Final Order 1

Order Details: Notice of Motion
Pdf Text: N/m No. 738/19 in St. No. 824/19. 1 Order.
IN THE BOMBAY CITY CIVIL COURT AT BOMBAY.
NOTICE OF MOTION NO. 738 OF 2019
(CNR NO. MHCC010018922019)
IN
STAMP NO. 824 OF 2019
Mr. Abhay Narendra Lodha ...Plaintiff
Versus
Allahabad Bank ...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. P.P.Killedar, Advocate for Defendants.
ORAL ORDER
This is a notice of motion taken out by plaintiff for
temporary injunction. It is claimed by plaintiff that in view of master
circular issued by R.B.I. dated 01/07/2016 and a forensic report
conducted by defendant bank, no coercive action be obtained by the
defendant.
Plaintiff's case is narrated as follows :
2. Plaintiff Abhay Lodha is a promoter, director (of suspended
board), shareholder and personal guarantor of the company Gujrat
Foils. It is a company dealing with production of aluminium roll
products. The company has received loan of Rs.307 Crores from
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N/m No. 738/19 in St. No. 824/19. 2 Order.
defendant bank. Various primary and collateral securities were
provided alongwith personal guarantee as security to the lenders.
Plaintiff company has a good track record in business. However, due to
market recession and commercial changes in industry, the company
could not repay the loan to defendant, which resulted into the account
of plaintiff was classified as "N.P.A.". However the company has
substantial assets available. Plaintiff has expressed his readiness and
willingness to sell the property to reduce the liability. Plaintiff company
has paid Rs.211 Cores to its lenders including defendant. Plaintiff has
claimed for time for restructuring the company and regain its business.
However, based on "Forensic Audit Report" defendant bank has
declared the account of company as "Fraud". It has long effects. It is
claimed that no coercive action be taken as natural principles of law are
not followed by the defendant bank. No funds has been siphoned by
the plaintiff. It is claimed for temporary injunction.
3. Perused written statement submitted by defendant
Allahabad Bank. It is averred at the outset that present suit is not
tenable before this Court. Plaintiff has suppressed various material
facts. There is no evidence about movement of goods. There is a
difference between loss in business and loss occurred due to fraud. As
per order dated 30/11/2017 issued by N.C.L.T., Ahmedabad, the
Registrar, Insolvency Professional came to be appointed. He is not
made party, therefore suit is bad for nonjoinder of necessary parties.
In view of Forensic Audit Report dated 23/02/2018, it is clear that
various entries are paper entires which are created for showing
turnover. There are notices issued by the bank to the plaintiff on
24/07/2017 and 21/02/2018. Prior to that on 30/09/2016 the account
of company was declared as "N.P.A.". In short, it is requested to reject
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N/m No. 738/19 in St. No. 824/19. 3 Order.
the motion.
4. 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) Copy of forensic report is not provided to the plaintiff.
e) Only defendant Allahabad Bank has declared the account of
company as 'Fraud', however, other consortium bank has
not obtained steps.
f) Plaintiff has not challenged legality of master circular.
g) Resolution Professional is appointed who is available to
defendant bank, obviously he will not take care of plaintiff
or its company.
5. Ld. Advocate P.P.Killedar for defendant bank submits that
master circular is having classification of frauds and power to register
offence for misappropriation of funds. The account of plaintiff was
declared "N.P.A." on 30/09/2016. On 21/01/2017 the account of
company was marked as "Red Flagged". If action of defendant bank is
erroneous, plaintiff may approach to R.B.I. At present, Insolvency
Professional is the "Custodia Legis". At the time of exercise of forensic
report, proper intimation was given to the plaintiff. The representative
of plaintiff was present during said exercise. In view of Section 179,
180 of I.B.Code, 2016, the civil court do not vest the jurisdiction. It is
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N/m No. 738/19 in St. No. 824/19. 4 Order.
requested to reject the motion.
6. Section 179 and 180 of I.B.Code are in respect of no
jurisdiction to the civil court to challenge proceeding against the order
of D.R.T. In present case, no order of D.R.T. is challenged. On the
contrary, it is contention of plaintiff that defendant may continue with
D.R.T. proceeding or recovery proceeding. It is contention of plaintiff
that if time for restructuring the loan is given, he is ready to repay the
loan or bank may recover the loan from the huge asset of the company.
