U.P. STATE SUGAR CORPORATIONversusM/S SUMAC INTERNATIONAL LTD.

                 U.P. STATE SUGAR CORPORATION                                   A
                                     v.
                 M/S SUMAC INTERNATIONAL LTD.

                           DECEMBER 4, 1996

          [M.M. PUNCH! AND SUJATA V. MANOHAR, JJ.]                              B

      Code of Civil Procedure, 1908 : Order 39 Rules 1 and 2.

     Interim injunction-Bank guaralllee-Invocation of-Consideration
Joi-Guarantee worded in absolute tem1s-Gura11tor bound to make payment          C
on demand wit/tout demur-Irrespective of pendency of legal proceed-
ings-Held, in tlte circumstances, stay of bank guarantee was pennissible only
on grounds of fraud or irretrievable hann or injustice-Existence of dispute
about tem1ination of contract is not a ground for issuing injunction.

      Sick Industrial Companies (Special Provisions) Act, 1985: Sections 16,    D
17, 18 and 22.

       Reference before Board--Pendency of-Bank guarantee-Effect on in-
vocation of-Claimant undertook to ean11ark amoulll realised from bank
guarantee subject to any sclteme framed by Board-Held, such pendency
itself was not "irretrievable injustice''-Hence, invocation of bank guarantee
                                                                                E
not liable to be stayed.

      The appellant entered into an agreement with the respondent under
which the respondent agreed to set up a complete sugar plant for the
appellant. The agreement stated that time was the essence of the contract       F
and the respondent-seller was required to furnish five irrevocable bank
gnarantees which were payable on demand. It was expressly provided that
it would not be open to the gurantor to know the reasons or or to
investigate or to go into the merits of the demand invoking the bank
gnarantee or to question or challenge the demand or to require the proof
or the liability of the seller before paying the amount demanded. It was        G
further provided that the invocation of the bank guarantee would be
binding on the respondent and that the invocation of the bank gnarantee
would not be affected in any manner by reason or the fact that any dispute
or disputes had been raised by the respondent with regard to Its liability.
Nor would it be affected by the fact that proceedings were pending· before      H
                                      511
    512                  SUPREME COURT REPORTS [1996] SUPP. 9 S.C.R.

A any Tribunal, Arbitrator or Court with regard thereto.

          The contract was not carried out within the time envisaged under
    the contract. Thereafter, the time for completion of the contract was
    extended. The respondent, however, did not complete the contract within
    the extended period. The appellant invoked the bank guarantees and
B   subsequently withdrew such invocation.

         In the meanwhile, the State Government transferred the appellant's
  sugar plant to the joint sector. Therefore, the appellant cancelled the
  aforesaid agreement and invoked the bank guarantees. Being aggrieved the
C respondent filed applications before Civil Judge under Section 41(b) of the
  Arbitration Act, 1940 for interim stay against encashment of bank guaran-
  tees. These applications were dismissed and the High Court, in revision,
  granted an injunction restraining the appellant from enforcing the bank
  guarantees on the ground that the termination of the contract by the
  appellant showed that time was not the essence of the contract and,
D therefore, there was a fraud in the invocation of the bank guarantee. The
  High Court also referred to the conduct of the appellant in invoking the
  bank guarantee on an earlier occasion and subsequently withdrawing such
    invocation.

E         On behalf of the appellant it was contended that the appellant-com-
    pany undertook to earmark the amounts realised from the bank guaran·
    tees in question for the recovery of any claims which the respondent was
    entitled to recover from the appellant.

          On behalf of the respondent it was contended that there would be
F irretrievable injustice to the respondent if the bank guarantees were
    allowed to be realised because the appellant was a sick industrial company
    in respect of which a reference was pending before the Board for Industrial
    and Financial Reconstruction under the Sick Industrial Company (Special
    Provisions) Act, 1985; and, therefore, even if the respondent succeeded
G   before the Arbitrator it would not be able to realise its claim from the
    appellant.

