Final Order 1

Order Details: Notice of Motion
Pdf Text: N/m No. 737/19 in St. No. 823/19. 1 Order.
IN THE BOMBAY CITY CIVIL COURT AT BOMBAY.
NOTICE OF MOTION NO. 737 OF 2019
(CNR NO. MHCC010018912019)
IN
STAMP NO. 823 OF 2019
Mr. Abhay Narendra Lodha ...Plaintiff
Versus
Oriental Bank Of Commerce & Another ...Defendants
CORAM : HIS HONOUR JUDGE
SHRI G.G.BHANSALI.
(C.R.NO.31).
DATE : 12th JULY, 2019.
Mr. Bobade alongwith Ms. Priyanka Dube, Advocate for Plaintiff.
Mr. Prakash Shinde, Advocate for Defendants No.1 and 2.
ORAL ORDER
This is a notice of motion taken out by plaintiff for
temporary injunction.
2. Plaintiff is a promoter, director of suspended board,
majority shareholder and personal guarantor. Topworth Pipes and
Tubes Private Limited is an industry manufacturing steel pipes.
Defendant bank has initiated a process to declare the account of
plaintiff as a fraud account. Hence this motion is preferred.
3. According to plaintiff, company has a good track of record
in the business of steel product. It has received several certificates from
-- 1 of 11 --
N/m No. 737/19 in St. No. 823/19. 2 Order.
foreign institute. The company has been sanctioned various funds from
a consortium of lenders including the defendant upon due verification
of documents and completion of all formalities. The loan of Rs.1205
Crores was sanctioned. The company has repaid the amount of Rs.359
Crores. As on today 1097 Crores are outstanding towards plaintiff
company on 31/03/2018.
4. According to plaintiff, due to market recession and
commercial changes in steel industry, the company could not repay the
loan of defendant, which resulted into the account of plaintiff was
classified as "NPA". However, the lenders have initiated various
recovery proceeding against the plaintiff; equally plaintiff has filed
various recovery proceedings against the debtors. The details are given
by the plaintiff in plaint.
5. The corporate debt restructuring was failed and account of
company with the bank was classified as 'N.P.A.' The structure debt
restructuring was not invoked by the lenders for which the promoters
were agreeable. The lenders initiated recovery proceedings against the
company, N.C.L.T. proceeding etc. The account of company was
declared as fraud by the defendants without following natural principles
of law and guidelines of R.B.I. Hence it is requested for temporary
injunction.
6. Perused reply filed by defendant no.1 Oriental Bank of
Commerce. The reply filed by defendant no.2 Union Bank of India is
replica of reply filed by defendant no.1. It is averred that present
motion and suit are deserves to be dismissed at the threshold. It is the
attempt to delay the recovery proceeding. The account of plaintiff
-- 2 of 11 --
N/m No. 737/19 in St. No. 823/19. 3 Order.
company is declared "N.P.A." on 31/03/2016. The consortium bank has
conducted forensic audit report wherein it has noticed that huge funds
came to be siphoned by the plaintiff. As per master circular issued by
R.B.I. dated 01/07/2016, the account of plaintiff company is classified
as "Red Flagged" and "Fraud Account". It is claimed to reject the
motion.
7. Learned advocate Mr. Bobade alongwith Adv. Ms. Priyanka
Dube for plaintiff has submitted following materials points.:
a) There is a loss caused to plaintiff due to recession and
macro economic factors.
b) The defendant bank has declared the account of plaintiff as
fraud without following principles of natural justice.
c) As per various civil suit filed by plaintiff the amount around
388.10 crores, are to be recovered from debtors of plaintiff.
d) Plaintiff's company has issued letters to defendants no. 1
and 2 on 11/09/2018 and 21/12/2018 to seek explanation
in respect of declaration of account as fraud. However, no
reply is given by the defendants 1 and 2 bank.
8. Ld. Advocate Prakash Shinde for defendants 1 and 2
submits that present suit is filed by suspended director who has no role
to play. The proceeding under Section 7 of I.B.Code, 2016 for
appointment of Resolution Professional. As per order of N.C.L.T.,
Mumbai dated 11/12/2018 a Resolution Professional came to be
appointed. Therefore, it is argued that plaintiff require to approach
Resolution Professional. As per impugned circular of R.B.I. the account
of plaintiff company is declared as 'Fraud Account' and 'Red Flagged'.
In view of Section 60 of I.B.Code, this Court do not vest the jurisdiction.
-- 3 of 11 --
N/m No. 737/19 in St. No. 823/19. 4 Order.
9. On perusal of Section 60 of I.B.Code, it is in respect of
adjudication in relation to insolvency resolution and liquidation for
corporate persons. It is to note that no order issued by N.C.L.T. is
challenged by plaintiff. Plaintiff approached this Court to restrain
defendants from using coercive action and filing criminal cases against
the plaintiff and other directors relying on master circular of R.B.I.
Therefore Section 60 of I.B.Code do not attract in present case.