7. It is to note that defendant Allahabad Bank was a lead
bank. Defendant and consortium bank has sanctioned the loan to
plaintiff company upon completion of all formalities. As per scope of
master circular, the area of action is very wide, it includes lawyers,
auditors etc. It is not disputed that the Gujrat Foil Company holds huge
assets. There is no obstruction on the part of plaintiff to recover the
loan by adopting due process of law. Admittedly, Allahabad Bank with
other consortium banks has initiated the recovery proceeding before
D.R.T., Mumbai.
8. 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.
9. 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
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N/m No. 738/19 in St. No. 824/19. 5 Order.
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
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.”
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N/m No. 738/19 in St. No. 824/19. 6 Order.
10. As observed in Gupta Coal case (supra) it is crystal clear
that present suit is maintainable before this court.
11. The material question is whether essential conditions as per
master circular are followed by the defendant bank before the plaintiff
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.”
12. 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
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N/m No. 738/19 in St. No. 824/19. 7 Order.
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
and directors, names of officials involved and lodging of
complaint with police/CBI.”
13. It is material to note that the time limit as speculated in
above provision is not followed by the defendant bank.
14. 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.”
15. It is material to note that the delay as expected in para no.
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N/m No. 738/19 in St. No. 824/19. 8 Order.
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.
16. 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.
17. 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,
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N/m No. 738/19 in St. No. 824/19. 9 Order.
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.”
18. 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
view on the RFA. (Red flagged accounts.)
19. On perusal of entire papers submitted by both side, it is
necessary to note following important points:
a) The mandatory time line prescribed by the RBI has not
been followed by the defendant bank while declaring the
account as fraud or red flagged.
b) The allegations in respect of diversion of funds leveled by
defendant bank has been satisfactorily clarified by plaintiff
with documentary evidence as no amount was directly
deposited in the account of plaintiff company.
c) The property of plaintiff company is attached under the
process initiated as per provisions of SARFAESI Act.
Plaintiff don't have any objection to continue with
sale of said property.
d) In forensic report there is no finding in respect of siphone
of the funds.
e) In forensic report it is observed that company was running
in loss since 201516.
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N/m No. 738/19 in St. No. 824/19. 10 Order.
20. On perusal of a petition before D.R.T., there is no whisper
about forensic report. The copy of petition 146/2018 before D.R.T. is
filed on record. Nothing is mentioned in said petition in respect of
account of company is "Fraud" or "Red Flagged". On page no.100 of
report of Chartered Accountant Mr. S.P.Rungtha filed by defendant
bank, it is mentioned that in the year 201516, the company was
running in loss and in the year 201617 the company has reported the
loss of Rs.42.10 Crores.
21. In the executive summary of the forensic audit report, it
has been observed by the auditor that money is outstanding to be
recovered from the debtors for which the company is making the efforts
and that the company has suffered loss. Also, the methodology and
limitations of the forensic report says that “our report or its part of the
findings is strictly meant for Allahabad Bank and should not be used by
anyone without written consent. Further, this report or any
communication in this regard cannot be used by the bank for any other
purpose including filling the same before any judicial authority.”
22. 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.
23. 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.
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N/m No. 738/19 in St. No. 824/19. 11 Order.
24. In view of scope of master circular dated 01/07/2016, it
may initiate action to prosecute promoter, guarantor, auditor etc.
There is no evidence shown by defendant bank that the account in itself
was fraud. On the contrary, defendant bank alongwith consortium
bank has sanctioned huge loan to the company.
25. Plaintiff is ready to face consequences of recovery as well as
D.R.T. proceeding. However, there is substance to believe that
defendant bank has initiated the action under the garb of master
circular dated 01/07/2016 for recovery of loan. Therefore balance of
convenience lies in favour of plaintiff. Obviously, irreparable loss will
be caused to plaintiff if the Court refuse to grant injunction. Plaintiff or
its company may not be able to avail any loan or to make transaction if
the impugned account is declared as 'Fraud'. Hence the order :
ORDER
1. The Notice of Motion no. 738 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 request for 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.
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N/m No. 738/19 in St. No. 824/19. 12 Order.
5. Notice of Motion no. 738 of 2019 is disposed of accordingly.
(G.G.BHANSALI)
Judge,
City Civil & Sessions Court,
Date : 12/07/2019. Mumbai.
1. Dictated on : 12/07/2019.
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. 11.31 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.
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