Final Order 1

Order Details: Notice of Motion
Pdf Text: Order on Notice of Motion
No. 972 of 2020.
MHCC010026422020
IN THE BOMBAY CITY CIVIL COURT AT MUMBAI
NOTICE OF MOTION NO. 972 OF 2020.
IN
Suit No.471 of 2020.
Abhay Narendra Lodha. ..Applicant/
(Plaintiff)
In the matter between
Abhay Narendra Lodha …Plaintiff
V/s.
1.Union Bank of India and Anr. ...Defendants
Appearance:
Adv Megha Gupta a/w Adv Aamrin and Mubina for plaintiff.
Adv. Prakash Shinde a/w Mitali Devkar for defendant No.1.
Adv. Hemant Naik i/b Sunil Kadam for defendant No.2.
CORAM : H. H. JUDGE AND
ASST SESSIONS JUDGE,
SHRI. S. B. PAWAR (C.R.No.59)
DATE : 17th OCTOBER, 2022.
ORDER
Plaintiff has taken out the present Notice of Motion for
various reliefs as per clauses (a) to (f) including the injunction to
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restrain defendants, their agents, servants, officers, or any person
claiming through them, acting upon the defendant’s declaration of the
company’s account as fraud/RFA or taking any coercive action on
account of and/or on the basis of the said declaration in any manner
whatsoever.
2. It is the case of the plaintiff that he has filed the suit for
declaration, injunction and other reliefs. Plaintiff is a director of Gujrat
Foils Limited (GFL). By setting out detailed pleading and background
in the plaint, the plaintiff has raised the grievance that defendants have
not followed the guidelines issued by the Reserve Bank of India (In
short 'RBI') vide declaring the account of GFL as fraud/RFA. The
defendants have acted in gross violation of RBI guidelines and the
principles of natural justice. They have not disclosed the basis for
declaring the account as fraud/RFA therefore, declaration is illegal. The
declaration is based upon the Audit Report of the M/s. S. P. Rungtha
and Associates, which is absolutely arbitrary and illegal. Plaintiff, by
issuing letter dated 25.11.2019 and 27.11.2019 requested the
defendants to provide reasons and documents perused by the
defendants for declaring the account of GFL as fraud/RFA. The said
letters are not answered by the defendants. Therefore, the plaintiff
filed the suit for declaration, injunction and other reliefs.
3. Defendant Nos. 1 & 2 filed separate replies and contested
the Notice of Motion. The common contentions raised by the defendants
are that the borrower company GFL is ordered to be liquidated by NCLT
vide order dated 16.09.2019. Therefore, the plaintiff has no locus
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standi to file the suit. The injunction cannot be granted in view of the
bar Section 41 of the Specific Relief Act. Defendants have followed the
RBI guidelines. The account of the plaintiff was declared as NPA.
Defendants have examined the account. The account is also examined
by conducting Forensic Audit Report and internal examination of the
transactions with defaulting borrowers. The plaintiff has systematically
committed fraud upon the defendants. The account of the company was
already declared as 'Willful Defaulter' after giving opportunity to the
plaintiff to make representation. Therefore, defendant No.1 declared
the account of GFL as ‘Fraud’ on 07.08.2019. Defendant No.2 declared
the account as fraud on 30.04.2022. Defendant No.2 in its reply
affidavit has enumerated the suspicious transactions of GFL.
4. It is further contended by the defendants that they have
reported the fraud to RBI. The RBI guidelines in Circular dated
01.07.2016 updated on 03.07.2017 are followed by the defendants. No
right is conferred upon the borrower under the said Circular. There is
no provision to provide opportunity of hearing to the borrower or to
issue notice prior to initiating the fraud proceeding. Public money is
involved. The recovery proceeding is going on. The remedy of the
defendants for recovery of money cannot be curtailed by the Court. The
suit is filed only to avoid the criminal prosecution; therefore, it is
prayed that the Notice of Motion be dismissed.
5. In view of the rival contentions of the parties, following
points arise for my determination to which I record my findings for the
reasons to follow:
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Sr.No. FINDINGS REASONS
1. Whether plaintiff has made out
prima facie case?
Yes
2. Whether balance of conveyance
lies infavour of the plaintiff?
Yes
3. Whether plaintiff will suffer
irreparable loss, if injunction is
refused? Yes
4. Whether plaintiff is entitled to
the relief of temporary
injunction? Yes
5. What order? The Notice of
Motion is allowed.
