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.3327 OF 2019
IN
STAMP NO.9396 OF 2019
Mr. Abhay Narendra Lodha … Plaintiff
V/s.
Union Bank of India & Anr. … Defendants
Appearances :
Ld. Adv. Karan Bhosale a/w Adv. Priyanka Dubey a/w
Adv. Megha Gupta for plaintiff.
Ld. Adv. Prakash Shinde for defendants.
CORAM : HIS HONOUR JUDGE
SHRI MILIND V. KURTADIKAR
(C.R. No.20)
DATED : 24th OCTOBER, 2019
ORDER
Plaintiff has taken out this notice of motion for temporary
injunction restraining the defendant no.1 from acting upon their
declaration of plaintiffs account as fraud.
2. Plaintiff is the promoter, personal guarantor and Director of
suspended board of borrower Company i.e. Defendant No.2 Topworth
Steels & Power Private Limited Company (hereinafter referred as
“Company”). The defendant no.1 is the lender of said Company.
Plaintiff is in default of repayment of loan. Plaintiffs account went into
NPA. Defendant initially declared said account as “Red Flagged
Account” (hereinafter referred as RFA) and thereafter they have
MHCC01009061 2019
-- 1 of 16 --
Order Below NM 3327/19 .. 2 .. Stamp No.9396/19
declared his account as fraud. Plaintiff has challenged the very
declaration as fraud being without following the procedure given in
master circular and against rule of natural justice.
3. It is the case of plaintiff that Company is incorporated in
the year 2004. It has very good track record. The Company is dealing
into manufacturing of structural steel long products like Beams,
Channels and angles, MS Billets and Sponge iron. The sponge iron is a
substitute for scrap and is mainly used in making steel through the
secondary route. The Company has awarded various certifications for
completing the projects in time. Defendant no.1 is the lender of
plaintiff. It has sanctioned various credit facilities after due diligence
and by accepting sufficient securities in the form of collateral securities
and personal guarantee.
4. Since 2013 the iron steel industry is passing through a
difficult situations. Such industries further came under pressure by
cheap import of steel from China and Russia. In the year 2017 the steel
industry witnessed its toughest set back. Other reputed Companies
dealing in same business also got said set back. Therefore, Companies
account became irregular and classified as NPA. Plaintiff has tried his
best and requested the defendants for reconstruction. Unfortunately it
was not materialized.
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 plaintiff. There
-- 2 of 16 --
Order Below NM 3327/19 .. 3 .. Stamp No.9396/19
are very serious consequences of declaration of any account as fraud.
Considering said serious nature 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
defendant no.1 from acting on declaration of plaintiffs account as fraud.
6. Defendant no.1 has resisted the application by way of
reply. It is their contention that plaintiff is the promoter and director of
suspended board of said borrower Company who has availed various
credit facilities from this defendant and other consortium. Plaintiff has
availed loan to the tune of Rs.2036,51,32,740.58/ from the consortium
while an amount of Rs.156 crores from defendant no.1. 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. It is further argued that as on December 2017 an amount
near about Rs.156 crores is due against plaintiff. He has failed and
neglected to repay the loan amount. The Companies account has
declared as NPA in the year 2016. As per Forensic Audit Report the
borrower Company has remitted substantial advances to the suppliers
wherein neither material was received nor the advances were
recovered. Such transaction appears to be ambiguous in nature.
Majority of the advances extended to various entities, related parties,
associates concerns were adjusted/squared off with creditors and
debtors through joint venture for which no confirmation letters were
-- 3 of 16 --
Order Below NM 3327/19 .. 4 .. Stamp No.9396/19
produced from verification. It amounts to diversion of funds. Such
irregularities were noticed in the Forensic Audit Report. Therefore,
plaintiffs account is declared as fraud as per master circular issued by
R.B.I. The consortium lender State Bank of India has approached the
NCLT. So also recovery proceedings were initiated before DRT under
the SARFAESI Act. The NCLT has passed liquidation order and
appointed the liquidator. Therefore suspended director has no locus
standi to file suit on behalf of borrower Company. This suit is filed in
order to create hurdle in recovery proceeding as well as to avoid the
consequences on declaration as fraud. As such plaintiff is not entitled to
relief sought.