          Allowing the appeal, thi• Court

          HELD : 1.1. The bank guarantees which are irrevocable in nature,
H in terms, provide that they are payable by the guarantor to the appellant
     U.P. STATE SUGAR CORPN. v. SUMAC INTERNATIONAL LTD.             513

on demand without demur. The bank guarantees further provide that the A
right of the purchaser to recover from the gnarantor any amonnt shall not
be affected or suspended by reason of any disputes that may have been
raised by the respondent with regard to its liability or on the ground that
proceedings are pending before any Tribunal, Arbitrator or Court with
regard to such dispute. The guarantor shall immediately pay the guaran-
                                                                            B
teed amount to the appellant-purchasers on demand. [518-E-G]

      1.2. The law relating to invocation of such bank guarantees is 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. C
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 realisa-
tion of such a bank guarantee. The courts have carved out only two D
exceptions. A fraud in connection with such a bank gnarantee would vitiate
the very foundation of such a bank gnarantee. 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 gnarantee would result in irretriev-
able harm or injustice to one of the parties concerned. Since in most cases E
payment of money under such a bank guarantee would adversely affect the
hank and its customer at whose instance the gnarantee 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 F
country. The two grounds are not necessarily connected, though both may
co-exist some cases. [518-H; 519-A-D)

       U.P. Cooperative Federation Ltd. v. Singh Consultants and Engineers
(P) Ltd., [1988) 1SCC174; Svenska Handelsbanken v. Mis. Indian Charge
Chrome & Ors., [1994) 1SCC502;Larsen & Tubro Ltd. v.Maharashtra State G
Electricity Board & Ors., [1995) 6 SCC 58; Hindustan Steel Workers Con-
struction Ltd. v. G.S. Atwa! & Co. (Engineers) Pvt Ltd., [1995) 6 SCC 76;
National Themial Power Corporation Ltd. v. F/owmore Pvt. Ltd. & Anr.,
[1995) 4 SCC 515; State of Maharashtra &Am: v.M/s. National Const1uction
Company, Bombay & Anr., JT (1996) 1 SC 156 and Hindustan Steelworks H
    51ll                 SUPREME COURT REPORTS [1996] SUPP. 9 S.C.R.

A Co11stmction Ltd. v. Tarapore & Co. & Anr., JT (1996) 6 SC 295, relied on.

          Bo/ivi11ter Oil SA v. Chase Ma11hattan Bank NA (1984) l AER 351 and
    Itek Corporation v. The First National Bank of Boston, 566 Fed Supp. 1210,
    referred to.

B        1.3. The existence or any dispute between the parties to the contract
  is not a ground for issuing an injunction to restrain the enforcement or
  bank guarantees. There must be a fraud in connection with the bank
  guarantee. The disputes between the parties relating to the termination of
  the contract cannot make invocation or the bank guarantees rradulent. In
C the present case there is, therefore, no such fraud. An earlier invocation of
  the bank guarantee and subsequent withdrawal or this invocation do not
  make the bank guarantees or their invocation tainted with fraud in any
  manner. Under the terms ortbe contract it is stipulated that the respondent
  is required
          '
                to give unconditional bank guarantees against advance pay-
  ments as also a similar bank guarantee for due delivery of the contracted
D plant within the stipulated period. In the absence of any fraud the appellant
  is entitled to realise the bank guarantees. (521-G-H; 522-B-C]

          2.1. The mere fact that a reference under The Sick Industrial Com-
    panies (Special Provisions) Act, 1985 is pending before the Board for
    Industrial and Financial Reconstruction is not sufficient to bring the case
E   in the ambit of the "Irretrievable injustice" exception. Under Section 17 of
    the Act after making an inquiry, if the Board is satisfied that a company
    has become a sick industrial company, the Board may then decide, by an
    order in writing, whether it is practicable for the company to make its net
    worth exceed the accumulated losses within a reasonable time. If this is
F   practicable, then the Board shall give such company the opportunity to
    make its net worth exceed the accumulated losses. Under Section 17(3) if
    the Board decides that this is not practicable within a reasonable time, it
    may adopt measures specified in Section 18 and provide for a scheme for
    appropriate measures in relation to that company. There can, therefore,
G   be presumption that the appellant-company will, in no circumstance, be
    able to discharge its obligations. (522-E-H; 523-A)