REASONS
6. Heard Ld. Advocate Megha alongwith Adv. Aamrin Malik
for plaintiff, Ld. Advocate Prakash Shinde for defendant No.1 and Ld.
Advocate Sunil Kadam for defendant No.2. Ld. advocate for the
plaintiff submits that the loan was sanctioned to the company in the
year 2011 by consortium of the banks. The account of the company
was declared as NPA in the year 2018. The banks have not followed the
time limit as provided in the Circular dated 01.07.2016. Principles of
natural justice are also not followed. Defendants have not replied the
letters issued by the plaintiff on 25.11.2019 and 27.11.2019. They have
relied upon the Forensic Audit Report prepared on the instructions of
Committee of Creditors (In short 'COC'). IRP has not initiated any action
on the basis of Forensic Audit Report. The said report is not produced in
the Court. Neither show cause notice, nor Forensic Audit Report was
served upon the plaintiff. It is a tactic and machinery used by the
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defendants to recover the loan amount. Defendant No.2 declared the
account of GFL as RFA on 21.01.2017 and thereafter, after a period of
three years, the account is declared as fraud. The specific time limit
provided in clauses 8.9.5 and 8.9.6 of the Circular dated 01.07.2016 is
not followed. The accountability of staff is not fixed for the delay. In
the above circumstances, she submitted that the whole exercise of the
defendants of declaring the account as fraud is illegal.
7. Ld. Advocate for the plaintiff further submitted that
plaintiff has given collaterals as the security for the loan. Plaintiff is
not seeking any relief in respect of recovery of the amount. In view of
the penal measures in Clause 8.12 of the Circular, the consequences of
the declaration are drastic. Therefore, the plaintiff has locus standi to
file the suit in order to protect his interest and he is entitled to the relief
of injunction. She relied upon the following judgments:
i) Rajesh Agarwal V/s. Reserve Bank of India, Writ Petition No.
19102 of 2019 (Telangana High Court)
ii) State Bank of India and Ors. V/s. Rajesh Agrawal and Ors.,
Petitions for Special Leave to Appeal No.3931/2021 (Supreme
Court).
iii) Surana Developers (Wadala) LLP V/s. Reserve Bank of India,
Writ Petition No.826/2021 (Bombay High Court, Ordinary
Original Civil Jurisdiction).
iv) Satishchandra Ratanlal Shah V/s. State of Gujrat and Anr.,
Criminal Appeal No.9/2021 (Supreme Court)
v) Apple Sponge and Power Limited and Others V/s. Reserve
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Bank of India and Others, W.P.(C)No.306/2019 & CM
APPL.No.7039/2019 (Delhi High Court).
vi) Oswal Apparels Pvt. Ltd. and Others V/s. State Bank of India
and Others, MANU/PH/1231/2017 and
vii) Bank of India V/s. Gupta Coal India Private Limited, Nagpur
and others., Civil Revision Application No.97/2017 (Bombay
High Court).
8. Per contra, Ld. Advocate for defendant No.1 argued that the
account of plaintiff is not declared as fraud. The company is now in
liquidation and is under the management of the IRP. Therefore, under
Section 17 of I.B.C, plaintiff cannot bring the suit on behalf of the
company. There is bar under Section 41 of the Specific Relief Act to
grant injunction restraining defendants from filing criminal complaint.
The account is already declared as fraud and only complaint to CBI is
remained to be filed. Non adherence to the timeline as provided in the
Circular cannot give any benefits in favour of the plaintiff. Even if any
complaint is filed, the investigating agency is expected to carry out the
detailed investigation before taking any action. It is the obligation on
the bank to follow the guidelines of RBI, in order to safeguard the
interest of banking institutions. The suit is filed only to avoid the other
consequences under IBC. He relied upon the judgment of the Hon’ble
Telangana High Court in Yashdeep Sharma Vs. Reserve Bank of India,
2021 SCC OnLine TS 1852.
9. Ld. Advocate for defendant No.2 strenuously argued that
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the suit is based upon the old guidelines of the RBI. The Circular dated
01.07.2016 does not require providing the Forensic Audit Report to the
borrower. No right of hearing is given to the borrower. Defendant No.2
has declared the account as fraud on 14.05.2020 by following the
guidelines. If time limit is not followed by the defendant, plaintiff
cannot derive any benefit out of it. In the meetings of JFL, the plaintiff
was represented. It was disclosed during the JFL meetings that plaintiff
opened accounts in other banks. The declaration of fraud is based upon
the queries raised by the auditor. At this stage, defendants cannot
disclose the entire material as there is possibility that there may be
tampering of evidence. The remedy to the plaintiff is to approach the
Writ Court and not a civil Court. Therefore, he urged that the Notice of
Motion be dismissed.
