrevocable guarantee being an independent contract between the bank and the beneficiary. But can the beneficiary be permitted to indulge in such an act, more sowhen it is a State and an instrumentality like the respondent – CCL where the dispute is definitely not with the party at whose instance the bank has given the guarantee but with another independent juristic entity i.e. M/s AAPL. It is therefore of vital significance to discern the subtle distinction in the action of the respondent CCL when tested on the touchstone of the settled principles of law in the matter of interference in the invocation of a bank guarantee which is unconditional and irrevocable in nature.
Although, the Respondent had pleaded the doctrine of lifting of corporate veil in their counter affidavit in the background facts narrated thereunder, but for the reasons best known to them, such a plea has not been pressed during course of argument on their behalf. However, it is relevant to refer to the principles of law in the matters of application of doctrine of lifting of corporate veil as laid down in the case of Balwant Rai Saluja (supra) and also in the case of Indowind Energy Limited (Supra). In the case of Balwant Rai Saluja (supra), it was held as under:
“70. The doctrine of “piercing the corporate veil” stands as an exception to the principle that a company is a legal entity separate and distinct from its shareholders with its own legal rights and obligations. It seeks to disregard the separate personality of the company and attribute the acts of the company to those who are allegedly in direct control of its operation. The starting point of this doctrine was discussed in the celebrated case of Salomon v. Salomon & Co. Ltd. Lord Halsbury LC, negating the applicability of this doctrine to the facts of the case, stated that: (AC pp. 30 & 31) “[a company] must be treated like any other independent person with its rights and liabilities [legally] appropriate to itself … whatever may have been the ideas or schemes of those who brought it into existence.” Most of the cases subsequent to Salomon case, attributed the doctrine of piercing the veil to the fact that the company was a “sham” or a “façade”. However, there was yet to be any clarity on applicability of the said doctrine.
71. In recent times, the law has been crystallised around the six principles formulated by Munby, J. in Ben Hashem v. Ali Shayif. The six principles, as found at paras 159-64 of the case are as follows:
(i) Ownership and control of a company were not enough to justify piercing the corporate veil;
(ii) The court cannot pierce the corporate veil, even in the absence of third-party interests in the company, merely because it is thought to be necessary in the interests of justice;
(iii) The corporate veil can be pierced only if there is some impropriety;
(iv) The impropriety in question must be linked to the use of the company structure to avoid or conceal liability;
(v) To justify piercing the corporate veil, there must be bothcontrol of the company by the wrongdoer(s) and impropriety, that is use or misuse of the company by them as a device or facade to conceal their wrongdoing; and
(vi) The company may be a “façade” even though it was not originally incorporated with any deceptive intent, provided that it is being used for the purpose of deception at the time of the relevant transactions. The court would, however, pierce the corporate veil only so far as it was necessary in order to provide a remedy for the particular wrong which those controlling the company had done.
Ownership and control of Company are not enough, there must be both control of the Company by the wrong doer and impropriety that is use or misuse of the Company as a device or facade to conceal their wrong doings. Courts have pierced the corporate veil, so far as it was necessary in order to provide remedy for theparticular wrong which those controlling the Company had done. Since the Respondents have not pressed upon the aforesaid plea, this Court is not required to render any finding thereupon.
In the ultimate analysis, the action of the Respondent CCL to invoke the Bank Guarantees furnished by the petitioner for realization of the outstanding dues of M/s AAPL cannot be said to be fair, just and reasonable in the eye of law. The impugned actions are therefore held as arbitrary, illegal and amounting to fraudulent act which would cause irretrievable injuries to the petitioner, If interference is not made, it may also embolden the Respondent authorities in improperly resorting to such action dehors the authority of law.
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.
In Himadri Chemicals Industries Ltd. v. Coal Tar Refining Company, this court summarized the principles for grant of refusal to grant of injunction to restrain the enforcement of a bank guarantee or a letter of credit in the following manner :
“14…(i) While dealing with an application for injunction in the course of commercial dealings, and when an unconditional bank guarantee or letter of credit is given or accepted, the Beneficiary is entitled to realize such a bank guarantee or a letter of credit in terms thereof irrespective of any pending disputes relating to the terms of the contract.
(ii) The bank giving such guarantee is bound to honour it as per its terms irrespective of any dispute raised by its customer.
(iii) The courts should be slow in granting an order of injunction to restrain the realization of a bank guarantee or a letter of credit.
(iv) Since a bank guarantee or a letter of credit is an independent and a separate contract and is absolute in nature, the existence of any dispute between the parties to the contract is not a ground for issuing an order of injunction to restrain enforcement of bank guarantees or letters of credit.
