Telangana High Court
M/S. Shree Saraiwwalaa Agrr Refineries ... vs Union Of India And 2 Others on 22 December, 2021
Author: Satish Chandra Sharma
Bench: Satish Chandra Sharma, N.Tukaramji
THE HON'BLE THE CHIEF JUSTICE SATISH CHANDRA SHARMA
AND
THE HON'BLE SRI JUSTICE N. TUKARAMJI
WRIT PETITION Nos.22588 OF 2019 AND
3648 AND 3667 OF 2020
COMMON ORDER:(Per the Hon'ble the Chief Justice Satish Chandra Sharma)
1. Regard being had to the similitude in the controversy involved in the present cases, the writ petitions were analogously heard and by this common order, they are being disposed of by this Court.
2. The petitioner is common in all the three writ petitions. The facts of W.P.No.22588 of 2019 reveals as follows:-
The petitioner, a company registered under the Companies Act, has filed the present writ petitions being aggrieved by the action of the respondent No.3/Andhra Bank (now merged with Union Bank of India) in declaring the petitioner's account as 'fraud' and is also aggrieved by the Master Circular issued by the Reserve Bank of India, dated 01.07.2016 as violative of principles of natural justice and fair play.
3. The petitioner has prayed the following reliefs:
"In these circumstances and for the reasons stated above, it is 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 the action of 2 3rd respondent in declaring the petitioner as 'Fraud' as arbitrary, illegal and contrary to 'Master Directions on Frauds - Classification and Reporting by commercial banks and select FIs dated 01.07.2016 issued by the 2nd respondent, and further declaring the 'Master Directions on Frauds - Classification and Reporting by commercial banks and select FIs dated 01.07.2016 as violative of principles of natural justice and consequently to set aside the decision of the 3rd respondent Bank and the impugned circular, and pass such other order or orders as this Hon'ble Court may deem fit and proper in the interest of justice.
It is further prayed that pending the disposal of the writ petition, this Hon'ble Court may be pleased to stay all proceedings consequential to the action of the 3rd respondent in declaring the petitioner as 'Fraud' and pass such other order or orders as this Hon'ble Court may deem fit and proper in the interest of justice.
It is further prayed that pending the disposal of the writ petition, this Hon'ble Court may be pleased to direct the 2nd respondent to produce the record of proceedings in which the petitioner was declared as 'Fraud' and share a copy of the same with the petitioner, and pass such other order or orders as this Hon'ble Court may deem fit and proper in the interest of justice."
4. The facts, as stated in the writ petition, reveal that the petitioner company is involved in the business of manufacture of edible oils and fats, rice and rava products and is having two manufacturing facilities in the State of Telangana as well as in the State of Andhra Pradesh. The petitioner company from 2003 to 2015 sought credit facilities from a consortium of banks with Andhra Bank (now merged with Union Bank of India) as a Lead Banker 3 for a sum of Rs.675 crores. The petitioner company was declared as Non Performing Asset (NPA) on 14.05.2018 with effect from 31.03.2018. The petitioner company has further stated that after the account of the petitioner company became NPA, the consortium of lenders in the JLF Meeting dated 10.08.2018 proposed to conduct forensic audit of the petitioner company for the period till 31.03.2019. The petitioner company, as stated, has submitted all the requisite information as required by the forensic auditor appointed in the matter from time to time and it is the contention of the petitioner company that no adverse observations or detection of fraud activity by the petitioner company was noticed in the forensic audit. However, the respondent No.3 Bank kept on pushing the auditor to look deeper into the books so that the petitioner company is declared as 'fraud'. It has also been stated that the respondent No.3 Bank also initiated recovery proceedings before the Debt Recovery Tribunal and finally an e-mail dated 23.09.2019 was initiated by Tamilnad Mercantile Bank Limited to the respondent No.3/Union Bank of India with a copy to the petitioner company declaring the petitioner's account as 'fraud'. The petitioner company has further stated that the petitioner company contacted the Officers of the respondent No.3 Bank and it 4 was informed to the petitioner that the decision was taken by the management of the Bank in line with the Directives of the Reserve Bank of India.
