The Kerala High Court recently adjudicated a significant case concerning the invocation of expired bank guarantees by the Customs Department. The Division Bench, comprising Justices A.K. Jayasankaran Nambiar and Easwaran S., addressed the pivotal question of whether the Customs Department possesses the legal authority to invoke bank guarantees that have surpassed their validity period.
The case originated when the appellant, an assessee undergoing Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016, challenged the decision of a Single Judge. The Single Judge had previously ruled that contesting the invocation of bank guarantees is permissible only on grounds of fraud or when irretrievable injury or loss is inflicted upon the guarantor. This stance was contested by the appellant, leading to the present appeal.
The appellant had imported various capital goods under the Export Promotion Capital Goods (EPCG) Scheme, a government initiative designed to facilitate the import of capital goods at concessional customs duty rates, provided certain export obligations are fulfilled. To secure these imports, the appellant furnished 45 bank guarantees of varying amounts, covering the duty liabilities associated with the EPCG authorizations.
Subsequently, due to financial distress, the appellant became subject to CIRP proceedings initiated by the National Company Law Tribunal (NCLT), Kochi. In the course of these proceedings, the Customs Department submitted a claim to the resolution professional, seeking to recover dues purportedly owed by the appellant. However, this claim was rejected by the resolution professional, prompting the Customs Department to take further action.
On January 11, 2023, the Customs Department issued a letter to the bank, instructing the encashment of the bank guarantees provided by the appellant. This directive led to the filing of a writ petition by the appellant before the Kerala High Court, challenging the legality of invoking bank guarantees that had allegedly expired. The Single Judge dismissed this petition, leading to the present appeal before the Division Bench.
In the appellate proceedings, the appellant contended that the bank guarantees in question had expired and were no longer enforceable. They argued that, upon the expiration of these guarantees, the Customs Department lacked the legal authority to invoke them. Conversely, the Customs Department maintained that the nature of the bank guarantees allowed for their invocation beyond the initial validity period, asserting that the bank had agreed to keep the guarantees active until explicitly instructed otherwise by the department.
The Division Bench scrutinized the terms and conditions of the bank guarantees, as well as the communications between the bank and the Customs Department. The court noted that the bank, in its affidavit dated March 17, 2025, unequivocally stated that the bank guarantees had expired and were no longer in force. This assertion by the bank was pivotal in the court's deliberation.
Drawing upon established legal principles, the court emphasized that the right to invoke a bank guarantee is confined to its validity period. Once a bank guarantee has expired, any attempt to invoke it is legally untenable. The court referenced its previous rulings, highlighting that demands for invocation must be made within the active period of the bank guarantee to be enforceable.
Furthermore, the court addressed the argument concerning the extended claim period often associated with bank guarantees. It clarified that the creditor's right to invoke the guarantee is limited to its validity period and does not extend into any subsequent claim period unless explicitly stipulated in the agreement. This interpretation aligns with the court's prior judgments, reinforcing the principle that the enforceability of bank guarantees is strictly time-bound.
In light of these considerations, the Division Bench concluded that the Customs Department's attempt to invoke the expired bank guarantees was not permissible under law. The court set aside the impugned letter dated January 11, 2023, by which the Customs Department sought to encash the bank guarantees, thereby providing relief to the appellant.
This judgment underscores the critical importance of adhering to the validity periods stipulated in bank guarantee agreements. It serves as a cautionary precedent for both governmental agencies and private entities, highlighting that the enforcement of financial instruments like bank guarantees is strictly governed by their terms and temporal limitations. The ruling reinforces the necessity for timely action and due diligence in financial and contractual dealings, ensuring that rights and obligations are exercised within the bounds of legal frameworks.
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