Dismissed

Auraleafs Labs Private Limited v. State Bank of India

DRT18 Aug 2023SA/226/2022

Case brief

AI extract

What is this about?

The DRTII dismissed the petitioner's application for stay against the release of physical possession of assets under SARFAESI Act. The Tribunal held the petition was not maintainable regarding a third-party property and found no illegality in the bank's possession proceedings.

What did the court decide?

IA No. 1927/2023 is dismissed and the interim stay granted earlier is vacated.

Auraleafs Labs Private Limited versus State Bank of India — Banking and Recovery | DRT (2023)

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IN THE DEBTS RECOVERY TRIBUNAL - II AT HYDERABAD

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DATED THIS THE 18TH DAY OF AUGUST, 2023

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PRESENT: SH. RAMESHWAR KOTHE,B.Com, L.LB.(Hons.), M.A. PRESIDING OFFICER

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Interlocutory Appl ication No.L927 / 2023 In SA No.226/2O22

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M/s Auraleafs Labs Private Limited Represented by its Managing Director Sri Vallabhaneni Krishna Mohan S/o V. VenkateswaraRao

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Aged about 52 years, Occ:Managing Director #Administrative Office at 4th Floor, L-e9lz Above HDFC Bank, Gem Square Building Madhapur Road, Hyderabad, Telangana

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... Petitioner

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Versus

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State Bank of India SME Branch, Saifabad (07315) HACA Bhavan, Opp. Public Gardens Hyderabad, Telangana State - 500 004 Represented by Authorized Officer

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...Respondent

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Counsel for the Petitioner

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Co u n se I fo rRespo nde nt Ba n k

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:Sri G.K. Deshpande

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:Sri G, Prabhakar Sarma

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-:s-D-.s:-

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This Interlocutory Application (IA) No.1927 /2023 is filed by^the applicant in SA No.226/2022 for stay of all further^{proceedings of the} respondent bank in^pursuance to the^{Advocate Commissionernotice} dated 19.06.2023 issued as^per orders^{passedin Crl MP No.135/2023} on the file of learned Chief^{Metropolitan Magistrate,Medchal-Malkajgiri}

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Page 2 of 12

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lA No.1927/2023 irl SA No.226/2022

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to take physical possession of the petition schedule properties. Mr.Vallabhaneni Krishna Mohan, lYanaging Director of the petitioner has sworn to the affidavit filed in support of the petition.

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This Tribunal, after hearing both sides, dismissed the abovestay petition vide order dated 10,07.2023. Aggrieved by the said order, the petitioner herein approached the Hon'ble High Court for the State of Telangana at Hyderabad by filing WP No.18365 of 2023. The Hon,ble High Court set aside the order dated 10.07.2023 on 28.07.2023 with the following o bse rvation/d irection :

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"7. We are conscious of the aforesaid well-settled legal position, Howevert from a perusal of the order dated 10.07.2023, it is evident that the order only contains the conclusions and not reasons. The quasi judiciary authority is required to assign reasons in support of its orders. It is trite law that the reason is the heartbeat of the conclusion. Since the Debts Recovery Tribunal has not recorded any reason for rejecting the application for stay filed by the petitioner, in the peculiar facts of the case, we set aside the order dated 10.07,2023 and direct the Debts Recovery Tribunal to hear the parties afresh and to decide the application for grant of stay preferred by the petitioner by a speaking order within a period of ten days from the date of receipt of a copy of this order. It is made clear that this Court has not expressed any opinion on the merits of the matter."

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This Tribunal received the order of the Hon,ble Htgh Court on 09.08.2023 vide memo filed by the learned counsel for the respondent bank. Hence, the IA is taken up afresh for hearing and is belng disposed of as per directions of the Hon,ble High Court.

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The case of the petitioner is that the petitioner company is currenuy operating with about 50 employees and 25-35 daily labourers. It filed sA No.226/2022 cha enging the sale notice dated 24.!7.2020. Pending SA, the respondent bank obtained orders from learned Chief r)''wi.* a// "$"

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PaBe 3 of 12

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lA No.1927 /2023 in SA No.226/2022

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lvletropolitan lvlagistrate, Medchal-Malkajgiri and in^pursuance of the same, the advocate commissioner appointed therein issued notice dated 19.06.2023 to hand over^{physical possession} within 15 days. Aggrieved by the said action, the petitioner filed the present stay petition along with amendment petition. According to petitioner, lts loan account was illegally declared as NPA. In the Sec.14 application, pendency of SA was not mentioned.