As to Point No.1 to 4:
Undisputed Facts
10. It is not disputed that GFL availed credit facilities from
consortium of banks, including the defendants and huge amount to the
extent of Rs. 100 Crores is outstanding in the loan account as per the
statement made in the plaint. The plaintiff purchased 32,63,140 shares
of GFL in the year 2008 and plaintiff was the director and is personal
guarantor to the loan. It is further undisputed that the account of GFL
is declared as NPA by all the banks in consortium in the year 2016,
2017 and 2018. It is further admitted position that proceeding under
Section 7 of IBC was initiated against GFL and now the company is
under liquidation. Defendant No.1 declared the account of GFL as
fraud on 07.08.2019. Defendant No.2 declared the account as RFA on
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21.01.2017 and later on as fraud on 30.04.2022.
Locus of the Plaintiff to file the Suit
11. Both the defendants have challenged the locus standi of the
plaintiff to file the suit on behalf of the GFL on the ground that IRP was
appointed on the date of the suit and the company is under liquidation.
It is submitted that under Section 17 of IBC, only IRP can initiate action
on behalf of the company.
12. Undisputedly, the plaintiff is a director of Suspended Board
of GFL. He is also a personal guarantor to the credit facilities. Though
it appears that the company is under liquidation, in view of the penal
consequences proved in clause 8.12 of the Circular dated 01.06.2017,
the interest of the plaintiff as the director of the company is prima facie
affected as it is the plaintiff who may ultimately face the criminal
prosecution, on the account of GFL being declared as fraud. Therefore,
prima facie plaintiff has locus standi to institute the suit and to seek the
reliefs in respect of the declaration.
Jurisdiction of the Court
13. In the judgment of Bank of India V/s. Gupta Coal (Supra), the
Hon’ble Bombay High Court has held that Civil Court has jurisdiction to
try and entertain the suit challenging the declaration of account as
fraud. Therefore, prima facie there is no jurisdictional bar to entertain
the suit.
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Relevant Provisions in the Circular dated 01.07.2016 updated on
03.07.2017 –
14. The relevant clauses in the Circular are quoted under for
easy reference;
2.2.1 In order to have uniformity in reporting, frauds have been
classified as under, based mainly on the provisions of the Indian Penal
Code:
a. Misappropriation and criminal breach of trust.
b. Fraudulent encashment through forged instruments, manipulation
of books of account or through fictitious accounts and conversion of
property.
c. Unauthorised credit facilities extended for reward or for illegal
gratification.
d. Cash shortages.
e. Cheating and forgery.
f. Fraudulent transactions involving foreign exchange.
h. Any other type of fraud not coming under the specific heads as
above.
8.9.4 The initial decision to classify any standard or NPA account as
RFA or Fraud will be at the individual bank level and it would be
the responsibility of this bank to report the RFA or Fraud status of
the account on the CRILC platform so that other banks are alerted.
In case it is decided at the individual bank level to classify the
account as fraud straightaway at this stage itself, the bank shall
then report the fraud to RBI within 21 days of detection and also
report the case to CBI/Police, as is being done hitherto. Further
within 15 days of RFA/Fraud classification, the bank which has red
flagged the account or detected the fraud would ask the consortium
leader or the largest lender under MBA to convene a meeting of the
JLF to discuss the issue. The meeting of the JLF so requisitioned
must be convened within 15 days of such a request being received.
In case there is a broad agreement, the account should be classified
as a fraud; else based on the majority rule of agreement amongst
banks with at least 60% share in the total lending, the account
should be red flagged by all the banks and subjected to a forensic
audit commissioned or initiated by the consortium leader or the
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largest lender under MBA. All banks, as part of the consortium or
multiple banking arrangement, shall share the costs and provide the
necessary support for such an investigation.
8.9.5 The forensic audit must be completed within a maximum
period of three months from the date of the JLF meeting
authorizing the audit. Within 15 days of the completion of the
forensic audit, the JLF shall reconvene and decide on the status of
the account, either by consensus or the majority rule as specified
above. In case the decision is to classify the account as a fraud, the
RFA status shall be changed to Fraud in all banks and reported to
RBI and on the CRILC platform within a week of the said decision.
