Kerala High Court
Great India Estate Pvt. Ltd vs Union Bank Of India on 18 March, 2022
Author: N.Nagaresh
Bench: N.Nagaresh
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 :3: 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 :4: 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 :5: 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 :6:
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 :7: 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 :8: 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 :9: 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 : 10 : 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 : 11 : 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: 12 :
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 : 13 : 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 : 14 : 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 : 15 : 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 : 16 : 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 : 17 : 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 : 18 : 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 : 19 : 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 : 20 : 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.