8. Heard Learned Counsel appearing on behalf of plaintiff and
defendant no.1 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 him 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
-- 4 of 16 --
Order Below NM 3327/19 .. 5 .. Stamp No.9396/19
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
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
-- 5 of 16 --
Order Below NM 3327/19 .. 6 .. Stamp No.9396/19
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 director is
challenging the 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.
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 sides
arguments 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 him 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
his 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
-- 6 of 16 --
Order Below NM 3327/19 .. 7 .. Stamp No.9396/19
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
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 is 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.
-- 7 of 16 --
Order Below NM 3327/19 .. 8 .. Stamp No.9396/19
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, there in no information on record as to when plaintiffs
account was declared as RFA. There is only information is that
plaintiffs account is declared as fraud on 08.10.2018. So it goes to show
that defendant no.1 has not observed the time limit given in master
circular. As against this it is the submission of Ld. Counsel for
defendant that plaintiffs account is declared as fraud on 08.10.2018. It
was reported to R.B.I. on 26.10.2018. So it goes to show that
defendant has followed the time limit given in master circular.
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 8.8 deals with
bank as sole lender. As per said rule in case of sole lender the fraud
monitoring group (FMG) will take a call on whether an account in
which early warning signals are observed should be classified as RFA.
This exercise should be done within a month from EWS being noticed.
The Bank may use external auditors including Forensic experts.
However, said exercise has to be done within six months from
declaration as RFA. Here no where defendant bank came with clear
statement as to when plaintiffs account is declared as RFA. It is only
contention that plaintiffs account was declared as fraud on 08.10.2018.
In absence of exact date of declaration as RFA it is difficult to conclude
whether defendant bank has declared plaintiffs account has fraud
within six months from RFA. As defendant bank is silent about date of
declaration of the account as RFA, adverse inference can be drawn that
defendant bank has not adhered the time limit of six months in
-- 8 of 16 --
Order Below NM 3327/19 .. 9 .. Stamp No.9396/19
declaring plaintiffs account as fraud. Even no explanation is given on
behalf of defendant bank for keeping mum regarding date of
declaration of plaintiffs account as RFA. So this point will go against
defendant bank.
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
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.
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
-- 9 of 16 --
Order Below NM 3327/19 .. 10 .. Stamp No.9396/19
heads as above.
20. Here it is alleged by defendant that plaintiff has diverted
the funds to sisters Companies, he has used the loan amount for the
purpose other than the purpose for which it was sanctioned. Plaintiff
also siphoned off 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. N V Dand and Associates
dated 29.01.2019. However, neither the copy of Forensic Audit Report
is supplied to plaintiff nor defendant has 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. Here Ld. Counsel for defendant mainly relied on minutes of
lenders meeting of borrower Company held on 18.02.2018 wherein the
representative of plaintiff were also present. Ld. Counsel argued that in
the minutes of meeting it is very clear about diversion and siphoning off
funds by borrower Company. Said minutes noticed various
irregularities in the functioning of borrower Company. I have gone
through said minutes of meeting dated 18.02.2018. As per said minutes
diversion of funds and siphoning off amounts is noticed. As per said
-- 10 of 16 --
Order Below NM 3327/19 .. 11 .. Stamp No.9396/19
minutes Forensic Auditor was appointed and as per its report above
irregularities were noticed. So the conclusion in said meeting is based
on Forensic Audit Report. However as discussed in foregoing para
neither copy of Forensic Audit Report is supplied to plaintiff nor it is
placed on record. So in absence of Forensic Audit Report the conclusion
in above meeting cannot be relied upon.
22. The Ld. Counsel for defendant also relied on Special
Investigation Audit (SIA) conducted by defendant bank. He argued that
the SIA is self explanatory. It shows several irregularities done by
plaintiff. Therefore said report is sufficient to show that plaintiff has
done such irregularities which can cover definition of fraud as
mentioned in rule 2.2 in master circular. As against this it is argued by
Ld. Counsel for plaintiff that based on SIA there was discussion in the
consortium meeting. However the meeting has not reached to the
findings. Therefore said report cannot be considered as conclusive for
declaration of plaintiffs account as fraud. I have gone through the
minutes of meeting dated 07.12.2016 wherein SIA was discussed.
Admittedly there was discussion on certain issues of irregularities
committed by plaintiff. However no further material is placed on record
to show that the consortium has finally reached to any conclusion.
