Calcutta High Court
Ramesh Chandra Bardia vs State Bank Of India And Ors on 24 January, 2023
In The High Court at Calcutta
Constitutional Writ Jurisdiction
Original Side
The Hon'ble Justice Sabyasachi Bhattacharyya
W.P.O. No.12 of 2021
RAMESH CHANDRA BARDIA
VS
STATE BANK OF INDIA AND ORS.
AND
W.P.O. No.13 of 2021
MANOJ TOSHNIWAL
VS
STATE BANK OF INDIA AND ORS.
AND
W.P.O. No.20 of 2021
MKN INVESTMENT PRIVATE LIMITED
VS
STATE BANK OF INDIA AND ORS.
AND
W.P.O. No.24 of 2021
BIPLAB SHANKAR BOSE
VS
STATE BANK OF INDIA AND ORS.
AND
W.P.O. No.26 of 2021
SWAPAN KUMAR DATTA
VS
STATE BANK OF INDIA AND ORS.
For the petitioner : Mr. Mainak Bose,
Ms. Urmila Chakraborty,
Mr. Rishav Karnani,
Mr. Pranav Sharma
2
For the respondent Bank : Mr. Joy Saha,
Mr. Anirban Pramanick,
Ms. Subhasree Dey
Hearing concluded on : 20.12.2022
Judgment on : 24.01.2023
The Court:
1. The Managing Directors/Personal Guarantors of EMC Limited, a
company registered under the Companies Act, 2013 have preferred the
present writ petitions, all against a Wilful Defaulter Identification
Committee (IC) order dated February 24, 2020, whereby the petitioners
were identified as Wilful Defaulters, and a Review Committee (RC) order
confirming the same, communicated on December 28, 2020.
2. The EMC Limited (for short, "the company"), as the principal borrower,
availed of a loan from a consortium of banks, of which the State Bank
of India was the lead bank. On an application of an operational creditor
under Section 9 of the Insolvency and Bankruptcy Code, 2016 (in brief,
"the IBC"), a Corporate Insolvency Resolution Process (CIRP) started on
November 12, 2018. The committee of creditors consisted of all the
consortium banks. A resolution plan was approved by the committee of
creditors and sanctioned by the Adjudicating Authority (NCLT, Kolkata
Bench) on October 21, 2019.
3. On February 8, 2019, the IC issued a show cause notice based on the
audited balance sheet of the company for the financial year 2016-17, to
which a representation was made by the petitioners. The IC, by its
order dated February 24, 2020, declared the petitioners to be wilful
defaulters. The petitioners filed a representation against the IC order
before the RC which passed its order, affirming the order of the IC, on
July 8, 2020 and communicated the same to the petitioners on
December 28, 2020.
4. Learned senior counsel for the petitioners assails the IC and RC orders
on several grounds. First, the allegation of non-utilisation of funds for
the specific purpose of the loan and diversion of funds for other
purposes is contended to be baseless and contrary to the appraisal
notes for the financial years 2014-15, 2015-16, 2016-17 and 2017-18
and also contrary to the recordings made in the minutes of the
consortium meetings.
5. Insofar as the second allegation of transferring borrowed funds to
subsidiary group companies of Rs. 23.21 Crore as per balance sheet for
2016-17 is concerned, it is submitted that the bank, after analysis and
verification of transactions of the previous year, issued each year's
appraisal note and renewed the loan. The appraisal note for renewal of
loan for 2017-18 took into consideration all transfers and investments
made during 2016-17 and records that all the said investments and
loans and advances extended towards associates/subsidiaries are
strategic in nature and considered acceptable. The loan was also
renewed. Hence, it is argued, the respondents are barred by Estoppel,
Acquiescence and Waiver from disputing the said transactions.
6. Learned senior counsel for the petitioners argues that all transfers of
funds to subsidiaries and investments were made with full notice to,
and knowledge of, the consortium members. Moreover, the investments
were within 20% of the cash accrual of the previous year, as per terms
of the sanction. That apart, it is submitted, the investments were made
over an eight-year period from financial year 2010-11 to 2016-17 and
not in 2016-17 only, which is recorded in the disclosed audited balance
sheets.
7. The allegation of investments being made by the company to the tune of
Rs. 139.05 Crore in different companies without the approval of the
lenders is also denied. The appraisal note for financial year 2017-18
specifically considers such investments and approves the same as
being strategic in nature and considered acceptable.
