Final Order 1

Order Details: Notice of Motion
Pdf Text: CNR No.
IN THE BOMBAY CITY CIVIL COURT AT BOMBAY
ORDER BELOW NOTICE OF MOTION NO.3050 OF 2019
IN
S.C. SUIT NO.2211 OF 2019
Mr. Ashwin Narendra Lodha & Ors. … Plaintiffs
V/s.
Bank of Baroda & Ors. … Defendants
Appearances :
Ld. Adv. Shrinivas Bobade a/w Adv. Priyanka Dubey for plaintiff.
Ld. Adv. Dinesh Bamne for defendant no.1 to 3.
CORAM : HIS HONOUR JUDGE
SHRI MILIND V. KURTADIKAR
(C.R. No.20)
DATED : 05th OCTOBER, 2019
ORDER
Plaintiff's have taken out this notice of motion for
temporary injunction restraining the defendants from acting upon their
declaration of plaintiff as willful defaulter.
2. It is the case of plaintiff that plaintiff nos.1 to 4 are the
directors/alleged guarantors of M/s. Akshata Marcantile Private Limited
(hereinafter called as AMPL). Defendant no.1 is the one of the lender
of AMPL while defendant no.2 & 3 are the committees of the first
defendant formed for the purpose of identification of willful defaulters
under the guidelines issued by RBI. AMPL is trading into iron and steel
business like HR and CR coils. The company has very good track record
MHCC01000927201 9
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of its business. The defendant bank alongwith other banks under the
consortium of state bank of India has sanctioned loan as well as credit
facilities to plaintiff. Said loans are secured by the securities in the form
of movable as well as immovable properties. Defendant bank has
sanctioned credit facility of Rs.152 Crores to plaintiff. Since beginning
plaintiff was maintaining the loan account very regular and was prompt
in repayment of loan.
3. However, during the period of 2010 to 2017 the steel
industry witnessed its toughest time with no more demand for steel
products. China was the largest steel producer in the world also
witnessed a slowdown in this economy. China has dumped its steel
relatively at cheaper rate in India. It has brought very huge impact on
AMPL business as well as other reputed steel companies. So also AMPL
was finding it difficult to realize the debtors in timely manner. It has
adversely affected its cash loan. The defendant no.1 has declared
plaintiffs account as NPA. Moreover, defendant bank has declared
plaintiff's as willful defaulter without following due procedure given in
the master circular as well as by violation of rules of natural justice.
The defendant bank has declared plaintiff as willful defaulter without
giving opportunity of hearing. Said decision has very severe and grave
consequences. Therefore, declaration of willful defaulter is not in
accordance with law. On said submission plaintiff prayed for injunction
restraining the defendant from acting against plaintiff upon declaration
of willful defaulter.
4. Defendant bank has resisted the application. It is
submitted that defendant bank has granted credit facility and other cash
facilities to plaintiff under security of movable and immovable
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properties. The consortium of banks has granted credit facility of near
about 500.00 Crores. Plaintiff has availed the credit facilities.
However, it became highly irregular in operating the accounts in respect
of cash credit facilities. The operation of said accounts was very poor
and unsatisfactory. Plaintiff failed and neglected to serve the monthly
interest in respect of the said credit facilities on several months. It has
failed and neglected to submit stock statement and failed to maintain
sufficient level of hypothecated securities. In spite of repeated request
plaintiff failed and neglected to regularize the account of said cash
credit facilities. Consequently, the accounts became overdrawn and
went of out of order. Therefore, on 29.11.2015 plaintiffs account is
classified as NPA (None Performing Assets) as per the R.B.I. guidelines.
5. As plaintiff's have failed and neglected to pay the dues,
defendant has initiated action against plaintiff for recovery of loan
before DRT and under SARFAESI Act. During Forensic Audit in the year
2016, it revealed that plaintiff has committed several acts of defaults in
payment and repayment of its obligations and diverted and siphoned off
the funds. Based on Forensic Audit report and in view of master
circular defendant bank has issued notice to plaintiff as to why it should
not be declared as willful defaulter. Despite receipt of notice, plaintiff
has not made any representation. Therefore, based on Forensic Audit
report and default in obeying the obligations the willful defaulter
committee has declared plaintiff as willful defaulter by order dated
13.12.2018. Said decision is confirmed by review committee on
29.01.2019. The said order is duly communicated to plaintiff on
14.02.2019. As plaintiff has declared as willful defaulter defendant has
got the legal right to take action upon such declaration of willful
defaulter. In order to give go by to said declaration and to create
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hurdle in recovery of loan amount plaintiff has filed this notice of
motion.
