Allowed

Mmtc Ltd. v. Millennium WIRE3S (P) Ltd. and 6 Ors.

Bombay HC24 Jul 2014NMS/375/2013

Case brief

AI extract

What is this about?

On a motion for permanent injunction, the Bombay High Court restrained the issuing bank from honoring a Letter of Credit. The court ruled that the negotiating bank acted beyond its mandate by advancing funds as a loan rather than discounting the credit as permitted by its terms.

What did the court decide?

Notice of motion allowed to restrain the Issuing Bank from making payment to the Negotiating Bank under the Letter of Credit.

Mmtc Ltd. Vs Millennium WIRE3S (P) Ltd. and 6 Ors. — Insurance | Bombay HC (2014)

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IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION

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NOTICE OF MOTION NO.375 OF 2013

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SUIT NO.786 OF 2012

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M/s. MMTC Limited. ….Plaintiff.

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vs.

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M/s. Millennium Wires(P) Ltd. and ors. ….Defendants.

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Mr. Rajiv Narula i/by S.K.Singh for the Plaintiff. Mr. Rahul Narichania, Sr. Advocate with Mr. Zoeb Cutlerywala and Ms. Krushi N.Burfiwala i/by ALMT Legal for Defendant No.5. Ms. Radha Bhandari i/by M.V.Kini & Co. for Defendant No.2.

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CORAM : M. S. SANKLECHA, J.

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DATE : 24 JULY 2014

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PC:

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This notice of motion has been taken out by the plaintiffs in a suit for permanent injunction to restrain the defendant No.2 (Issuing Bank) from honoring the Letter of Credit dated 2 December 2011 amounting to US $ 544500/- and also restrain the defendant No.5 (Negotiating Bank) from making any payments under the Letter of Credit to defendant Nos.3 and 4 (suppliers of goods- beneficiary).

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Briefly the facts relevant for disposal of this motion are as under:

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a) On 22 November 2011, a sale contract was issued by defendant No.3 (supplier) to defendant No.1 (buyer) for sale of 75 Metric ton of copper wire rod at a consideration of US $ 544500/-.

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b) In view of an arrangement arrived at between defendant No.1 (buyer) and the plaintiffs, the plaintiffs' BankersM/s. Indus Bank defendant No.2 at the instance of the plaintiff opened Letter of Credit dated 2 December 2011 in favour of defendant No.3 (supplier). The Letter of Credit was irrevocable and inter alia provided for 90 days issuance from the date of bill of lading and was also subject to Uniform Customs and Practice for Documentary Credit (UCP) 600.

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c) On 6 December 2011, the 75 Metric tons of Copper wire were boarded on the vessel Sinar Buton by the defendant No.3 (supplier). On receipt of the goods, a bill of lading dated 6 December 2011 was issued by defendant No.6. (Owner/agent of vessel Sinar Buton).

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d) On 12 December 2012, defendant No.5 (Negotiating Bank) made payment to defendant No.3 (supplier) on discounting the Letter of Credit dated 2 December, 2012.

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e) On 23 December 2011, the defendant No.1 (the buyer) addressed a communication to the plaintiff accepting the import documents received from the defendant No.5 (Negotiating Bank) and also requested the plaintiff to direct its bankers namely defendant No.2 (Issuing Bank) to accept the documents at the earliest. Consequent to the aforesaid communication and at the instance of the plaintiffs, defendant No.2 (Issuing Bank) informed the defendant No.5 (Negotiating Bank) to accept the documents.

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f) In the mean time, the defendant No.1 (buyer) while tracking the cargo, learnt that defendant No.3 (supplier) had played a fraud upon it as the goods which were allegedly loaded under the bill of lading dated 6 December 2012 were discharged at Port Bandar Abbas on 12 January 2012. On further enquiry from Defendant No.6 (Shipping Company) it learnt that no Bill of Lading was issued by it on 6 December 2012 and the surveyor M/s. SGS informed the defendant No.1 that documents given under its letter head evidencing survey are not genuine. In view of the above, the defendant No.1 informed the plaintiffs of the above fraud. The plaintiffs in turn by communication dated 24 January 2012 to defendant No.2 (Issuing Bank) requested it to withhold the payment to defendant No.5 (Negotiating Bank) under letter of credit dated 2 December 2011.