8. It is alleged that the IC failed to consider the promoter's infusion into
the funds as per sanction.
9. The ID, it is contended, held that in a consortium meeting held on
September 25, 2018 it was confirmed that the company maintains a
current account with the HDFC Bank which was opened without the
permission of the lenders. Such account, however, was opened in 2005,
much prior to the sanction of loan by the respondent-bank.
10. Although the IC recorded that the investments were recorded in several
joint lenders' meetings to be strategic and mainly to expand business,
but also held that such investments made from the funds of the lenders
never yielded any return and was also not returned to any of the
consortium lenders. Such finding was based on the financial
statements for the financial year 2016-17 and found place first in the
ID order of 2020, although not reflected from the appraisal notes
between 2011-12 and 2016-17.
11. Neither the IC nor the RC, it is argued, took into consideration the
various details disclosed in the representations given by the petitioners
at each of those stages. The RC did not take into consideration the
petitioners' representation since the same was filed beyond 15 days.
Learned counsel for the petitioners further argues that the RC failed to
undertake an independent assessment on the events of wilful default
and merely reproduced the IC report.
12. The IC and RC, it is alleged, travelled beyond the grounds enumerated
in the show cause notice and held the petitioners to be wilful
defaulters.
13. That apart, it is contended that the show cause notice is based on the
events of 2016-17, in which financial year there was admittedly no
default and the mechanism of wilful defaulter declaration could not
have been resorted to.
14. In support of the said contention, learned senior counsel for the
petitioners cites Axis Bank Ltd. Vs. Gaurav Dalmia, a Division Bench
judgment of this court.
15. It is further argued that the IC as well as the RC orders are otherwise
contrary to the judgment of the Supreme Court in State Bank of India
vs. Jah Developers Private Limited [(2019) 6 SCC 787]] .
16. The Single Bench decisions of this court dated December 23, 2020 in
Suresh Kumar Patni vs. Punjab National Bank & Ors. and Kejriwal
Mining Pvt. Ltd. & Ors. vs. Allahabad Bank &Ors., reported at 2020 SCC
OnLine Cal 1050, are also relied on by the petitioners.
17. It is reiterated on behalf of the petitioners that the initiation of
proceedings for declaration of Wilful Defaulter was contrary to the
Reserve Bank of India (RBI) Master Circular of July, 2015.
18. It is argued that the allegations of events of wilful default are based on
the audited balance sheet of the borrower company for the financial
year 2016-17. However, it would be evident from the appraisal note for
the said financial year that there was no default in the said period. The
lead bank, that is, the SBI, recorded therein that the conduct of the
account is satisfactory and there was no instance of devolvement of LCs
and invocation of BGs ever.
19. Hence, placing reliance of the Division Bench judgment of this court in
Axis Bank Ltd. vs. Gaurav Dalmia & Ors. (supra), is argued that when
there is no default during the period complained of, no proceedings
could be initiated under the Master Circular.
20. The respondent bank has admittedly accepted the investments in other
companies in the appraisal notes of each year. Once accepted, the same
amounts to approval, since the Master Circular does not require prior
approval for such investments. The investments had the approval of the
lenders and were never complained of till the issuance of the show
cause notice in February, 2019.
21. It is factually denied that the investments were in excess of the terms of
the sanction, that is, above 20% of the cash accrual of the previous
year. Even if so done, it is submitted that the same was subsequently
accepted and approved and as such stood waived and does not qualify
as an event of wilful default under the Master Circular. Such
ratification of the investments by the consortium banks over the years,
which were considered to be in the business interest of the company, is
argued to operate as estoppel against the respondent bank from taking
any action thereon.
22. Such stand, it is argued, is contradictory to the process note issued by
the respondent bank on January 3, 2017 for working capital
assessment for the financial year 2016-17, which recorded that the
investments were made for expansion of the activities of the borrowing
company in diversified market and for the purpose of expanding its
global presence. The argument, it is contended, is raised in course of
final hearing for the first time, although not raised either in the show
cause notice or dealt with in the order of either the IC or the RC.
23. Although the ground, that the borrower has not used the finance
advanced for the specific purpose for which it was given, was alleged in
the show cause notice, the IC did not provide any evidence in support
thereof or arrived at any finding on the said issue. Hence, it is argued
that the bank's stand is inconsistent.
24. Hence, both the orders of the IC and the RC respectively ought to be set
aside, learned senior counsel contends.