        2.2. There is no material to show that the appellant- company cannot
  make its net worth positive. No scheme has been framed under the said
  Act so far. Even under Section 22 there is no absolute bar against any suit
H for the recovery of,money. The suit cannot be proceeded with except with
    U.P. SfATESUGAR OORPN. v, SUMAC INTERNATIONAL LID. [MRS. SUJATA V, MANO HAR, J.)   515
the consent of the Board or the Appellate Authority. Therefore, in an A
appropriate case, the Board or the Appellate Authority is entitled to give
its consent to such a claim being proceeded with. In any case the appellant
company undertakes to earmark the amounts realised from the bank
guarantees in question for the purpose of recovery of claims, if any, which
the respondent may ultimately be found to be entitled to recover from the B
appellant. Any scheme which the Board may frame under the said Act will
be subject to this undertaking given by the appellant to set apart the
amounts realised under the bank guarantees in question for meeting any
validly adjudicated claims of the respondent against the appellant under
or arising from the said contract. If any scheme is required to be framed,
the Board shall take into account this undertaking, while framing the C
scheme. [523-D-H]

        CIVIL APPELLATE JURISDICTION: Civil Appeal No. 15357 of
1996.

     From the Judgment and Order dated 15.12.95 of the Allahabad High D
Court in C.R. No. 488 of 1995.

        Dushyant Dave and Pradeep Misra for the Appellant.

        V.C. Mahajan and Anil Kr. Sangal for the Respondent.
                                                                                             E
        The Judgment of the Court was delivered by

        MRS. SUJATA V. MANOHAR, J. Leave granted.

       The appellant, U .P. State Sugar Corporation entered into an agree-
ment dated 2nd of August, 1989 with the respondent, M/s Sumac Interna-                       F
tional Pvt. Ltd. under which the respondent agreed to design, to prepare
an engineering lay-out and to manufacture or procure and supply to the
appellant the machinery and equipment for a complete sugar plant for
extension and modernisation of the appellant's existing sugar plant at
Rohana Kalan, District Muzaffarnagar, U.P. The respondent was required                       G
to set up a new plant of 2500 TCD at a new site or an adjoining site close
to the existing sugar plant of the appellant. The total contract price was
fixed under Clause 2.1 of the contract at Rs. 1780 lacs.

      Under the terms of the agreement the respondent was required to
set up the plant and make it ready for commercial production by 30th of H
    516                   SUPREME COURT REPORTS [1996] SUPP. 9 S.C.R.

A   November, 1990. The agreement stated that in this regard time was of the
    essence of the contract and if the respondent failed to do so the conse-
    quences were also spelt out in the contract. Under Clause 3 of the contract
    a month-wise progressive delivery report was to be submitted by the
    respondent and a PERT/CPM chart had to be submitted and adhered to.
B   Clause 4 which dealt with delivery required the respondent to complete all
    supplies by 15th of November, 1990 so that the plant could be commis-
    sioned by 30.11.1990. Under Clause 11.1 the respondent- seller was entitled
    to a reasonable extension of time as decided by the purchaser if the
    purchase order was expressly suspended for no fault of the seller.

C         Under Clause 15 the respondent-seller was required to furnish to the
    appellant five bank guarantees as specified therein. These were :

          1. A bank guarantee for timely deliver of plant and machinery as
    provided in Clause 14.1 representing five percent of the contract price
    referred to in Clause 2.1. This was required to be furnished within 3-1/2
D   months of the signing of the agreement.

          2. The seller was required to furnish a bank guarantee in respect
    guaranteed performance of the plant and machinery for an amount repre-
    senting 5% of the contract price. This guarantee was required to be
E   furnished eight months before the scheduled date of commissioning men-
    tioned in Clause 4.1 or within six months from the date of signing of the
    agreement or after 2-1/2 months of the opening of the Letter of Credit
    whichever of these dates was earlier.

          3. Three bank guarantees in respect of advance payments to be made
F   by the appellanJ to the respondent under Clauses 13.2(a) to 13.2(c) were
    required to be for Rs. 89 lacs, Rs. 178 lacs and Rs. 89 lacs respectively,
    representing 5%, 10% and 5% of the contract price respectively.

          Under Clause 13.2 on receipt of the first of these bank guarantees
    for Rs. 89 lacs the first instalment of advance would be paid within a week
G   from the date of signing of the agreement. On receipt of the second bank
    guarantee for Rs. 178 lacs the second advance would be paid by the
    appellant to the respondent within 2-1/2 months of the signing of the
    agreement subject to the respondent furnishing various statements, certifi-
    cates etc. as set out in that clause. The third bank guarantee for Rs. 89 lacs
H   was to be furnished against the advance to be paid by the appellant to the
    U.P. STATE SUGAR CORPN. v. SUMAC INTERNATIONAL LTD. jMRS. SUJATA V. MANO HAR, J.]   517
respondent within 3-1/2 months from the date of the signing of the agree- A
ment. These three bank guarantees are thus in respect of the advance
payments required to be made by the appellant to the respondent.

