Telangana High Court
M/S. Shree Saraiwwalaa Agrr Refineries ... vs Union Of India on 26 September, 2024
THE HONOURABLE SRI JUSTICE C.V. BHASKAR REDDY
WRIT PETITION Nos.12816 and 23524 of 2023
COMMON ORDER:
The issue involved in these writ petitions is intrinsically interconnected and therefore, they are taken up and heard together and are being disposed of by this common order.
2. Writ Petition No.12816 of 2023 is filed seeking following relief:
"...to pass an order or direction or any other proceedings one in the nature of Writ of Certiorari calling for records pertaining to show cause notice dt01-12-2022 and all connected proceedings including the orders dt.27-03-2023 and quash the same as being illegal, arbitrary, highhanded, without jurisdiction and hit by the doctrine Nemo iudex in causa sua, in violation of the principles of natural justice, in violation of the guidelines prescribed RBI circular No.RBI/2015-16/100 DBR.No.CID.BC.22/20.16.003/2015-16 dt.01st July 2015, in violation of the rights guaranteed under Article 14 to 21 and 300A of the Constitution of India ..."
3. Writ Petition No.23524 of 2023 is filed seeking following relief:
"...it is therefore prayed that this Hon'ble Court may be pleased to pass an order or direction or any other proceedings one in the nature of Writ of Mandamus, declaring of the action of the Bank in issuing the communication dated 05.08.2023 with reference No.004/11/2023-24 and in further issuing Reminder on 17.08.2023 inspite of the e-mail of the Petitioner dated 13.08.2023 as illegal, arbitrary, highhanded and in deliberate violation of the judgment of the Hon'ble Supreme Court in CA No.7303 of 2022 dated 23.03.2023 and violative of the Master Directions on Frauds issued by the 2nd Respondent dated 01.07.2016, and consequently set aside the communication dated 05.08.2023 with reference No.004/11/2023-24..."
4. Writ Petition No.23524 of 2023 is taken up as a leading case to decide the lis in both these cases.
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5. It is stated that the petitioner is an Micro, Small, and Medium Enterprises (MSME) Unit registered with the Government of India vide registration No.Udyam-TS-02-0045415 and engaged in the business of manufacture of finest edible oils and fats, rice and rava products. It is furrier stated that the petitioner is having manufacturing units in Telangana and Andhra Pradesh and had established more than 60,000 retail outlets across the country. It is further stated that the petitioner company was sanctioned credit facilities for a sum of Rs.675 Crores from consortium five banks and the petitioner company provided adequate security for extending the said facilities. It is the case of the petitioner company that the change in government policy, increasing customs duty on the supply of edible oils from 7.5% to 15% and later to 48%, has significantly impacted the company's returns, resulting in the need for additional working capital and the inability to clear payments as per the scheduled timeline. It is stated that consequently, the consortium banks declared the petitioner's account as Non-Performing Asset (NPA) on 31.03.2018 without granting 'Corrective Action Plan' or the 'Restructuring of Debt' and initiated proceedings against the petitioner for recovery of loans under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ('SARFAESI Act') and assets of the petitioner and guarantors were sold by way of public 3 auction between 2020 and 2022. It is further case of the petitioner that after declaring its account as NPA, the consortium of lenders in their meeting dated 10.08.2018 proposed to conduct forensic audit of petitioner company from 01.04.2015 to 31.07.2018 and the same was later enhanced to till 31.03.2019. It is further case of the petitioner that it has furnished all the information to the forensic auditor who submitted a draft report in April, 2019 and pre-final report in August, 2019 and final report in November, 2019 and in the said reports, there was no adverse observations for alleged diversion or siphoning of bank funds or events of willful defaults or detection of fraudulent activity. It is further case of the petitioner that without taking the said facts into consideration when its account has been declared as fraud in terms of the RBI Master Directions on Fraud dated 01.07.2016, the petitioner filed W.P.No.22588 of 2019 on the file of this Court and this Court vide order dated 22.12.2021 was pleased to dismiss the writ petition stating that there was no reason to interfere with the action of the respondent No.3-bank. Questioning the