Cmi Limited vs Canara Bank on 18 October, 2022

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Delhi High Court - Orders

Cmi Limited vs Canara Bank on 18 October, 2022

1. Petitioner designs and manufactures wires, cables and conductors at its manufacturing units/plants situated at Faridabad, Haryana [hereinafter, "Faridabad unit"] and Baddi, Himachal Pradesh. For conduct of its business, Petitioner availed financial facilities from various banks, including Respondent Bank, but for reasons that the Court is not examining, it was unable to repay the same. Thereafter, several meetings were held between Petitioner and consortium of lender banks in respect of restructuring of loan(s), and it was decided to open a trust and retention account ["TRA"] wherefrom Petitioner could make payments pertaining to operation of Signature Not Verified Digitally Signed By:SAPNA SETHI W.P.(C) 14359/2022 Page 1 of 7 Signing Date:20.10.2022 20:12:37 above-stated manufacturing units. Accordingly, TRA bearing No. 120000731099 was opened on 24th January, 2021. While discussions qua restructuring process were ongoing, Respondent Bank issued 'debit-freeze' instructions vide letter bearing LCB DEL/CMIL/375/2022/TRA/PP dated 03rd October, 2022 [hereinafter, "impugned letter"], which is impugned in the present petition.

2. Considering the nature of the controversy, on 11th October, 2022, the Court had directed Managing Director of Petitioner to have a meeting with Respondent Bank. Pursuant thereto, Petitioner and consortium members met on 13th October, 2022 (which inadvertently has been mentioned as 12th October, 2022 in previous order dated 14th October, 2022). Certain proposals and counter-offers were exchanged between the parties, which shall be discussed hereinafter, but unfortunately, nothing positive materialised. In such circumstances, the Court has proceeded to decide the matter.

3. Mr. Manik Dogra, counsel for Petitioner, makes the following submissions:

3.1. Respondent Bank's decision is based on erroneous grounds and reasoning. The Faridabad unit is operational and generates revenue; debit freeze on operation of TRA is not only arbitrary, but also entirely baseless.

At the Faridabad unit, production activities to the tune of Rs. 7 crores were conducted in the quarter ending in September, 2022.

3.2. TRA was opened to maintain manufacturing/ operating expenses of Petitioner. Entire functioning of Petitioner would come to a halt if it is not permitted to transact from the said account, and pay statutory dues and other Signature Not Verified Digitally Signed By:SAPNA SETHI W.P.(C) 14359/2022 Page 2 of 7 Signing Date:20.10.2022 20:12:37 recurring expenses arising from regular day-to-day operations. Nearly 40 employees are engaged at Faridabad unit who are being gravely affected on account of non-disbursal of their salaries due to debit freeze instructions. If TRA operations are not resumed, Petitioner's business activities would be adversely affected, which would ultimately affect the consortium members. 3.3. Respondent Bank has usurped its powers and illegally frozen operation without consulting other member banks.

4. Mr. Deepak Jain, counsel for Respondent Bank, on the other hand, argues that TRA was set up to facilitate functioning of Petitioner while restructuring process was still ongoing; as negotiations on restructuring have failed, there is no illegality in Respondent Bank's impugned action.

5. The Court has considered the submissions advanced by counsel. It is an undisputed fact that Petitioner's account is a Non-Performing Asset ["NPA"] and parties have attempted to restructure the same. As per agreement between Petitioner and consortium, during the continuance of negotiations qua restructuring proposal, a TRA was opened for "manufacturing operating expenses and statutory payment", and it was agreed that existing liabilities would not be recovered therefrom. Daily transactions in TRA were to be verified by auditors viz. M/s Rajput Jain and Associates, appointed by Respondent Bank. However, vide the impugned letter, Respondent Bank froze operation of TRA, for following reasons:

"To, M/s CMI Limited PD-II, Jhilmil Metro Station Jhilmil Industrial Area Delhi-ll0095 Signature Not Verified Digitally Signed By:SAPNA SETHI W.P.(C) 14359/2022 Page 3 of 7 Signing Date:20.10.2022 20:12:37 Dear Sir, Sub: Operation in TRA account no 120000731099 With reference to the captioned subject, TRA account was opened to do the banking transaction towards operating the unit smoothly, howeyer we have observed that the unit is not in operation as on date.

We had called the last Consortium Meeting on 02.09.2022 at our Circle Office Delhi, but you have not attended the meeting. The Minutes of Meeting dated 02.09.2022 was already shared with you on 08.09.2022, wherein it is mentioned that Canara Bank has filed the suit in DRT.

We have earlier also requested you to repay the total outstanding amount from time to time, but it is not paid till date and Rs 166.99 is outstanding as on 31.08.2022. Kindly, note that operation in TRA account is permissible only if unit is working and operational. So henceforth account will be in debit freeze status till any further decision is taken by all the lending member banks.

This is for your information."

