Unconditional bank guarantees must be honoured absent fraud or irretrievable injustice; pending sickness proceedings do not bar encashment.

Unconditional bank guarantees must be honoured according to their terms, and courts will not restrain encashment merely because disputes exist under the underlying contract. Interference is confined to exceptional cases involving egregious fraud going to the root of the guarantee or irretrievable injustice of an exceptional character; on the stated facts, neither exception was established, so restraint was unsustainable. Pendency of proceedings under the Sick Industrial Companies (Special Provisions) Act, 1985 did not itself show impossibility of recovery or exceptional injury, and therefore did not justify an injunction against enforcement of the guarantees.

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Issues: (i) Whether an injunction could be granted to restrain encashment of unconditional bank guarantees in the absence of fraud or irretrievable injustice; (ii) Whether the pendency of proceedings under the Sick Industrial Companies (Special Provisions) Act, 1985 created such irretrievable injustice as to justify restraint on encashment.

Issue (i): Whether an injunction could be granted to restrain encashment of unconditional bank guarantees in the absence of fraud or irretrievable injustice.

Analysis: Unconditional bank guarantees are to be honoured according to their terms. The bank's obligation is independent of disputes under the underlying contract, and courts should not interfere except in exceptional cases. The recognised exceptions are fraud of an egregious nature going to the root of the guarantee, and irretrievable harm or injustice of an exceptional character.

Conclusion: No injunction can be granted merely because contractual disputes exist. In the absence of established fraud or irretrievable injustice, encashment of the bank guarantees cannot be restrained.

Issue (ii): Whether the pendency of proceedings under the Sick Industrial Companies (Special Provisions) Act, 1985 created such irretrievable injustice as to justify restraint on encashment.

Analysis: A pending reference under the Sick Industrial Companies (Special Provisions) Act, 1985 does not by itself establish impossibility of recovery or exceptional irretrievable injury. The statutory scheme contemplates inquiry, possible rehabilitation measures, and limited restraints under section 22, but not an absolute bar against recovery. On the facts, there was no material to show that reimbursement would be impossible.

Conclusion: Pendency of proceedings under the Sick Industrial Companies (Special Provisions) Act, 1985 did not justify an injunction against enforcement of the guarantees.

Final Conclusion: The restraint order was unsustainable, the bank guarantees could be enforced, and the matter was also referred to arbitration for adjudication of the underlying contractual disputes.

Ratio Decidendi: An unconditional bank guarantee must be honoured according to its terms unless fraud of an egregious nature or irretrievable injustice of an exceptional kind is clearly established.

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