        Under Clause 15.5 all these bank guarantees are payable on demand.
It is expressly provided that it shall not be open to the guarantor to know
the reasons of or to investigate or to go into the merits of the demand                       B
invoking the b.ank guarantee or to question or challenge the demand or to
require the proof of the liability of the seller before paying the a111ount
demanded. It is further provided that the invocation of the bank guarantee
shall be binding on the respondent and that invocation of the bank guaran-
tee would. not be affected in any manner by reason of the fact that any                       C
dispute or disputes had been raised by the respondent with regard to its
liability. Nor would it be affected by the fact that proceedings were pending
before any Tribunal, Arbitrator or Court with regard thereto.

       Accordingly, the respondent furnished, inter alia, four bank guaran-
tees, one being a guarantee for due delivery and the other three being the                    D
bank guarantees in respect of advance payment of price. The total amount
covered by the bank guarantees securing advance payments is Rs. 3.56
crores, which amount was paid by the appellant to the respondent as
advance.
                                                                                              E
      The contract was not carried out within the time envisaged under the
Contract. Thereafter, at a meeting held on 1.10.1991 between the appellant
and the respondent, the time for completion of this project was extended
upto May 1992 and a detailed chart was drawn up for the completion of
the project by that date. No further extension of time has been given by
the appellant to the respondent thereafter. The respondent, however, did                      F
not complete the said project within the extended period.

      By their letter dated 6th of September, 1995 the State of U.P.
Through the Special Secretary, Govt. of U.P. informed the Managing
Director of the appellant that it had been decided to transfer the Rohana                     G
Kalan (Muzaffarnagar unit) of the appellant to the joint sector. As a result,
the expansion project of this unit should be cancelled and appropriate
action in accordance with law should be taken. Thereupon the appellant
cancelled the agreement by its letter dated 7th of September, 1995 ad-
dressed to the respondent. The appellant claimed a refund of the advance
payment of Rs. 3,14,78,093 as unutilised and unadjusted amount of advance                     H
    518                  SUPREME COURT REPORTS (1996) SUPP. 9 S.C.R.

A payment. The appellant, by its four letters all dated October 28, 1995
    addressed to the respondent invoked the three bank guarantees in respect
    of advance payments after giving credit to the respondent for material
    worth Rs. 42 lacs which had been supplied till then. The appellant also
    invoked the delivery guarantee for Rs. 89 lacs. The bank guarantees so
B   invoked are : Bank guarantee no. 9/47 dated 10.8.89 for Rs. 89 lacs. In this
    bank guarantee credit for Rs. 42 lacs has been given and the invocation of
    the bank guarantee is only for the balance sum of Rs. 47 lacs. The second
    bank guarantee so invoked is no. 9/64 dated 20.11.89 for Rs. 178 lacs. The
    third bank guarantee is no. 9no of 6.1.90 for Rs. 89 lacs and the fourth,
    delviery guarantee is no. 12/88 dated 13.11.1990 for Rs. 89 lacs.
c
           On 5.10.1995 the respondent filed a petition under Section 20 of the
    Arbitration Act for appointment of an arbitrator since the agreement
    between the parties provides for arbitration. The respondent also filed two
    applications for interim relief under Section 41(b) of the Arbitration Act
D   seeking interim stay against encashment of bank· guarantees. The Civil
    Judge, Senior Division, Muzaffarnagar before whom these applications
    were filed, dismissed these applications. In revision, however, these ap-
    plications have been allowed by the High Court and an injunction has been
    granted restraining the appellant from enforcing these bank guarantees.
    Hence, the appellant has come by way of the present appeal.
E
          These bank guarantees which are irrevocable in nature, in terms,
    provide that they are payable by the guarantor to the appellate on demand
    without demur. They further provide that the appellant shall be the sole
    judge of whether and to what extent the amount has become recoverable
F   from the respondent or whether the respondent has committed any breach
    of the terms and conditions of the agreement. The bank guarantees further
    provide that the right of the purchaser to recover from the guarantor any
    amount shall not be affected or suspended by reason of any disputes that
    may have been raised by the respondent with regard to its liability or on
    the ground that proceedings are pending before any Tribunal, Arbitrator
G   or Court with regard to such dispute. The guarantor shall immediately pay
    the guaranteed amount to the appellantCpurchasers on demand.

