Great India Estate Pvt. Ltd vs Union Bank Of India
2022 Latest Caselaw 3128 Ker

        IN THE HIGH COURT OF KERALA AT ERNAKULAM
                        PRESENT
          THE HONOURABLE MR.JUSTICE N.NAGARESH
FRIDAY, THE 18TH DAY OF MARCH 2022 / 27TH PHALGUNA, 1943
                 WP(C) NO. 5672 OF 2022
PETITIONER:

         GREAT INDIA ESTATE PVT. LTD,
         1ST FLOOR, NEW CORPORATION BUILDING,
         LMS JUNCTION, PALAYAM, THIRUVANANTHAPURAM-695
         033, REPRESENTED BY ITS CHIEF OPERATING
         OFFICER, SRI. ANIL KUMAR A.R.

         BY ADV K.PRAVEEN KUMAR


RESPONDENTS:

    1    UNION BANK OF INDIA,
         REPRESENTED BY ITS CHAIRMAN, UNION BANK BHAVAN,
         239, VIDHAN BHAVAN MARG, NARIMAN POINT,
         MUMBAI 400 021, MAHARASHTRA STATE.
    2    THE MANAGER,
         UNION BANK OF INDIA, CHALAI BRANCH,
         NEAR CHENTHITTA, CHALAI P.O,
         THIRUVANANTHAPURAM 695 036.

         BY ADVS.
         SHRI.A.S.P.KURUP, SC, UBI
         SADCHITH.P.KURUP

     THIS WRIT PETITION (CIVIL) HAVING COME UP       FOR
ADMISSION ON 18.03.2022, THE COURT ON THE SAME       DAY
DELIVERED THE FOLLOWING:
 W.P.(C) No.5672/2022
                                        :2:




                                                                           [CR]




                            N. NAGARESH, J.

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                        W.P.(C) No.5672 of 2022

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                Dated this the 18th day of March, 2022

