Madhya Pradesh High Court
Gulab Chand Agrawal vs Central Bank Of India on 4 March, 2025
Author: Vishal Dhagat
Bench: Vishal Dhagat
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IN THE HIGH COURT OF MADHYA
PRADESH
AT JABALPUR
BEFORE
HON'BLE SHRI JUSTICE VISHAL DHAGAT
ON THE 4th OF MARCH, 2025
WRIT PETITION No. 30047 of 2024
GULAB CHAND AGRAWAL AND OTHERS
Versus
CENTRAL BANK OF INDIA
Appearance:
Shri Akshat Agrawal - Advocate for the petitioners.
Shri Abhinav Sunil Kherdikar - Advocate for respondent.
ORDER
Petitioners have filed this petition under Article 226 of the
Constitution of India making a prayer for quashing of proceedings of
identification and declaration of account of Sanwaria Consumer
Limited (hereinafter referred to as "SCL") to be fraud and to quash
show cause notice dated 11.06.2024 (Annexure-P/6), reply/letter
dated 01.07.2024. Further, to direct respondent Bank not to initiate
any action for declaring account of SCL/petitioner fraud during
operation of moratorium under Sections 14 and 96 of the Insolvency
and Bankruptcy Code, 2016 (hereinafter referred to as "IBC, 2016").
2. Learned counsel appearing for the petitioners submitted that
petitioner Nos.1, 2 & 3 are suspended Directors of SCL. Respondent
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is Financial Secured Creditor. Accounts of SCL were declared Non-
Performing Asset (NPA). Operational Creditors of SCL initiated
proceeding under IBC, 2016. SCL entered into Corporate Insolvency
Resolution Process (hereinafter referred to as "CRIP") vide order
dated 29.05.2020 (Annexure-P/1) of National Company Law
Tribunal (NCLT), Indore Bench at Ahmedabad in case no. i.e. (MP)
C.P. (IB) No.7/9/NCLT/AHM/2019. Admission of SCL into CRIP
was on 29.05.2020 and moratorium was declared under Section 14
of the IBC. IB petition was admitted under Section 9 of the IBC,
2016 for insolvency resolution process (IRP). Mr. Rajeev Goyal was
appointed as Resolution Professional. Moratorium was made
operative from 29.05.2020 till completion of CRIP or until Bench
approves. Bench prohibited institution of suits or continuation of
pending suits or proceedings against corporate debtor including
execution of judgment and decree or order in any Court of law or
tribunal etc. and to prohibit any action to foreclose, recover or
enforce any security interest including action under the
Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (SARFAESI). Supply of
essential goods and services if continuing shall not be terminated or
suspended during moratorium period, Corporate debtor who provides
effective assistance to IRP. It is also directed that provision of
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Section 14(1) shall not apply to such transaction as may be notified
by central Government in consultation with financial Sector
regulator. Property of corporate debtor company was preserved.
3. It is submitted that respondent-Bank invoked provision of
Section 95 against guarantors of SCL and interim moratorium
became operational. Order imposing interim moratorium was passed
on 17.06.2021 by NCLT. Learned counsel appearing for petitioner
submitted that respondent conducted forensic and transaction audit
on audit reports dated 26.02.2020 and 10.05.2021 and observation
shared by Punjab National Bank lead bank of consortium. Order of
identification and declaring SCL as fraud was challenged in WP
No.8828/2022. Court held that order of identification and declaring
account of SCL to be fraud was passed without giving an
opportunity of hearing and directions of master circular of RBI was
not followed. Classification of account to be fraud was held to be
bad and case was remanded back to Bank for passing fresh order
after complying with principles of natural justice. Petitioners were
issued show cause notice dated 11.06.2024 by respondent Central
Bank of India for declaring account of SCL as fraud as per RBI
master circular and directions dated 01.07.2016. Reliance in said
notice was placed upon information shared by Punjab National Bank
(lead Bank) and forensic audit report dated 26.06.2020 and
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transaction audit report dated 10.05.2021. Petitioners filed reply to
show cause notice and sought withdrawal of proceedings on ground
that respondent cannot proceed for declaration of account of SCL to
be fraud during operation of moratorium. Action of respondent is
without jurisdiction in proceeding with identification and declaration
of account to be fraud as bar imposed upon Sections 14 and 96 of the
IBC by orders of NCLT dated 29.05.2020 and 09.03.2021 is in
operation. It is further submitted that Section 238 of IBC, 2016 lays
down that provisions of Code will have overriding effect over other
laws and, therefore, IB Code is a special law and will have
overriding effect over other laws. In view of aforesaid submission,
counsel appearing for petitioner made a prayer for issuance of writ
of certiorari for quashing initiation of legal action and proceedings
for identification and declaration of account of SCL as fraud.