Moreover copy of alleged SIA is not on record to corroborate the
contention of defendant bank about irregularities carried out by
plaintiff. Therefore the irregularities mentioned in SIA cannot be relied
upon.
23. 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
-- 11 of 16 --
Order Below NM 3327/19 .. 12 .. Stamp No.9396/19
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 is one letter issued by
plaintiff dated 15.01.2019 to defendant calling upon to submit the
documents and material relied by Bank in declaring plaintiffs account as
fraud. It is admitted position on record that despite said demand the
defendant has not provided documents or Forensic Audit Report to
plaintiff.
24. 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.
-- 12 of 16 --
Order Below NM 3327/19 .. 13 .. Stamp No.9396/19
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
the opinion that opportunity of hearing ought to have been given to
plaintiff before taking decision of fraud. Therefore the balance of
convenience lies in favour of plaintiff.
25. In citations at serial no.4 (supra) in the case of Moserbaer
India Limited it is observed that “An opportunity of hearing ought to be
effective hearing. Fair play demand that the documents/evidence on
which identification Committee relied before issuing a show cause
notice, must be shared or shown to the petitioner/borrower company so
that they can put forward their defence and explain purport of the
documents.” Similarly in another citation of M/s. Oswal Apparels
Private Limited (supra) it is observed that “it is also settled principle 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 principles of natural justice. That apart, the petitioners ought to
have been afforded adequate opportunity to present their case in its
correct perspective.” So considering above ratio I am of opinion that
before taking decision the defendant bank ought to have given
opportunity of hearing to plaintiff/borrower. In absence of it balance of
-- 13 of 16 --
Order Below NM 3327/19 .. 14 .. Stamp No.9396/19
convenience lies in favour of plaintiff.
26. 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
plaintiff.
27. The Ld. Counsel for defendant relied on citation of Hon'ble
Apex Court reported in (2012) 6 Supreme Court Cases 792. Said
citation is on the point of factors to be considered while granting
temporary injunction. It is observed that primafacie case in favour of
party seeking relief is not enough. It must be shown that injury suffered
by plaintiff on refusal of temporary injunction would be irreparable. No
doubt while granting injunction it is necessary to consider above
mentioned factors. Here as per above discussion primafacie case and
balance of convenience is in favour of plaintiff. Therefore if defendant
bank is allowed to go ahead without following due procedure then it
amounts to causing irreparable loss to plaintiff.
28. The Ld. Counsel for defendant also argued that plaintiff has
-- 14 of 16 --
Order Below NM 3327/19 .. 15 .. Stamp No.9396/19
filed similar nature suit in the Court at Durg. In that suit plaintiff
prayed for temporary injunction. It was rejected by that Court and
therefore plaintiff cannot seek similar relief here. As against this Ld.
Counsel for plaintiff submitted that initially suit was filed in the Court
at Durg. However, said suit is withdrawn with liberty to file fresh suit.
Therefore this suit is maintainable. Here I may say that defendants
have not produced any documents on record to show that temporary
injunction application filed by plaintiff was rejected in the Court at
Durg. Therefore said contention cannot be relied upon. As against this
it is clarified by plaintiff that said suit was withdrawn with liberty to file
fresh suit. As defendants have not produced any documents, there is no
reason to disbelieve plaintiffs version that said suit was withdrawn with
liberty to file fresh suit. Therefore suit is maintainable here.
29. 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 and without following the
procedure given in master circular 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 his favour. So with this discussion I proceed to pass the order.
ORDER
1. NM No.3327/19 in Stamp No.9396/19 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 on their
declaration of plaintiffs account as “fraud” and from taking
any coercive action against plaintiff on such declaration
-- 15 of 16 --
Order Below NM 3327/19 .. 16 .. Stamp No.9396/19
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.: 24/10/2019 City Civil Court, Gr. Mumbai
Dictated on : 24.10.2019
Transcribed on : 01.11.2019
Signed on : 02.11.2019
sbk/
“CERTIFIED TO BE TRUE AND CORRECT COPY OF THE ORIGINAL SIGNED
JUDGEMENT/ORDER”
UPLOAD DATE TIME NAME OF STENOGRAPHER
02.11.2019 05.02 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.
24.10.2019.
Judgement/order signed by P.O on 02.11.2019.
Judgement/order uploaded on 02.11.2019.
-- 16 of 16 --