                             JUDGMENT

~~~~~~~~~

The petitioner is M/s.Great India Estate Private

Limited, a Company incorporated under the Companies Act,

1956 in the year 1991. The petitioner seeks to quash Ext.P3

and to declare that the respondents cannot withhold or

freeze the account of the petitioner without any legal

grounds.

2. The petitioner holds a Current Account bearing

No.395801010036375 with the 1 st respondent-Bank, in its

Chalai Branch. The petitioner transferred an amount of ₹1

Crore from its own account to the said Current Account on W.P.(C) No.5672/2022

01.02.2022. The amount was not accounted. When

contacted, the 2nd respondent-Branch Manager required the

petitioner to furnish fresh KYC details, which were provided

on 03.02.2022. The Current Account, however, was not

made operational.

3. The petitioner had to make payment to Suppliers.

Hence, the petitioner entrusted cheques to the 2 nd

respondent-Branch Manager on 10.02.2022. The petitioner

was initially asked to wait for two more days to make the

account operational. To the surprise of the petitioner, on

14.02.2022, the petitioner was informed as per Ext.P3 that

the debit facility in the Account has been disabled and hence

the transfer cannot be processed and transferred.

4. The petitioner states that they have to complete a

Housing Project by June, 2022 as per the orders of the Real

Estate Regulatory Authority (RERA). Amounts have to be

paid to Suppliers and wages are to be paid to employees. If

supply of materials are delayed, it will affect building

completion and the petitioner will have to face adverse W.P.(C) No.5672/2022

orders from RERA and litigations by Home Buyers. The

respondents are therefore compellable to operationalise the

Current Account, contended the learned counsel for the

petitioner.

5. The respondents contested the writ petition. The

respondents stated that Mr. Iqbal Elias and Najeeb Elias

Mohammed are the Directors of the petitioner-Company.

Later, another Public Limited Company was incorporated by

name Green Gateway Leisure Limited. Both, Iqbal and

Najeeb, among others, were the promoters of Green

Gateway Leisure Limited also. Both the entities are

interconnected. Mr. Iqbal and Mr. Najeeb are grossly in the

management of green Gateway Leisure Limited. They have

deep and pervasive control over both the companies.

6. The respondent-Bank had granted a term loan of

₹25 Crores to the Green Gateway Leisure Limited. The

repayment of the said advance was defaulted. The

respondents therefore filed OA No.417/2018 before the Debt

Recovery Tribunal-1 Ernakulam. Later, the respondents W.P.(C) No.5672/2022

approached the National Company Law Tribunal, Kochi filing

application under Section 7 of the Insolvency and Bankruptcy

Code, 2016. When the corporate guarantor filed appeal

before the National Company Law Appellate Tribunal, the

parties were directed to settle their liability within six months.

The respondents therein, however, colluded together and

started routing the funds through several subsidiary

companies including the petitioner-Company.

7. The respondents argued that the diversion of

funds was with the intention to defraud the creditors including

the 1st respondent-Bank. Now, the Bank has initiated IBC

proceedings against the personal guarantors of Green

Gateway Leisure Limited. It is to defeat these litigations that

funds were routed through the petitioner-Company.

Therefore, the respondents invoked powers available to them

under Section 171 of the Indian Contract Act and disallowed

the withdrawal of the amounts. This was done invoking the

power available to the Bank to lift the corporate veil of the

company in order to exercise the right of banker's lien. W.P.(C) No.5672/2022

8. The learned counsel for the petitioner relied on the

judgment of this Court in Lonankutty Antony v. Joint

Registrar of Co-operative Societies and others [2016 (2)

KLT 281] wherein this Court held that the respondent-Bank's

action of retaining or withholding husband's title deeds even

after his clearing of loan is per se illegal and arbitrary in a

case where husband was not a party to the loan transaction

to his wife. The learned counsel for the petitioner further

relied on a Division Bench judgment of the Hon'ble

Karnataka High Court in Vijaya Bank and another v.

Naveen Mechanised Construction (P) Limited [AIR 2004

KAR 199] wherein the Division Bench held that it is only in

exceptional cases and that too only the courts are entitled to

lift the veil of corporate entity. A Bank is not entitled to say

that two distinct companies incorporated under the

Companies Act are one and the same. The learned counsel

for the petitioner also relied on the judgment of the Hon'ble

Gauhati High Court in Tilendra Nath Mahanta v. United