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g) On 1 February 2012 the defendant No.2 (Issuing Bank)

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addressed a communication to defendant No.5 (Negotiating Bank) that the documents submitted to them by the defendant No.3 (supplier– beneficiary) were forged documents and therefore investigate and revert in respect thereof.

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h) On 10 February 2012, the defendant No.2 (Issuing Bank) informs the plaintiff that defendant No.5 (Negotiating Bank) has already negotiated the Letter of Credit dated 2 December 2011 with defendant No.3 (supplier) based on the acceptance of the documents by defendant No.1 (buyer). Further, defendant No.2 (Issuing Bank) informed the plaintiff that in terms of theprovisions of UCP 600 it is bound to make payment to defendant No.5 (Negotiating Bank).

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It is on the basis of the aforesaid facts that the plaintiff has filed the present suit seeking permanent injunction to restrain the defendant No.2 (Issuing Bank) from honoring letter of credit dated 2 December 2011. By orders dated 2 March 2012 and 19 March 2012, this Court granted ad-interim injunction restraining the defendant No.2 (Issuing Bank) from making payments to defendant No.5 (Negotiating Bank) under the Letter of Credit dated 2 December 2011.

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Mr. Rajiv Narula learned Counsel appearing for the plaintiffs in support of the notice of motion submits as under:

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a) This is a case of fraud as the defendant No.3 (supplier) who was to ship 75 metric ton of copper rods had in fact not shipped the same and the compliance documents such as Bill of Lading dated 6 December 2011, survey report etc. were not existing documents, being forged and fabricated. Therefore it was not open to the Negotiating Bank (Defendant No.5) to make payment under the Letter of Credit to defendant No.3 (supplier). In any event, the defendant No.2 (Issuing Bank) should be restrained from making any payment to defendant No.5 (Negotiating Bank). This is because the transaction does fall within the two exceptions of the Rule of unconditionally honouring Letters of Credit i.e. of fraud and irretrievable injury for grant of injunction in making payments under the Letters of Credit;

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b) In any event, the payment was made by the Negotiating Bank (defendant No.5) to defendant No.3 (supplier) on 12 December2011 i.e. much before the acceptance of complying documents on 6 January 2012 was communicated by defendant No.2 (Issuing Bank) or defendant No.1 (Buyer) in India to defendant No.5. Further, withdrawal of acceptance of complying documents was made known to defendant No.5 (Negotiating Bank) on 1 February 2012. Thus, the payment by the defendant No.5 (Negotiating Bank) to the defendant No.3 (supplier) was contrary to the mandate of the Letters of Credit dated 2 December 2011 which required payment to be made 90 days

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issuance from the date of Bill of Lading. Therefore, the date of payment prior to acceptance of complying documents andbefore 5 March 2012 was an action beyond the mandate of the Letters of Credit dated 2 December 2011;

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c) Attention was drawn to Exhibit 'A' to the further Affidavit in reply dated 2 August 2013 and it is pointed out that the amounts were advanced by the defendant No.5 (Negotiating Bank) to defendant No.3 (supplier) in its Offshore Foreign Currency Loan Facility (OFCL) to the extent of the discounted value of Letters of Credit. This loan amount was to be adjusted after maturity date of the Letter of Credit i..e. 5 March 2012. Thus the submission of having made the payment to defendant No.3 (supplier) by discounting the Letter of Credit is merely a red herring; and

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d) The payment made to defendant No.3 (supplier) on 12 December 2011 was a completely separate transaction entered into by defendant No.5 (Negotiating Bank) not under the mandate of Letter of Credit but separately in its capacity as banker. The extension of loan facilities to defendant No.3 (supplier) in OFCL Account was an independent act and not an act of discounting the documents and making over payment to the supplier.

