CASES Flashcards
SBI v Rajesh Agarwal
“Telangana High Court allowed a writ filed by the chairman and managing director of BS Limited under Article 226 (Power of High Courts to issue certain writs) of the Constitution of India, 1949 (“Constitution”) on the contention that the principles of natural justice must be read into the Master Direction and an opportunity of hearing should be given to a borrower before the declaration of its account as fraudulent. BS Limited engaged in the business of power transmission failed to meet its payment obligations to lender banks, thereby defaulting in repayment of credit facilities. In accordance with the Master Direction, the lender banks formed a joint lenders forum with SBI as the lead bank and declared the assets of BS Limited as non-performing assets (“NPA”) by invoking Clause 2.2.1 (Classification of Frauds) of the Master Directions.
“Principles of natural justice are not mere legal formalities but are substantive obligations that need to be followed by the decision making and adjudicating authorities. Therefore, principles of audi alteram partem has to be read into the Master Direction to save it from the vice of arbitrariness. The principles of natural justice can be read into a statute or a notification where it is silent on granting an opportunity of a hearing to a party whose rights and interests are likely to be affected by the orders that may be passed. Classification of an account as fraud may lead to serious civil and criminal consequences against the interest of borrowers even though the Master Direction is conceived in public interest. It amounts to “blacklisting” a borrower from availing any credit and affect an individual’s CIBIL score. Classification of an account as fraud debars the borrower from raising institutional finances, thus, adversely affects the fundamental rights of a promoter/director to carry on a trade or a business, which is guaranteed under Article 19(1)(g) of the Constitution. Therefore, unilateral power to banks to declare a person/company as ‘a fraudulent borrower’ violates Article 19(1)(g) of the Constitution. In view of the above findings, the SC upheld the order passed by the Telangana High Court stating that a “reasoned order” and “an opportunity for hearing” should be given before classification of an account as fraudulent.
”
TYPES OF FRAUD TO BE
REPORTED TO RBI
- Misappropriation of funds
- Forged cheques/instruments
- Fraudulent foreign exchange transactions
- Digital banking frauds
KEY COMPLIANCE
REQUIREMENTS- FRAUD
- Present information to the Audit Committee every quarter
- Fraud review conducted annually
3.Title deeds and key credit documents for exposures of Rs. 5 crore and above must undergo periodic legal audits
REPORTING MECHANISM FOR FRAUD
- Submit Fraud Monitoring Returns within 14 days
- Utilize the Central Fraud Registry
3.Closed once law enforcement agency actions completed and staff accountability examinations conducted
Naresh Kumar Aggarwal v. CFM Asset Reconstruction Pvt. Ltd
“State Bank of India (SBI) sanctioned credit facilities to Action Ispat and Power Pvt. Ltd. (““Principal Borrower””) and executed a Master Restructuring Agreement (MRA) in 2013 with other banks. Nikhil Footwear Pvt. Ltd. (““Corporate Debtor””) provided a guarantee for the debt through a Deed of Guarantee in favor of SBICAP Trustee Company Ltd. A second MRA was executed in 2016, and the Principal Borrower’s account was classified as a Non-Performing Asset (NPA) in 2017.
In January 2021, SBI assigned its debt owed by the Principal Borrower to CFM Asset Reconstruction Company (CFM ARC) via an Assignment Agreement. SBI filed an insolvency application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), against the Principal Borrower, which was admitted by the National Company Law Tribunal (NCLT) on March 23, 2022. Subsequently, CFM ARC filed an insolvency application under Section 7 of the IBC against Nikhil Footwear Pvt. Ltd., which was admitted by the NCLT on February 28, 2023. A shareholder of Nikhil Footwear Pvt. Ltd. challenged this order before the National Company Law Appellate Tribunal (NCLAT).”
All in all, it stands settled by the Appellate Authority that when an ARC acquires an asset in a particular manner and procedure, as prescribed under the provisions of Section 5 of SARFAESI Act, the deeming section will come into play rather than the importance being given towards the document being registered or not. However, it has been made evident by the Appellate Tribunal that the instant ratio shall be applicable, only if the assignments pertain to ARCs, in accordance with the provisions prescribed under the SARFAESI Act.
