Calcutta High Court
Hemant Kanoria & Anr vs Saxena & Saxena & Ors on 6 November, 2024
OD- 4
IN THE HIGH COURT AT CALCUTTA
(ORDINARY ORIGINAL CIVIL JURISDICTION)
ORIGINAL SIDE
G.A. No. 1 of 2024
In
C.S. No. 190 of 2024
HEMANT KANORIA & ANR.
-VS-
SAXENA & SAXENA & ORS.
BEFORE:
The Hon'ble JUSTICE KRISHNA RAO
Hearing Concluded On : 07.10.2024
Order On : 06.11.2024
Appearance:
Mr. Ratnanko Banerji, Sr. Adv.
Mr. Jishnu Chowdhury, Adv.
Mr. Deepan Kumar Sarkar, Adv.
Mr. Soumalya Ganguli, Adv.
Mr. Samriddha Sen, Adv.
Mr. Biswaroop Mukherjee, Adv.
... for the plaintiffs.
Mr. Dhruv Dewan, Adv.
Mr. Anoop Rawat, Adv.
Mr. Saurav Panda, Adv.
Mr. Deepanjan Dutta Roy, Adv.
Ms. Arushi Chandra, Adv.
Ms. Sanjana Jha, Adv.
Ms. Rashi Sharma, Adv.
...for the defendant nos. 2 to 23.
2
ORDER
1. The plaintiffs have filed the present application praying for grant of
interim order. The plaintiffs have filed the suit praying for declaration
that the audit report is illegal, null and void and other prayers.
2. The plaintiffs were the shareholders of SREI Infrastructure Finance
Limited (SIFL). SREI Infrastructure Finance Limited is the holding
company of and owns 100% shareholding in SREI Equipment Finance
Limited (SEFL), the plaintiffs were the directors of a SEFL and SIFL.
3. On 4th October, 2021, the Reserve Bank of India under the provisions of
Section 45(IE) of the Reserve Bank of India Act, 1934, issued a
Notification regarding the appointment of Mr. Rajneesh Sharma as the
Administrator with respect to the management and affairs of the above
two companies. The Board of Directors of the said two companies were
superseded and the Administrator took over the affairs and
management of the said two companies.
4. The Reserve Bank of India in exercise of powers conferred under
Section 227 read with Section 239(2)(zk) of the Insolvency and
Bankruptcy Code, 2016 and initiated Corporate Insolvency Resolution
Process (CIRP) in respect of the SREI Entities. The Adjudicating
Authority in respect of the said two companies for CIRP on 8th October,
2021.
5. By an email dated 6th December, 2021, the defendant No. 2 has
appointed the defendant no.1 for the purpose of carrying out a forensic
audit in respect of the affairs of SEFL. The forensic audit to be
conducted by the defendant no.1 with respect to the affairs of SEFL
relating to the period from 1st April, 2016 to 30th September, 2020 and
are restricted to transaction relating to the IL & FS group of companies
which are as follows:
"a. Gujarat Integrated Maritime Complex
Private Limited;
b. Sealand Ports Private Limited;
c. IL&FS Transportation Networks Limited;
d. IL& FS Energy Development Company
Limited;
e. Chennai Nashri Tunnelway Limited; and
f. Fagne Sonagadh Expressway Limited."
6. The defendant no.1 on completion of forensic audit has published
report on 7th February, 2022.
7. Mr. Ratnanko Banerji, Learned Senior Advocate representing the
plaintiffs submits that the plaintiffs came to know about the
publication of forensic report only on 25th June, 2024. He submits that
in respect of the transactions of the SREI Entities (other than IL & FS),
KPMG Limited had been appointed as auditor for the purpose of
conducting forensic audit and KPMG has published multiple reports.
8. Mr. Banerji submits that the defendant no.1 has been required by the
defendant no.2 to carry out a forensic audit in respect of SEFL in or
around 6th December, 2021. On the said date, SEFL had already been
admitted for CIRP and all the records of SEFL were under the control of
the Administrator/ Resolution Professional. He submits that without
specific concurrence of the Administrator, no step could have been
taken and the report reveals that without any permission, the
defendant no.1 carried out the forensic audit upon consulting records
obtained from the Administrator.
9. Mr. Banerji submits that the report is not conclusive and no
responsibility has been taken by the defendant no.1. He submits that
the report is not reliable, incapable of being acted upon and is not an
audit report in law. He submits that the report contains disclaimers
and is contrary to the norms of ICAI. He submits that the report is
partial in nature, selective and without context inasmuch as the
present management of the SREI Entities, who alone had been
consulted by the defendant no.1 while preparing the report and did not
provide email communications between erstwhile management and
SREI Credit Sanctioning Committee personnel and Ledgers of IFIN
(IL&FS group entity) in the books of group entities of SEFL/SIFL.