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In view of the above, it is submitted that the ad interim injunction already granted should be confirmed.

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As against the above Mr. Narichania, learned Senior Counsel appearing for defendant No.5 (Negotiating Bank) opposes the grant of interim relief and submits as under:-

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a) There is no allegation of fraud on the part of defendant No.5 (Negotiating Bank) in the plaint or affidavit in support of the notice of motion. The defendant No.5 (Negotiating Bank) acted bona-fide in the course of its business and had no knowledge of the alleged fraud on the date it discounted the Letter of Credit dated 2 December 2011 and made payment on 12 December 2012;

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b) International transactions would come to stand still if the bankers are expected to view each document presented to them with suspicion and examine its genuineness before making payment under the Letter of Credit. It is submitted that defendant No.5 (Negotiating Bank) has acted with due diligence and in the terms of of Articles 7 of the UCP 600. The Issuing Bank has to reimburse the Negotiating Bank. Further notice of complying documents being not acceptable has to be given within five (5) working days in terms of Article 14 and 16 of UCP 600. This not having been done, the defendant No.2 (Issuing Bank) is duty bound to honour its commitment under the Letter of Credit.

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c) The payments have been made by defendant No.5 (Negotiating Bank) to defendant No.3 (supplier) on the basis of the complying documents being found to be acceptable by the plaintiff, defendant No.1 and defendant No.2-( Issuing bank). Thus, even though the Letter of Credit dated 2 December 2011 was negotiated and payments were made prior to such acceptance, it would not make any material difference to the transaction as the complying documents had been accepted. It is further submitted that there is no bar in the Letter of Credit dated 2 December 2011 or any other documents that barred and/or prevented defendant No.5 (Negotiating Bank) from negotiating the Letter of Credit and making payment before the due date on 5 March 2014. It is on 5 March 2012 that the defendant No.2 - (Issuing Bank) will pay/reimburse the amounts due to defendant No.5 (Negotiating Bank); and

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d) In an identical fact situation where defendant No.5Negotiating Bank was involved, the Appeal Bench of this Court in Ushdev International Ltd. v/s. Sims Copper Sdn Bhd & Others (Appeal (L) No.144 of 2014 in Notice of Motion No.364 of 2013 in Suit No.2060 of 2012) had on 8^th April 2014 dismissed the appeal of the Appellant/Plaintiff from an order of the learned Trial Judge refusing to grant any ad-interim injunction in favour of the Plaintiff against the Negotiating

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Bank. In view of the above, it is submitted that the issue is covered in favour of Defendant No.5 (Negotiating Bank) and the ad-interim injunction restraining Defendant No.2 (Issuing Bank)from making payment should be vacated;

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e) A Division Bench of the Delhi High Court in STC v/s. Millennium Wires (P) Ltd. (REA/OS) 139/2013 inC. M. 179/2013) rendered on 10^th December 2013 has in an identical case rejected the plaint under Order VII Rule 11 of the C.P.C. as it did not disclose a case of action. It is submitted that the facts are identical in this case and the Plaintiffs have not pleaded any knowledge of fraud before making payment on the part of the Defendant No.5 (Negotiating Bank). Therefore, no injunction be granted to restrain Defendant No.2 (Issuing Bank) from making payment.

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I have considered the rival submissions. It is a settled position that payment under a Letter of Credit has to be honoured and the exception to the same, are only two following circumstances:-

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(a) when there is a fraud in the underlying transaction; and

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(b) irretrievable injury.