5. The contention of the petitioner company is that the action taken against the petitioner company by declaring the petitioner's account as 'fraud' is in violation of the principles of natural justice and fair play and therefore, the Circular itself issued by the Reserve Bank of India under Section 35A of the Banking Regulation Act, 1949 as it excludes the principles of natural justice and fair play deserves to be quashed and the consequential action taken by the Bank also deserves to be quashed on the ground of violation of principles of natural justice and fair play. The other ground taken by the petitioner company is that the forensic audit report nowhere holds the petitioner guilty of playing any fraud and in fact, the findings of the forensic audit are in favour of the petitioner company.
6. The learned counsel for the petitioner has vehemently relied upon the Judgment delivered by the Division Bench of this Court in the case of Rajesh Agarwal v. Reserve Bank of India1 and his contention is that this Court while deciding the aforesaid case on 10.12.2020 has held that the action of the Bank therein is bad in law as principle of audi 1 2021 (2) ALD 290 : 2021 (1) ALT 454 5 alteram partem was not included in the Master Circular. Attention of this Court has been drawn to paragraphs 69 and 70 of the aforesaid Judgment and his contention is that in the light of the aforesaid Judgment, the decision arrived at by the respondent No.3 Bank in declaring the petitioner's account as 'fraud' deserves to be set aside.
7. The Reserve Bank of India has filed a detailed reply in the matter and the contention of the Reserve Bank of India is that Section 35A of the Banking Regulation Act, 1949 empowers the Reserve Bank of India to issue directions to the Banks and the 'Master Directions on Frauds' has been issued by the Reserve Bank of India in public interest. The Reserve Bank of India being the regulator and supervisor of the Banks in the country has been issuing many instructions to the Banks to sensitize them against banking frauds. On 22.03.2021, the Reserve Bank of India had issued a Master Circular on Frauds incorporating the circulars issued on the subject till that date and the Master Circular issued on Frauds are updated every year. It has been further stated that in 2016, the Reserve Bank of India has started issuing Master Directions on each subject covering all instructions on that subject and the Master Directions are being updated suitably whenever there is a change in the policy. It has been further stated 6 that 'Master Directions on Frauds - Classification and Reporting by Commercial Banks and select FIs' (hereinafter called as 'Master Directions on Frauds'/'Master Circular') was issued on 01.07.2016 and it is nothing but updation of the existing Master Circular on Frauds - Classification and Reporting, dated 01.07.2015. It has been further stated that subsequently Master Directions on Frauds was updated on 03.07.2015.
8. The Reserve Bank of India has also stated that the Master Circular does not violate the principles of natural justice and fair play nor it is arbitrary. The information in the Central Fraud Registry does not cause injury to the borrower's reputation or his/her business and the information is shared with other banks on private and confidential basis, which is in the nature of a Bankers Report on an account. The Reserve Bank of India has further stated that it is done with an intention to share the information for the purpose of exercising caution while dealing with such parties as indicated in Caution Advice/Central Fraud Registry. It has been further stated that it is mandatory to file a complaint with the Law Enforcement Agencies who then independently investigate the matter and present it in Court of Law.
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9. The Reserve Bank of India has further stated that the information on frauds is published by the Reserve Bank of India at aggregate level without revealing the details of individual cases and it does not cause injury to the borrower's reputation or business. It has been further stated that the loan fraud is a breach/violation of the terms and conditions of the contract by a borrower as perceived by the Bank who granted the loan to the borrower. It has been further stated that in case of commission of fraud by the borrower, the Bank is the injured party and has a right to report the crime to Law Enforcement Agencies. It is not incumbent on the Banks to provide the perpetrator an opportunity to be heard in a similar manner for lodging an FIR, no opportunity of hearing is to be granted. It has been further stated that in case of classification and reporting of fraud, it is necessary to file a complaint with Law Enforcement Agencies and the investigation is done independently by the Law Enforcement Agencies and it is not a case where by mere declaration of fraud, a person/entity is punished.
10. It has been further stated that 'Master Directions on Frauds' provides for a comprehensive mechanism and the forensic auditor does the audit on the basis of the documents supplied by the borrower. It is not a case where 8 the forensic auditor on his own prepared some documents and it is only based upon the information furnished by the Bank and the borrower and the forensic audit is done in respect of the account of the borrower, who is very much aware of the same and at no stretch of imagination, it can be presumed that unilateral action is initiated against the borrower.
