Final Order 1

Order Details: Notice of Motion
Pdf Text: Notice of Motion No.739 of 2019 1 St. No.1012/2019
IN THE BOMBAY CITY CIVIL COURT AT BOMBAY
NOTICE OF MOTION No.739 of 2019
IN
STAMP NO.1012 of 2019
M/s Executive Trading Co. Pvt. Ltd and Anr. ... Plaintiff
V/s.
Union Bank of India & Ors. ... Defendants
CORAM : HIS HONOUR JUDGE
SHRI. GOPAL G. BHANSALI.
(C.R. NO.31)
DATE : 04.05.2019.
APPEEARANCE.
Adv. Mr. Shrinivas Bobade a/w Adv. Ms. Priyanka Dube for plaintiff.
Adv. Mr. Subhash Menon for defendant.
ORAL ORDER
This is a notice of motion taken out by plaintiff for
temporary injunction. Plaintiff Executing trading company is dealing in
trading of iron and steel products like plate, CR coils, galvanized coils
etc,. Defendant bank has initiated process to declare the account of
plaintiff as fraud account, hence this motion is preferred.
2 Plaintiff company has good track record in the business of
steel product. Defendant bank after due survey sanctioned the loan of
212.5 crores and out of which 171.47 crores was outstanding on
31.03.2011. The credit facility was secured by way of primary and
collateral security alongwith personal guarantee. In last various years
plaintiff has repaid some part of loan alongwith interest and incurred
routine expenses of company, labour etc, as detail mentioned in plaint
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Notice of Motion No.739 of 2019 2 St. No.1012/2019
page no. 6 to 12. However, 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 several recovery proceeding
against the plaintiff; equally plaintiff has filed various recovery suit
against debtors, valued rupees 388.10 crores, as mentioned in table on
page no.16 and 17 of the plaint.
3 It is continued by plaintiff that a forensic audit has been
conducted by the auditor of defendant bank, based on master circular
issued by the RBI dated 01.07.2016. However the guidelines prescribed
in said circular are not followed by the defendant bank. Hence it is
requested for temporary injunction.
4 Perused written statement cum affidavit in reply submitted
by defendant bank. It is averred that plaintiff has created various
companies on paper to siphon off the loan. Plaintiff has suppressed
various material facts. There is no evidence about movement of goods.
The sister company PAPL has neither purchased goods nor returned the
funds to the defendant. Plaintiff has prepared bogus lorry receipts,
delivery challance etc. It is alleged that there is a misappropriation of
funds and breach of trust on the part of plaintiff. The funds sanctioned
for one purpose are used for another purpose. Plaintiff no.2 is director
in PAPL. Defendant has noting to do with recession and import of
material from China. Plaintiff has not submitted proof of movement of
goods and VAT returns to forensic auditor. There is difference between
business loss and loss occurred due to fraud.
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Notice of Motion No.739 of 2019 3 St. No.1012/2019
5. It is added in para 20 onwards in written statement that
defendant bank has initiated action under SARFAESI Act and attached
property of plaintiff situated at Andheri. There is a loss occurred to
public exchequer. Hence, it is requested to reject the motion.
6. 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.
7. Learned advocate Mr. Subhash Menon for defendant bank
submits that master circular is having classification of frauds and power
to register offence upon notice of fraud and misappropriation of funds.
At the time of visit of bank the stock of only 70 lacs was noticed by the
defendant. The account of plaintiff was declared NPA upon ample
opportunity given to plaintiff in 2014. However, since September 2016,
noting is deposited by plaintiff in loan account. Plaintiff company has
diverted the funds to the purpose for which loan was not sanctioned.
He relied over M/s. Anad Kumar Mills V/s Indian Overseas Bank, (Civil
Appeal no.7214/2012, Apex Court order dated 03.05.2018) wherein it
is held that suit is not maintainable before civil court. It is requested to
reject the motion.
8. It would be appropriate to note admitted fact at the
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Notice of Motion No.739 of 2019 4 St. No.1012/2019
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.
9. 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.
10. 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
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 report.”
“The relief as sought in the suit is with regard to
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Notice of Motion No.739 of 2019 5 St. No.1012/2019
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.”
11. As observed in Gupta Coal case (supra) it is crystal clear
that present suit is maintainable before this court.
12. 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.:
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Notice of Motion No.739 of 2019 6 St. No.1012/2019
“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.”
13. 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
and directors, names of officials involved and lodging of
complaint with police/CBI.”
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Notice of Motion No.739 of 2019 7 St. No.1012/2019
14. It is material to note that the time limit as speculated in
above provision is not followed by the defendant bank.
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.
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Notice of Motion No.739 of 2019 8 St. No.1012/2019
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
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Notice of Motion No.739 of 2019 9 St. No.1012/2019
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. On perusal of entire papers submitted by both side, it is
necessary to note following important points:
a) Forensic audit report is not submitted by the defendant
bank for perusal to the court nor copy is given to the
plaintiff.
b) 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.
c) 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.
d) 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.
e) From the huge asset of company, defendant bank may
recover the amount as plaintiff has defaulted the loan.
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
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Notice of Motion No.739 of 2019 10 St. No.1012/2019
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.
Hence, the order.
ORDER
1. The Notice of Motion no. 739 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.
5. Notice of Motion no. 739 of 2019 is disposed of
accordingly.
(Gopal G.Bhansali )
Judge,
Date:04.05.2019. City Civil Court, Gr.Mumbai.
Dictated on : 04.05.2019.
Transcribed on : 04.05.2019.
Signed on : 14.05.2019
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Notice of Motion No.739 of 2019 11 St. No.1012/2019
“CERTIFIED TO BE TRUE AND CORRECT COPY OF THE ORIGINAL
SIGNED ORDER.”
16.05.2019 at 11.00 a.m. ASHOK SHANKAR SUGDARE
UPLOAD DATE AND TIME NAME OF STENOGRAPHER
Name of the Judge HHJ SHRI G.G.BHANSALI
(Court Room No.31)
Date of pronouncement of Order 04.05.2019
Order signed by P.O. on 04.05.2019
Order uploaded on 16.05.2019
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