Karnataka High Court Suggests Measures To Strengthen Safeguards Against Fake Bank Guarantees; Takes Note Of MoF's Proposal To Examine Remedial Measures

The High Court took note of the submission that the Ministry of Finance proposes to examine remedial and preventive measures.

The Petitioners approached the High Court seeking relief in the context of the levy of liquidated damages and initiation of any further proceedings in terms of the Request for Proposal (RFP) and Engineering Procurement and Construction Agreement (EPC).

The Single Bench of Justice Suraj Govindaraj held, “In that view of the matter, the submission that the Ministry of Finance has taken note of the issue and proposes to examine remedial and preventive measures assumes significance. Any steps taken towards strengthening verification protocols, enhancing inter-institutional coordination, and introducing secure authentication mechanisms would have a salutary effect in safeguarding public interest and in reinforcing the credibility of financial instruments relied upon in public transactions.”

The Bench thus suggested, “By way of illustration, and without being exhaustive, such measures may include the issuance of bank guarantees in a digitally verifiable form incorporating secure and tamper-proof QR codes or similar authentication tools, enabling instant verification of the guarantee particulars, such as the issuing bank and branch, beneficiary, amount, period of validity, and subsisting status, directly from the issuer’s system.”

“Further, the assignment of a unique, non-reusable identification number to each bank guarantee, capable of verification throughout its lifecycle, including issuance, amendment, extension, invocation, and discharge, may assist in preventing duplication, alteration, or reuse of fraudulent instruments”, it further added.

Senior Advocate Vikram Huilgol represented the Petitioner, while Additional Solicitor General Of India Aravind Kamath represented the Respondent.

Factual Background

The case as set up by the petitioner was that the Petitioner had engaged the services of Jay Doshi and Brijesh Bhuta to arrange for Bank Guarantees since they had indicated that they arrange for such Guarantees for reputed construction Companies. The Bank Guarantee furnished by the said persons was furnished by the Petitioner to the respondents for the purpose of consideration of the Bid submitted in furtherance of the RFP. It was their case that they did not know that the said Bank Guarantees were fabricated and forged.

The Petitioner-Company itself had filed a criminal complaint against the said Jay Doshi and Brijesh Bhuta. It was the case of the petitioner that since there was no involvement in creating or obtaining a fabricated bank guarantee, the petitioner ought not to be mulched with liquidated damages and/or proceedings under Clauses 4.1 and 4.2 of the RFP and 7.1.2 of EPC.

Reasoning

The Bench noted that the clauses in question require an action on the part of the contractor, directly or indirectly, to have indulged in any of the above activities. It was noticed by the Bench that in the present matters, the charge sheet was laid on the basis of the complaint filed by the petitioner and though there were several accused who have been arrayed, neither the petitioner nor its officers were arrayed as accused. It was also stated that the mastermind was one Ashish Singh, and fake Bank Guarantees had been issued to nearly 12 other entities, defrauding them.

“From the documents on record, it is clear that there is no particular allegation against the petitioner having indulged in such activities. It is the person whom the petitioner had approached who has indulged in such activities and furnished the fake Bank Guarantees to the petitioner. There being no allegation against the petitioner that the petitioner has secured fake Bank Guarantees or has conspired with those accused to secure such fake Bank Guarantees”, it added.

The Bench thus held that though the termination would stand, the threats held out by the respondents that there would be a levy of liquidated damages and/or debarring the petitioner from participating in future tenders would not stand. Allowing the writ petition, the Bench quashed the notice and the letter insofar as the levy of liquidated damages and/or the debarring of the petitioner was concerned.

Highlighting how the absence of a uniform, secure, and verifiable mechanism for authentication of bank guarantees creates fertile ground for fraud and poses risks to public funds, the Bench suggested that the availability of contemporary technological and institutional solutions may merit examination by the appropriate authorities with a view to strengthening safeguards against the furnishing and acceptance of fake bank guarantees.

The Bench thus suggested some measures while underscoring the systemic importance of robust verification processes in safeguarding public interest, protecting public funds, maintaining financial discipline, and preserving confidence in public procurement and contractual frameworks.

Cause Title: M/S DRN Infrastructure Pvt. Ltd v. Union Of India (Neutral Citation: 2025:KHC:54420)

Appearance

Petitioner: Senior Advocate Vikram Huilgol, Advocate Aditya Bhat

Respondent: Additional Solicitor General Of India Aravind Kamath, Advocate B.S.Venkatanaryana

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