11. The Reserve Bank of India has further stated that the 'Master Circular' provides a comprehensive mechanism. The Committee headed by an Executive Director or equivalent with two senior officers takes a decision and thereafter the order of the Committee is reviewed by another Committee headed by the Chairman/CMD or the MD & CEO/CEO and two independent Directors/non- executive directors of the Bank. The order is final only after it is confirmed by the said Review Committee. Meaning thereby, lot of checks and balances have been provided under the Master Circular and no case for interference by this Court is made out and therefore, the Reserve Bank of India sought for dismissal of the present writ petitions.
12. The respondent No.3/Andhra Bank (Union Bank of India), Lead Bank of the consortium, has filed a detailed counter affidavit and it has been stated that action has 9 been taken in the matter keeping in view the Master Directions on Fraud, dated 01.07.2016. It has been further stated that clause 1.3 of the Circular clearly establishes that the classification is purely an administrative exercise meant not only as an exercise necessary for follow up action in accounts classified as 'Fraud Account' but also as a preventive exercise. The classification of account is thus necessary and required to be undertaken in the circumstances. The Master Circular is in the nature of directions to the Banks as regards classification of account, its reporting to the Reserve Bank of India and follow up action and closure of account classified as 'Fraud Account'. It has been further stated that the petitioner has been enjoying credit facilities in consortium with Andhra Bank (Union Bank of India) as the Lead Bank, being State Bank of India, Indian Bank, Punjab National Bank and Tamilnad Mercantile Bank the other member Banks. The petitioner's account was declared as NPA and the Consortium of Bankers has taken steps to realise the securities and also filed an Application before the Debt Recovery Tribunal for recovery of an amount of Rs.617,40,94,702.61/-. It has been further stated that the petitioner is trying to mislead this Court by drawing parallel with declaring a borrower as 'wilful defaulter'. It 10 has been stated that classification of an account as a 'Fraud Account' is distinct and distinguishable from declaring the borrower as a 'wilful defaulter'. In the case of declaring a borrower as a 'wilful defaulter', it is the person/borrower who is declared (not classified) as a wilful defaulter and not the account. Since such declaration affects the person/borrower, a detailed procedure is prescribed wherein a right of hearing is provided to such person/borrower in those cases, whereas in respect of classification of loan account as 'Fraud Account', it is done as a preventive measure purely for reporting, controlling, monitoring, follow up action and therefore, there is no necessity nor any requirement of hearing before classification of account as 'fraud'.
14. The respondent No.3/Bank has further stated that the petitioner company has filed Forensic Audit Report and the petitioner is reading only one paragraph, i.e., last paragraph of the Report and based upon the last paragraph of the Report, an attempt is being made before this Court by the learned counsel for the petitioner that there is nothing against the petitioner company in the forensic audit. Attention of this Court has been drawn to other paragraphs also, wherein there is a categorical statement against the petitioner company. On the basis of 11 which, the account of the petitioner company has been declared as 'fraud'. A prayer has been made for dismissal of the writ petitions.
15. Heard the learned counsel for the parties at length and perused the record. The matter is being disposed of with the consent of the parties at admission stage itself.