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The learned counsel for the petitioner company submits that the company is in the field of manufacture of Nutraceutical and other related extracts. For acquiring a unit, the^petitioner company availed term loan facility of Rs.19.50 crores and worklng capital facility of Rs.5.10 crores in 2018. The unit became operational lnMarch 2019 onwards due to initial establishment works in spite of which, interest was serviced till August, 2019. Without any reasons, the respondent bank conducted stock audit, forensic audit,^personal inspection and though nothing adverse could be found durlng audits, the respondent bank appropriated the emergency fund of R.1 crores to^loan account and zeroed the drawing limits because of which the liquldity of^the company hampered. On 08.03.2020 the respondent bank^informedby e-mail about appropriatlon of Rs.1 crores and advised to^{regularizethe} account. Even in the Covid-19 circumstances, the^petitioner cooperated the respondent bank in furnishing stock^{reports, sales data} etc.

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It is further submitted the respondent bank did not respondent to^its mail dated 30.03.2020 to update drawing^powers in CC account so as to enable to execute the orders on hand for much demanded^hand wash and sanitizers in Covid-19 circumstances. The respondent bank rejected the request to grant 10o/o additional CC llmit to^{sustain Covid-} 19 impact on the^ground that the term loan and CC accounts^were "tr/-:-

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-/'/^''\a\L''

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Page 4 of 12

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lA No.192712023 in sA No.226/2022

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already under stress. Though the^{petitionerwas asked to submit} request for moratorium of three months as^{per RBI announcement} daled 27.03.2O2O, the^{respondent bank instead of granting the same,} pointed out that the overdue amount under term loan account^from August,2019 to December, 2019 was recovered by^breakingDSRA that CC account was irregular by Rs.23,09,235l-, that^{petitioner was} not cooperating with auditors and it inflated^figures of^stock availability. The rejectlon of moratorium^{periodwas broughtto the} notice of Hon'ble Finance Minister^{wlth a copy} to the^{respondent bank} and its Chairman vide letter dated^29.06.2020 and^{the respondent} issued reply on 22.O7.2020 with untenable^reasons. In^betweenthe request and rejection of moratorium, the respondent bank^issue demand notice on 15.07.2020 u/s 13(2) of the^{SARFAESIAct. The} very classlfication of account as NPA is against the^{guidelinesissued} by the Central Government/RBl for^{MSME industry.}

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The learned counsel for the^petitioner further submits that by another Circular dated 06.08.2020, the RBI announced that if the^MSf4E account was standard as on 01.03.2020, the existing loans upto Rs.25 crores may be classified as 'standard' for restructuring the loan accounts. Even according to respondent bank, the loan account of petitioner was not an NPA as on 01.03.2020. The Hon'ble Supreme court in its^judgement dated 27.11.2020 ln wP (civil) No.825 of 2020 recorded the affidavits of Central Government/RBI regarding moratorium granted for the^period from 01.03.2020 to 31.08.2020. But practically, though the petitioner was entitled for benefit under RBI Clrcular dated 06.08.2020, the respondent bank did not extend the same to the petitioner ignoring the said circulars/guidelines. The learned counsel further took me to COVID-19 Regulatory Package Circulars dated 27.03.2020, 17.04.2020, Resolution Framework for .4uryru)

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'-/ 'rt$

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Pate 5 of 12

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lA No.7927 /2023 in sA No.226/2022

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COVID-19 Related Stress accounts dated 06.08.2020, dated 23.05.2020.

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It is further contended that the repayment commenced^from 30.06.2019 for 90 months and Rs.20 lakhs for further three^months. The petitioner serviced interest and instalments as^per letter^oF arrangement dated 20.08.2018. He has drawn attention to^the tabulation at^page 12 showing details of^{payments made by petltioner} on various dates between luly to October, 2019 and said that^the company never defaulted in repayment by more than 90 days and hence the classification of NPA was against the^prudential norms mandated by the RBI. The respondent bank unilaterally took demand draft for Rs.18 crores in favour of A.P. Mahesh Cooperative^Bankand handed over to petitioner on 25.01.2019 whereas debited^interest amount of Rs.38.12 lakhs. If that amount is considered to^{be pald for} the months of November, 2018 to January, 2019 the account^would not come under SMA category.

