RBI Can Cancel Bank Of Baroda License Over Payment Dispute; Calcutta HC Issues Strict Order

The Calcutta High Court has asked the Reserve Bank of India (RBI) to consider “appropriate steps” against Bank of Baroda (BoB), including revoking its banking license, for failing to honour a bank guarantee given by a third party to Indian Oil Corporation (IOCL).

The division bench comprising of Justice Sanjib Banerjee and Justice Kausik Chanda said in the order on 10 February, “Considering the conduct of the appellants, the Reserve Bank of India (RBI) 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.”

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The Story Behind Such Action!

Indian Oil Corporation (IOCL) told the court that it had entered into an agreement with Simplex Projects Limited in 2017 for operating certain work at the Bongaigaon facility of IOCL in Assam.

To undertake the work, Simplex was required to provide a bank guarantee on account of security deposit. An unconditional bank guarantee was furnished by the lender on behalf of Simplex for about ?6.97 crore.

According to the order, there was no work coming in from Simplex, hence IOCL issued several notices and finally invoked the bank guarantee.

What did Bank of Baroda do?

The order read, “It is submitted on behalf of IOCL that notwithstanding the bank having no right to stall immediate payment upon the invocation of an unconditional bank guarantee, the bank in this case sought some time.” IOCL asserted that the bank had no right to hamper immediate payment of the unconditional bank guarantee, let alone seek extra time.

IOCL has also claimed that Bank of Baroda must have informed Simplex about the invocation and the company immediately 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 contract between IOCL and Simplex.

The order also read, “IOCL submits that despite Simplex failing to obtain any order in such proceedings and the Delhi High Court observing that the bank guarantee was unconditional and payment thereunder could not be avoided once the guarantee was invoked, an appeal was preferred which was withdrawn by or about June 1, 2018,” 

Bank of Baroda still refused to release the payment in terms of the unconditional guarantee on the grounds that the money may not have been made available by Simplex to the bank.

On 24 June, 2019 through another order the court had directed the bank to pay immediately, in which the regulator had not been required to look into the conduct of the Bank of Baroda. 

Therefore, in the current appeal by IOCL was filed in the form of a cross objection, to consider the conduct of the bank and seeking directions to the RBI to take steps against the bank, since it has behaved in an inappropriate manner despite being a  nationalized bank.