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.3243 OF 2019
IN
STAMP NO.9159 OF 2019
Sunil Ratnakar Gutte & Ors. … Plaintiffs
V/s.
UCO & Ors. … Defendants
Appearances :
Ld. Adv. Shrinivas Bobade a/w Adv. Priyanka Dubey for plaintiff.
Ld. Adv. Prakash Shinde for defendants.
CORAM : HIS HONOUR JUDGE
SHRI MILIND V. KURTADIKAR
(C.R. No.20)
DATED : 23rd OCTOBER, 2019
ORDER
Plaintiff's have taken out this notice of motion for
temporary injunction restraining the defendants from acting upon their
declaration of plaintiffs account as fraud.
2. Plaintiffs are the suspended directors promoter and
guarantors of Sunil Hitech Engineers Limited (hereinafter referred as
Company). The defendants are the consortium lenders of said
Company. Plaintiffs are in default of repayment of loan. Plaintiffs
account went into NPA. Defendant initially declared their account as
“Red Flagged Account” (hereinafter referred as RFA) and thereafter
they have declared their account as fraud. Plaintiffs have challenged
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the very declaration as fraud being without following the procedure
given in master circular and against rule of natural justice.
3. It is their case that in the year 1984 Company is
incorporated by Gutte family. The Company has very good track of
record. They have successfully completed various big projects across
the country. In the year 2008 plaintiff entered into business of
construction of Civil works in power sector. The Company has base of
500 members. Now it is a major engineering, procurement &
construction Company in India. The defendants are the bankers of
plaintiff. They have sanctioned credit facilities after due diligence and
by accepting sufficient securities.
4. That the Companies operation has been under strain and
the liquidity suffered on account of various external reasons which were
beyond the control of management. Therefore the Companies account
became irregular due to losses and ultimately has been classified as
NPA. Even some other established Companies dealing in same business
also facing same set back. From April 2018 the defendants have
restricted the stock and discontinued the issuance of bank guarantee for
the project undertaken by plaintiff and plaintiff and its joint venture
Companies. Similarly plaintiff Could not recover dues from their
customers for various reasons.
5. There is master circular issued by R.B.I. for declaring any
account as fraud by following certain procedure. Here, defendants have
not followed the procedure given in master circular and declared
plaintiffs account as fraud. Even they have not followed the rule of
natural justice by not giving opportunity of hearing to plaintiffs. There
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are very serious consequences of declaration of any account as fraud.
Considering said serious nature of consequences it was mandatory for
defendants to follow the procedure as well as time line given in master
circular. On said submission plaintiff prayed for injunction restraining
defendants from acting on declaration of plaintiffs account as fraud.
6. Defendant no.1 UCO Bank has filed the reply on behalf of
all the banks/consortium. It is the first and foremost submission of
defendant that plaintiff are the borrowers and guarantors of
borrower/defaulter Company SHEL and has availed various credit
facilities under the consortium led by UCO Bank to the tune of
Rs.1875.50 crores and have not repaid said loan amounts. The
borrower Company is under the Corporate Insolvency Resolution
Process (CIRP) under the Insolvency and Bankruptcy Code 2016 and
rules and regulations thereunder. The NCLT has passed order for
liquidation of borrower Company and appointed the liquidator.
Therefore, in view of said process suspended directors have no locus
standi to file suit and claim the relief.
7. That a sum of Rs.1875.50 crores is due as on date against
plaintiff. They have failed and neglected to repay the amount. The
Companies account was declared as NPA on 17.07.2018. As per
Forensic Audit the borrower Company has diverted funds to sister
Companies and have not utilized the loan amount for the purpose for
which it was granted. There is siphoning off huge amounts alongwith
falsification of accounts. Therefore plaintiffs account is declared as
fraud by following the guidelines given in the master circular. The
consortium lenders have initiated recovery proceeding before DRT as
well as under SARFAESI Act. So also NCLT has passed the order of
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liquidation by appointing the liquidator. As such plaintiffs are not
entitled to file suit and seek relief on liquidation of Company. In order
to give go by to liquidation process and to avoid the consequences on
declaration of fraud plaintiff has filed this suit and seeking relief to
which plaintiffs are not entitled to.
8. Heard Learned Counsel appearing on behalf of plaintiff and
defendants and also gone through the plaint and reply given by
defendant.
9. 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 plaintiffs accounts is declared as fraud. 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 fraud.
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.
10. Defendant came with a preliminary objection that suit is
not maintainable in view of declaration by NCLT about liquidation of
borrower Company and appointment of liquidator. It is argued that
NCLT has passed liquidation order and appointed the official liquidator.
Therefore in view of section 17 of I & B Code as well as as per section
231 of I & B Code suit is not maintainable. As against this the Ld.
