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.3326 OF 2019
IN
STAMP NO.9395 OF 2019
Mr. Abhay Narendra Lodha … Plaintiff
V/s.
Corporation Bank Limited & Ors. … Defendants
Appearances :
Ld. Adv. Priyanka Dubey a/w Megha Gupta for plaintiff.
Ld. Adv. Prakash Shinde for defendants.
CORAM : HIS HONOUR JUDGE
SHRI MILIND V. KURTADIKAR
(C.R. No.20)
DATED : 23th OCTOBER, 2019
ORDER
Plaintiff has taken out this notice of motion for temporary
injunction restraining the defendants from acting upon their declaration
of plaintiffs account as fraud.
2. Plaintiff is the promoter, personal guarantor and suspended
Director of Defendant No.3 Topworth Steels & Power Private Limited
(hereinafter referred as “Company”). The defendant no.1 and 2 are the
lenders 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 declared his account as fraud. Plaintiff has
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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 and 2 are the lenders
of plaintiff. They have 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
are very serious consequences of declaration of any account as fraud.
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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
defendants from acting on declaration of plaintiffs account as fraud.
6. Defendant no.1 and 2 have resisted the application by their
separate reply. However the contention raised in their reply is similar
in nature and therefore narrated in common. 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 these
defendants 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.111 crores from defendant no.1 and near about Rs.252 crores from
defendant no.2. 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 of
Rs.111 crores and Rs.252 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 2015. 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
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debtors through joint venture for which no confirmation letters were
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
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 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
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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
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
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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 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
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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
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.
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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 22.08.2017 while
fraud is declared on 31.05.2019. It goes to show that defendants have
not observed 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 8.9 deal with
lending under consortium or multiple banking arrangement.
Admittedly here is case of multiple Banking. 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 has to 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
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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
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.
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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 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. Here Ld. Counsel for defendant is 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 minutes Forensic Auditor was appointed and as per its report above
irregularities were noticed. So the conclusion in said meeting is based
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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. 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
plaintiff dated 18.07.2019 and 06.06.2019 addressed to defendants. By
those letters he has asked the defendants to give him 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.
23. 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.
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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
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.
24. 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
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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.
25. The Ld. Counsel for defendant also argued that plaintiff has
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.
26. 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 his favour. So with this discussion I proceed to pass the order.
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ORDER
1. NM No.3326/19 in Stamp No.9395/19 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
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 : 24.10.2019
sbk/
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“CERTIFIED TO BE TRUE AND CORRECT COPY OF THE ORIGINAL SIGNED
JUDGEMENT/ORDER”
UPLOAD DATE TIME NAME OF STENOGRAPHER
02.11.2019 01.10 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 24.10.2019.
Judgement/order uploaded on 02.11.2019.
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