          The law relating to the invocation of such bank guarantees is by now
  . well settled. When in the course of commercial dealings an unconditional
H bank guarantee is given or accepted, the beneficiary is entitled to realize
    U.P.STATESUGAROORPN. v. SUMACJN1ERNATIONALL1D. [MRS.SUJATA V. MANOHAR,J.]   519

such a bank guarantee in terms thereof irrespective of any pending dis- A
putes. 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 realiza-
tion of such a bank guarantee. The courts have carved out only two
                                                                              B
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 irretriev-
able harm or injustice to one of the parties concerned. Since in most cases           c
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 averse effect of such an injunction on commercial dealings in the D
country. The two grounds are not necessarily connected, though both may
co-exist in some cases. In the case of U.P. Cooperative Federation Ltd. v.
Singh Consultants and Engineers (P) Ltd. (1988] 1 SCC 174, which was the
case of a works contract where the performance guarantee given under the
contract was sought to be invoked, this Court, after referring extensively to
English and Indian cases on the subject, said that the guarantee must be E
honoured in accordance with its terms. The bank which gives the guarantee
is not concerned in the least with the relations between the supplier and
the customer;' nor with the question whether the supplier has performed
his contractual obligation or not, nor with the question whether the sup-
plier is in default or not. The bank must pay according to the tenor of its F
guarantee on demand without proof or condition. There are only two
exceptions to this rule. The first exception is a case when there is a clear
fraud of which the bank has notice. The fraud must be of an agregious
nature such as to vitiate the entire underlying transaction. Explaining the
kind of fraud that may absolve a bank from honouring its guarantee, this
Court in the above case quoted with approval the observations of Sir John G
Donaldson, M.R. in Bo/ivinter Oil SA v. Chase Manhattan Bank NA, (1984)
1 AER 351 at 352 : "The wholly exceptional case. where an injunction may
be granted is where it is proved that the bank knows that any demand for
payment already made or which may thereafter be• made will clearly be
fraudulent. But the evidence must be clear both as to the fact of fraud and H
    520                   SUPREME COURT REPORTS [1996) SUPP. 9 S.C.R.

A as to the bank's knowledge. It would certainly not normally be sufficient
    that this rests on the uncorroborated statement of the customer, for ir-
    reparable damage can be done to a bank's credit in the relatively brief time
    which must elapse between the granting of such an injunction and an
    application by the bank to have it charged. This Court set aside an
    injunction granted by the High Court to restrain the realisation of the bank
B
    guarantee.

          The same question came up for consideration before this Court in
    Sve11ska Handelsbanken v. Mis Indian Charge Chrome & Ors. [1994) 1 SCC
    502. This court once again reiterated that a confirmed bank guarantee/ir-
e   revocable letter of credit cannot be interfered with unless there is estab-
    lished fraud or irretrievable injustice involved in the case. Irretrievable
    injury has to be of the nature noticed in the case of Itek Corporation v. 17te
    First National Bank of Boston etc. (566 Fed Supp. 1210). On the question
    of fraud this Court confirmed the observations made in the case of U.P.
D   Cooperative Federation Ltd. (supra) and stated that the fraud must be that
    of the beneficiary, and not the fraud of anyone else.

         On the question of irretrievable injury which is the second exception
  to the rule against granting of injunctions when unconditional bank guaran-
  tees are sought to be realised the court said in the above case that the
E irretrievable injury must be of the kind which was the subject-matter of the
  decision in the Itek Corporation case (supra). In that case an exporter in
  the U.S.A. entered into an. agreement with the Imperial Government of
  Iran and sought an order terminating its liability on sand by letters of credit
  issued by an American Bank in favour of an Iranian Bank as part of the
F contract. The relief was sought on account of the situations created after
  the Iranian revolution when the American Government cancelled the ex-
  port licences in relation to Iran and the Iranian Government had forcibly
  taken 52 American citizens as hostages. The U.S. Government had blocked
  all Iranian assets under the jurisdiction of United States and had cancelled
G the export contract. The court upheld the contention of the exporter that
  any claim for damages against the purchaser if decreed by the American
  Courts would not be executable in Iran under these circumstances and
  realisation of the bank guarantee/Letters of credit would cause irreparable
  harm to the plaintiff. This contention was upheld. To avail of this exception,
  therefore, exceptional circumstances which make it impossible for the
H guarantor to reimburse himself if he ultimately succeeds, will have to be
    U.P. SfATE SUGAR <XlRPN. v. SUMACl1'.'TERNATIONALLTD. {MRS. SUJATA V. MANOHAR,J.]   521