Counsel for plaintiff relied on judgment of our High Court (Nagpur
bench) in the case of Bank of India V/s. Gupta Coal Company (Civil
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Revision 97/2017 decide on 04.09.2018) about maintainability of suit
before Civil Court.
11. I have gone through section 17 of the I & B Code 2016.
Said chapter is regarding Corporate Insolvency Resolution Process
(CIRP). As per said section after appointment of Interim Resolution
Professional (IRP) the management of affairs of corporate debtor vest in
(IRP). So also the powers of directors, partners and guarantors stand
suspended. So also as per section 231 of said Code no Civil Court have
jurisdiction in respect of any matter in which the adjudicating authority
is empowered by or under, this Court to pass any order and no
injunction shall be granted by Court in respect of any action taken in
pursuance of order passed by adjudicating authority. So on going
through above sections and more particularly section 231 of IB Code
there is bar in respect of matter within the jurisdiction of adjudicating
authority i.e. NCLT. So also there is bar to pass injunction order in
respect of any action taken by said authority.
12. It is an admitted position on record that defendants have
approached before NCLT, DRT and also started recovery proceeding
under the SARFAESI and other available Acts. Since beginning it is
made clear by Ld. Counsel for plaintiff that plaintiff is not against the
recover proceedings nor by way of this suit plaintiff is challenging or
restraining the recover proceeding. No doubt plaintiff is not challenging
the recovery proceedings nor challenging the proceedings which is
pending before NCLT. Here, plaintiff being suspended directors are
challenging their declaration as fraud as without following the
procedure given in master circular. Therefore, in my opinion the bar as
contemplated under section 231 of IB Code will not apply here.
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13. Moreover Ld. Counsel for plaintiff invited my attention
towards the decision of Hon'ble High Court in the case of Bank of
India V/s. Gupta Coal (Nagpur bench) decided on 04.09.2018. 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 process of law. 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 as fraud under the master circular issued by R.B.I.
Therefore, such suit of declaration is maintainable before Civil Court.
14. it is further argued by Ld. Counsel for defendant that
plaintiff is asking for injunction against action of defendant on declaring
their account as fraud. It is the right accrued to defendant by way of
master circular. Therefor in view of provisions of Section 41(d) of the
Specific Relief Act. injunction cannot be granted. I have gone through
section 41 of Specific Relief Act. It is regarding “injunction when
refused”. As per sub section(d) injunction cannot be granted to restrain
any person from instituting or prosecuting any proceeding any Criminal
matter. No doubt in such case injunction cannot be granted. However
here the circumstances are some what different. Plaintiff is making
grievance that declaration of fraud is not as per procedure laid down in
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master circular. Plaintiff is challenging the virus of the action taken by
defendant. In such circumstances if said decision is not taken an
accordance with the procedure laid down, then the aggrieved party has
every right to ask for injunction. So the bar as mentioned in section
41(d) of Specific Relief Act is not applicable here.
15. 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 fraud is not proper. As against this it is the defence of
defendant bank that before declaring plaintiff as fraud 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 fraud while it is the defence
of defendant bank that plaintiff are declared as fraud 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 fraud.
16. It is the first grievance of plaintiff that in master circular
certain time line is given for completing the process of declaring any
account as fraud. As per said circular the maximum time limit is six
months. Here, plaintiffs account declared as RFA on 21.06.2018 while
fraud is declared on 02.09.2019. It goes to show that defendants have
not observed the time limit given in master circular.
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17. I have gone through the master circular issued on
01.07.2016. It is master circular on fraud. Chapter VIII of said master
circular deals with loans fraud, new frame work. Rule 8.9 deal with
lending under consortium or multiple banking arrangement.
Admittedly here is case of consortium. As per sub rule 8.9.4 after
declaration of fraud by individual bank it has to be reported to R.B.I.
within 21 days. Further within 15 days of fraud classification the
individual bank ask the consortium leader to convene a meeting to
discuss the issue. Such meeting must be convened within 15 days of
such request. In case there is a broad agreement the account should be
classified as a fraud else based on the majority. Decision can be taken
subjected to a Forensic Audit. As per rule 8.9.5 the Forensic Audit must
be completed within a maximum period of three months and within 15
days of the completion of the Forensic Audit the JLF shall reconvene
and decide on the status of the account. As per rule 8.9.6 the overall
time allowed for the entire exercise is of six months from the date when
the first member bank reported the account as fraud. Here, admittedly
plaintiffs account is declared as RFA on 21.06.2018 while it is declared
as fraud on 02.09.2019. It clearly goes to show that defendants bank
have not followed time limit as specified in master circular. Even no
any explanation is comingforth from defendant about not following the
time limit.