Besides, within 30 days of the RBI reporting, the bank
commissioning/ initiating the forensic audit should lodge a
complaint with the CBI on behalf of all banks in the
consortium/MBA. For this purpose, if the bank initiating the
forensic audit is a private sector bank, the complaint shall be lodged
with the CBI by the PSU bank with the largest exposure to the
account in the consortium/MBA. If there is no PSU bank in the
consortium / MBA or it is a solo bank lending by a private sector
bank/foreign bank, the private bank/foreign bank shall report to
the Police as per extant instructions. This would be in addition to
the complaint already lodged by the first bank which had detected
the fraud and informed the consortium/MBA.
8.9.6 It may be noted that the overall time allowed for the entire
exercise to be completed is six months from the date when the first
member bank reported the account as RFA or Fraud on the CRILC
platform.
Proceedings of declaration of fraud by defendants
15. Plaintiff is challenging the declaration of fraud primarily on
the ground that the principals of natural justice are not followed by the
defendants and the basis for declaration is not furnished to the plaintiff.
Defendants have taken the stand that RBI Circular does not provide for
giving opportunity of hearing to the borrower or issuance of notice prior
to the initiation of the proceeding. Ld. Advocate for defendant No.2 has
submitted that no disclosure can be made of the said proceeding as
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evidence may be tampered.
16. It is pertinent to note that in reply affidavit, defendant No.2
has described the specific details of the suspicious transactions. If
defendant No.2 could disclose those details in the reply, there was no
difficulty for defendants to bring on record supporting documents or the
Forensic Audit Report to indicate prima facie that the case of the
plaintiff is covered in clause 2.2.1 of the Circular, reproduced above.
However, not a single document is produced by both the defendants in
respect of the proceeding initiated for declaration of the account of the
company as fraud.
17. So far as the grievance of the plaintiff regarding non
adherence to the time limit prescribed in the circular is concerned, it is
apparent that there is huge delay on the part of defendant No.2 to
complete the proceedings in terms of clauses 8.9.4, 8.9.5 and 8.9.6 of
the Circular in declaring the account as fraud. The Circular provides for
fixing accountability in case there is delay and action can be initiated
against the erring officers and staffs of the bank. After going through
the relevant clauses of the Circular, it appears that the time limit to
complete the exercise is prescribed to safeguard the interest of the
banking institutions. Therefore, mere delay in the declaration prima
facie cannot affect the validity of the declaration. However, non
adherence to the timeline prescribed under the Circular by the banks,
especially where there is huge delay, may raise questions about the
sufficiency of the basis for any such declaration and the real object
behind such declaration.
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Judgments cited by the parties
18. The Hon’ble Telangana High Court, in the judgment of
Rajesh Agarwal V/s. Reserve Bank of India (supra) held that the
principle of audi alteram partem, part of the principles of natural
justice, is to be read in Clause 8.9.4 and 8.9.5 of the Master Circular.
The said judgment is under challenge before the Hon’ble Apex Court in
State Bank of India and Ors. V/s. Rajesh Agrawal and Ors.,
Petitions for Special Leave to Appeal No.3931/2021 and the Hon’ble
Apex Court vide its order dated 15.04.2021 stayed the above
observation of the Hon’ble High Court. Thus, the issue as to whether the
principles of natural justice can be read into the relevant clauses of the
Master Circular is now subjudice before the Hon’ble Supreme Court.
19. The Hon’ble Telangana High Court in another judgment of
Yashdeep Sharma Vs. Reserve Bank of India, 2021 SCC OnLine TS
1852, relied upon by the Ld. Advocate for defendant No.1 has taken the
view that no relief can be granted to the petitioner in so far as the issue
of personal hearing is concerned. The Hon’ble Supreme Court has
stayed the observation in respect of personal hearing. In the facts of the
said case, the Hon’ble High Court held that formation of opinion was
based upon the findings arrived at in the Forensic Audit Report and the
account was rightly declared as fraud.
20. In the judgment of Apple Sponge and Power Limited and
Others V/s. Reserve Bank of India and Others (supra), the Hon’ble
Delhi High Court as under
17. To me it prima facie appears that declaring an account as ‘fraud’
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would arise in a case of egregious default on the part of an account
holder, something more than the account holder being a ‘willful
defaulter’. For an account to be declared as ‘fraud’ must entail an
element of criminality on the part of the account holder, which
aught to be inferred only on the basis of some substantial material
which must be put to the errant account holder; and after
considering any explanation such account holder has to offer; and
not unilaterally by a stroke of pen.