Assets Care & Reconstruction Enterprise Limited vs Ankit Metal & Power Limited
Assets Care & Reconstruction Enterprise Limited (ACRE) filed an insolvency petition against Ankit Metal & Power Limited. The Corporate Debtor argued that ACRE was not a valid Financial Creditor due to alleged violations in the assignment process.
The SARFAESI Act permits ARCs to acquire financial assets, making them Financial Creditors with the same rights as banks. Issues with stamping or assignment do not override the existence of debt and default under IBC.
Encore Asset Reconstruction Company Pvt. Ltd. v. Ms. Charu Sandeep Desai
The corporate debtor secured a loan from Dena Bank in 2011 by creating a charge on an unencumbered property. The loan became a non-performing asset, prompting Dena Bank to initiate proceedings under the SARFAESI Act, 2002. The Resolution Professional demanded that Dena Bank (and subsequently Encore Asset Reconstruction Company) hand over possession of the mortgaged property, as the title still vested with the corporate debtor.
The National Company Law Appellate Tribunal (NCLAT) directed Dena Bank to hand over possession of the mortgaged property to the Resolution Professional. The NCLAT held that Section 18 of the IBC prevails over Section 13(4) of the SARFAESI Act, emphasizing that the IBC takes precedence due to its non-obstante clause under Section 238.
Rakesh Kumar Gupta Vs. Mahesh Bansal &
others
The Appeal has been filed by the Appellant in view of
admission of an Application under Section 7 of Insolvency
and Bankruptcy Code 2016, (in short IBC) which was filled
by the Respondent No. 2 Punjab National Bank (Financial
Creditor) against Gupta Marriage Hall Private Limited
(Corporate Debtor).
The ground raised by Appellant is that the Bank/Financial Creditor had already resorted to various proceedings under
the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI
Act) and had also resorted to proceeding under Recovery of Debts due to Banks and Financial Institutions Act, 1993
(DRT Act).
The Counsel for Appellant further states that, as the Bank resorted to those remedies, the Bank could not have filed
an Application under Section 7 of IBC and the Application should have been rejected.
NCLAT further observed that the pendency of actions under the SARFAESI Act or actions under the DRT Act
does not create obstruction for filling an Application under Section 7 of IBC, especially in view of Section 238 of IBC.
The Application is more to bring about a Resolution of Corporate Debtor than any penal action or any recovery proceedings.
Punjab National Bank v. Vindhya Cereals Pvt. Ltd.
This case revolves around Punjab National Bank (PNB), acting as the financial creditor, initiating a Corporate Insolvency Resolution Process (CIRP) against Vindhya Cereals Private Limited (VCP Ltd.), the corporate debtor. The initiation was based on VCP Ltd.’s default in repaying significant loan amounts extended by PNB, prompting legal proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC).
The NCLAT set aside the order of the NCLT on the ground forum shopping where the Tribunal had rejected an application under Code on the ground that the matter was already pending under Debt Recovery Tribunal . However, in the above mentioned case, the Appellate Tribunal observed that because parallel proceedings under the IBC and SARFAESI Act can exist, thus it is not a matter of forum shopping.
Unigreen Global Private Limited v. Punjab National Bank
The appellant of this case is a corporate debtor against whom the financial creditors initiated the Corporate Insolvency Regulatory Process under Section 7 of the Code. The appellant approached the NCLT for the process but their application under Section 10 of the Code was rejected on grounds of suppressing information in Form VI of the application and/or rather the application was found to be incomplete under Section 11.
As per NCLAT the Adjudicating Authority has no option but to admit the application of a corporate debtor under Section 10 of the Code, if it is satisfied that:
i. there is a debt and default of such debt has occurred;
ii. the corporate debtor is not ineligible under Section 11 of the Code; and
iii. the application of the corporate debtor is complete in all aspects and if it is incomplete the corporate debtor is to be granted time to rectify the defects as stipulated under the Code.