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In this case, the Plaintiffs have submitted that there is a fraud on the part of Defendant No.3 (supplier). No fraud is being

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alleged against the Negotiating Bank i.e. Defendant No.5 herein. Nor, it is being alleged that Defendant No.5 (Negotiating Bank) had knowledge of the fraud before making the payment on 12 December 2011 to Defendant No.3 (supplier). Therefore, following the Supreme Court's decision in the case of Fedral Bank v/s.V.M. Jog Engineering Ltd. 2001(1) SCC 663 as the payment was made by the Defendant No.5 (Negotiating Bank) to Defendant No.3 (supplier) without any knowledge of fraud on the part of Defendant No.3 (supplier). The fraud was admittedly discovered later. Thus, the Letter of Credit cannot be dis-honoured by the Issuing Bank i.e. Defendant No.2. on ground of fraud. Therefore, prima facie, I accept the submission made on behalf of Defendant No.5 (Negotiating Bank) that Plaintiffs case does not fall within the exception of fraud so as to restrain the Defendant No.2 (Issuing Bank) from making payment to the Defendant No.5 (Negotiating Bank). In this view, there is no occasion to consider UCP 600.

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However, in the alternative, the case of the Plaintiffs was that Defendant No.5 (Negotiating Bank) had failed to follow the mandate of Letter of Credit dated 2^nd December 2011 in having discounted the same prior to the due date i.e. 5^th March 2012. In the above view, Defendant No.5 (Negotiating Bank) is not entitled to receive payment from the Defendant No.2 (Issuing Bank). In support, it is submitted that the Letter of Credit dated 2^nd

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December 2011, does not permit/ provide for discounting of the Letter of Credit by the defendant No.5 (Negotiating Bank) so as to make payment to the beneficiary prior to the due date. The Letter of Credit clearly provides for payment on maturity i.e. on expiry of 90 days from the date of a Bill of Lading. Thus, it is Letter of Credit for deferred payment. The right of discounting the Letter of Credit not being provided for in the Letter of Credit, Defendant No.5 (Negotiating Bank) could not have discounted the Letter of Credit and made payment to Defendant No.3 (supplier). In fact, we find that such a provision for allowing discounting is provided to enable discounting of the Letter of Credit. This is evident from the decision of the Division Bench of this Court in Ushadev International (supra) wherein the Letter of Credit provided for payment within 180 days usance but as recorded by the Division Bench of this Court it also contained the following clause:-

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“Even though LC is 180 days usance terms the negotiating bank may discount the credit confirming documents and pay beneficiary at sight basis only.”

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Thus, in the present case, the payment by the Defendant No.5 (Negotiating Bank) to the Defendant No.3 (supplier) was, prima facie, beyond the mandate of the Letter of Credit dated 2^nd December 2011. This discounting of the Letter of Credit was done by the Defendant No.5 (Negotiating Bank) not as

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an agent of the Defendant No.2 (Issuing Bank) but in its capacity as a Banker. It is an independent transaction. Therefore, the decision of the Division Bench of this Court in Ushadev International (supra) will not apply as there was a mandate in that case in the Letter of Credit which permitted the Negotiating Bank to discount the Letter of Credit and pay the beneficiary prior to the maturity date. Besides, in Ushadev International (supra) the Division Bench of this Court, it was not the Plaintiffs case therein that discounting of Letter of Credit was beyond the mandate of the Letter of Credit, as it is in this case.

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It is the case of the Plaintiff that the payment was made by the Defendant No.5 (Negotiating Bank) on 12 December 2011 by discounting the Letter of Credit. At that point of time, neither the Plaintiffs nor defendant No.2 (Issuing Bank) had accepted the complying documents furnished by defendant No.3 (supplier) to defendant No.5- (Negotiating Bank). Therefore, discounting of the Letters of Credit dated 2 December 2011 on 12 December 2011 is a transaction carried out by defendant No.5 (Negotiating Bank) is an independent transaction in its capacity of a banker. It is not in its capacity as an agent of the Defendant No.2 (Issuing Bank) that the amounts were paid by defendant No.3 (Negotiating Bank) under the Letter of Credit dated 2^nd December 2011. This transaction of discounting the Letters of Credit and advancing amount to defendant No.3 by defendant