10. It would be appropriate to note admitted fact at the
inception. Upon completion of all formalities, loan was sanctioned by
the defendant bank to plaintiff company. The process of declaring
fraud is based on master circular dated 01.07.2016. Plaintiff is not
against the process of recovery. The copy of forensic report is not given
to plaintiff. The scope of action under master circular is very wide, it
includes lawyers, auditors etc. relating to preparation of report of
company. As per various suit filed by plaintiff, the amount around
388.10 crores, is due towards debtors of plaintiff.
11. It is not disputed that defendant bank has initiated action
under master circular dated 01.07.2016. According to learned advocate
for defendant, in view of M/s Innovative Industries V/s ICICI bank
(Civil Appeal 8337/12017 decided on 31.08.2017), it is held that the
suit by insolvent company is not maintainable before the civil court.
12. The material question is whether present suit is tenable
before this court. In Bank of India V/s Gupta Coal (Civil revision
97/2017 decided on 04.09.2018) it is observed that suit relating to red
flag and fraud account as per master circular is maintainable before the
civil court. The observations of the Hon'ble Lordship of Hon'ble High
-- 4 of 11 --
N/m No. 737/19 in St. No. 823/19. 5 Order.
Court of Bombay, Bench at Nagpur are reproduced for sake of
convenience:
“The relief as sought is a declaration that the action of the
defendants in declaring the account of the plaintiff
Company as fraud is illegal followed by prayer for
permanent injunction. Various documents including the
Forensic Audit Report have been filed on record.”
“The relief as sought in the suit is with regard to
declaration of the account of the plaintiffCompany as
a fraud account. The same cannot be said to be a
dispute arising out of ordinary transactions of bankers
and traders. It is the case of the plaintiffCompany
that in view of various guidelines of the Reserve
Bank of India and Master Circular, its accounts has
been declared as fraud account without following the
due procedure and in breach of principles of natural
justice. In the light of the challenge as raised, it
would be the Civil court that would retain jurisdiction
to entertain the suit.”
“Same can not be a reason to reject the plaint. In
view of the fact that the reliefs sought in the plaint are
not those reliefs which are impermissible in view of
provisions of the Sections 17 and 18 of the Act of
1993 as well as Section 34 of the Act of 2002, the
cognizance of the suit is not barred before the civil
court.”
13. The material question is whether essential conditions as per
master circular are followed by the defendant bank before the plaintiff
-- 5 of 11 --
N/m No. 737/19 in St. No. 823/19. 6 Order.
account is red flagged and declared as fraud. It is necessary to peruse
some basic conditions as mentioned in the master circular issued by the
RBI dated 01.07.2016. Para no. 3.2 from said circular is reproduced as
follows.:
“3.2 Reporting of frauds to Reserve Bank of India.
3.2.1. Banks need to furnish Fraud Monitoring Return
(FMR) in individual fraud cases, irrespective of the amount
involved, to RBI electronically using FMR Application in
XBRL System supplied to them within three weeks from the
date of detection.
3.2.2. A monthly certificate, as per AnnexI, (mentioning
that soft copy of all the FMRs have been submitted to RBI)
is to be submitted by the bank to CFMC, Bengaluru with a
copy to the respective SSM of the bank, within seven days
from the end of the month.”
14. The para no. 3.2.6 speaks about time limit for flash report.
It runs as follows.:
“3.2.6. In addition to the FMR, banks are required to
furnish a Flash Report (FR) for fraud involving amounts of
Rs.50 million and above within a week of such frauds
coming to the notice of the bank's head office. The FR is to
be furnished in the form of a DO letter addressed to the
PCGM/ CGMinCharge, DBS, RBI, Central Office, Mumbai
with a copy to CFMC, Bengaluru. The FR, inter alia, should
include amount involved, nature of fraud, modus operandi
in brief, name of the branch/ office, names of parties
involved, their constitution, names of proprietors/ partners
-- 6 of 11 --
N/m No. 737/19 in St. No. 823/19. 7 Order.
and directors, names of officials involved and lodging of
complaint with police/CBI.”
15. According to para no. 3.3, in respect of delay in reporting
frauds and to fix responsibility of staff. It runs as follows.:
3.3.1. Bank should ensure that the reporting system is
suitable streamlined so that delays in reporting of frauds,
submission of delay and incomplete fraud reports are
avoided. Banks must fix staff accountability in respect of
delays in reporting fraud cases to RBI.
“3.3.2. Delay in reporting of frauds and the consequent
delay in alerting other banks about the modus operandi
and dissemination of information through Caution Advice/
CFR against unscrupulous borrowers could result in similar
frauds being perpetrated elsewhere. Bank should
therefore, strictly adhere to the time frame fixed in this
circular for reporting of fraud cases to RBI failing which
they would be liable for penal action prescribed under
Section 47(A) of the Banking Regulation Act, 1949.”
16. It is material to note that the delay as expected in para no.
3.3 of master circular is not explained by the defendant bank nor
responsibility of staff is fixed for avoiding to report the fraud to RBI, if
any.
17. Para no. 4.4 of master circular speaks about special
committee of the board, which includes MD and C.E.O. of the company.
Defendant is failed to clarify in respect of such committee formed by
defendant.