decisively established. Clearly, a mere apprehension that the other party A
will not be able to pay, is not enough. In the Itek case (supra) there was a
certainty on this issue. Secondly, there was good reason, in that case for
the court to be plima facie satisfied that the guarantors i.e. the bank and
its customer would be found entitled to receive the amount paid under the
guarantee.
                                                                                              B
      Our attention was invited to a number of decisions on this issue --
among them, to Larsen & Turbro Ltd. v. Maharashtra State Electlicity Board
& Ors., [1995] 6 SCC 58 and Hindustan Steel Workers Construction Ltd. v.
G.S. Atwal & Co. (Engineers) Pvt. Ltd., [1995] 6 SCC 76, as also to National
Thennal Power Corporation Ltd. v. Flowmore Pvt. Ltd. &Anr., [1995] 4 SCC                      C
515. The latest decision is in the case of State of Maharashtra & Anr. v. Mis
National Construction Company, Bombay & Anr., JT (1996) 1 SC 156,
where this Court has summed up the position by stating, "The rule is well
established that a bank issuing a guarantee is not concerned with the
underlying contract between the parties to the contract. The duty of the                      D
bank under a performance guarantee is created by the document itself.
Once the documents are in order the bank giving the guarantee must
honour the same and make payment ordinarily unless there is an allegation
of fraud or. the like. The courts will not interfere directly or indirectly to
withhold payment, otherwise trust in commerce internal and international
would be irreparably damaged. But that does not mean that the parties to                      E
the underlying contract cannot settle the disputes with respect to allega-
tions of breach by resorting to litigation or arbitration as stipulated in the
contract. The remedy arising ex-contractu is not barred and the cause of
action for the same is independent of enforcement of the guarantee." The
other recent decision is in Hindustan Steelworks Construction Ltd. v.                         F
Tarapore & Co. & Anr., JT (1996) 6 SC 295.


       Clearly, therefore, the existence of any dispute between the parties
to the contract is not a ground for issuing an injunction to restrain the
enforcement of bank guarantees. There must be a fraud in connection with G
the bank guarantee. Jn the present case we fail to see any such fraud. The
High Court seems to have come to the conclusion that the termination of
the contract by the appellant and his claim that the time was of the essence
 of the contract, are not based on the term~ of the contract and, therefore,
there is a fraud in the invocation of th'e bank guarantee. This is an
 erroneous view. The disputes between the parties relating to the Iormina- H
    522                   SUPREME COURT REPORTS (1996] SUPP. 9 S.C.R.

A tion of the contract cannot make invocation of the bank guarantees
    fraudulent. The High Court has also referred to the conduct of the appel-
    fant in invoking the bank guarantees on an earlier occasion on 12th of
    April, 1992 and subsequently withdrawing such invocation. The court has
    used this circumstance in aid of its view that the time was not of the essence
    of the contract. We fail to see how an earlier invocation of the bank
B   guarantees and subsequent withdrawal of this invocation make the bank
    guarantees or their invocation tainted with fraud in any manner. Under the
    terms of the contract it is stipulated that the respondent is required to give
    unconditional bank guarantees against advance payments as also a similar
    bank guarantee for due delivery of the contracted plant within the stipu-
C   lated period. In the absence of any fraud the appellant is entitled to realise
    the bank guarantees.