6. Heard Learned Counsel appearing on behalf of plaintiff and
defendants and also gone through the plaint and reply given by
defendant.
7. Here, it is the contention of defendant bank that plaintiff
has diverted and siphoned off the loan amount and not kept the
obligations of repayment of amount in time. Therefore, based on
Forensic Audit report plaintiff has declared as willful defaulter. As
against this it is the grievance of plaintiff that defendant has not
followed due procedure laid down in master circular while declaring
them as willful defaulter. Defendant has not given opportunity of
hearing and thereby not followed the rule of natural justice. Before
going towards the factual aspect it will be better to deal with the legal
objections raised by defendant bank.
8. Defendant came with the case that suit is not tenable in
view of provisions of section 9 of CPC. It is argued that as per
explanationI to section 9, a suit in which the right to property or to an
office is contested, is a suit of Civil nature. Here the suit is neither
related to property nor an office. Therefore, such declaratory suit is not
a Civil suit within the meaning of section 9 and therefore it is not
tenable. As against this it is argued by plaintiff that, this is a suit for
declaration against the action initiated by defendant. Plaintiff is
challenging the virus of action taken by defendant and therefore suit
will lie as per section 9 of CPC.
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9. Section 9 of CPC deals with jurisdiction of the Civil Courts
and bar thereon. It says that Court is empowered to try all Civil suits
unless barred by law. It is settled legal position is that Civil Court has
every jurisdiction to try the suit. No doubt Civil Court cannot try and
entertain the suit which are expressly or impliedly barred. Here,
plaintiff is seeking declaration against the action of defendant declaring
them as willful defaulter. The action leveled by defendant is based on
master circular issued under R.B.I. guidelines. Therefore, in my opinion
nothing will bar from presenting such grievance before Civil Court. As
such I am of opinion that Civil Court has every jurisdiction to try and
entertain such nature of suit. Therefore, this objection fails.
10. Another defence of defendant is about maintainability of
suit before Civil Court. It is argued that as per the master circular
issued under R.B.I. guidelines, once the financial institution or any
person declared as willful defaulter then as per its consequences it
directly affects the fundamental rights of persons. Therefore the only
remedy to challenge said action is by way of Writ Petition before
Hon'ble High Court. As such suit before Civil Court is not maintainable.
11. As against this it is the contention of Ld. Counsel for
plaintiff that, suit is maintainable before Civil Court. There is no
express or implied bar in R.B.I. guidelines and master circular nor in
any Act. Therefore suit being of Civil nature is maintainable before
Civil Court.
12. Both Ld. Counsel have relied on citations in support of their
contention. The Ld. Counsel for defendant has relied on decision of
Hon'ble Apex Court in the case of State Bank of India V/s. M/s. Jah
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Developers Pvt. Ltd. & Ors. decided on 08.05.2019. I have gone
through said citation. The question before Hon'ble Apex Court was
whether the person is entitled to be represented by a lawyer before
declaring him as willful defaulter. So also next question was whether
an oral hearing is required to be given to the defaulter/borrower under
revised master circular dated 01.07.2015. It is observed that the willful
default committee/inhouse committee are not vested with judicial
power of the State. All their powers being of administrative nature. As
such States judicial power will not vest in such inhouse committee.
Therefore, no lawyer has right to appear before said committee before
declaring any person as willful defaulter. While deciding whether oral
hearing is necessary before committee, it is observed that the rule of
natural justice can be followed by giving liberty to make written
representation and therefore it is not mandatory to give oral hearing in
each and every case.
13. So from above citation no where it was the question before
the Court whether Civil Court has jurisdiction or not. No doubt in said
citation it is observed that the consequences of declaring willful
defaulter has impact on fundamental right of person. However, no
where it is observed that in no case Civil suit will not be maintainable.
On the other hand the Learned Counsel for plaintiff relied on decision
of Hon'ble High Court of Bombay (Nagpur bench) decided on
04.09.2018 by Lordship Chandurkar. As per facts of said case the
company accounts declared as fraud and said action of bank is
challenged before the Court. Bank has raised the objection that, Civil
Court has no jurisdiction to entertain the suit. It is observed that the
relief sought is a declaration that the action of defendant bank in
declaring plaintiffs account as fraud is illegal and without following due
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process of law. Therefore it is further observed that in the light of
challenge as raised, it would be the Civil Court that would retain
jurisdiction to entertain the suit. So on considering both the citations as
above, I am of the opinion that the ratio in citation relied on by plaintiff
of Nagpur bench (Supra) is much more applicable here. Here also
plaintiff is seeking declaration against the action of defendant declaring
them willful defaulter under the master circular issued under the
guidelines of R.B.I. Therefore, such suit of declaration is maintainable
before Civil Court.
