Pak-China Power Tiff

HUBCO goes to court as Chinese bank notifies encashment of financial guarantees

Karachi: In a significant move, a division bench of Sindh High Court has overturned a single-bench ruling in a case involving the encashment of a Standby Letter of Credit (SBLC) issued by the Hub Power Company Ltd (HUBCO) for the construction of two 660-megawatt coal-fired power plants in Balochistan by a Chinese company.

In its ruling on 9 December, the court ordered all parties to file their replies and objections before the bench.

The $150 million SBLC was provided by HUBCO when it set up China Power Hub Generation Co (CPHGC) to implement the project in association with China Power International Holding Ltd (CPIH).

HUBCO claims that the project had been completed and had started producing electricity, but the China Development Bank (CDB), which funded the Chinese part of the investment in the project, has still not issued a project completion certificate, triggering CPHGC to notify the encashment of the SBLC.

HUBCO had approached the court seeking a restraining order against the encashment notice served by China Power Hub Generation Company (CPHGC).

HUBCO argued that the single-judge bench had dismissed its application without assigning reasons through a short order despite the fact that HUBCO had a good case for the grant of interim relief.

“According to learned counsel for the appellants, there is no default on the part of the appellants towards contractual obligation between the parties, whereas the project has been completed in all respects,” the court order read.

The court also noted HUBCO’s plea, that the consortium (China Development Bank) has not issued the completion certificate of the project in spite of the fact that after its completion, it started producing electricity in 2010. Meanwhile, profits to the tune of about $400 million have already been accrued from the project and repayments worth $350m rhave been made to the Chinese lenders, it argued.

The legal battle started right after an encashment notice worth $150 million was served by CPHGC under the Standby Letter of Credit on the issuing bank (National Bank of Pakistan). In response, HUBCO initiated legal proceedings.

CPHGC served encashment notice by raising a technical objection regarding alleged non-fulfillment of one of the requirements; the opening of a revolving account by the government of Pakistan, saying that the lenders will withdraw their investments if the guarantee is not extended as per the terms of the agreement.

Earlier, HUBCO had extended the guarantee once at the instance of respondents. However, when HUBCO approached the National Bank of Pakistan for another extension, the bank expressed its inability to comply on account of restrictions in the regulation of the State Bank of Pakistan (SBP).

This put HUBCO in a disadvantageous position. Because in case the SBLC encashment was granted, HUBCO wuld be required to pay an amount of Rs 35 billion. This could have a serious financial impact on the remaining power projects of the company.

In its initial ruling, the SHC bench had said: “Keeping in view the facts as stated above, and in order to place both the parties at a level playing field to protect their rights, without causing any injury or placing any party in a disadvantageous position, the SHC deems it appropriate to hear the parties in detail in order to ascertain as to whether there has been any default on the part of HUBCO.”

In that order, the court also demanded to hear the version of the NBP as well as the consortium (China Development Bank), who it said had not been impleaded as a party either in the suit or in the instant High Court appeal although the issuance of the project completion certificate lies within their domain.

“Accordingly, issue notice to the respondent No.4 as well as consortium bank l.e. China Development (Agent) to be served through the first three modes for December 06, 2022, which reply/objections, if any, be filed with advance copy to the lost counsel for appellants,” the order added.

The hearing was to be held on 6 December, but was rescheduled to 9 December as the court overturned the earlier single-bench ruling and ordered the relevant parties to file their responses with the court.