Bank of India [2002 (1) KLT SN 45] to contend that bankers W.P.(C) No.5672/2022

lien can arise only over things belonging to a customer and

held as security by Bank and not over any fixed deposits in

the hands of the Bank.

9. The learned Standing Counsel for the respondents

placing reliance on the judgment of the Apex Court in

Syndicate Bank v. Vijay Kumar and others [(1992) 2 SCC

330] argued that the general lien of bankers would enable

the Bank to hold lien over the accounts of the petitioner-

Company for the liabilities of the sister company. In fact, the

petitioner-Company as well as the Company named Green

Gateway Leisure Limited are one and the same and the

corporate veil of the petitioner-Company is liable to be lifted

in view of the judgment of the Hon'ble Apex Court in Delhi

Development Authority v. Skipper Construction

Company Private Limited and another [(1996) 4 SCC 622].

10. The learned Standing Counsel for the

respondents, relying on the judgments of the Hon'ble High

Court of Calcutta in Star Battery Limited and another v.

State Bank of India and others [2019 SCC Online Cal 282] W.P.(C) No.5672/2022

and in Mohan Insurance and Financial Consultancy

Private Limited v. HDFC Bank Limited [2019 SCC Online

CAL1949], argued that in order to exercise the powers of the

banks on general lien, the banks are entitled to competent to

lift corporate veil of the petitioner-Company. As the Bank

found that the petitioner-Company as well as the Green

Gateway Leisure Limited are one and the same inasmuch as

they are controlled by the same persons, the respondent-

Bank extended its bankers lien to the current account of the

petitioner-Company, which is absolutely legal and justifiable.

The writ petition is therefore without any merit and it is liable

to be dismissed, contended the Standing Counsel.

11. I have heard Sri. K. Praveen Kumar, learned

counsel for the petitioner and Sri. ASP Kurup, learned

Standing Counsel for the respondents.

12. The grievance of the petitioner is that the

petitioner-Company holds a current account with the 1 st

respondent-Bank and it has no liability other than if any

related to the current account held by them. The respondents W.P.(C) No.5672/2022

have frozen the current account of the petitioner on the

ground that another company named Green Gateway

Leisure Limited has liabilities with the respondent-Bank and

the Directors of the petitioner-Company are also the

Directors of the Company named Green Gateway Leisure

Limited. This Court finds that the petitioner-Company and the

Company named Green Gateway Leisure Limited are two

distinct companies incorporated under the Companies Act,

1956. An Incorporated Company is an independent legal

entity distinct from its shareholders and Directors. Therefore,

the 1st respondent-Bank cannot ordinarily hold or freeze the

accounts of the petitioner-Company for the liabilities of the

other Company. The powers of the banks to have general

lien cannot be extended to freeze a current account of one

legal entity for any default or liability of a different corporate

entity.

13. The learned Standing Counsel for the

respondents, on the other hand, contended that under

Section 171 of the Contract Act, the Bank has a general lien. W.P.(C) No.5672/2022

Since the petitioner-Company and the defaulter company

named Green Gateway Leisure Limited are owned and

controlled by the same persons, the Bank can freeze or

withhold the current accounts of the petitioner-Company in

exercise of its powers of general lien.

14. By mercantile system and in view of Section 171

of the Indian Contract Act, 1872, the Bank has a general lien

over all forms of securities or valuable instruments deposited

by or on behalf of the customer in the ordinary course of

banking business. The general lien is a valuable right of the

banker judicially and statutorily recognised in India. In the

absence of an agreement to the contrary, a banker has a

general lien over such securities or bills received from the

customer in the ordinary course of banking business. The

Bank has a right to use the proceeds in respect of any

balance that may be due from the customer by way of

reduction of customer's debit balance. As held by the Hon'ble

Apex Court in Syndicate Bank (supra), such a lien is also

applicable to negotiable instruments including FD receipts W.P.(C) No.5672/2022

which are remitted to the Bank by the customer for the

purpose of collection.

15. In this case, for the liabilities of Green Gateway

Leisure Limited, the Bank has exercised its ostensible power

of general lien over the petitioner-Company. The 1 st

respondent-Bank has frozen the account of the petitioner-

Company, which obviously is an independent incorporated

entity. The justification advanced by the 1 st respondent-Bank

for their conduct is that the Bank has lifted the corporate veil