same, the petitioner has filed S.L.P.No.762 of 2022 on the file of Hon'ble Supreme Court and the Hon'ble Supreme Court was pleased to grant leave and numbered the SLP as Civil Appeal No.7303 of 2022. It is stated that before the Hon'ble Supreme Court, the petitioner along with batch of petitioners challenged the vires of Master Directions issued by RBI on Fraud and 4 also the action of Banks in declaring the accounts as 'Fraud' in terms of Master Directions. The Hon'ble Supreme Court vide judgment dated 27.03.2023 was pleased to allow the appeal filed by the petitioner along with batch of similar cases and issued certain decisions i.e, borrowers must be served a notice and given an opportunity to explain the conclusions of forensic audit report and be allowed to represent by the banks/JLF before their account is declared as 'fraud' under the Master Directions and the decision classifying the borrowers account as fraudulent must be made by a reasoned order. It is further case of the petitioner that when the respondents have not adhered to the guidelines of the Hon'ble Apex Court and passed order dated 27.03.2023 in consequence to show cause notice dated 01.12.2022, the petitioner filed W.P.No.12816 of 2023 and this Court has granted interim order dated 28.04.2023 suspending the impugned order dated 27.03.2023. Pending adjudication of the said writ petition, the petitioner has received a communication dated 05.08.2023 from the office of respondent No.3 directing the petitioner to submit its response/reply on the irregularities/anomalies as pointed out by the Forensic Auditor in their report dated 08.04.2019 within a period of 15 days from the date of receipt of the letter. Soon after receiving the said notice, the petitioner has submitted a reply through email dated 13.08.2023 stating that the banker has relied on incorrect Forensic Audit Report 5 dated 08.04.2019 which was only a draft report and the bank has not referred to the subsequent and Final Forensic Audit Report dated 01.11.2019 and also not followed the guidelines issued by the Hon'ble Apex Court in its judgment dated 23.03.2023. It is further case of the petitioner that the respondent-bank without taking into consideration the explanation submitted by it, has issued impugned communication dated 05.08.2023 informing that petitioner's account would be classified as fraud. Hence the petitioner has filed Writ Petition No.23524 of 2023.
6. The respondent No.3 has filed counter affidavit inter alia stating that the petitioner company availed credit facilities from the consortium of banks and as on the date of classifying the petitioner's account as NPA, the petitioner is liable to pay Rs.500.05 Crores as on 30.09.2022. It is stated that the outstanding liability payable by the petitioner to the entire consortium of lenders is approximately Rs.920.85 Crores as on 31.02.2021. It is stated that the competent authorities duly taking into consideration, irregular payments, as pointed out by the Forensic Auditor Report, decided to declare the petitioner's account as fraud. It is stated that the petitioner was into the practice of recording the actual receipt of one customer's account into another customer's account as the system of accounting is based on the brokers instead of actual customers, which lead to 6 invisibility of the actual debtors to determine the actual receivables of petitioner. It is also stated that the petitioner has not maintained regular accounts and details of paid receivables party wise for the years 2015, 2016 and 2017 and the petitioner approached third party financers, thereby opening fresh LCs and repaid the LCs given by the third parties, NBFCs outside the consortium banks instead of paying to the consortium member banks. It is stated that the petitioner opened LCs worth Rs.45.15 Crores in favour of third party beneficiaries and as per Forensic Audit Report, these third party financers do not have any business relationship with the petitioner and audit report were unable to comment on the genuineness of such transactions due to unavailability of adequate information. It is further case of the respondents that duly taking into account overall performance of the petitioner company for discharging financial obligation and following the guidelines issued by the Hon'ble Supreme Court in the State Bank of India vs. Rajesh Agarwal 1, the respondent has issued impugned communication dated 05.08.2023 which does not suffer from any legal infirmities warranting interference by this Court under Article 226 of the Constitution of India and ultimately prayed to dismiss the writ petitions.