25. Learned senior counsel appearing for the respondents contends that
the specific performance for which the finance was availed of by the
petitioners was mentioned in the Sanction Letter dated January 19,
2017. Such performance was to procure several construction materials
like cement, MS Angle, tower materials etc. As the projects of the
company are executed at various places all over India and normally at
remote places, therefore the LCs can be opened for transporting of
materials through transporters who may not be approved by the IBA.
26. However, the loan amount was diverted for other purposes. The year-
wise movements of the funds from March 31, 2011 to March 31, 2017,
as reflected in the relevant documents, indicate that the petitioner had
admittedly made loans and advances over a period of years and the
same were duly disclosed in the audited accounts of the respective
years.
27. As per the audited balance-sheet for the financial year 2016-2017, the
company had made an investment of Rs.139.05 crores in different
companies. Such investments were made over a period of years in the
ordinary course of business, allegedly with full knowledge of banks and
other consortium bankers.
28. It has been admitted by the petitioner that all investments and
advances to group/other companies were properly recorded in the
books of accounts, details of which are claimed to be well-known to all
lenders through submission of audited accounts and other documents
submitted to the SBI as a part of compliance. The loans and advances
extended to associates/subsidiaries were admitted by the petitioner to
have digressed from Rs.35.61 crore in financial year 2016 to Rs.23.21
crore in financial year 2017. Thus, above diversion of funds to group
companies and subsidiaries are admitted.
29. Learned senior counsel appearing for the respondents places reliance
on the definition of diversion of funds as contemplated in Clause 2.2.1
of the Master Circular and submits that the act of the petitioners falls
squarely within the said definition.
30. Learned counsel specifically argues that, in the present case, Clause
2.1.3, sub-clauses (b) and (c) as well as the definition of siphoning off
funds in Clause 2.2.2 are satisfied, for which the petitioners have been
held to be wilful defaulters. The defence of the petitioners to the
admitted diversion of funds is two-fold according to the respondents:
a) The diversion was within the permissible limit of 20% and
b) The diversion was strategic in nature and was condoned by the
banks.
31. With regard to the first defence, the sanction letter of the bank dated
October 8, 2014 provided that a maximum cap of 20% of the cash
accruals as on the last balance-sheet of the company will be allowed for
the purpose of investments/advances/guarantees to its
subsidiaries/associate companies in a year. All such
investment/advances were to be done with prior approval from the lead
bank.
32. However, the said letter and the conditions thereof were superseded by
the subsequent sanction letter dated January 19, 2017, which does not
contained any clause with regard to the investment of 20% of cash
accruals with subsidiaries/associate banks. Thus, it is argued by the
respondents, on and from January 19, 2017 such remission of 20% of
cash accruals became impermissible, in spite whereof the accruals
continue to be disbursed to subsidiaries and group companies.
33. No documents have been produced to show what the cash accruals
were in each year or whether such cash accruals were the contribution
of promoters or not.
34. Thus, the diversion of any funds of the lenders without necessary
consent of the lenders cannot be explained by contending that such
advances/diversions were within the 20% cap.
35. Regarding the second submission that the diversion was strategic in
nature and condoned by the banks, not a single document has been
produced by the petitioners to show any prior permission of the bank.
Admittedly, the banks came to know of the diversions from their
reflection in the financial statements of the borrower-company. The
purported condonation was, thus, at best post facto. Learned senior
counsel for the respondents argues that the attraction of the clauses of
the Master Circular is automatic the moment there is diversion of
funds. The issue of condonation does not arise inasmuch as the
classification of wilful defaulter is concerned.
36. It is contended that irrespective of any diversion being condoned or not,
the Master Circular applies.
37. Learned senior counsel appearing for the respondents next submits
that the order of the IC dated December 19, 2019 provided elaborate
reasons.
38. The same demonstrates due consideration and application of mind.
39. The decision of the RC dated December 28, 2022 contains a table
where the diversion of funds was tabulated, on the basis of which the
RC came to the finding that there has been a diversion of funds. The
RC also takes note of the balance-sheet for the financial year 2016-
2017. The RC has also noted that as per Note 39 of the audited
balance-sheet for the year 2016-2017, the company has made an
investment of Rs.139.05 crore in different companies. Only after
considering the balance-sheet, the RC came to the conclusion that
there was diversion of funds without the approval of lenders. The RC
order is also reasoned and well-considered.
