DATE: 24/07/2025
COURT: High Court of India
BENCH: Justice Jyoti Singh
FACTS:
The Plaintiff-Bank filed a suit seeking a
declaration that the invocation of the Bank Guarantees (BGs) through various
notices or letters was invalid, illegal, and void. In addition, the Plaintiff
sought a decree for a sum of Rs.48,77,13,600/- along with
applicable interest from the date of payment against the Defendant – Ministry
of Road, Transport and Highways (MoRTH). The third Defendant in the case was a
company against which insolvency proceedings had been admitted by the National
Company Law Tribunal (NCLT), resulting in the appointment of a Resolution
Professional. During the Corporate Insolvency Resolution Process (CIRP), no
legally compliant resolution plan was submitted to the Committee of Creditors
(CoC) by the 269th day. Consequently, on the 270th day, the company went into
liquidation by operation of law, following which the NCLT appointed a
Liquidator to oversee the process.
MoRTH had entrusted the Bihar Government
with the development, maintenance, and management of National Highway-104 and
resolved to undertake the rehabilitation and upgradation of the highway to two
lanes. It invited bids for this purpose, and the Defendant company, in
collaboration with another entity, entered into two Joint Bidding Agreements to
form a Joint Venture (JV) to execute the project. The Defendant company
approached the Plaintiff-Bank for various credit facilities, including the
issuance of BGs. As a precondition for sanctioning the BGs, the Plaintiff
required the opening of an Escrow Account to ensure proper fund management.
However, the Plaintiff later discovered that the project payments and revenues
generated by the JV were not being routed through the Escrow Account, prompting
it to address a letter of concern to MoRTH. Meanwhile, insolvency proceedings
under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), were
initiated and admitted against the Defendant company. The Plaintiff alleged
that MoRTH and the JV, without its prior consent, fraudulently discontinued the
escrow arrangement and unilaterally altered the terms of the contractual
relationship. The Plaintiff further contended that, under the Indian Contract
Act, 1872 (ICA), and applicable Uniform Rules for Demand Guarantees, it stood
discharged from its obligations under the BGs. It also claimed that any prior
waiver of its rights was invalid and legally untenable, thereby rendering the
BG invocation baseless.
ISSUES:
The central issues in the case were: (1)
whether the invocation of the Bank Guarantees (BGs) by the Ministry of Road,
Transport and Highways (MoRTH) was valid and legally sustainable, particularly
when the agreed escrow mechanism was allegedly bypassed; and (2) whether the
Plaintiff-Bank stood discharged from its obligations under the BGs due to
unauthorized changes made by MoRTH and the Joint Venture (JV), in violation of
the Indian Contract Act, 1872 and the applicable Uniform Rules for Demand
Guarantees. A related issue was whether a waiver of the Bank’s rights could be
considered valid without explicit and informed consent.
JUDGEMENT WITH REASONING:
The Court held that the invocation of the
Bank Guarantees was invalid and not binding on the Plaintiff-Bank. It granted
relief by restraining the enforcement of the BGs and upheld the Plaintiff’s
contention that it had been discharged from its obligations due to unauthorized
modifications in the contractual relationship and the discontinuation of the
escrow mechanism. The Court further held that the Plaintiff’s waiver of rights,
if any, was neither explicit nor legally enforceable.
The Court’s reasoning was rooted in both
contractual and insolvency law principles. It noted that the BGs were issued by
the Plaintiff-Bank on the clear condition that all project-related revenues
would be routed through an Escrow Account. This was not merely a procedural
requirement but a fundamental contractual safeguard meant to ensure financial
discipline and transparency. The unilateral discontinuation of this escrow
arrangement, without prior written consent from the Bank, constituted a
material breach of contract. The Court emphasized that under Sections 62 and 63
of the Indian Contract Act, a party cannot unilaterally alter contractual
obligations, especially when those obligations form the basis of financial risk
undertaken by another party, in this case, the Bank. Moreover, the Court
recognized that the Plaintiff was never consulted or informed of these changes
and had not expressly waived any of its rights under the original agreement.
Additionally, the Court found that the
invocation of BGs during the pendency of the insolvency resolution process, without
full compliance with contractual terms, undermined the protective framework
envisaged by the Insolvency and Bankruptcy Code, 2016. It stressed that any
alteration of obligations or invocation of financial guarantees involving a
company under insolvency must meet heightened scrutiny, particularly to avoid
prejudicing secured creditors or violating the moratorium imposed by NCLT
orders. The attempt to bypass the escrow mechanism and invoke guarantees in
such circumstances was seen as not only contractually unsound but also
inconsistent with public policy and the integrity of insolvency proceedings.
Thus, the Plaintiff-Bank was found to be rightly discharged of its obligations,
and the Court rejected the Defendant’s claim for enforcement of the BGs.
ANALYSIS:
This case presents a critical intersection
of banking law, contract law, and insolvency law, arising from the invocation
of Bank Guarantees (BGs) by a government authority during the insolvency of a
contracting party. The Plaintiff-Bank’s position was rooted in the contractual
condition that all project-related funds must flow through an Escrow Account—an
essential control mechanism to mitigate financial risk. The failure to adhere
to this condition, combined with the unilateral modification of contractual terms
by MoRTH and the JV without the Bank’s prior consent, undermined the
foundational terms of the BGs. The Bank contended, and the Court accepted, that
these deviations were not minor breaches but material alterations that
discharged its obligations under the BGs. The Court emphasized that waiver of
contractual safeguards, such as escrow requirements, cannot be presumed or
imposed in the absence of clear and informed consent, especially when such
safeguards determine the risk exposure of a financial institution.
The Court’s analysis also underlined the
importance of maintaining procedural integrity during insolvency proceedings.
Invoking BGs after the commencement of the Corporate Insolvency Resolution
Process (CIRP), without observing the agreed-upon financial protocols, was held
to be contrary to the Insolvency and Bankruptcy Code, 2016. The Court noted
that such acts risk prejudicing the interests of secured creditors and
violating the statutory moratorium. By refusing to uphold the BG invocation,
the Court reinforced that financial guarantees cannot be separated from the
context and terms under which they were issued. This decision thus sets a
precedent on the sanctity of contractual terms in financial transactions and
the legal responsibilities of parties dealing with entities undergoing
insolvency resolution.
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