16. The facts of the case reveal that the petitioner company, incorporated in the year 1999, is engaged in the business of manufacture of edible oils and other products and availed credit facilities from a consortium of banks with Andhra Bank (Union Bank of India) as a Lead Bank for a sum of Rs.675 Crores. The account of the petitioner company was declared as NPA on 14.05.2018 and the consortium of banks has taken steps to realise the securities and also filed an Application before the Debt Recovery Tribunal for recovery of a sum of Rs.617,40,94,702.61/-. The petitioner company is aggrieved by the action of the respondent No.3/Andhra Bank (Union Bank of India) in declaring the petitioner's account as 'fraud'. The Reserve Bank of India is a Statutory Corporation constituted by the provisions of Section 3 of the Reserve Bank of India Act, 1934, for the purpose of regulating the issue of Bank Notes and keeping 12 the reserves with a view to secure monetary stability in the country and generally to operate currency and credit system of the country. The Reserve Bank of India has been, inter alia, entrusted with the statutory obligation of administering the provisions of Banking Regulation Act, 1949. In the Banking Regulation Act, the Reserve Bank of India has been vested with various powers with respect to banking companies, such as granting licences, conducting inspections, giving directions, advises etc. The Reserve Bank of India has been vested with the powers to determine the Banking policy in the interest of banking system, in the interest of monetary stability and sound economic growth, having due regard to the interests of the depositors. The Reserve Bank of India is also concerned with organization of a sound and healthy banking system, ensuring effective coordination and control over credit through a proper Monetary and Credit Policies. The Reserve Bank of India has the primary responsibility to ensure stability of the banking system in the country and Directions/Guidelines have been issued by the Reserve Bank of India from time to time. The Reserve Bank of India being an expert body, its decisions with regard to regulation of banks deserve to be given due weightage. Section 35A of the Banking Regulation Act empowers the 13 Reserve Bank of India to issue directions to the banks. Section 35 A of the Banking Regulation Act is reproduced as under:-
"35A. Power of the Reserve Bank to give directions.- (1) Where the Reserve Bank is satisfied that-
(a) in the public interest; or
(aa) in the interest of banking policy; or
(b) to prevent the affairs of any banking company
being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company; or
(c) to secure the proper management of any banking company generally, it is necessary to issue directions to banking companies generally or to any banking company in particular, it may, from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions.
(2) The Reserve Bank may, on representation made to it or on its own motion, modify or cancel any direction issued under sub-section (1), and in so modifying or cancelling any direction may impose such conditions as it thinks fit, subject to which the modification or cancellation shall have effect."
17. The 'Master Directions on Frauds' has been issued by the Reserve Bank of India in public interest under Section 35A of the Banking Regulation Act. The Reserve Bank of India being the regulator and supervisor of the banks in the country has issued many instructions to the banks to 14 sensitize them against banking frauds and to have deterrent systems against such frauds. The Reserve Bank of India has issued a 'Master Circular on Frauds' dated 01.07.2016 incorporating the earlier circulars issued on the subject and the Reserve Bank of India updates the Master Circular on Frauds annually, generally in July incorporating the instructions issued till then. In 2016, the Reserve Bank of India has started issuing Master Directions of each subject covering all the instructions on that subject and the Master Directions are also updated suitably whenever there is a change in the policy. All the changes so made are reflected in the Master Directions available on the Reserve Bank website and finally 'Master Directions on Frauds - Classification and Reporting of Commercial Banks and select FIs' was issued on 01.07.2016. It is, in fact, more or less an updation of the existing Master Circular on Frauds - Classification and Reporting, dated 01.07.2015. Subsequently, Master Directions on Frauds was updated on 03.07.2017.
18. Clause 1.3 of the 'Master Directions on Frauds' is reproduced as under:-
"1.3 Purpose These directions are issued with a view to providing a framework to banks enabling them to detect and report frauds early and taking timely consequent actions like 15 reporting to the investigative agencies so that fraudsters are brought to book early, examining staff accountability and do effective fraud risk management. These directions also aim to enable faster dissemination of information by the Reserve Bank of India (RBI) to banks on the details of frauds, unscrupulous borrowers and related parties, based on banks' reporting so that necessary safeguards/ preventive measures by way of appropriate procedures and internal checks may be introduced and caution exercised while dealing with such parties by banks."
19. The purpose set out in the Master Circular clearly establishes that the classification of account as 'fraud' is purely an administrative exercise, which is necessary to take follow-up actions and is also a preventive exercise to ensure that other banks also share the information which is in the Central Fraud Registry for the purpose of exercising caution while dealing with such parties. Much has been argued before this Court on the ground of principles of natural justice and fair play and a prayer has been sought to quash the 'Master Directions on Frauds', dated 01.07.2016 to the extent they do not provide for opportunity of hearing.
