Bank guarantee for commercial supplies not barred by sick company law; recovery limited to the contractual ceiling.

Section 22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 did not bar enforcement of a bank guarantee issued for payment of goods supplied to a sick industrial company, because the guarantee secured a commercial supply transaction and not a loan or advance to the company; the suit on the independent contract against the bank was therefore maintainable. The recoverable amount was then limited by the guarantee terms, which capped the bank's liability at Rs. 50,00,000 inclusive of interest and fixed interest at one per cent above the borrowing rate subject to that ceiling. Relief was granted within the contractual limit.

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Issues: (i) Whether the bar under section 22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 applied to enforcement of a bank guarantee executed to secure payment for goods supplied to a sick industrial company. (ii) If the suit was maintainable, what amount and rate of interest were recoverable under the guarantee.

Issue (i): Whether the bar under section 22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 applied to enforcement of a bank guarantee executed to secure payment for goods supplied to a sick industrial company.

Analysis: Section 22(1) stays proceedings for recovery of money, enforcement of security against the industrial company, and suits on guarantees in respect of loans or advances granted to the industrial company. The guarantee in question secured payment for commercial supplies of goods and was not a guarantee in respect of any loan or advance. The transaction was held to be a commercial transaction and the suit was founded on an independent contract between the plaintiff and the bank, to which the industrial company was not a party. The cited authorities on guarantees for loans or advances did not extend the statutory bar to such a guarantee.

Conclusion: The bar under section 22(1) did not apply, and the issue was decided in favour of the petitioner.

Issue (ii): If the suit was maintainable, what amount and rate of interest were recoverable under the guarantee.

Analysis: The principal amount due under the invoices was admitted, and after adjustment of the payment received, the balance remained payable. However, the guarantee itself limited the bank's total liability to Rs. 50,00,000 inclusive of interest, and also fixed interest at one per cent above the borrowing rate, subject to that ceiling. Accordingly, the recoverable amount had to conform to the contractual cap.

Conclusion: The petitioner was entitled to a decree for Rs. 50,00,000 inclusive of interest, with interest as awarded in the judgment.

Final Conclusion: The suit succeeded on the merits, the statutory bar was negatived, and relief was granted within the contractual ceiling of the guarantee.

Ratio Decidendi: A bank guarantee given to secure payment for commercial supplies is not a guarantee in respect of a loan or advance to the industrial company, so section 22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 does not bar its enforcement.

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