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No.5 carries with it the inherent risks of any Banker doing the same. The subsequent acceptance of the complying documents by plaintiffs and defendant Nos.1 and 2 will not relate back to the date of discounting i.e. 12 December 2011 of the Letter of Credit dated 2 December 2011. This is particularly so as on 6^th January 2012, the Plaintiff/ Defendant No.2 (Issuing Bank) were not aware of the payment having been made by discounting the Letter of Credit on 12^th December 2012. Prima facie, I find that Defendant No.5 (Negotiating Bank) had acted beyond the mandate of the Letter of Credit.

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Further attention was drawn to Exhibit 'A' of the further affidavit dated 2^nd August 2013 filed by the Defendants. It is noticed that the payment made by Defendant No.5 (Negotiating Bank) to Defendant No.3 (supplier) on 12 December 2011, was not payment made by mere discounting Letter of Credit but loan extended to Defendant No.3 (supplier) in its OFCLA. It must be pointed out that an identical submission was raised before the Appeal Court in Ushdev International Ltd. (supra) but the same was not accepted. This was for the reason that the above submission was raised for the first time in rejoinder before the Appeal Court and in that view the Court saw no reason to entertain/ consider the issue. In this case, the Plaintiffs has raised this issue at the hearing of the Motion and therefore is being considered. Prima facie, it appears from the document annexed at

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Exhibit 'A' to the further affidavit dated 2^nd August 2013 filed by Defendant No.5 (Negotiating Bank) to be a document evidencing extension of loan facility to Defendant No.3 (supplier) in its OFCLA Account. The amount extended as loan was equivalent to amount to be available on discounting the Letter of Credit dated 2^nd December 2011 on 12^th December 2011. The loan was to be adjusted after the date of maturity of the Letter of Credit. Therefore, prima facie, the amount receivable under the Letter of Credit from Defendant No.2 (Issuing Bank) on 5^th March 2012 was in the nature of security for the loan extended to Defendant No.3 (supplier) in its OFCLA Account.

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On both the above issues, Plaintiff has made out a prima facie case that an injunction to restrain defendant No.2Issuing Bank from making payment under the Letter of Credit to defendant No.5-Negotiating Bank. The decision rendered by this Court in Ushadev International (supra)is completely distinguishable in view of the fact that in the case before the Division Bench,there was a clause in the Letter of Credit which permits the Negotiating Bank to discount the Letter of Credit and pay to the beneficiary much prior to the date of maturity. Such a clause is not found in the Letter of Credit dated 2^nd December 2011. Similarly, the decision of the Delhi High Court in MMTC (supra) dealt with the absence of particulars of fraud i.e. attribution of knowledge of the fraud to the Defendant No.5

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(Negotiating Bank) before making the payment as alleged. It does not deal with the alternative submissions raised by the Plaintiffs before me. The injunction is being granted on the basis that Defendant No.5 (Negotiating Bank) has acted beyond the mandate of Letter of Credit dated 2^nd December 2011.Besides, prima facie, it appears that no payment under the Letter of Credit was made prior to the due date i.e. 5^th March 2012. It was only a loan advanced on 12^th December 2012 to Defendant No.3 (supplier) and the Letter of Credit was in the nature of security for the loan. The true and correct nature of this financial structuring/engineering will be an issue which would be gone into at the final hearing. Till then the plaintiffs are entitled to protection.

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At the final hearing of the suit, if the plaintiffs fail to establish its case then the Trial Judge may pass such order directing the Plaintiffs to pay interest at such rate as he deems fit to defendant No.5(Negotiating Bank).

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Accordingly, Notice of Motion is allowed in terms of prayer clause (a), with no order as to costs.

Mmtc Ltd. v. Millennium WIRE3S (P) Ltd. and 6 Ors.

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Mmtc Ltd. v. Millennium WIRE3S (P) Ltd. and 6 Ors.

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