20. Heavy reliance has been placed upon the Judgment delivered by this Court in the case of Rajesh Agarwal (supra). It is true that a coordinate Bench of this Court has certainly held that the principle of audi alteram partem, part of the principles of natural justice, is to be read in 16 Clause 8.9.4 and 8.9.5 of the Master Circular. The aforesaid Judgment delivered by the Division Bench has not attained finality. In Special Leave Petition filed by the State Bank of India, i.e., S.L.P. (C) No.3931 of 2021, the Hon'ble Supreme Court, by order dated 15.04.2021, has granted interim order and the observation of the High Court to the extent of personal hearing be given, has been stayed. The Order passed by the Hon'ble Supreme Court is reproduced as under:-
"Applications seeking exemption from filing certified copy of the impugned order are allowed.
Issue notice.
Dasti service, in addition, is permitted. Learned counsel is permitted to file counter affidavit within a period of four weeks from today. Rejoinder affidavit within two weeks thereafter.
Set down for hearing on Tuesday, the 13th July, 2021 on top of the Board.
Meanwhile, the Minutes/Order dated 15.02.2019 passed by the Joint Lenders Meeting is not to be acted upon. The High Court insofar as it observed that a personal hearing be given is stayed."
21. In the considered opinion of this Court, as the issue of principle of natural justice and fair play is pending before the Hon'ble Supreme Court, the same is not being dealt with at present. However, the facts of the case reveal that the forensic audit, which was conducted, was not a unilateral exercise on the part of the auditor. The audit was conducted with full participation of the petitioner 17 company and based upon the audit report, which was certainly prepared with the participation of the petitioner, the petitioner account has been classified as 'fraud'.
22. Learned counsel for the petitioner has much argued upon the 'Conclusion' part of the Audit Report and the same is reproduced as under:-
"Conclusion:
The Company SARL which is in edible oil and rice business has continuously progressed its turnover and reached to a peak turnover of Rs.2450 Cr in the last year ending 31.03.2018. To sustain high turnover at ultra low profitability, the request for enhancement of working capital was made but was rejected. The results of the business at every year end has been very bleak in terms of margins not even being 1% of the turnover as can be seen from the financial statements, led to vulnerability of business.
It is interesting to analyze what circumstances made company as defaulter and NPA account with bankers during laws few months post closure of FY 18 though indication could be seen in last 2 years itself when company registered high revenue growth with reduced profitability at cost of Supply chain risks and lack of control on debtors, which increased substantially. The Company continued to do higher business volumes with insignificant enhancement in working capital limits in the last 3 years. The company had to face many regulatory hurdles during the current year which were reported and are known in public domain and it being a business entirely based on imports, the business came to grinding halt with the change in government policies and tax structure, sources of funds dried, with loss of faith by financial institutions, leading the production to stop, supplies could not be made, customers started blocking old 18 money, because no new supply being possible and as a result all letter of credits started devolving and account became irregular with banks, with no possibility for the company to react by shifting fully to indigenous sources or arrange for any funds.
The huge amount of debtors of about Rs.500 Cr and above leaves an important observation about the traditional practices of business control, extension of credit to customers without concrete agreements, grouping the credits at broker level leading to limited visibility of receivables party wise from a longer period. Further the lack of unit level financial control and inter dependence of all the businesses with a common supply chain and distribution proved fuel in fire when management was unable to serve the customers and de-risk any of its business with the change in tax regime and government policy in the lead business. Further the insistence of Statutory Auditor on creating provision and writing off these debtors as bad debts resulted these bad debts falling the prey of legal proceedings and forcing the company to commit itself towards a bleak recovery for the receivables.
A question arises as to whether the overall management accounting system was adequate enough to run such large operations, which resulted into a total collapse in event of business exigency which has hit the entire edible oil industry and was beyond the control of management, where over leveraging without adequate control and absence of strong risk mitigation measures led to the down fall.
The company has conveyed that it has taken legal action against debtors recovery but being civil suits, law will take its own time and on the other hand counter claim of the debtors indicate long drawn futile process of recovery. The above observation and also key finding and executive summary narrated in this report leaves a question on management system control and lack in adopting adequate risk measures in areas such as recovery from debtors, legal documentations with the brokers and 19 trails of transaction adequate which are essential for the recovery of receivables, results in bleak recovery of the same.
SARL was a profitable Company as there has been positive increase in its revenue, but with high leverage and thin margins, it would be difficult to run and operate the units in the current situation without incurring major repairs and renovation cost and further deterioration will make the plants unviable for operations.