40. Learned senior counsel next contends that this Court, in exercise of
jurisdiction under Article 226 of the Constitution, does not sit in appeal
over an administrative decision but only enforces fundamental rights or
legal rights or legal duties or rights in performance of legal duty and
defends the abuse of power or neglect by public authorities.
Interference if the decision is vested by error apparent on the face of
record is also possible, but the High Court does not look into the
sufficiency of the grounds. Learned counsel cites, in this context, West
Bengal Central Service Commission Vs. Abdul Hamid, reported at (2019)
18 SCC 39.
41. Clause 2.2.1(d) of the Master Circular also provides for routing of funds
through any bank other than the lender bank or members of
consortium without prior permission of the lender as a ground for
declaration of Wilful Defaulter. In the present case, it is admitted that
the petitioners were routing money through the HDFC bank, which is
not a part of the consortium. Hence, the petitioners are liable to be
classified as wilful defaulters under Clause 2.2.1(d) of the Master
Circular.
42. The petitioners have argued by way of defence that the HDFC bank
account was in operation since prior to the consortium loan/advance.
However, Clause (O), which is a part of the sanction letter dated
January 19, 2017, clearly provides that the petitioners cannot have any
current account in any other bank which is not a member of the
consortium. Thus, the petitioners acted not only in violation of Clause
2.2.1(d) of the Master Circular but also the terms of the sanction letter
of January 19, 2017.
43. In the reply to the show-cause notice dated February 8, 2019, given by
the petitioners in March, 2019, the diversion of funds to group
companies and subsidiaries was repeatedly admitted.
44. While distinguishing the cases cited by the petitioners, learned senior
counsel for the respondents argues that Axis Bank Ltd. (supra) holds
that once the resolution of a company in a CIRP succeeds and money
due to the bank thereunder is paid in full, the classification of wilful
default would be liable to be removed. However, this is subject to the
fact that there are no personal guarantees furnished by any of the writ
petitioners. In the present case, the borrower company went through a
successful resolution process. However, the successful resolution
applicant failed to pay the money, as a result whereof the resolution
ultimately failed. In the circumstances, no money was recovered by the
bank; as such, the decision in the matter of Gaurav Dalmia (supra) is
not applicable. In any event, in the present case, there were personal
guarantors, for which the said cited judgment is also not applicable.
45. Inasmuch as the ratio laid down in State Bank of India vs. Jah
Developers Private Limited (supra) is concerned, the same has no
application, it is argued. The only proposition laid down therein is that
the borrower will have complete liberty to make a full representation
both before the IC and the RC. In the present case, there is no
complaint that the borrower was not allowed to make full
representation before both committees. In fact, the petitioners filed
reply and representation before both the IC and the RC, which were
disposed of by orders. As such, Jah Developers Private Limited (supra)
also has no application to the present case.
46. Suresh Kumar Patni (supra) is based, it is contended, only on its facts
and does not lay down any proposition of law. On an appreciation of
facts, the court arrived at a finding that the orders of the IC and RC
were passed violating all norms of natural justice and consequently
those orders were set aside. Having regard to the fact that the said
case is based on the peculiar facts of the same, it cannot be used as a
precedent.
47. Lastly, learned senior counsel argues that Kejriwal Mining Pvt. Ltd.
(supra) is also not applicable since this Court was of the opinion that
the petitioner had adopted dilatory tactics and consequently the orders
of the two committees were upheld. Having regard to the fact that this
is a case where orders of the two committees were upheld by the writ
court, this case has no relevance nor is applicable to the facts of the
present case. It is, thus, argued that the writ petitions ought to be
dismissed.
48. Upon considering the submissions of parties, the first aspect which has
to be considered is the scope of interference by the writ court in the
present case. A composite reading of the IC and RC orders indicates
that ample reasons were given while coming to the decisions in both the
orders. Inasmuch as the finds of fact on merits are concerned, it is
beyond the domain of the writ court to interfere. As rightly contended
by the respondents by placing reliance on Abdul Hamid's Case (supra),
there is no scope of this Court sitting in appeal over the decision of the
committees, more so since there is no jurisdictional error apparent on
the face of the records, nor can there be found any fault in the decision-
making process adopted by the respondent authorities.
49. The approval notes relied on by the petitioners are undoubtedly
documents which indicate post facto knowledge of the consortium
banks with regard to the loans/advances and investments. However,
the sanction letter dated January 19, 2017, also annexed to the writ
petition and not being a disputed document, does not provide for
transfer of funds to subsidiaries.