of the petitioner-Company and it has found that the

petitioner-Company and the defaulter-Green Gateway

Leisure Limited is one and the same. The reasons for

arriving at this conclusion is that two Directors of the

petitioner-Company are Directors in Green Gateway Leisure

Limited also and they have deep and pervasive control over

the said Company. The question arises whether a Bank can

claim that it has lifted the corporate veil of any Company and

come to a conclusion of their own.

W.P.(C) No.5672/2022

16. The doctrine of lifting up of corporate veil becomes

relevant when by a fiction of law, a Company is seen as a

distinct entity separated from its members, but in reality, it is

an association of persons who, in fact, are the beneficial

owners of the Company and its corporate property. This

fiction is created by a veil and is called the Corporate Veil.

Lifting or piercing of corporate veil means ignoring the fact

that a Company is a separate legal entity and has a separate

identity of Corporate personality. This concept disregards the

separate identity of the Company and looks behind the true

owners or real persons who are in control of the Company.

17. The separate personality of a Company is a

statutory privilege and it must be used for a legitimate

purpose only. Whenever and wherever a fraudulent or

dishonest use is made of the legal entity, the individuals will

not be allowed to hide behind the curtain of corporate

personality. The court or appropriate authority will break this

shell of the Company and sue the individuals who have done

or committed such a crime or offence. This lifting of the W.P.(C) No.5672/2022

curtain is called a Lifting of the Corporate veil.

18. The doctrine of lifting the veil has been developed

as a device to avoid the hardship of the doctrine of corporate

personality. It may be understood as the identification of a

Company with its members. In order to protect themselves

from the liabilities of the Company, its members often take

the shelter of the corporate veils. Sometimes these

corporate veils are used as a vehicle of fraud, or evasion of

tax. To prevent unjust and fraudulent acts, it becomes

necessary to lift the veils to look into the realities behind the

legal facade and to hold the individual member of the

Company liable for its acts. The corporate veil has been

lifted by the courts and legislatures in the interest of equity,

justice and good conscience.

19. The doctrine of lifting up of corporate veil seeks to

strike a balance between the interest of the public and the

concept of a separate personality. The doctrine is essentially

used as a flexible tool to ensure justice. It would defeat the

object of the device if it were to be applied rigidly with no W.P.(C) No.5672/2022

scope at all left for judicial discretion. The doctrine can be

applied only by legislature, courts of law and statutory and

executive authorities. If parties to contracts or parties bound

by mutual liabilities and obligations are permitted to claim

that he/it has lifted the veil of the corporate body with whom

he/it has such contractual relations/obligations and found the

corporate body to be another entity, and hence is no more

bound by his/its liabilities and obligations, it would result in

chaos in the fields of contracts. Lifting up of corporate veil

can be done only by the State. Citizens and private bodies

who question the identity of corporate bodies can resort to

lifting up of corporate veil only through courts of law.

20. In Star Battery Limited (supra), the Hon'ble Apex

Court held with approval the observations in Balwant Rai

Saluja v. Air India Limited [(2014) 9 SCC 407] that the

Company may be a "facade" even though it was not originally

incorporated with any deceptive intent, provided that it is

being used for the purpose of defection at the time of

relevant transactions. The court would, however, pierce the W.P.(C) No.5672/2022

corporate veil only so far as necessary in order to provide a

remedy for the particular wrong which those controlling the

company done. Thus, relying upon the aforesaid decisions,

the doctrine of piercing the veil allows the court to disregard

the separate legal personality of a Company and impose

liability upon the persons exercising real control over the

Company.

21. In Star Battery Limited (supra), on facts, the

Hon'ble High Court of Calcutta found that the same persons

are in control of the two companies in question and that the

Bank can exercise lien. In Mohan Insurance and Financial

Consultancy Private Limited (supra), the Court found that

the misdeed is of trying to siphon of funds of the other

Company so as to make it unavailable for the purpose of

realisation of the claim of the Bank against the other

Company. In both the afore cases, the Court lifted the veil of