Furthermore, while deciding insolvency applications, Adjudicating Authority has no jurisdiction to record and consider unrelated facts which are beyond the requirement of the Code and forms prescribed under the Rules.
Indian Overseas Bank v M/s RCM Infrastructure Ltd.
ndian Overseas Bank extended credit facilities to RCM Infrastructure Ltd., which was later classified as a non-performing asset (NPA). The Bank initiated proceedings under the SARFAESI Act, taking symbolic possession of secured assets and issuing an e-auction notice. Meanwhile, the Corporate Debtor filed for insolvency under Section 10 of the Insolvency and Bankruptcy Code (IBC), and the NCLT admitted the petition on January 3, 2019, imposing a moratorium under Section 14 of the IBC.
The Supreme Court observed that the sale of the properties pursuant to the SARFAESI Act and the Rules would require to fulfil the following constituents: (a) intention of the parties to convey the security interest towards the outstanding payment obligations; (b) the proposed purchaser making payment of the entire amount towards the transfer of the properties; and (c) the authorised officer under the SARFAESI Act issuing a certificate of sale in favour of the purchaser.
Considering that complete payment of the sale consideration had not been received prior to the initiation of CIRP of the Corporate Debtor, the sale was not a complete sale and as per the moratorium issued under section 14 of the IBC any further action towards the sale of the properties would be prohibited.
Although the e-auction sale was confirmed prior to the moratorium, full payment of the bid amount was completed only after CIRP initiation. The Bank included the unpaid bid amount in its claim during CIRP but later revised it after receiving payment. The Corporate Debtor’s promoter challenged the sale, leading to its annulment by NCLT.
On appeal, NCLAT upheld this decision, citing that SARFAESI proceedings cannot continue post-CIRP initiation due to the overriding provisions of Section 14(1)(c) of the IBC.
Harsh Govardhan Sondagar v. International Assets Reconstruction Company Ltd
The Supreme Court held that the Bank could vacate (a) those Tenants whose leases/tenancies have expired or stood determined; or (b) those Tenants whose leases/tenancies are (i) contrary to Section 65A of the Transfer of Property Act, 1882 (the “TP Act”) or (ii) contrary to the terms of the mortgage; or (iii) created after the issuance of notice of default and demand by the Bank under Section 13(2) of the SARFAESI Act.
A Tenant who was inducted into the property before it was mortgaged to the Bank.- the Supreme Court has held that such lease/tenancy would be binding on the Bank, that the rights of the Banks under the SARFAESI Act cannot override the rights of the Tenants under the TP Act, and if the lease/tenancy is valid and subsisting and has not expired or been terminated at the time when the Bank seeks to take possession, then such Tenants cannot be dispossessed from the property/secured asset till their lease/tenancy rights expire or stand terminated as per law.
A Tenant who was inducted into the property after it was mortgaged to the Bank but before the Bank issues notice of default and demands payment under Section 13(2) of the SARFAESI Act.- The Supreme Court has held that these Tenants cannot be dispossessed from the property by the Banks unless their leases have expired or have got terminated as per the terms of the lease and if the Bank wishes to sell the property, it will obviously have to do so with Tenants in possession and subject to the lease/tenancy. The Supreme Court has also observed that for Tenants to claim a lease/tenancy for a period exceeding one year, they would have to produce a registered lease deed/ tenancy instrument as any lease/tenancy for a period exceeding one year can only be created by a registered document/instrument.
A lease/tenancy contrary to the terms of the mortgage prohibiting the mortgagor/borrower from creating any tenancy or leasing of the property- such leases/tenancies would be invalid as the SARFAESI Act itself under Section 13(13) which prohibits any creation of encumbrance without prior consent after such notice by the Bank. Therefore, in such cases also the Banks need not have the Tenants vacated by filing a suit before the Civil Court nor are they constrained to sell the property with such Tenants in possession. The Bank can have such Tenants evicted and directly recover vacant possession under by approaching the Magistrate and have such Tenants vacated with the assistance of Police.