4. Learned counsel appearing for the respondent-Bank
submitted that account of SCL was classified as fraud in terms of
master circular dated 01.07.2016. Said action was under challenge in
WP No.5197/2023. Vide order dated 25.07.2023, said petition was
allowed in terms of order passed in WP No.8828/2022 vide order
dated 07.07.2023. Declaration of account as fraud was quashed and
case was remitted back to Bank for passing fresh order after giving
opportunity of hearing. Thereafter, show cause notice dated
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11.06.2024 along with forensic audit report and transaction audit
report and email of lead Bank Punjab National Bank dated
13.08.2019, was issued to petitioners. Reply and representation were
filed. Bank has sent reply dated 25.07.2024 to representation dated
01.07.2024 and rejected the representation. An opportunity of
personal hearing was to be provided to petitioners on 31.08.2024.
Petitioners made request for rescheduling the matter due to medical
emergency. Bank considered the request and accepted the same and
personal hearing was rescheduled on 14.10.2024. It is submitted that
moratorium under Sections 14 and 96 of IBC, 2016 is applicable in
relation to recovery of dues and master circular and directions of
RBI dated 01.07.2016 are not related to recovery of outstanding dues
but to detect and report fraud and taking timely action as prescribed
in Clause 1.3 of master circular and directions. Therefore, no case is
made out for interference and petition may be dismissed.
5. Heard the counsel for the parties.
6. Only question which arises before Court is that "whether
Bank can proceed for identification and declaration of accounts of
Company as fraud in pursuant to master circular and directions of
RBI dated 01.07.2016 despite orders of moratorium under Sections
14 and 96 of the Insolvency and Bankruptcy Code, 2016?".
7. Sections 14, 96 and 238 of the Insolvency and Bankruptcy
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Code, 2016 are quoted as under:-
"Section 14. Moratorium-
(1) Subject to provisions of sub-sections (2) and (3), on the
insolvency commencement date, the Adjudicating Authority shall by
order declare moratorium for prohibiting all of the following,
namely:-
(a) the institution of suits or continuation of pending suits
or proceedings against the corporate debtor including
execution of any judgment, decree or order in any court of
law, tribunal, arbitration panel or other authority;
(b) transferring, encumbering, alienating or disposing of
by the corporate debtor any of its assets or any legal right
or beneficial interest therein;
(c) any action to foreclose, recover or enforce any security
interest created by the corporate debtor in respect of its
property including any action under the Securitisation and
Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (54 of 2002);
(d) the recovery of any property by an owner or lessor
where such property is occupied by or in the possession of
the corporate debtor.
[Explanation.-For the purposes of this sub-section, it is hereby
clarified that notwithstanding anything contained in any other law
for the time being in force, a license, permit, registration, quota,
concession, clearances or a similar grant or right given by the
Central Government, State Government, local authority, sectoral
regulator or any other authority constituted under any other law for
the time being in force, shall not be suspended or terminated on the
grounds of insolvency, subject to the condition that there is no
default in payment of current dues arising for the use or continuation
of the license, permit, registration, quota, concession, clearances or a
similar grant or right during the moratorium period;]
(2) The supply of essential goods or services to the corporate debtor
as may be specified shall not be terminated or suspended or
interrupted during moratorium period.
[(2A) Where the interim resolution professional or
resolution professional, as the case may be, considers the
supply of goods or services critical to protect and preserve
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the value of the corporate debtor and manage the
operations of such corporate debtor as a going concern,
then the supply of such goods or services shall not be
terminated, suspended or interrupted during the period of
moratorium, except where such corporate debtor has not
paid dues arising from such supply during the moratorium
period or in such circumstances as may be specified;]
[(3) The provisions of sub-section (1) shall not apply to-
(a) such transactions, agreements or other arrangements as
may be notified by the Central Government in
consultation with any financial sector regulator or any
other authority;]
(b) a surety in a contract of guarantee to a corporate
debtor.].