10. Mr. Banerji submits that as per applicable auditing norms, the
defendant no.1 was required to enquire with the plaintiffs as to whether
they had any real or actual contemporaneous knowledge of any alleged
fraud concerning the SREI Entities. He submits that the audit report
had been undertaken well after the supersession of the Board of the
SREI Entities on 4th October, 2021, the plaintiffs had not been either
consulted or approached by the defendant no.1 while preparing the
audit report.
11. Per contra, Mr. Dhruv Dewan, Learned Advocate representing the
defendant nos. 2 to 23 submits that in the present application, no
interim order can be granted. He submits that the plaintiff has also
challenged the report submitted by KPMG in C.S. No. 242 of 2023 but
no interim order is passed. He submits that forensic report is not a
final report and it is only a show cause.
12. Mr. Dewan submits that in the case of Hemant Kanoria Vs. Bank of
India (WPA No. 28329 of 2023) dated 2nd February, 2024, the
Coordinate Bench of this Court in the writ proceeding has explained the
procedure with regard to the Forensic Audit Report. He submits that
Forensic Report is only a preliminary opinion in order to issue show
cause notices. The probative value and evidentiary strength of the
Forensic Audit Report can only be ascertained at the stage of final
decision to declare the plaintiffs fraud.
13. Mr. Dewan submits that the plaintiffs has filed writ petition being WPA
No. 15471 of 2024 challenging show cause notice dated 16th May, 2024
in connection with Forensic Audit Report dated 7th February, 2022 and
in the said proceeding also, the plaintiffs could not able to get any order
of stay.
14. Mr. Dewan submitted that SA 240 is only for financial statement and
the Forensic Audit Report is not a financial statement. He submits that
SA 240 is not applicable in the present suit. He submits that for
preparation of Forensic Audit Report comments from management is
not required. He submits that they will get an opportunity to give reply
to the show cause notice in connection with the Forensic Audit Report.
15. Mr. Dewan in support of his submissions relied upon the judgment in
the case of State Bank of India Vs. Rajesh Agarwal and Others
reported in (2023) 6 SCC 1 and submitted that the Reserve Bank of
India has the right to take all such measures as are necessary to
protect the health of the banking system. He submits that the Master
Directions on Frauds lay down the procedure for banks, who in case of
a breach of loan agreements by the borrowers, can seek appropriate
remedies by approaching law-enforcement agencies and debarring
borrowers from accessing further institutional finance.
16. Heard the Learned Counsel for the respective parties, perused the
materials on record and the judgment relied by the defendants. The
plaintiffs have prayed for an order of injunction restraining the
defendants form giving any effect or further effect to the Forensic Audit
Report submitted by the defendant no.1 dated 7th February, 2022.
17. By an order dated 1st October, 2021, the Reserve Bank of India has
superseded the Board of Directors of SIFL for the following reasons:
i. As per data submitted by financial
institutions, the total borrowings of SIFL stood
at Rs. 11,746 crore, on June 30, 2021. SIFL
has defaulted with 12 lenders aggregating
Rs.3,566 crore.
ii. The Board of Directors of SIFL and Srei
Equipment Finance Limited (SEFL) had on July
04, 2019 approved transfer of assets and
liabilities (including liabilities towards issued
and outstanding NCDs) of SIFL by way of
slump exchange to SEFL with effect from
October 01, 2019. Despite non-receipt of No-
objection Certificate (NOC) from majority of the
lending institutions, SIFL and SEFL had given
effect to the slump exchange.
iii. Several supervisory concerns (e.g. violation of
IRACP norms, evergreening of NPA accounts,
connected lending, weak corporate governance
standards, inadequate systems and control,
poor compliance standards, etc.) observed
during past inspections by the Reserve Bank
have been communicated through supervisory
letters, DO letters and also reiterated in the
meetings held by the Reserve Bank with the
management of the company.
iv. Inspection of SIFL with reference to financial
position as on March 31, 2020 revealed that
the company is not meeting minimum
regulatory CRAR (15%) and NOF (Rs.300
crore). Further, infrastructure loans as a
percentage of total assets was assessed at
3.33% as against the regulatory requirement
of 75%.
v. Special Audit conducted by the Reserve Bank
in December 2020-January 2021 observed
that funds disbursed to certain borrowers
were received back from such borrowers/
their group companies on the same
date/dates close to the date of disbursement,
which indicated evergreening.
vi. SIFL has remained non-compliant with RBI
regulations and supervisory instructions.
Despite continuous engagement and follow up
by the Reserve Bank, SIFL has failed to take
corrective action on governance, systems and
controls, compliance, etc."