18. Relying on such delay the Ld. Counsel for plaintiff
submitted that considering the serious consequences on declaration as
fraud it can be said that the time limit given in master circular is
mandatory. The Ld. Counsel for defendant submitted that the issue of
time limit is in between defendant bank and R.B.I. and R.B.I. will take
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care of not following the time limit. I have gone through the chapter of
consequences on declaration as fraud. Considering said serious nature
consequences it can be construed that the time limit given in master
circular is mandatory in nature. So this issue will go against the
defendants.
19. Rule 2.2 of master circular deals with classification of
fraud. It says that fraud 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) Unauthorized credit facilities extended for reward or for
illegal gratification.
d) Cash shortages.
e) Cheating and forgery.
f) Fraudulent transactions involving foreign exchange.
g) Any other type of fraud not coming under the specific
heads as above.
20. Here it is alleged by defendant that plaintiffs have diverted
the funds to sisters Companies, they have used the loan amount for the
purpose other than the purpose for which it was sanctioned. Plaintiffs
also siphoned of huge amount and there is falsification and
manipulation of accounts. As per reply of defendants all above detected
in Forensic Audit Report conducted by M/s. Desai Saksena and
Associates dated 19.07.2019. However, neither the copy of Forensic
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Audit Report is supplied to plaintiff nor defendants have taken care to
place it on record to corroborate their contention about irregularities
carried out by plaintiff in Criminal nature as mentioned in master
circular. So without going through the Forensic Audit Report the
decision of defendant declaring plaintiff as fraud cannot be justified. It
is defendants contention that plaintiff has diverted and siphoned off the
funds. It is also their contention that said fact is noticed in Forensic
Audit. In such circumstances Forensic Audit Report is the best and
relevant evidence to decide the issue. In absence of said report the
order of defendant declaring plaintiff as fraud will not sustain. As such
plaintiff has made out primafacie case.
21. Now next question is of following rule of natural justice i.e.
opportunity of hearing to other party. Here, as per master circular no
where it is mentioned that before taking such decision Bank should give
hearing the defaulter/borrower. It is argued by Ld. Counsel for plaintiff
that considering this procedural aspect and consequences on declaration
as fraud it is quite but natural and it is explicit that chance of hearing
should have been given to plaintiff. Here, there are two letters by
defendant dated 02.03.2019 and 02.04.2019 addressed to plaintiff. By
those letters defendants have informed to plaintiff that there account
are declared as NPA and they are following due procedure for declaring
their account as fraud. By way of first letter plaintiff was called upon to
file say. It is a matter of record that plaintiffs have replied by their
letter dated 21.03.2019 and they have asked the defendants to give
them chance of hearing and to provide the copies of documents relied
on by them. It is admitted position on record that despite said demand
the defendants have not provided documents or Forensic Audit Report
to plaintiff.
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22. 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
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 fraud 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
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the opinion that opportunity of hearing ought to have been given to
plaintiff's before taking decision of fraud. Therefore the balance of
convenience lies in favour of plaintiff.
23. Here, plaintiff is not claiming the relief against the recover
proceedings initiated by lenders Bank. The Ld. Counsel for plaintiff
fairly submitted that plaintiff is not making any grievance here about
the recovery proceeding initiated by defendant under various forums.
As per Ld. Counsel plaintiff is only seeking relief against declaration of
fraud being without following due procedure. As per consequences of
declaration as fraud there is no bar for taking steps for recovery of loan
amount. It goes to show that defendant Bank can go ahead with
recovery proceedings. However, considering above discussion I am of
the opinion that primafacie there is material on record to show that
defendant has not followed due procedure before declaring plaintiffs
account as fraud. Therefore balance of convenience is in favour of
plaintiffs.
24. It is a matter of record that the consequences of declaration
of fraud 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 pass the
order.
ORDER
1. NM No.3243/19 in Stamp No.9159/19 is hereby made
absolute in terms of prayer clause (b).
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2. Defendants, their agents, servants or any person claiming
through them are hereby restrained from acting on
their declaration of plaintiffs account as fraud and from
taking any coercive action against plaintiffs on such
declaration 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 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.: 23/10/2019 City Civil Court, Gr. Mumbai
Dictated on : 23.10.2019
Transcribed on : 23.10.2019
Signed on : 23.10.2019
sbk/
“CERTIFIED TO BE TRUE AND CORRECT COPY OF THE ORIGINAL SIGNED
JUDGEMENT/ORDER”
UPLOAD DATE TIME NAME OF STENOGRAPHER
24.10.2019 05.40 p.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.
23.10.2019.
Judgement/order signed by P.O on 23.10.2019.
Judgement/order uploaded on 24.10.2019.
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