Karnataka High Court Denies Relief To Jeweller Rajesh Exports On Letters Of Credit

Banks are duty-bound to comply with the Reserve Bank of India’s timelines on letter of credit and receipt of export proceeds. Being a guarantee, any injunction against the letter can be granted only on grounds of fraud or irreparable loss, the Karnataka High Court has said.

Letter of credit is an undertaking given by a bank to a specified entity on behalf of a buyer. The bank generally guarantees any shortfall in payment by the buyer.

The matter pertains to a plea by Rajesh Exports Ltd., which sought a deferment of payment by Canara Bank against letters of credit worth Rs 3,879 crore. The company obtained the facility from Canara Bank’s branch in India for importing gold from its subsidiary Valcambi SA.

Rajesh Exports received the entire quantity of gold, approximately 10 tonnes, from Valcambi, which discounted the letters of credit with Canara Bank’s Hong Kong and London branch. Discounting of letters of credit involves some payment to the seller against the facility.

Problems arose due to the outbreak of Covid-19, which brought Rajesh Exports’ business to a standstill. Meanwhile, Canara Bank kept making payments against the letters of credit. Rajesh Exports moved court seeking deferment saying the bank will purchase foreign exchange at market rates in order to make payments which will result in a loss to the company.

The jewellery manufacturer argued that it could incur a loss of Rs 700 crore due to difference in value of foreign exchange if the bank continues to release the payments.

A bench comprising Justice PS Dinesh Kumar dismissed Rajesh Exports' plea for deferral observing that the bank is bound by the RBI's regulations which stipulate a 90-day limit on letters of credit issued for gold imports.

The court granted a stay of five days as Rajesh Exports sought time for filing an appeal against the order.

Arguments

GS Kannur, senior counsel for the jewellery manufacturer, sought a deferral arguing that:

• Rajesh Exports could have received the payments in Swiss Francs during normal circumstances. However, Covid-19 outbreak hampered the business and while the RBI has extended the time for receipt of export proceeds against other commodities, no extension has been granted for gold.
• Canara Bank continued making the payments during the pendency of its request with the central bank.
• The bank didn’t stop the payments despite the fact that Valcambi SA — the beneficiary under letters of credit — agreed for a deferral.
• The RBI discriminated against gold exporters by not granting any extension.

Canara Bank opposed the company’s plea on grounds that it was bound by the RBI’s master circular on receipt of export proceeds. It argued that a writ petition under Article 226 of the Constitution was not maintainable as letters of credit are a contract between a bank and a company. And it is duty-bound to pay the discounting banks in London and Hong Kong since Valcambi SA had already received payments from them.

The high court agreed with the bank’s arguments, and held:

• The transactions were complete since Rajesh Exports had already received the gold and the letters were discounted by its subsidiary.
• Valcambi’s acceptance could not be considered relevant since the discounting banks did not agree for a deferment and sought payments.
• Rajesh Exports’ plea is ‘preposterous’ and Valcambi SA should not have discounted the letters if it wanted a deferral.
• Being a government entity, Canara Bank has a duty to honor the letters of credit and make the payments.

The Bombay High Court had taken a similar stance three months ago, and refused to grant relief to steel importers on a letters of credit transaction.