           Before us, however, in the course of argument, learned advocate for
    the respondent urged for the first time that in this case there would be
D irretrievable injustice to the respondent if the bank guarantees are allowed
    to be realised because the appellant is a sick industrial company in respect
    of which a reference is pending before the Board for Industrial and
    Financial Reconstruction under the Sick Industrial Companies (Special
    Provisions) Act, 1985. The respondent contends that even if it succeeds
    before the Arbitrator it will not be able to realise its claim from the
E appellant. The mere fact that a reference under The Sick Industrial Com-
    panies (Special Provisions) Act, 1995 is pending before the Board, is, in
    our view, not sufficient to bring the case in the ambit of the "irretrievable
    injustice" exception. Under the scheme of the said Act the Board is
    required to make such inquiry as it may deem fit for determining whether
F , any industrial company has become a sick industrial company. Under
    Section 16(4) where the Board deems it fit to make an inquiry or to cause
    an inquiry to be made in this connection, it may appoint one or more
    persons to be special directors for safeguarding the financial and other
    interests of the company or in the public interest. Under Section 17 after
    making an inquiry, if the Board is satisfied that a company has become a
G sick industrial company, the Board may then decide, by an order in writing,
    whether it is practicable for the company to make its net worth exceed the
    accumulated losses within a reasonable time. If this is practicable, then the
    Board shall give such company the opportunity to make its net worth
    exceed the accumulated losses. Under sub-section (3) of Section 17 if the
H Board decides that this is not practicable within a reasonable time, it may
    U.P. SfA1ESUGAR CORPN. v. SUMAC INTERNATIONALLTD. jMRS. SUJATA V. MANOHAR, J.]   523
adopt measures specified in Section 18 and provide for a scheme for                        A
appropriate measures in relation to that company. There can, therefore, be
no presumption that the company will, in no circumstance, be able to
discharge its obligations.

       Under Section 22 on which the respondent relies, where in respect
of an industrial company, an inquiry under Section 16 is pending, or any                   B
scheme under Section 17 is under preparation or a sanctioned scheme is
under implementation or when an appeal under Section 25 is pending, then
no proceedings for the winding up of the industrial company or for
execution, distress or the like against any of the properties of the industrial
company or the appointment of a receiver in respect thereof can be                         C
proceeded with; and no suit for the recovery of money or for the enforce-
ment of any security against the industrial company shall lie or be
proceeded with except with the consent of the Board or, as the case may
be, the Appellate Authority. The respondent contends that its right to
realise its claim, if established, would be affected by reason of Section 22
of the said Act. There is no material before us to show that the appellant-                D
company cannot make its net worth positive. No scheme has been framed
under the said Act so far. Even under Section 22 there is no absolute bar
against any suit for the recovery of money. The suit cannot be proceeded
with except with the consent of the Board or the Appellate Authority.
Therefore, in an appropriate case, the Board or the Appellate Authority                    E
is entitled to give its consent to such a claim being proceeded with. This is
not a situation of the kind envisaged in the case of Itek Corporation (supra)
where there was no possibility whatsoever of recovery of any amount from
the purchaser. In the present case, there is a good possibility of such
recovery. In any case, learned counsel for the appellant has, on instructions,
very fairly stated that the appellant-company undertakes to earmark the                    F
amounts realised from the bank guarantees in question for the purpose of
recovery of claims, if any, which the respondent may ultimately be found
to be entitled to recover from the appellant. Any scheme which the Board
may frame under the said Act will be subject to this undertaking given by
the appellant to set apart the amounts realised under the bank guarantees                  G
in question for meeting any validly adjudicated claims of the respondent
against the appellant under or arising from the said contract. If any scheme
is required to be framed, the Board shall take into account this undertak-
ing, while framing the scheme.

                                                                                           H
    524                  SUPREME COURT REPORTS [1996] SUPP. 9 S.C.R.

A         Both sides are agreed that for a speedy resolution of their disputes
    they are willing to refer all their disputes under or arising from the said
    contract to the sole arbitration of Justice R.M. Sahai (retd.), a retired
    Judge of this Court. We accordingly refer all disputes between the parties
    under or arising from the contract to the sole arbitration of Justice R.M.
    Sahai (retd.). The arbitrator may fix his remuneration in consultation with
B   the parties. The parties shall obtain appropriate directions from the
    learned arbitrator in connection with the filing of claims, replies etc. in
    accordance with law. The petition filed by the respondent before the court
    of Chief Judicial Magistrate/Civil Judge, Muzaffarnagar under Section 20
    of the Arbitration Act is disposed of accordingly.
c         The appeal is allowed and the impugned judgment and order of the
    High Court is set aside and the injunction granted by the High Court is
    vacated. Parties will bear their own costs.

    v.s.s.                                                    Appeal allowed.