(4) The order of moratorium shall have effect from the
date of such order till the completion of the corporate
insolvency resolution process:
Provided that where at any time during the corporate
insolvency resolution process period, if the Adjudicating
Authority approves the resolution plan under sub-section
(1) of section 31 or passes an order for liquidation of
corporate debtor under section 33, the moratorium shall
cease to have effect from the date of such approval or
liquidation order, as the case may be."
"Section 96. Interim-moratorium-
(1) When an application is filed under section 94 or section
95-
(a) an interim-moratorium shall commence on
the date of the application in relation to all the
debts and shall cease to have effect on the date
of admission of such application; and
(b) during the interim-moratorium period--
(i) any legal action or proceeding pending in
respect of any debt shall be deemed to have
been stayed; and
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(ii) the creditors of the debtor shall not initiate
any legal action or proceedings in respect of
any debt.
(2) Where the application has been made in relation to a firm, the
interim-moratorium under sub-section (1) shall operate against all
the partners of the firm as on the date of the application.
(3) The provisions of sub-section (1) shall not apply to such
transactions as may be notified by the Central Government in
consultation with any financial sector regulator."
"Section 238 Provisions of this Code to override other laws-
The provisions of this Code shall have effect,
notwithstanding anything inconsistent therewith
contained in any other law for the time being in
force or any instrument having effect by virtue
of any such law."
8. Relevant master directions of fraud issued by RBI dated
01.07.2016 (Annexure-P/3) are quoted as under:-
"2.2 Classification of Frauds:-
2.2.1 In order to have uniformity in reporting, frauds 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. Unauthorised 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.
8.9 Lending under Consortium or Multiple Banking
Arrangements
8.11 Filing Complains with Law Enforcement Agencies
8.12 Penal measures for fraudulent borrowers."
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9. Learned counsel appearing for the petitioner has placed
heavy reliance on Section 96(1)(B)(i). It is argued by him that during
interim moratorium period any legal action or proceeding pending in
respect of any debt shall deem to have been stayed. It is also argued
that IBC will have overriding effect over master circular of RBI and
Bank cannot proceed with identification and declaration of accounts
of Company as fraud during operation of interim moratorium under
Sections 14 and 96.
10. On going through the aforesaid provision of laws, it is
clear that purposes of imposing moratorium and interim moratorium
are different from proceedings initiated by Bank for classification of
account of borrower as fraud. Benefit of moratorium is granted to a
debtor so that there can be resolution of insolvency, liquidation and
bankruptcy. Application can be filed by financial creditor against to
corporate debtor when there is default by debtor in loan accounts.
Insolvency resolution process is to be completed within period of
180 days from date of admission. After admission of insolvency
resolution process, moratorium under Sections 14 and interim
moratorium under Section 96 will become operative on order of
NCLT on application of corporate creditor under Sections 94 and 95.
Moratorium will operate in respect of legal action or proceedings in
respect of any debt extended to borrowers. Classification of fraud is
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in respect of misappropriation, criminal breach of trust, creating
forged instruments, manipulation of books, making fictitious
accounts, conversion of property, illegal gratification, cheating,
forgery etc. These actions of borrowers cannot be said to be part of
debt. Bar of proceeding is in relation to debt but not in relation to
illegal or criminal acts of borrowers. Bank may also report fraud to
investigation agencies. Objective of declaring accounts of company
to be fraud is to bring to books unscrupulous borrowers and related
parties and for fraud risk management. Declaration disseminate
information to all Banks and it works as internal check and
prevention.
11. Considering the purpose of declaring accounts of a
company to be fraud and purpose for imposing moratorium under
Sections 14 and 96 are entirely different, therefore, moratorium
under Sections 14 and 96 will not result in suspension of
proceedings which are initiated by Bank for identification and
declaration of an account to be fraud. Petitioners have filed WP
No.8828/2022 on 13.04.2022. Moratorium was declared by orders of
NCLT under Sections 14 and 96 of the IBC, 2016 on 29.05.2020 and
09.03.2021. Petitioners ought to have taken the issue which is raised
in this petition in earlier writ petition No. 8828/2022 filed by them.
A person entitled to more than one relief in respect of the same cause
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of action may sue for all or any of such reliefs but if he omits, except
with the leave of the Court, to sue for all such reliefs, he shall not
afterwards sue for any relief so omitted. In this case, petitioners
omitted to seek relief which is prayed for in WP No.8828/2022.
12. Resultantly, writ petition is dismissed.
(VISHAL DHAGAT)
JUDGE
$A