21. The Hon’ble Bombay High Court in Surana Developers
(Wadala) LLP V/s. Reserve Bank of India, Writ Petition
No.826/2021 deferred the hearing of the matter involving controversy
concerning declaration of account as ‘fraud’ by observing that the
Hon’ble Supreme Court is considering the controversy on an expeditious
basis and granted adinterim protection to the petitioner. The judgment
in Oswal Apparels Pvt. Ltd. and Others V/s. State Bank of India and
Others, MANU/PH/1231/2017, is in respect of declaration of ‘willful
defaulter’ and the judgment in Satishchandra Ratanlal Shah V/s.
State of Gujrat and Anr., Criminal Appeal No.9/2021, deals with the
offence of cheating. Therefore, both these judgments are not applicable
to the facts of the present case.
Conclusion
22. None of the defendant banks have carried out independent
Forensic Audit Report. The Forensic Audit Report relied upon by them
for declaring the account of GFL as ‘fraud’ is not placed on record.
There is no disclosure of the findings recorded in the said Forensic
Audit Report which formed basis for declaration of account as ‘fraud’.
Moreover, the validity of the declaration and the legality of the
procedure adopted by the defendants depends upon the decision of the
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Hon’ble Supreme Court on the Master Circular dated 01.07.2016. As
observed by the Hon’ble Bombay High Court in the judgment of Surana
Developers (Wadala) LLP V/s. Reserve Bank of India, the Hon’ble
Supreme Court is considering the controversy on expeditious basis. In
the event, the observation of the Hon’ble Telangana High Court in
respect of personal hearing is upheld by the Hon’ble Supreme Court, the
legality of the proceedings adopted by the defendants will be affected.
In these circumstances, in view of the final relief claimed in the suit, an
order of restraint is necessary for restraining the defendants from acting
upon the declaration.
23. As regards the submission of Ld. Advocates for the
defendants in respect of bar under Section 41 of the Specific Relief Act,
under Section 41(d) of the Act, injunction cannot be granted to restrain
any person from instituting or prosecuting any proceeding in criminal
matter. In the present case, the further proceeding of filing complaint is
based upon the declaration of account as ‘fraud’ and the said
declaration is under challenge in the suit. This Court has come to
conclusion that the validity of the declaration depends upon the
decision of the Hon’ble Supreme Court. In these circumstances, at this
juncture, prima facie bar under Section 41(d) of the Specific Relief Act
is not attracted in the present facts.
24. The plaintiff is not claiming any relief in respect of the
recovery proceedings initiated by the banks. Plaintiff has made out
prima facie case to restrain defendants from taking further steps on the
basis of the declaration of account as ‘fraud’ at least till the decision of
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the Supreme Court on the controversy regarding the Circular. The relief
clauses (a) to (d) and (f) of the Notice of Motion are in the nature of
final reliefs in the suit and thus cannot be granted at this stage.
However, in the light of the above discussion, relief clause (e) can be
considered. To that extent balance of convenience is in favour of the
plaintiff and plaintiff may suffer irreparable loss if injunction is refused.
The Notice of Motion deserves to be partly allowed to the extent of
prayer clause (e) only. Thus point Nos.1 to 4 are answered in the
affirmative and following order is passed:
ORDER
1. Notice of Motion No. 972 of 2020 is partly allowed in following
terms:
2. Defendants, their agents, servants, officers or any person claiming
through them are restrained by an order of injunction from acting upon
the declaration of the account of GFL as fraud till further order of the
court.
3. It is made clear that this order shall not affect the recovery
proceedings by the banks in any manner whatsoever.
4. Notice of Motion No. 972 of 2020 is disposed off.
(S.B. Pawar)
Judge,
Dated: 17/10/2022 City Civil and Sessions Court,
Greater Bombay (CR 59)
Declared on : 17.10.2022
Direct Typed on : 17.10.2022
Checked on : 03.11.2022
Signed On : 04.11.2022
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CERTIFIED TO BE TRUE AND CORRECT COPY OF THE ORIGINAL
SIGNED JUDGMENT/ORDER”
08.11.2022 at 11.55 a.m. Mrs. P.R.Wagh
UPLOAD DATE AND TIME NAME OF STENOGRAPHER
Name of the Judge (with Court
Room No.)
HHJ SHRI.S.B.Pawar,(C.R.No.59)
Judge.,City Civil & Sessions Court,
Date of pronouncement of /Order 17.10.2022
Order signed by P.O. on 04.11.2022
order uploaded on 08.11.2022
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