Tetronics (International) Ltd v HSBC Bank Plc

Case reference: 
[2018] EWHC 201 (TCC)
Thursday, April 12, 2018

Key terms: 
Balance of Convenience – Bank Guarantees - Calls – Fraud – Injunction

The case concerned an injunction to prevent HSBC Bank plc (“HSBC”) from making payment following a call on a bank guarantee. The claimant, Tetronics (International) Ltd (“Tetronics”) and BlueOak Arkansas LLC (“Blue Oak”) entered into a contract for work performed by Tetronics at a plant owned and operated by Blue Oak in Arkansas, United States of America.  An advance payment was made to the Claimant which was secured by an on-demand guarantee provided by HSBC Bank plc (“HSBC”) amounting to £3.8m. 

The original guarantee expired in June 2017. Following negotiations between Tetronics and Blue Oak, HSBC provided a further guarantee on 13 November 2017. As a pre-condition to HSBC providing the new guarantee, Blue Oak confirmed that it was not aware of any current circumstances that would give rise to a breach of the underlying contract of the guarantee. Nonetheless, on 11 December 2017, Blue Oak issued a Notice of Default to Tetronics and, thereafter, made a call on the guarantee. On 18 January 2018, an ex parte injunction was granted to prevent HSBC from making payment under the guarantee and Tetronics sought to extend that injunction in these proceedings. On 25 January, Blue oak applied for the injunction to be discharged. 

In order to grant the injunction, the Court had to be satisfied that (i) there was a seriously arguable case of fraud, (ii) that HSBC was aware of the fraud and (iii) that the balance of convenience favoured granting the injunction. 

In its draft judgment of 7 February 2018, the Court concluded that there was a cogent and compelling case of fraud. A key factor was the incredibly short timeframe between Blue Oak procuring the new guarantee on 13 November 2017, in which Blue Oak confirmed it was unaware of any circumstances that would give rise to a breach to the underlying contract and the Notice of Default on 11 December 2017.  

After confirming that HSBC had been made aware of the fraud, the Court considered the balance of convenience. The terms of the agreement between HSBC and Tetronics provided that, if HSBC adhered to the call, Tetronics’ account at HSBC would be immediately debited with the sum of £3.08 million. Tetronics claimed that, as a result, it would become immediately insolvent. On that basis, in its draft judgment of 7 February 2018, the Court held that the balance of convenience tilted in favour of continuing the injunction.

However, before issuing the final judgment, new evidence came to light in separate arbitration proceedings. During these proceedings, it became apparent that Tetronics shareholders could in fact make additional contributions if HSBC were to make payment under the guarantee. As a result, Tetronics would not become immediately insolvent. The new evidence led the TCC to conclude that, despite the strong arguable case of fraud, the injunction should be discharged. 

This case is a useful reminder as to when banks can be prevented from paying on-demand bonds. It demonstrates that even where a party has established that a seriously arguable case of fraud exists, the balance of convenience still might weigh in favour of discharging the injunction.

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