The majority of investment made by the company with a prime objective was in distribution, brand building and increasing the reach other than creating hard assets of building plant and machinery.
The intangible asset of brand investment in distribution and non-running fixed assets does have a severe erosion calling for an impairment in very short period of time, given the plant and machinery hardly provides for any cover against the debt.
With the above observations read with key findings & executive summary and other points narrated in our report, we conclude that management and promoters should have been more careful in financial control and one wonders why aggressive steps for recovery of debtors (overdue for extra ordinary time with no confirmations) is not taken which was main reason of account becoming NPA. Basis the sample audit, review of legal cases, interviews of brokers, understanding of trade practices, clarification on reconciliation of debtors by statutory auditors in recent time, overall substance of the account 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."
23. Learned counsel for the petitioner contends that the Forensic Audit did not come to a conclusion that of declaring the account of the petitioner as 'fraud'. 20
24. Learned counsel for the Andhra Bank (Union Bank of India) has drawn the attention of this Court towards pages 213, 216 and 219 (of the petitioner's paper book) of the Forensic Audit Report. They read as under:-
Obs Observation Unusual Indicators & Level of No Conclusion based on Unusual Audit Findings Indications 4 Devolvement of Letter of Credit:
- The company has a history - Multiple devolvement of devolvement of LCs with all of LCs simultaneously the member banks of the resulted in huge consortium since May 2017. shortage of cash flow in However the Company had the Company and made the payment against the increased the bankers same in the extended period of stress to recover the time to the banks. loans disbursed.
- Also, due to such
- As per the minutes of the implications the consortium meeting dated Company has been 28.04.2017, the Company had liable to pay 2% HIGH informed the consortium additional interest on banks that the reason for LCs the amount due to the devolvement initially was due banks increasing their to strike at Krishnapatnam liabilities.
area impacting the production. - This indicates that This further affected the the Company realisability of receivables continued to make impacting the cash flows. procurements and open LC's without
- The Company has devolved having any financial ILCs of amount aggregating to arrangement for INR 45.86 Crores that were repaying the same on issued in January 2018 to timely basis. As a March 2018 and FLCs issued result, once the banks since August 2017, stopped opening new aggregating to BOUT USD 73 LC accounts, the million (equivalent to INR Company could not 476.80 Crores approx), remain repay the commitments outstanding as on date. for the lack of availability of funds.
- Subsequent to account being The Company had declared as NPA, the Company obtained finance from ahs approached the third third party financiers, party financiers who have however could not opened fresh LCs on behalf of sustain for long due to the Company under the additional finance arrangement as explained in costs.
the Key findings section. - Approaching third
party financiers for
additional LCs, when
there has been
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devolvement of the
existing ones increases
the liability and risk
potentials.
- The Company has
repaid the LCs of third
party NBFCs, outside
the Consortium, prior
to the member banks.
Obs Observation Unusual Indicators & Level of
No Conclusion based on Unusual
Audit Findings Indications
4 Misutilisation of funds for
purpose other than
sanctioned for: - We are informed that
- The Company has the funds were utilised
transactions during December for purpose of
2016 to September 2018 with purchase of land
Ekaakshara Refineries Pvt unauthorisedly and
Ltd., its associate Company hence indicates
having common directors. The misutilisation of loan
Company during December funds. The Company,
2016 to August 2017 made however, realised the
adjustment of INR 0.70 Crores principal amount from
through vendor account P Ekaakshara Refineries
Ram Mohan Reddy (a water Private Limited.
tank supplier) and payment of MEDIUM
INR 1.90 Crores was made - Credit Limits were
without any business being sanctioned to the two
carried on in the associate divisions in the
Company. No other Company on the basis
transactions were being of its stock and trade
carried until September 2018, receivables valuations
resulting in cumulation of on individual basis.
interest cost for more than a The Company never
year on the funds transferred maintained division
by the Company. However, wise accounts of the
Ekaakshara repaid the funds customers separately,
in September 2018 for INR given the commonality
2.60 Crores for settlement of of customer accounts
the account. led to loss of control on
Risk parameters.