1 (2023) 6 SCC 1 7
7. Considered the submissions of learned counsel for the respective parties and perused the record.
8. Mr.B.Chandrasen Reddy, learned Senior Counsel representing Sri Kailash Nath P.S.S, learned counsel for the petitioner submitted that, in the minutes of the consortium meeting held on 19.04.2019, under Agenda No.1, it was observed that the lenders expressed their inability to provide an opinion on the report on the grounds that the Final Forensic Audit Report was inconclusive in declaring the petitioner's account as fraudulent and that some of the member banks had received the report only on 17.04.2019 and requested the lead bank to convene a consortium meeting at a later date for the finalization of the Forensic Audit Report. It is contended by the learned Senior Counsel that member banks have requested lead bank to appoint a concurrent auditor on behalf of the consortium banks for monitoring the transactions of the petitioner company. The learned Senior Counsel relied upon the Forensic Auditor Report dated 01.11.2019 and its conclusions at Section 6-Summary Financials, which reads as under:
"...with the above observations read with key findings & executive summary and other points narrated in our report, we conclude that management & promoters should have been more careful in financial control. The series of event of delays and defaults in the entire supply chain beginning from the retailers to wholesalers leading to willful defaults by distributors led to the default by the Company. One wonders why aggressive steps for recovery of debtors (overdue for extra ordinary time with no confirmations) 8 was not taken during the course of business, which was main reason of account becoming NPA. Basis the sample audit, review of legal cases, interviews of available brokers, understanding of trade practices, clarification on reconciliation of debtors by statutory auditors in recent time, overall substance of the account, lack of any material evidence and subject to reliance on the data for the recovery of debtors, we find no diversion of funds or fraud being intentionally carried out by the management."
Relying upon the said observations of the Forensic Audit Report, the learned Senior Counsel vehemently contended that there are no reasonable grounds to classify the petitioner's account as fraud and the respondents without taking into consideration, the Forensic Audit Report dated 01.11.2019 and relying upon the inconclusive Report erroneously exercised discretion in issuing impugned proceedings, dated 05.08.2023 and ultimately, prayed this Court to allow the writ petitions.
9. On the other hand, Mr.B.S.Prasad, learned Senior Counsel representing Pearl Law Associates for the respondent No.3 has submitted that, as per the Forensic Audit Report dated 08.04.2019, certain serious irregularities and anomalies were pointed out by the auditors. The consortium banks, considering the overall management system, noted that these irregularities resulted in a total collapse, making it difficult for the petitioner to run and operate its units without incurring substantial costs for repairs and renovations, which further deteriorated the situation and rendered the plants unavailable for operations. Further, there was a huge 9 amount of debtors, totaling approximately Rs.500 crores and above, along with the extension of credit to customers without concrete agreements, the grouping of credits at the broker level leading to limited visibility of receivables, and a lack of financial control at the unit level. The respondents have rightly issued the impugned order dated 05.08.2023 calling for explanation from the petitioner, to place appropriate report before the Committee for identification of the loan account of the petitioner as fraud or otherwise as per the RBI Master Directions on Fraud. It is further submitted that the petitioner, instead of submitting an explanation raising all his objections, has instituted the present writ petitions, which are misconceived and liable to be dismissed.
