The Calcutta High Court has directed the Reserve Bank of India (RBI) to contemplate taking suitable steps against the Bank of Baroda (BoB) such as cancelling its licence for failing to honour a bank guarantee furnished by a third party to Indian Oil Corporation Ltd (IOCL).
The two-judge division bench of Justice Sanjib Banerjee and Justice Kausik Chanda in the order on February 10 instructed the RBI to "consider the conduct of the appellants" and take into account "appropriate steps" that can be considered against the bank "including revoking its licence or the authority to carry on banking business, if necessary."
The court was hearing a case filed by IOCL against the BoB as the bank did not release the payment with regards to a bank guarantee worth Rs 6.97 crore provided to it (IOCL) by Simplex Projects Ltd.
What is the case?
IOCL informed the court that it had entered into an agreement with Simplex Projects Limited in 2017 for conducting certain work at the Bongaigaon facility of the oil marketing company in Assam. In order to carry out the work Simplex was required to furnish a bank guarantee on account of security deposit.
The BoB then provided an unconditional bank guarantee of around Rs 6.97 crore on behalf of Simplex. As stated in the order, Simplex did not honour the contract signed between it and the IOCL which issued several notices and ultimately invoked the bank guarantee.
IOCL argued that the bank did not have any right to delay immediate payment of the unconditional bank guarantee, least of all seek extra time. The oil marketing company also alleged that the BoB informed Simplex about the invocation of the bank guarantee.
Following this, the company (Simplex) immediately initiated proceedings under Section 9 of the Arbitration and Conciliation Act, 1996 before the Delhi High Court (HC), in accordance with the arbitration agreement contained in the contract signed between IOCL and Simplex.
As per the IOCL's submission, the Delhi High Court had also found that the bank guarantee was unconditional and the payment thereunder could not be avoided once the guarantee was invoked.
Despite the Delhi HC's observation, the bank did not release the payment (in terms of unconditional guarantee) saying that the money may not have been given by Simplex to the bank.
It was against this background that the IOCL contended that given the conduct of the BoB which was unbecoming of a nationalised bank, a suitable order should be passed to repeal its licence.
Coinciding with the submissions made by the IOCL, the Calcutta HC's division bench directed the RBI to take the required steps in this direction.