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Loan Agreement Legally unenforceable :-

(B) The defendants assert that the purported loan transaction is tainted with fraud. The Loan Agreement under which a sum of Rs.250 Crores is shown to have been advanced is unenforceable in law as the device adopted by the plaintiff of "ever-greening the loan" is prohibited by law and also defeats the provisions of law. The defendants contend that the Serous Fraud Investigation Offce ('SFIO') is investigating into the affairs of the plaintiff. A report is submitted on 28 th May, 2019 ('SFIO Report'). The SFIO Report adverts to wide-scale "ever greening of loans" by the plaintiff which is wrongful and prohibited by law. The loan transaction in question has also been a subject matter of investigation. The SFIO Report reveals that the instant loan was also advanced in fagrant violation of binding directions and is, thus, legally unenforceable. The SFIO Report, according to the defendants, itself warrants an unconditional leave to defend the suit.

Legally unenforceable debt:-

22. Mr. Seervai assailed the enforceability of debt on the count of it being in express breach of the directives of the Reserve Bank of India, which have the statutory force. The loan was advanced by the plaintiff in furtherance of an object prohibited by law. Thus, the contract is void under Section 23 of the Indian Contract Act, urged Mr. Seervai.

23. As a second limb of this submission, it was urged with a degree of vehemence that in such a scenario where a party has resorted to an unlawful and fraudulent device, the policy of law is to let the loss fall where it rests. In the case at hand, according to Mr. Seervai, the situation is further accentuated by the fact that it is not the defendant who alleges the fraud but SFIO, a specialized investigative agency, constituted under the Companies Act, 2013, in a well documented report concluded that the top offcials of the plaintiff indulged in nefarious and fraudulent activities in the matter of advancing loans including SJ30-19INCOMSS779-19+.DOC the loans to the SKIL Group. This report of SFIO by itself furnishes a justifable ground to grant an unconditional leave to defend the suit.

28. In the backdrop of the aforesaid report of the SFIO, Mr. Seervai would submit that the fresh loans in the instant case were thrust on the defendants to paint a rosy fnancial picture.

As the SFIO has categorically observed that such dubious device was adopted merely to avoid the categorisation of bad debts and/or NPA, which the plaintiff, under the directives of RBI, was enjoined to report, the transaction suffers from the vice of being prohibited by law.

29. The edifce of aforesaid submission was built on the premise that the directives issued by the RBI have a statutory force. To lend support to the aforesaid submission, the learned Senior Counsel for the defendants placed a strong reliance on the judgment of the Supreme Court in the case of B.O.I. Finance Ltd. vs. Custodian and others1.

42. Availing loan to retire existing debt is neither uncommon nor per se unlawful. The lenders often lend money beyond the creditworthiness of a debtor, by choice or unknowingly. For the debtor, in a straitened fnancial condition, availaing loan to repay the loan appears the easiest of the options. The hope of revival foats. But, often than not, the boat sinks, under the weight of over indebtedness.

43. Undoubtedly, the plaintiff indulged in imprudent and risky fnancial business. As indicated in the report of SFIO, this might be with the full knowledge and understanding of the consequences. However, the non-observance of prudent lending SJ30-19INCOMSS779-19+.DOC norms does not imply that the very transaction is void. It is pertinent to note that the defence that the debt has become unenforceable because of the aforesaid practice of 'ever-greening of the loans' did not see the light of the day till the affdavit-in- reply came to be fled. None of the correspondence placed on record emanating from the defendants indicates that the defendants had ever resisted the extension of the facility. Thus, the mere fact that SFIO has carried investigation in the affairs of the plaintiff and found that the plaintiff indulged in the practice of ever-greening of the loans, may not justify an inference that the entire transaction is void. It is especially for the reason that the existence of liability of the SKIL group to the tune of about 700 Crore was acknowledged by the defendants. Thus, I am not persuaded to agree with the submission on behalf of the defendants that the defendants are entitled to an unconditional leave to defend the suit on account of the extension of loan facility in breach of RBI directives.