Allahabad Hc Pulled Up For Stopping Guarantee Encashment

The Supreme Court yesterday severely criticised the Allahabad High Court for passing injunctions against the encahsment of bank guarantees, against all established principles in this field.

It also passed strictures on the State Bank of India (SBI), Meerut, for deliberately dragging its feet to benefit one of the parties to get injunctions from the courts.

The Supreme Court has stated in several judgments that bank guarantees should be allowed to be encashed if there is a prima facie breach of contract between two parties. There were only a few exceptions, as when there is established fraud or there would be irretrievable loss to either party.

 

The High Court in this case flouted this principle, inviting harsh words from the Supreme Court. The apex court called the injunctions passed by the high court judicial impropriety and judicial adventurism. We strongly deprecate the tendency of the subordinate courts in not applying the settled principles and in passing whimsical orders which necessarily has the effect of granting wrongful and unwarranted relief to one of the parties, the judgment said.

It is time that this tendency stops.

The bench consisting of Justice K S Paripoornan, Justice K Venkataswami and Justice B N Kirpal passed the strictures in a dispute between Dwarikesh Sugar Industries Ltd and Prem Heavy Engineering Works.

The engineering company could not fulfill some of its supply contracts with the sugar firm. Therefore the sugar unit invoked the bank guarantees given by the bank. The bank delayed the encashment, enabling the engineering company to get injunctions from a civil court without the knowledge of the sugar firm.

The high court on appeal also passed a virtual stay. Aggrieved by this, the sugar unit appealed to the Supreme Court.

The apex court observed that it was unfortunate that the high court did not refer to the law on this subject. The high court said it was not of much importance. This, said the Supreme Court, was clearly a method adopted by it to avoid and apply the law laid down in leading judgments.