State arms manufacturer Denel’s reputation would suffer irreparable harm if Absa paid back part of a R60m advance to India for failing to satisfy a military hardware contract, the Johannesburg High Court heard yesterday.

Denel, which posted losses of R1,6bn in its recent report to Parliament, won an interim interdict last Friday stopping Absa from repaying the State Bank of India R27m because of Denel’s failure to satisfy a contract signed in 2003.

The Indian government, through the State Bank of India, made an advance payment guarantee of $10m for weapons in February 2003 to Absa. Absa offered a counter-guarantee ensuring compensation to the payer if the seller did not deliver the goods or delivered partially.

Earlier this month, the State Bank of India received a letter from the Indian defence ministry demanding $4m from Absa for Denel’s failure to deliver the contract of armour-piercing ammunition and rifles as specified and for violating a contractual clause that prevented payments to third parties to win the contract.

India, one of the country’s biggest arms customers, has suspended business with Denel. Denel has denied both allegations.

Counsel for Denel Hilton Epstein, arguing for the interim interdict to be made permanent, said the issue was not about the money that Denel had to repay.

“This is a question of the reputation of Denel. If this guarantee has to be paid, inference will be drawn that Denel had acted improperly,” Epstein said.

State Bank of India counsel Nic Maritz said Denel was not party to the counter-guarantee agreements between banks. Absa’s failure to honour guarantees might do irreparable harm to its reputation, Maritz said.

Judgment was reserved.

With acknowledgements to Ernest Mabuza and the Business Day.