-- 7 of 11 --
N/m No. 737/19 in St. No. 823/19. 8 Order.
18. Para no. 8.3 of master circular is in a respect of EWS and
RFA (early warning signals and red flagged accounts). It expects detail
investigation into RFA. The modalities for monitory and detailed study
of annual report as whole is expected by FMG (fraud monitoring
group). The report require to submit to the special committee of the
board. Para no. 8.7 and 8.8 are in respect of prompt reporting. The
material part is reproduced as follows.
“Delay, for the purpose of this circular, would mean that the
fraud was not flashed to CFMC, RBI or reported on the CRILC
platform, RBI within a period of one week from its (i)
classification as a fraud through the RFA route which has a
maximum time line of six months or (ii) detection/ declaration as
a fraud ab initio by the bank as hitherto.
8.8 Bank as a sole lender.
8.8.1. In cases where the bank is the sole lender, the FMG will
take a call on whether an account in which EWS are observed
should be classified as RFA or not. This exercise should be
completed as soon as possible and in any case within a month of
the EWS being noticed. In case the account is classified as RFA,
the FMG will stipulate the nature and level of further
investigations or remedial measures necessary to protect the
bank's interest within a stipulated time which can not exceed six
months.”
19. It is surprising to note that defendant bank is silent in
respect of prompt reporting and stipulated time, as mentioned above. It
is incumbent on the part of bank to use external auditors, including
forensic experts and internal team to investigate before taking a final
-- 8 of 11 --
N/m No. 737/19 in St. No. 823/19. 9 Order.
view on the RFA. (Red flagged accounts.)
20. As per para no. 8.12 of the master circular the scope of
penal measures for fraudulent borrowers is very wide. It is not limited
for recovery of loan. Accordingly, there is a strong prima facie case
proved by the plaintiff.
21. As observed in Gupta Coal Case (supra) the suit before this
Court is maintainable. It is pertinent to note that the time limit as
speculated in para 3.2 (1, 2 and 6) is not followed by the defendant
bank.
22. Plaintiff Abhay Lodha is promoter, director and guarantor
in Topworth Pipes Private Limited. The copy of forensic report is not
supplied by defendant to plaintiff nor produced before this Court.
There is no evidence submitted by the defendant that requirements of
master circular are complied. Defendants 1 and 2 bank are relying on
forensic report of Allahabad Bank. Accordingly, there is no individual
or separate forensic report prepared by the defendants bank.
23. In the executive summary of forensic report of Allahabad
Bank, there is no whisper in respect of siphoning of the funds or
diversion of funds by the promoter or director.
24. It is contended by learned advocate for defendant that
plaintiff may repay the loan, thereafter no action will be initiated
against plaintiff. It appear that defendant bank has initiated the action
for recovery of the loan under the garb of master circular dated
01.07.2016.
-- 9 of 11 --
N/m No. 737/19 in St. No. 823/19. 10 Order.
25. The property of plaintiff company is attached under
SARFAESI Act. Plaintiff don't have any objection to continue with sale
of said property. Admittedly, upon mortgage of various properties of
company, loan came to be sanctioned by defendant bank. Plaintiff is
ready to face consequences of DRT and recovery proceeding.
26. Considering wide scope of master circular, the balance of
convenience lies in favour of plaintiff. Obviously, irreparable loss will
be caused to plaintiff, if the court refuse to grant injunction as prayed.
Hence, the order.
ORDER
1. The Notice of Motion no. 737 of 2019 is allowed, as
per prayer clause “a” and “b”.
2. Defendant bank, personally or through representative
are restrained from taking coercive action against
plaintiff on account of red flag or fraud account,
based on master circular. Defendant or their
representative are restrained from branding the
plaintiff as willfull defaulter and publishing the name
of plaintiff as defaulter, till further order.
3. Defendant may submit written statement in detail to
expedite hearing.
4. It is made clear that defendant bank may continue
with proceeding under SARFAESI Act, recovery
proceeding, attachment and sale of attached property
to recover the defaulted loan against plaintiff.
-- 10 of 11 --
N/m No. 737/19 in St. No. 823/19. 11 Order.
5. Notice of Motion no. 737 of 2019 is disposed of
accordingly.
(G.G.BHANSALI)
Judge,
City Civil & Sessions Court,
Date : 12/07/2019. Mumbai.
1. Dictated on : 11/07/2019.
2. Transcribed on : 15/07/2019.
3. Signed on : 18/07/2019.
4. Delivered to Certified :
Copy Section on
“CERTIFIED TO BE TRUE AND CORRECT COPY OF THE ORIGINAL
SIGNED JUDGMENT/ORDER”
UPLOAD DATE AND TIME NAME OF STENOGRAPHER
18/07/2019. 11.25 a.m. Miss M.A.Kulkarni
Name of the Judge (with Court Room no.) HHJ Shri G.G.Bhansali.
(Court Room No.31).
Date of Pronouncement of Judgment/Order 12/07/2019.
Judgment/Order signed by P.O. on 18/07/2019.
Judgment/Order uploaded on 18/07/2019.
-- 11 of 11 --