10. The case of the petitioner is that the respondents issued the impugned order dated 05.08.2023 on the ground of alleged irregularities observed in the loan account of the petitioner and relied on the Forensic Auditor/Internal Auditor Report dated 08.04.2019. The Minutes of the Consortium Bank meeting held on 08.04.2019, consisting of representatives from Andhra Bank (lead bank), member banks, and officials from PWC, discussed Agenda No.1 concerning the Forensic Report prepared against the petitioner company. It was categorically noted that the lenders expressed the opinion that the Final Forensic Audit Report was inconclusive to declare the account 10 of the petitioner as fraudulent. It was also observed that since some member banks received the Report on 17.04.2019, they expressed their inability to fully discuss it at that time and requested the lead bank to convene another consortium meeting to finalize the Forensic Auditor Report. In addition to the above, the Final Report of the Forensic Audit dated 01.11.2019, which is subsequent to the initial Report, revealed that, based on sample audits, reviews of legal cases, interviews with brokers, understanding of trade practices, and the statutory auditors' clarification and reconciliation of debtors, as well as the overall account substance, there was a lack of material evidence. Consequently, the Forensic Audit Committee found no diversion of funds or intentional fraud committed by the management. A careful examination of this Report, prima facie establishes that the petitioner company was not found any diversion of funds or intentional fraud being played for remitting the amounts to the consortium of banks. Further, the Hon'ble Apex Court in State Bank of India vs. Rajesh Agarwal's case (supra), has framed following guidelines for classifying the accounts as fraud in terms of the RBI Guidelines:
"81.The conclusions are summarized below:
i. No opportunity of being heard is required before an FIR is lodged and registered;11
ii. Classification of an account as fraud not only results in reporting the crime to investigating agencies, but also has other penal and civil consequences against the borrowers;
iii. Debarring the borrowers from accessing institutional finance under Clause 8.12.1 of the Master Directions on Frauds results in serious civil consequences for the borrower;
iv. Such a debarment under Clause 8.12.1 of the Master Directions on Frauds is akin to blacklisting the borrowers for being untrustworthy and unworthy of credit by banks. This Court has consistently held that an opportunity of hearing ought to be provided before a person is blacklisted;
v. The application of audi alteram partem cannot be impliedly excluded under the Master Directions on Frauds. In view of the time frame contemplated under the Master Directions on Frauds as well as the nature of the procedure adopted, it is reasonably practicable for the lender banks to provide an opportunity of a hearing to the borrowers before classifying their account as fraud;
vi. The principles of natural justice demand that the borrowers must be served a notice, given an opportunity to explain the conclusions of the forensic audit report, and be allowed to represent by the banks/ JLF before their account is classified as fraud under the Master Directions on Frauds. In addition, the decision classifying the borrower's account as fraudulent must be made by a reasoned order; and vii. Since the Master Directions on Frauds do not expressly provide an opportunity of hearing to the borrowers before classifying their account as fraud, audi alteram partem has to be read into the provisions of the directions to save them from the vice of arbitrariness."
11. For the aforementioned reasons, as the respondents failed to consider the Final Forensic Audit Report dated 01.11.2019 and the conclusions drawn therein, and instead relied on the Audit Report dated 08.04.2019, which the member banks deemed inconclusive, and in light of respondent No.3-Bank's failure to follow the decision to provide an opportunity to explain the conclusions of the forensic audit report, the impugned orders dated 27.03.2023 and 05.08.2023, along with the consequential orders, are liable to be set aside.
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12. Accordingly, both the Writ Petitions are allowed, and the impugned orders dated 27.03.2023 and 05.08.2023 issued by the respondents are set aside. The respondents are directed to issue a fresh show cause notice to the petitioner, following the guidelines laid down by the Hon'ble Apex Court in State Bank of India vs. Rajesh Agarwal (supra) supra) as well as the guidelines issued by the RBI and call for an explanation from the petitioner regarding the classification of the petitioner's account as 'fraud' and, upon receipt of such explanation, they are directed to consider the same along with the observations made in the Final Forensic Auditor Report dated 01.11.2019 and pass a reasoned order, after affording the petitioner an opportunity for a personal hearing, in accordance with law, within a period of eight (08) weeks from the date of receipt of the explanation.
As a sequel, miscellaneous petitions pending if any, shall stand closed. No order as to costs.
___________________________ C.V. BHASKAR REDDY, J Date: 26.09.2024 scs