6. As per Respondent Bank, debit freeze instructions were issued consequent to meeting held on 02nd September, 2022, minutes whereof have been annexed as Annexure P-10. For contextual understanding of the impugned decision, relevant portion thereof is reproduced hereunder:

" xxx ... xxx ... xxx The matter of restructuring plan of the company was discussed in detail. Matter with regard to operational status of both the plant were discussed in the meeting and it was noted that while taking the symbolic possession, when the representative of lenders ie Canara Bank, HDFC Bank, IDFC First Bank, Induslnd Bank, Bank of Maharashtra and Kotak Mahindra Bank were present it was noted that the Baddi plant was closed and Faridabad plant was working with very minimum capacity. Hence the opinion of the respective member banks were sought with regard to restructuring. Member banks informed as under:

1. IDFC First Bank has informed that they are in favour of restructuring plan

2. Bank of Maharashtra has informed that they will follow the lead bank and take internal approval

3. Bank of Bahrain and Kuwait has informed that they will go with the majority of the lenders and take internal approval

4. HDFC Bank has informed that they are not in favour of restructuring plan as both the units are not working

5. Member banks was of the opinion with consideration of the above point that the Baddi plant of the company is not in operation and Faridabad plant is running with minimum capacity for minor activity only. As HDFC bank is not in favors of resolution plan, Signature Not Verified Digitally Signed By:SAPNA SETHI W.P.(C) 14359/2022 Page 4 of 7 Signing Date:20.10.2022 20:12:37 without which the minimum lenders consent i.e 75 % in value and 60 % in number as per the extant guidelines for resolution of stress assets cannot be complied with. It was decided by the member banks to go for recovery action to the consortium.

                                         xxx             ...                xxx               ...              xxx"

                                                                                                  [Emphasis Supplied]

7. Mr. Dogra strongly contended that reason for debit freeze on TRA, as stated in impugned letter, is contrary to stand taken before the Court viz.

failure of restructuring process. He emphasised that varying stance of Respondent Bank indicates that impugned decision is based on whimsical grounds. Although there is some variance in Respondent Bank's stand, yet, the afore-noted minutes of meeting dated 02nd September, 2022 reveals that there was no consent among consortium members qua the resolution plan as per extant guidelines. Restructuring process was thus closed and recovery has been initiated by Respondent Bank before the DRT.

8. Having regard to the fact that Petitioner's account has been declared as NPA and member banks are on recovery mode, the Court is not inclined to intervene in the impugned action and direct Respondent Bank to permit operation of TRA. The decision to settle outstanding due(s) and/or restructure the loan falls entirely within the purview of banks' discretion. The Court cannot issue a writ of mandamus compelling Respondent Bank to de-freeze operations of Petitioner's TRA, particularly when there is no demonstrable legal right to claim restructure/ settlement of loan amounts. The afore-said arrangement was based on mutual agreement between parties, and if Respondent Bank/ consortium is of the opinion that restructuring is no longer a prudent mode of recovery, as per its commercial wisdom, there is no reason for granting the relief as sought. Settlement of Signature Not Verified Digitally Signed By:SAPNA SETHI W.P.(C) 14359/2022 Page 5 of 7 Signing Date:20.10.2022 20:12:37 loan amount is always a two-sided decision, which cannot be imposed by the Court.

9. That said, it must also be noted that pursuant to meeting held on 13th October, 2022, three alternative options were given to Petitioner:(a) increase the cutback to 20%; (b) give additional security; (c) operate from OCC/Working Capital account. Mr. Dogra argued that consortium is cleverly attempting to defeat the purpose of opening the TRA as existing rate of cutback i.e., commission to member banks on each transaction, is 2%, and demand for 20% cutback is commercially inviable. He further emphasises that option of opening OCC/Working capital account would be ineffective for two reasons: (a) credit facilities have been overdrawn by Petitioner; and (b) consortium had specifically resolved that amount lying in TRA shall not be utilised towards repayment of loan and thus, if OCC/Working capital account is opened for Petitioner, all amounts therein could be directed towards its liabilities.

10. Respondent Bank may be deviating from the original agreed terms, but that cannot be held to be impermissible. A perusal of minutes of various meetings placed on record, such as minutes dated 02nd September, 2022, exhibit justified reasoning of Respondent Bank, which certainly is not arbitrary. The original agreement qua TRA was in nature of an interim arrangement during subsistence of restructuring process/ negotiations. If the consortium has lost faith in restructuring process, they have a right to re- negotiate, and Petitioner cannot insist otherwise.

Signature Not Verified Digitally Signed By:SAPNA SETHI W.P.(C) 14359/2022 Page 6 of 7 Signing Date:20.10.2022 20:12:37

11. Lastly, as regards Petitioner's plea that Respondent Bank has taken the impugned decision unilaterally, the consortium has clarified that none of the member banks are in favour of allowing operations in TRA.1

12. For the foregoing reasons, the Court is not inclined to entertain the present petition.

13. Dismissed along with pending application(s).

SANJEEV NARULA, J OCTOBER 18, 2022/ d.negi 1 As recorded in Minutes of the Meeting dated 13th October, 2022.

Signature Not Verified Digitally Signed By:SAPNA SETHI W.P.(C) 14359/2022 Page 7 of 7 Signing Date:20.10.2022 20:12:37

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Delhi High Court - Orders