14. So far as factual aspect is concerned it is the grievance of
plaintiff that, defendant bank has not followed the guidelines and
procedure as given in master circular and therefore the declaration of
plaintiff as willful defaulter is not proper. As against this it is the
defence of defendant bank that before declaring plaintiff as willful
defaulter bank has followed the guidelines and procedure given in
master circular by giving fair opportunity to plaintiff to place their case.
So the nature of dispute is that it is the contention of plaintiff that
defendant has not followed proper procedure before declaring them as
willful defaulter while it is the defence of defendant bank that plaintiff
has declared as willful defaulter by following due procedure laid down
in master circular. It is settled legal position that, Court will not expect
nor anyone can bring the negative evidence. Court will expect positive
evidence and in case of failure to bring it, negative inference has to be
drawn. So little more burden is on defendant to show that it has
followed due procedure before declaring plaintiff as willful defaulter.
15. I have gone through the revised master circular dated
01.07.2015 issued by R.B.I. It is master circular on willful defaulters.
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Rule2 speaks about guidelines on willful defaulters while Rule3
provides mechanism for identification of willful defaulters. As per Rule
2.1.3 a willful default would be deemed to have been occurred, if the
unit has diverted the funds for other purpose, if the unit has siphoned
off the funds by not utilizing for the purpose for which it was granted
and lastly unit has disposed off or removed movable or immovable
property given under security. Here, as per show cause notice dated
12.09.2018, defendant has alleged about diversion and siphoning of
funds by plaintiffs.
16. Now Rule3 of said master circular provides the mechanism
for identification of willful defaulters. As per clauseb of Rule3, if the
committee concludes that an event of willful default has occurred, it
shall issue a show cause notice to the concerned borrower and call for
submissions and after considering submissions, issue an order recording
the fact for willful default and the reasons for the same. It goes to show
that before declaring anyone as willful defaulter the bank has to give
opportunity of submission in the form of written representation and by
considering it, has to pass reasoned order. Let us see what procedure is
followed by the defendant.
17. No doubt as per defendant on 12.09.2018 show cause
notice was issued to plaintiff giving opportunity of submitting written
representation within 15 days. It is a matter of record that during
aforesaid period plaintiff has not made any written representation. As
per defendant thereafter on 13.12.2018 WDC (willful defaulter
Committee) has passed order declaring plaintiff as willful defaulter.
Said order of WDC is confirmed by review committee on 29.01.2019.
On 14.02.2019 defendant has communicated said order to plaintiff.
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18. Based on above eventualities it is the defence of defendant
that despite opportunity plaintiff has not made written representation
and therefore, there was no option before WDC other than to pass
order. As against this plaintiff is challenging the very authority of
person issuing the show cause notice. It is a matter of record that by
reply dated 25.12.2018 plaintiff has raised certain queries and asked
the defendants to furnish copies of some documents. It is argued on
behalf of plaintiff that, as per master circular only executive director or
officer at the rank of GM/DGM can only be member of WDC. Here,
show cause notice dated 12.09.2018 is issued by Assistant General
Manager. Therefore it is not notice at all in the eye of law.
19. No doubt show cause notice is issued by AGM. However it
is also matter of record that plaintiff has not made representation in
response to show cause notice. However, as per Rule3 (b) of master
circular the WDC is supposed to pass reasoned order. Here the entire
allegations of defendant bank are based on alleged Forensic Audit
report dated 26.08.2016. Even the orders of WDC and review
committee are based on said Forensic Audit report. However, despite
demand by plaintiff defendant has not supplied the copies of Forensic
Audit report to plaintiff. To utter surprise defendant bank has not taken
care to produce copy of said Forensic Audit report on record. So
without going through the Forensic Audit report no one can justify the
order of WDC declaring plaintiff willful defaulter. Plaintiff has diverted
and siphoned off the funds is the main grievance of defendant bank. It
is also their contention that said facts is discovered in Forensic Audit.
Therefore, in my opinion Forensic Audit report was the only and
relevant evidence to judge the case. In absence of said report the order
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of defendant declaring plaintiff as willful defaulter will not sustain. As
such plaintiff has made out primafacie case.