(v) Fraud of an egregious nature which would vitiate the very foundation of such a bank guarantee or letter of credit and the beneficiary seeks to take advantage of the situation.
(vi) Allowing encashment of an unconditional bank Guarantee or a Letter of Credit would result in irretrievable harm or injustice to one of the parties concerned.
What flows from the aforesaid proposition of law is that irrespective of a dispute between the beneficiary and the party at whose instance the bank has given the guarantee, bank is obliged to honour its guarantee as long as it is an unconditional and irrevocable one. But but what about a case, where on the face of the admitted facts, there is no dispute between the beneficiary and the party at whose instance the bank guarantee has been issued. In such a scenario and in the absence of knowledge of a fraud, action of the bank to honour its guarantee may not be susceptible to question, as it is obliged to honour the unconditional and irrevocable guarantee being an independent contract between the bank and the beneficiary. But can the beneficiary be permitted to indulge in such an act, more sowhen it is a State and an instrumentality like the respondent – CCL where the dispute is definitely not with the party at whose instance the bank has given the guarantee but with another independent juristic entity i.e. M/s AAPL. It is therefore of vital significance to discern the subtle distinction in the action of the respondent CCL when tested on the touchstone of the settled principles of law in the matter of interference in the invocation of a bank guarantee which is unconditional and irrevocable in nature.
Although, the Respondent had pleaded the doctrine of lifting of corporate veil in their counter affidavit in the background facts narrated thereunder, but for the reasons best known to them, such a plea has not been pressed during course of argument on their behalf. However, it is relevant to refer to the principles of law in the matters of application of doctrine of lifting of corporate veil as laid down in the case of Balwant Rai Saluja (supra) and also in the case of Indowind Energy Limited (Supra). In the case of Balwant Rai Saluja (supra), it was held as under:
“70. The doctrine of “piercing the corporate veil” stands as an exception to the principle that a company is a legal entity separate and distinct from its shareholders with its own legal rights and obligations. It seeks to disregard the separate personality of the company and attribute the acts of the company to those who are allegedly in direct control of its operation. The starting point of this doctrine was discussed in the celebrated case of Salomon v. Salomon & Co. Ltd. Lord Halsbury LC, negating the applicability of this doctrine to the facts of the case, stated that: (AC pp. 30 & 31) “[a company] must be treated like any other independent person with its rights and liabilities [legally] appropriate to itself … whatever may have been the ideas or schemes of those who brought it into existence.” Most of the cases subsequent to Salomon case, attributed the doctrine of piercing the veil to the fact that the company was a “sham” or a “façade”. However, there was yet to be any clarity on applicability of the said doctrine.
71. In recent times, the law has been crystallised around the six principles formulated by Munby, J. in Ben Hashem v. Ali Shayif. The six principles, as found at paras 159-64 of the case are as follows:
(i) Ownership and control of a company were not enough to justify piercing the corporate veil;
(ii) The court cannot pierce the corporate veil, even in the absence of third-party interests in the company, merely because it is thought to be necessary in the interests of justice;
(iii) The corporate veil can be pierced only if there is some impropriety;
(iv) The impropriety in question must be linked to the use of the company structure to avoid or conceal liability;
(v) To justify piercing the corporate veil, there must be bothcontrol of the company by the wrongdoer(s) and impropriety, that is use or misuse of the company by them as a device or facade to conceal their wrongdoing; and
(vi) The company may be a “façade” even though it was not originally incorporated with any deceptive intent, provided that it is being used for the purpose of deception at the time of the relevant transactions. The court would, however, pierce the corporate veil only so far as it was necessary in order to provide a remedy for the particular wrong which those controlling the company had done.
Ownership and control of Company are not enough, there must be both control of the Company by the wrong doer and impropriety that is use or misuse of the Company as a device or facade to conceal their wrong doings. Courts have pierced the corporate veil, so far as it was necessary in order to provide remedy for theparticular wrong which those controlling the Company had done. Since the Respondents have not pressed upon the aforesaid plea, this Court is not required to render any finding thereupon.
In the ultimate analysis, the action of the Respondent CCL to invoke the Bank Guarantees furnished by the petitioner for realization of the outstanding dues of M/s AAPL cannot be said to be fair, just and reasonable in the eye of law. The impugned actions are therefore held as arbitrary, illegal and amounting to fraudulent act which would cause irretrievable injuries to the petitioner, If interference is not made, it may also embolden the Respondent authorities in improperly resorting to such action dehors the authority of law.
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