50. However, in the present case, the borrower company admittedly made
loans and advances over a period of years. The said fact is evident from
the audited balance-sheet for the financial year 2016-2017 itself, which
also reveals that the company had made an investment of Rs.139.05
crores in different companies.
51. Although the defence of such funds being utilised for strategic interests
has been pleaded by the petitioners, the mere coinage of the vague
expression "strategic interests" does not mitigate the action of the
borrower company in utilising the finance obtained from the lender for
purposes other than the specific purpose for which the finance was
availed, giving rise to a diversion of funds as contemplated in Clause
2.1.3(b) of the Master Circular.
52. The said act of the borrower also tantamounts to siphoning off the
funds as the funds have not been utilised for the specific purpose for
which the finance was availed of, as envisaged in Clause 2.1.3(c) of the
Master Circular. The ingredients of 'diversion of funds', as stipulated in
Clause 2.2.1, are also satisfied in the present case, which is evident
from the documents considered by the IC and the RC respectively. Not
only were the investments made beyond the terms of the sanction and
for other purposes than for which the loan was sanctioned, borrowed
funds were admittedly transferred to the subsidiaries, group
companies, for whatever reasons.
53. It is also an admitted position that funds were being routed through the
HDFC, a non-consortium bank. The petitioners' contention that the
transactions with the said bank had been going on prior to the loan
does not cut much ice, since such transactions continued even after
the loan was taken. In fact, the sanction letter clearly debarred the
petitioners from doing so; yet, such transactions were carried on
through the HDFC by the petitioners. The apprehension of at least a
portion of such transactions being funded by the loan amount cannot
be ruled out.
54. In the present case, the IC and the RC concurrently found that the
said instances amounted to siphoning of funds and such judgment of
the lenders could not be said to be devoid of a consideration of objective
facts and circumstances. As such, merely because a different view may
be possible, this Court cannot interfere with the decisions of both the
committees in its writ jurisdiction.
55. It has been rightly contended by the respondents that the petitioners
have admitted the making over of the loans and advances, which were
disclosed in the audited accounts of the company. In fact, the
documents scrutinised by the committees were themselves sufficient to
come to the conclusion that the petitioners were wilful defaulters as per
the stipulations of the Master Circular of the RBI.
56. Since there was no provision in the sanction letter dated January 19,
2017 for investment of 20% of cash accruals in subsidiaries, which was
there in the October 8, 2014 sanction letter, there does not arise any
question of such defence being taken by the petitioners for the admitted
transfer of funds by way of investment/advances to its subsidiaries
and/or group companies.
57. The contention of the petitioners that the approval notes by the banks
amounted to approval for the purpose of satisfying the restrictions as
imposed in that regard in the sanction letter does not hold its ground,
since subsequent knowledge of the banks cannot be a determinant in
deciding as to whether such investment/advances were with our
without prior approval from the lead bank.
58. No condonation as such by the consortium banks can be found from
the records for the purpose of furnishing a defence to the petitioners for
violating the specific clauses of the Master Circular as cited in the IC
and the RC orders.
59. The petitioners got ample opportunity and filed representations before
both the committees, which were duly considered by the said
committees. As such, the proposition laid down in Jah Developers Pvt.
Limited (supra) is not attracted to the present case at all.
60. In the present case, there are personal guarantors. Moreover, the
Corporate Insolvency Resolution Process did not culminate in fruition,
although the same was successful initially, because of the failure of the
successful resolution applicant to pay the money. Hence, Gaurav
Dalmia's case (supra) is not applicable.
61. As far as Suresh Kumar Patni (supra) and Kejriwal Mining (supra) are
concerned, nothing in the said judgments comes to the aid of the
petitioners in alleviating the charges of wilful default brought by the IC
and confirmed by the RC.
62. The RC, instead of mechanically reproducing the IC order, scrutinised
the merits of the same and rendered its decision thereon.
63. In such view of the matter, the orders of the IC and the RC cannot be
said to be vitiated by any irregularity or patent miscarriage of justice
whatsoever.
64. Thus, the writ petitions fail. Accordingly, W.P.O. No.12 of 2021, W.P.O.
No.13 of 2021, W.P.O. No.20 of 2021, W.P.O. No.24 of 2021 and W.P.O.
No.26 of 2021 are dismissed on contest without any order as to costs.
65. Urgent certified copies of this order shall be supplied to the parties
applying for the same, upon due compliance of all requisite formalities.
( Sabyasachi Bhattacharyya, J. )