20. Next question is of following the rule of natural justice i.e.
opportunity of hearing should be given before taking decision. Even as
per master circular there is procedure for calling written submission by
the defaulter borrower. Here, in response to show cause notice dated
12.09.2018 plaintiff has not made said representation. However it is a
matter of record that by letter dated 25.12.2018 plaintiff has raised its
grievance and called upon the defendant to supply copies of documents
relied on by them including Forensic Audit report. The final decision by
review committee is taken on 29.01.2019 while it was communicated to
plaintiff on 14.02.2019. So considering the dates it can be seen that
before taking decision by review committee reply of plaintiff dated
25.12.2018 was before the defendant. In such circumstances it was
incumbent for the defendant to consider said reply before taking
decision. However, defendant has not taken care to consider the reply.
It goes to show that proper opportunity of hearing is not given to
plaintiff.
21. On the point of opportunity of hearing and rule of natural
justice the Learned Counsel for plaintiff has relied on following
citations...
(I) Writ Petition (Lodg.) No.345/2011 Finolex Industries
Limited & Anr. V/s. Reserve Bank of India & Ors. Bombay
High Court dated 23/24 August, 2011.
(II) Writ Petition No.2483/2016 Parekh Aluminex Limited
V/s. Allahabad Bank & Ors. with Writ Petition No.2485/2016
Devanshu Praveen Desai V/s. Allahabad Bank & Ors. with
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Writ Petition No.2487/2016 Deepen Arun Parekh V/s.
Allahabad Bank & Ors. Bombay High Court dated 27.06.2017.
(III) Civil Writ Petition No.3307/2016 M/s. Oswal Apparels
Pvt. Ltd, Ludhiana & Ors. V/s. State Bank of India, Ludhiana
& Anr. Punjab & Haryana High Court dated 14.02.2017.
(IV) S.B. Civil Writ Petition No.7488/2016 Moserbaer India Ltd.
V/s. State Bank of Bikaner & Jaipur & Anr. Rajasthan at
Jaipur Bench Jaipur dated 07.09.2016.
I have gone through all the citations. The ratio is that a
determination in regard to an entity being a willful defaulter can only
be made after compliance with the procedure laid down in master
circular. Absent compliance with the procedural norms and upon a
breech of principals of natural justice, the decision would stand vitiated.
It is further observed that it is settled principal of law that the
documents that are relied upon by any authority in arriving at a
conclusion must be made available to the affected party to conform to
the principals of natural justice. So also the party ought to have been
afforded adequate opportunity to present their case. So considering
above ratio I am of the opinion that opportunity of hearing ought to
have been given to plaintiff's before taking decision of willful defaulter.
Therefore the balance of convenience lies in favour of plaintiff.
22. It is a matter of record that the consequences of declaration
of willful defaulter are much serious in nature inclusive of penal
consequences. Therefore, without giving opportunity it is not expected
to take such decision. If it is allowed to go ahead, then it will cause
irreparable loss to plaintiff. As such plaintiff has made out primafacie
case to grant relief in their favour. So with this discussion I proceed to
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pass the order.
ORDER
1. NM No.3050/19 in SU No.2211/19 is hereby made
absolute in terms of prayer clause (a).
2. Defendants, their agents, servants or any person claiming
through them are hereby restrained from acting against
plaintiffs on their declaration as “Willful defaulters” and
from taking any coercive action against them pending the
hearing and till final disposal of the suit.
3. It is needless to say that defendant bank is at liberty to
proceed against plaintiff under SARFEASI Act regarding
recovery proceeding, attachment, sale of attached property
to recover the defaulted loan.
4. Cost as in cause.
( MILIND V. KURTADIKAR )
Judge, (C.R. No.20)
Dt.: 05/10/2019 City Civil Court, Gr. Mumbai
Dictated on : 05.10.2019
Transcribed on : 09.10.2019
Signed on : 09.10.2019
sbk/
“CERTIFIED TO BE TRUE AND CORRECT COPY OF THE ORIGINAL SIGNED
JUDGEMENT/ORDER”
UPLOAD DATE TIME NAME OF STENOGRAPHER
16.10.2019 11.05 a.m. Sanjay Baliram Kaskar
(Stenographer Higher Grade)
Name of the Judge HHJ Shri M.V. Kurtadikar
(CR No.20)
Date of Pronouncement of
Judgement/Order.
05.10.2019.
Judgement/order signed by P.O on 09.10.2019.
Judgement/order uploaded on 16.10.2019.
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