Expired Bank Guarantees Cannot be Sustained in Law: Kerala HC Dispels Customs’ Claim [Read Order]

The Kerala High Court recently held that the Customs Department does not have the liberty to invoke expired bank guarantees to recover any outstanding duties payable by an entity who had availed the benefits of the Export Promotion Capital Goods (EPCG) Scheme.

The decision was given by a Division Bench in a Writ Appeal filed impugning the Order of a Single-Judge Bench. The factual matrix follows the Appellant, ITMA Hotels India Private Limited who had imported various capital goods between April 2011 and March 2014 under the Export Promotion Capital Goods (EPCG) scheme, while furnishing to the Customs Department 45 bank guarantees totaling ₹4,14,72,500 to secure payments of duty.

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However, due to financial difficulties and the initiation of insolvency proceedings, the hotel project did not take off, leaving the imported goods unused at the company’s premises. The Appellant was later subjected to insolvency proceedings initiated by the State Bank of India, its financial creditor.

As per the directives of the National Company Law Tribunal (NCLT), Kochi, an Insolvency Resolution Professional (IRP) was appointed and a resolution plan was submitted and approved by the committee of creditors. The aggrieved Customs Department filed their claim for recovery before IRP which was summarily rejected.

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Despite the rejection, the Customs sought to invoke the expired bank guarantees through the State Bank of India, prompting the petitioner to pursue a Writ before the Single-Judge Bench who maintained that no challenge can be made towards the invocation of the Bank Guarantee, except in matters of fraud or irretrievable injury or loss caused to the person who has furnished the Bank Guarantee. Subsequently, the present Appeal was preferred.

Senior Counsel K.Sreekumar, M.Balagopal, R.Sreejith, Ammu Charles, Thressy Thomas,  R.Devika (Alappuzha) and Anjali Menon appearing for the appellant submitted before the Division Bench High Court that the bank guarantees had expired and were no longer enforceable. Secondly, it was argued that the Customs Department had failed to contest the rejection of its claim before the NCLT and was now attempting to circumvent the legal process by enforcing lapsed guarantees.

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Meanwhile Central Government Counsel Suvin R.Menon appearing for the Customs found fault with the Appellant’s argument that the Bank Guarantees had expired and that the Bank had agreed to make the Bank Guarantees alive until otherwise requested by the Customs Department.

P.V.Vinod (Bengalam), appearing for the Bank meanwhile stated that the last date of lodgement of the claim was 8.7.2020 and that no claims beyond the date would be honourable.

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The Division Bench of Justice A.K. Jayasankaran Nambiar and Justice Easwaran S., observed that the expired bank guarantees are legally unsustainable.

However, regarding the Customs’ claim that the Bank was contractually obliged to keep the Bank Guarantees alive, the Kerala High Court abstained from touching upon the specific questions of fact and proceeded to allow the Writ Petition while leaving open the rights of the Respondents to prefer recourse through appropriate proceedings.

To Read the full text of the Order CLICK HERE

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