18. After supersession of the Board of Directors of SIFL, the Reserve Bank
of India appointed Shri Rajneesh Sharma, Ex-Chief General Manager,
Bank of Baroda as the Administrator of the SIFL and SEFL. The
defendant no. 2 has appointed the defendant no.1 for the purpose of
forensic audit with respect to the affairs of the SEFL. The defendant
no.1 has conducted forensic audit in respect of the affairs of SEFL for
the period from 1st April 2016 to 30th September, 2016 and restricted to
transactions relating to the IL & FS group namely:
"a. Gujarat Integrated Maritime Complex
Private Limited;
b. Sealand Ports Private Limited;
c. IL&FS Transportation Networks Limited;
d. IL& FS Energy Development Company
Limited;
e. Chennai Nashri Tunnelway Limited; and
f. Fagne Sonagadh Expressway Limited."
19. The conclusion of the forensic report is as follows:
"Conclusion
It can be concluded from the above table that out of
total loan amount of Rs. 1179.78 Crores disbursed
by the SEFL/SIFL to IL&FS group entities, loan of
Rs. 1079.78# Crores were not disbursed in the
normal course of business. Further, out of Rs.
1079.78 Crores except for the amount of 212.97^
Crores, all the loans disbursed were round tripped
back to the Company. Further, with respect to Rs.
212.97 Crores, since no trail of receiving back of
money by SIFL/SEFL is found, there might be
possibility that these funds may have been
diverted elsewhere. These round tripping of funds
has resulted in evergreening of the books of
SEFL/SIFL, inflated profits, suppressed
provisioning, non- disclosure of potential NPAs and
wrongful reporting to various stakeholders."
20. As per the contention of the plaintiffs, the report is not reliable,
incapable of being acted upon and is not an audit report in law. It is the
further contention that the report contains disclaimers and the report
is contrary to the norms of ICAI. The further contention of the plaintiffs
that the report is partial in nature, selective and without context as the
present management of the SREI entities did not provide email
communications between erstwhile management and SREI Credit
Sanctioning Committee personnel and Ledgers of IFIN (IL&FS group
entity) in the books of group entities of SEFL/SIFL.
21. Sub-Sections 1 to 4 of Section 45-IE of the Reserve Bank of India Act,
1934, reads as follows:
"45IE. Supersession of Board of directors of
non-banking financial company (other than
Government Company).
(1) Where the Bank is satisfied that in the
public interest or to prevent the affairs of a
non-banking financial company being
conducted in a manner detrimental to the
interest of the depositors or creditors, or of the
non-banking financial company (other than
Government Company), or for securing the
proper management of such company or for
financial stability, it is necessary so to do, the
Bank may, for reasons to be recorded in
writing, by order, supersede the Board of
Directors of such company for a period not
exceeding five years as may be specified in
the order, which may be extended from time to
time, so, however, that the total period shall
not exceed five years.
(2) The Bank may, on super session of the
Board of Directors of the non-banking financial
company under sub-section (1), appoint a
suitable person as the Administrator for such
period as it may determine.
(3) The Bank may issue such directions to the
Administrator as it may deem appropriate and
the Administrator shall be bound to follow
such directions.
(4) Upon making the order of super session of
the Board of Directors of a non- banking
financial company,--
(a) the chairman, managing director and
other directors shall from the date of super
session of the Board of Directors vacate
their offices;
(b) all the powers, functions and duties,
which may, by or under the provisions of
this Act or any other law for the time being
in force, be exercised and discharged by or
on behalf of the Board of Directors of such
non-banking financial company or by a
resolution passed in general meeting of
such non-banking financial company, shall,
until the Board of Directors of such
company is reconstituted, be exercised and
discharged by the Administrator referred to
in sub-section (2)."
22. In the case of Hemant Kanoria Vs. Bank of India reported in 2024
SCC Online Cal 1012, the Coordinate Bench of this Court in the writ
proceeding wherein a Show Cause Notice with respect to the Audit
Report was served upon the petitioner and the petitioner has
challenged the said Show Cause Notice held that:
"42. The FAR, it is to be noted, is merely a
trigger for the formation of a preliminary
opinion by the respondent-Banks in order to
issue a show-cause notice under the Master
Directions. Thus, at the stage of issuance of
show-cause notices, it is not required to enter
into the probative value of the FAR. Such
probative value and evidentiary strength of
the FAR can only be ascertained at the stage
of final decision to declare the petitioner as a
fraud.
64. First, a show-cause notice is to be issued,
enumerating the exact offences alleged
against the borrower/Director. If any FAR or
other document forms the basis of the show-
cause, the same is to be served along with the
show-cause notice. (Both the said criteria
have, in fact, have been satisfied in the
present case in respect of BOI, BOB and UBI.)
