kolkata high court direct RBI to cancel of license of BOB

In a major blow to the Bank of Baroda, the Calcutta High Court has asked the RBI to consider taking appropriate steps against the bank, including revocation of its license, for its disorderly conduct in dealing with payment against an unconditional bank guarantee.

While disposing of a cross-objection filed by the Indian Oil Corporation (IOCL), the division bench comprising Justice Sanjib Banerjee and Justice Kausik Chanda directed,

"Considering the conduct of the appellants, the Reserve Bank of India should consider what appropriate steps may be taken against the Bank of Baroda, including revoking its licence or the authority to carry on banking business, if necessary."

The case arises out of failure on part of the bank to release the payment in terms of the unconditional bank guarantee worth Rs.6.97 crore, furnished to the IOCL on behalf of Simplex Projects Ltd.

As per IOCL, the bank guarantee was invoked after Simplex failed to live up to its obligations under the contract. Therefore, it contended that the bank had no right to stall immediate payment of the unconditional bank guarantee, let alone seeking extra time, as in this case.

IOCL claimed that in the interregnum, the bank informed Simplex regarding invocation of the bank guarantee pursuant to which Simplex promptly instituted proceedings under Section 9 of the Arbitration and Conciliation Act, 1996 before the Delhi High Court, by virtue of the arbitration agreement contained in the matrix contract between IOCL and Simplex.

It further submitted that the Delhi High Court also observed that the bank guarantee was unconditional and payment thereunder could not be avoided once the guarantee was invoked. Nevertheless, the bank has refused to release the payment in terms of the unconditional guarantee on the ground that the money may not have been made available by Simplex to the bank.

In this backdrop, IOCL argued that considering the conduct of the Bank of Baroda, an appropriate order should be passed to revoke its license, since it had acted in a manner unbecoming of a bank, a nationalized bank at that.

Concurring with the submissions, the division bench has asked the RBI to take appropriate steps in this direction.