the corporate, on the basis of factual evidence before it. The

judgments cannot be treated as one laying down a

proposition that the Banks are competent to lift the veil of a W.P.(C) No.5672/2022

corporate customer, and decline to discharge Banks' part of

obligations.

22. In the present case, the Bank is claiming that by

freezing the current account of the petitioner-Company, what

they have done is enforcing their right to execute general lien

in respect of another Company over the Current Account of

the petitioner-Company. It has to be noted that the

respondent-Bank has already approached the DRT-1

Ernakulam filing OA No.417/2018 for realisation of dues from

Green Gateway Leisure Limited. Later, the respondent-Bank

approached NCLT, Kochi initiating proceedings under IBC

Code. The Tribunal admitted the corporate insolvency

resolution process.

23. But, the NCLAT, Delhi set aside the Section 7

(IBC) application ordering that if the corporate debtor fails to

settle in six months time, the respondent-Bank is at liberty to

take appropriate steps. On the failure of the Corporate

Debtor to settle the accounts, the Bank has initiated IBC

proceedings against personal guarantors of the Green W.P.(C) No.5672/2022

Gateway Leisure Limited, including the two Directors who are

Directors in the petitioner-Company. It is when the issue is

pending before competent legal fora, the 1 st respondent-

Bank has frozen the petitioner's Current Account 'lifting the

corporate veil', without the junction of DRT or NCLT/NCLAT.

24. The allegation of the 1st respondent-Bank is that

the green Gateway Leisure Limited is diverting its funds

through the petitioner-Company. There is no materials

available in the records of the case, other than the allegation

that the two Directors of the Company are Directors in the

other Company also and that they have deep and pervasive

control over the Company. The specific case of the

petitioner-Company that they are having an ongoing

Villa/Housing Project named Royal Orchid and the funds

deposited in the Current Account are funds received from the

prospective buyers.

25. The petitioner has an ongoing project and the

RERA has directed the petitioner to complete the project in a

time bound manner for which construction payments are to W.P.(C) No.5672/2022

be made to the suppliers and wages are to be paid to

employees. In such circumstances, the unilateral act of the

1st respondent-Bank to freeze the current account of the

petitioner, when litigations are pending on the issue of debts

of the Green Gateway Leisure Limited, cannot stand the

scrutiny of law. Invocation of Section 171 of the Indian

Contract Act by the respondents against the petitioner-

Company for the dues of the Green Gateway Leisure Limited

is absolutely illegal.

The writ petition is hence allowed. Ext.P3 is set

aside. The respondents are directed to reactivate the Current

Accounts of the petitioner forthwith enabling them to operate

their accounts.

Sd/-

N. NAGARESH, JUDGE aks/15.03.2022 W.P.(C) No.5672/2022

APPENDIX OF WP(C) 5672/2022

PETITIONER'S EXHIBITS

Exhibit P1 TRUE COPY OF THE COUNTER FOIL OF THE RECEIPT DATE 01.02.2022 SHOWING TRANFER OF THE AMOUNT.

Exhibit P2 TRUE COPY OF THE LETTER NO.

ATE/GIE/LTR/24/21-22 DATED 03.02.2022 SUBMITTED BY THE PETITIONER TO THE 2ND RESPONDENT.

Exhibit P3 TRUE COPY OF THE LETTER NO.CB/ADV/50454399/1 DATED 14.02.2022 OF THE 2ND RESPONDENT.

Exhibit P4 TRUE COPY OF THE REPRESENTATION DATED 14.02.2022 SENT TO THE 2ND RESPONDENT.

Exhibit P5 TRUE COPY OF THE ORDER IN I.A. NO.

                       22/21 IN COMPLAINT NO. 136/2020 DATED
                       02.08.2021    OF    KERALA   REAL    ESTATE
                       REGULATORY AUTHORITY.
Exhibit P6             TRUE COPY OF THE BANK STATEMENT OF THE
                       PETITIONER WITH SBI,KOWDIYAR BRANCH
                       SHOWING THE TRANSFER OF RS 1 CRORE
                       FROM BELHASA GLOBAL EXCHANGE AND THE
                       TRANSFER OF SAID AMOUNT TO RESPONDENT
                       BANK BY THE PETITIONER

RESPONDENT'S EXTS


R1A    COPY OF MEMORANDUM OF ASSOCIATION OF PETITIONER COMPANY DT
23.10.1991.
R1B    COPY OF ARTICLES OF ASSOCIATION OF PETITIONER COMPANY DT
23.10.1991.

R1C COPY OF MEMORANDUM OF ASSOCIATION DT 1.9.2004 OF GREEN GATEWAY LEISURE LTD.

R1D COPY OF ARTICLES OF ASSOCIATION DT 1.9.2004 OF GREEN GATEWAY LEISURE LTD.

R1E COPY OF MINUTES DT 13.1.2016 PASSED BY THE PETITIONER COMPANY. R1F COPY OF RESOLUTION DT 2.2.2022 PASSED BY THE PETITIONER COMPANY. W.P.(C) No.5672/2022

R1G COPY OF EXTRACT OF DETAILS MAINTAINED BY THE MINISTRY OF CORPORATE AFFAIRS.

R1H COPY OF OA NO.417/2018 FILED BY THE BANK. R1I COPY OF ORDER DT 15.10.2020.

R1J COPY OF ORDER DT 9.9.2021 BY NCLAT, DELHI. R1K COPY OF ORDER BY NCLT ON 21.1.2022.