65. A fortnight thereafter would be ample time
to give reply to the show- cause notice. In its
reply, the noticee shall, apart from addressing
the allegations and controverting those
specifically, specify the documents which are
required to be provided to the noticee by the
Banks/financial institutions. If necessary, in
the reply, the borrower/Director or promoter
can reserve its rights to give a further
additional reply upon receiving such
documents.
66. Within a week from receiving such replies,
the Banks can give an inspection of the
documents, if extremely voluminous, and/or
furnish copies of the particular documents
which are sought by the borrower.
67. Within a further fortnight, if necessary,
the noticee/ borrower can be given an
opportunity to file additional reply, in the light
of the documents which have by now been
inspected / served on them. Thereafter, a
hearing shall be fixed by the bank on the
basis of the reply.
68. Upon such hearing being concluded, a
decision shall be taken whether оr not to
declare the borrower-company or its
Director/promoter as "fraud" or "perpetrator of
fraud". The aforesaid procedure would take, at
the most, 8 weeks in total to be concluded,
which would be sufficient compliance of the
Master Directions of the RBI. Thereafter, if
declared as fraud/perpetrator of fraud, the
same can be intimated by the Bank to the RBI.
69. The very first step has been complied with
in the present cases by issuance of show-
cause notices enumerating the exact
allegations and serving a copy of the FAR
which forms the basis of the show-cause
notices. Thus, there is no scope or reason to
set aside the show-cause notices as such.
70. However, the subsequent steps are
required to be undergone to give an effective
opportunity to the petitioner to rebut the
allegations made against him and the
borrower-companies."
23. In the present case, the Reserve Bank of India by invoking the
provisions of Section 45-IE of the Reserve Bank of India Act, 1934 has
superseded the Board of Directors of SIFL and appointed an
Administrator. Subsequently, the defendant no.2 has appointed
defendant no.1 for conducting Forensic Audit and submitted Forensic
Audit Report. Now, the plaintiffs have challenged the said Forensic
Report in the present Suit. Simultaneously, the plaintiffs have filed a
Writ Application being WPA No. 15471 of 2024 against the South
Indian Bank Limited challenging the Forensic Audit Report but the Writ
Court has not passed any interim order in favour of the plaintiffs.
24. In the case of Rajesh Agarwal (Supra), the Hon'ble Supreme Court
held that:
"83. RBI has the right to take all such
measures as are necessary to protect the
health of the banking system. Hence, the
Master Directions on Frauds lay down the
procedure for banks, who in case of a breach
of loan agreements by the borrowers, can seek
appropriate remedies by appropriate law-
enforcement agencies and debarring
borrowers from accessing further institutional
finance. However, any policy decision which
contemplates serious civil consequences for
any person will be open to challenge for being
arbitrary if the principles of natural justice are
not applied during the process."
25. The plaintiffs have relied upon the order passed by the Learned Judge,
Commercial Court at Alipore in Title Suit No. 09 of 2022 filed by the
plaintiffs challenging the Forensic Audit Report of KPMG and the
Learned Court has granted interim order and the same was challenged
before the Appellate Court being FMA No. 1254 of 2022 and the Hon'ble
Appellate Court also confirm the order passed by the Learned Judge,
Commercial Court. The Bank has challenged the said order before the
Hon'ble Supreme Court in Civil Appeal No. 7823 of 2023 and the
plaintiffs have withdrawn the Title Suit No. 09 of 2022 in view of the
objection raised by the bank regarding maintainability of the
Commercial Suit. As the suit is withdrawn and thus the order passed
by the Learned Judge, Commercial Court and the Hon'ble Appellate
Court cannot be taken into consideration as after the withdrawal of the
suit, the orders passed in the suit does not exists.
26. The plaintiffs have challenged the Forensic Audit Report. Forensic Audit
Report is only a preliminary opinion. If the bank intent to rely upon the
said report, the bank has to issue show cause notice to the plaintiff by
informing about the alleged offences against the plaintiffs. The plaintiffs
would be at liberty to submit reply to the show cause notice. If any,
decision is taken by the bank against the plaintiff after receipt of the
reply of the plaintiffs, the plaintiffs can take appropriate steps against
the decision of the bank.
27. Considering the above, this Court did not find any prima facie case and
balance of convenience in favour of the plaintiffs for grant of interim
order. Accordingly, prayer for grant of interim order is refused.
28. The defendants are directed to file affidavit-in-opposition within three
weeks, reply, if any, be filed within two weeks thereafter. List the matter
on 11th December, 2024 under the heading Adjourn Motion.
(KRISHNA RAO, J)
p.d/-
