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21-May-2020

On 1 May 2020, the Telangana High Court (Court) passed an order in M/s Pennar Industries Limited & Anr v. The Reserve Bank of India & Anr (IA No 3 of 2020 in WP No 6573 of 2020), granting an interim injunction restraining Yes Bank Limited (Yes Bank), the second respondent from debiting amounts due under letters of credit (LCs) from the account of the Petitioner.

Brief Facts

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The Petitioner had availed LCs as non-refund based working capital from Yes Bank for payment to its vendors / contractors. The Petitioner had already renegotiated with some of its vendors / contractors to postpone encashment of some LCs, while negotiations with other vendors were ongoing.

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During this time, the Petitioner sought a moratorium / extension on making payment due under LCs from Yes Bank in line with the Reserve Bank of India circulars dated 27 March 2020 and 17 April 2020 (RBI Circulars). Yes Bank refused and instead imposed ancillary interest for non-payment of dues upon development of the LCs.

Contentions of the Petitioner

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The Petitioner is a viable profit making entity with no dues / arrears to financial institutions. The COVID-19 lockdown had resulted in destruction of the Petitioner’s business, particularly due to complete halt of the supply chain.

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By way of the RBI Circulars certain relaxations could be granted to debtors including no downward classification of loan accounts, moratorium of 3 months on payment of term loan instalments, and deferment of interest recovery in case of certain working capital facilities. The RBI Circular would apply to the Petitioner.

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The Petitioner placed reliance on orders of the Delhi High Court in: (i) M/s Halliburton Offshore Services Inc v. Vedanta Limited (O.M.P. (I) (COMM) and I.A. 3697/2020), which granted an ad-interim injunction against invocation of bank guarantee due the existence of ‘special equities’; (ii) Eastman Auto & Power Ltd v. Reserve Bank of India & Anr (W.P.(C) 2997/2020 and CM APPL. 10397 - 103997/2020), in which certain banks were restrained from taking coercive steps against the debtor based on a reading of the RBI Circulars; and (iii) Anant Raj Limited v. Yes Bank Limited (Writ Petition (c) Urgent No. 5/2020), which clarified the intent and operation of the RBI Circular dated 27 March 2020.

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The Petitioner also relied on the Bombay High Court order in Tanscon Skycity & Ors v. ICICI Bank & Ors (Writ Petition LD-VC No. 28 of 2020), in which the period of lockdown was excluded from calculation of loan account aging.

Decision of the Court

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The Court noted that the RBI Circulars only mentioned cash credit / overdraft working capital facilities and did not specifically cover LCs.

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The COVID-19 pandemic and resultant lockdown was a ‘force majeure’ and parties were ‘frustrated in performing their obligations under the contract’. Notably, the terms ‘force majeure’ and ‘frustrated’ appear to be used in a general sense rather than a strictly legal context.

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The Court also took note of the Bombay High Court and Delhi High Court orders, in which relief was granted to parties in view of the existing difficulties and basis the RBI Circulars.

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Given the above circumstances, the Court held that the matter needed further examination and prima facie the Petitioner was entitled to interim relief. The Court accordingly restrained Yes Bank from debiting the Petitioner’s account for amounts due under the LCs for 90 days and taking other coercive steps including imposition of ancillary interest.

Comment

The present decision is significant for 2 key reasons. First, while substantial jurisprudence on COVID-19 has emerged from the Bombay High Court and Delhi High Court, the present case is an important precedent from the Telangana High Court. This paves the way for other similar orders emerging from other courts based on this existing jurisprudence and their interplay on a future date. The Supreme Court will eventually be seized of conflicting orders in this regard, but the stand being taken by various High Courts in India, will determine, how parties in those particular jurisdictions will act, in the present scenario.

Second, it reflects the general approach of Indian courts of taking a lenient / considerate approach with parties affected by the COVID-19 lockdown, at the interim and ad-interim stage. Courts, particularly in the cases relied upon by the Petitioner, have granted relief to parties based on a consideration of the COVID-19 situation and not strictly based on legal principles such as interpretation of force majeure provisions. Notably, the said orders have been followed in the present decision despite being interim and ad-interim orders.

However, there have also been instances where the established jurisprudence in this regard is being treated as the threshold, without any exception, that too, interestingly from the Bombay High Court and the Delhi High Court. For instance, the Bombay High Court in Standard Retail Pvt Ltd v. G.S. Global Corp (Commercial Arbitration Petition No. 404 of 2020) had refused to injunct the invocation of bank guarantees basis a reading of the force majeure clauses and since the relevant sector was exempted from lockdown restrictions. Similarly, the Delhi High Court in Indrajit Power Ltd vs Union of India (W.P.(C) 2957/2020 & CM Nos.10268-70/2020) (Indrajit Power case) also refused to injunct invocation of bank guarantee. In the Indrajit Power case, the petitioners were unable to fulfil their obligations despite an earlier extension of 12 months and as such the lockdown, which came into force only on 24 March 2020, did not materially alter their position, considering they had been in default much before that.

From the above, it appears that 2 branches of jurisprudence are emerging from courts in respect of COVID-19 related cases:

(1)

one, in which courts have taken a considerate view by excusing performance of contractual obligations and injuncting coercive action against defaulting parties on account of COVID-19. This approach is prevalent where arguments around the RBI Circulars have been raised; and

(2)

another, in which courts have refused injunctions / relief and required party performance. This approach is taken where there are specific facts which show that a party could have performed its obligations despite COVID-19 and/or the default is not entirely linked to COVID-19.

Thus, before approaching the court, it is important for parties to plan their approach and overall strategy, and analyse its applicability to the facts, by factoring in the above considerations.

-      Manavendra Mishra (Principal Associate), Ravitej Chilumuri (Principal Associate) and Akash Karmarkar (Associate)

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