- The Company have been However, funds
sanctioned credit facilities for sanctioned for Rice
Oil and Rice divisions division carry less
separately with specified limits potential risk than Oil
by the lead banker as per the division.
sanction letters, however
funds sanctioned for Rice
division in its account were
being transferred and utilised
in the Oil division. The funds
carried separate charges as
securities on its stocks and
receivable division wise, and
were supposed to be utilised
for the specific purpose they
were sanctioned for, which
was violated.
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RESPONSE TO ABOVE OBSERVATION
Management Response: Forensic Auditor's Comment:
The Company utilized funds of Funds were spent by SARL on
Rs.2.60 Crores by making payment behalf of Ekaakshara during the
to Ekaakshara. Subsequently, the period 07.10.2016 to 29.08.2017
Company has realised the entire amount to INR 2,60,01,508, The
amount from Ekaakshara Refineries entire amount was repaid by
Pvt Ltd. Ekakshara to SARL during
10.09.2018 to 14.09.2018.
Obs Observation Unusual Indicators & Level of
No Conclusion based on Unusual
Audit Findings Indications
8 Qualified opinion and
Emphasis of matter in FY
2017-18 by new Auditors:
- Substantial losses in
- The Company has reported a the current year have
loss of INR 223.33 Crores due eroded the net worth of
to which net worth of the the Company in single
Company has been fully year completely.
eroded from INR 204.72
Crores to negative net worth of
INR 25.61 crores. Further - These conditions and
devolvement of LC's on a large events indicate
scale followed with lower scale material uncertainty
of production/No production which may cast
in certain units gives doubts significant doubt on MEDIUM
about the continuity of the entity's ability to
business. So the Company's continue as going
ability to continue the concern.
business as going concern is
significantly dependent upon - The proposal for
the viability of the restructuring of the
restructuring plan to be account was declined
approved by Consortium by the bank.
Banks.
- The downgrading of
- The Company's rating by the rating of Company
Brickwork Ratings India in its indicates the
report "Rating Rationale" inefficiency of the
dated 23 February 2018, Company and the
wherein it downgraded the promoters to repay the
ratings of the Company to loan.
"BWR BBB" for the Fund
Based Bank Loan Facilities of
INR 106.61 Crores of the
Company and to "BWR A3+"
for Non-Fund Based Bank
Loan Facilities of INR 635.11
Crores.
- With respect to the liability
on account of post-retirement
medical benefits of employees
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including retired employees, a
defined benefit plan, is
recognised on actual basis in
respect of bills received by the
Company instead of
recognizing the liability for the
same as the present value of
the defined benefit obligation
at the balance sheet date
calculated on the basis of
actuarial valuation in
accordance with the notified
AS - 15 on Employee Benefits.
The consequential impact of
adjustment, if any, owing to
this non-compliance on the
financial statements is
presently not ascertainable.
- Sundry debtors worth INR
397.57 Crores are doubtful
debts which have been
classified as non-current
assets against a total debts of
INR 552.39 Crores as on 31
March 2018, of which
balances under significant
accounts are subject to
reconciliations and
confirmation. The Company
has made a provision of INR
132.02 Crores which appears
to be inadequate specially
keeping its view the position of
recovery in subsequent years
and therefore reported loss of
INR 223.33 Crores remains
under reported.
25. The relevant extracts of the audit report reveals that it is not a case where no adverse findings have been arrived at by the Forensic Auditor in the entire Report and therefore, this Court is of the opinion that based upon the findings arrived at in the Forensic Audit Report, the petitioner company's account was rightly declared as 'fraud' and the scope of interference in the peculiar facts and circumstances does not arise. There is no illegality or 24 infirmity in the decision making process warranting interference in the peculiar facts and circumstances of the case.
26. This Court has carefully gone through the Audit Report and it is not a case where there is no whisper against the petitioner company. This Court does not find any reason to interfere with the action of the respondent Bank in declaring the petitioner's account as 'fraud', which has been done by following due process of law as prescribed under the Master Circular issued by the Reserve Bank of India.
27. In the light of the aforesaid, the writ petitions are dismissed. Miscellaneous petitions, if any pending, shall stand dismissed. There shall be no order as to costs.
_____________________________ SATISH CHANDRA SHARMA, CJ ________________ N.TUKARAMJI, J 22.12.2021 Pln