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It is further contended that as^{per judgement} dated 27.03.2023^{of the} Hon'ble Supreme Couft in State Bank of India & Ors vs, Raiesh Agarwal & Ors in Civil Appeal No.7300 of 2022, all the loan accounts are declared as fraud without notice, such declaration^{is illegal.} In^the case of petitioner company, the declaration of account as NPA based on fraud declared for its sister concerns is illegal. The respondent bank vide ecircular dated 26.05.2023 said Frauds in loan accounts declared prior to 27.03.2023 will be reverse classifled wherever the borrower contests the classiflcation in a Court of Law. Without disclosing the pendency of SA, the respondent bank obtained orders in Cri MP No.135/2023 for taking physical possession through advocate commissioner, who issued notice dated 19.06.2023 that warrant would be executed on 04.07.2023. Learned counsel relies upon^judgment

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4ry<.r, '"1'o

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Page 5 of 12

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lA No.192712023 in sA No.226/2022

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inv/s Venshiv Pharma Chem vs. State Bank of India^{in WPNo.36677of} 2017 decided on 06.04.20lSwherein it was observed that DRTS uniform approach of^granting interim stay on^payment of a^{percentage of the} dues irrespective of merits of the case would cause^irreparable injustice to applicant/borrower. The^petitioner company has a^prima facle case for grant of stay. Unless stay is^granted, the livelihood of employees will badly be affected.

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The learned counsel for respondent bank submits that the^petitioner company is not the owner and^possessor of^petition schedule^item no.2 property and hence it cannot challenge the^proceedings of^the respondent bank under SARFAESI Act as^{per judgment} of Hon'ble High Court for the State of Telangana in WP^No.15121 of^{2021 decidedon} 06.07.2021 and wP Nos.5685, 8240 and¹¹⁶¹⁸ of^{2019decided on} 26.09.2079 following^judgement of Hon'ble Supreme Court in^M/s P nce Corrugated Packaging vs. Andhra Bank [2019 SCC OnLine TS 1657], The^petitioner company committed default in repayment of^loan amount and hence it became NPA. He refuted the contention that^the petitioner company's account was standard as on 01.03.2020 hence eligible for grant of benefit under Resolution Framework Circular dated 06.08.2020, stating that the loan accounts of^{petitionercompany were} declared as Fraud by the Fraud Identification Committee of respondent bank vide letter dated 20.06.2020. The^{learned counsel hasdrawn} attentlon to correspondence dated 18.02.2022 and 05.05.2022 and said that while^petitioner company seeking for settlement of account under OTSadmitted of committing default and classification of^loan account as sub-standard and also admitted of fraud in account and requested to delete the same on^paying the OTS amount. The OTS was rejected as the offer was not viable compared to the outstanding dues. ffio

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Paee 7 ot 12

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lA No.192712023 in SA No 226/2022

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Learned counsel further said that the demand notice,^possession notice and sale notice were issued to^petitioner company and others to pay Rs.74,t7 ,72,436.60ps as on 15.07.2020. Instead of clearing the dues, it filed wP No.23038 of 2020 and as per direction of Hon'ble Hlgh Court, filed the^present SA No.22612022. The respondent bank has rightly approached the learned CMM by filing Crl^lvl P No.135/2023 u/s 14 of the SARFAESI Act for taking^{physicalpossession} of the secured assets. The respondent bank has followed the^procedure contemplated under the SARFAESI Act and Rules framed thereunder and hence the^petition is liable to be dismissed.

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The learned counsel for petitioner, in reply, submits that the judgement of Hon'ble Supreme Court in M/s Prince corrugated Packaglng vs. andhra Bank [2019 SCC OnLine TS 1657] is not applicable in the case on hand as once the NPA classification is declared as illegal whole proceedings will become illegal. As held by the Hon'ble Supreme Court in State Bank of India &Ors. vs. Rajesh Agarwal & Ors, case. opportunity of hearing had not been afforded to the borrowerpetitioner herein, before labelling the account as fraud account.

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Heard the learned counsel appearing for the^petitioner company^and learned counsel for the respondent bank. Perused the material documents^placed on record.

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Now the issues arlse for consideration is;

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Whether the^petitioner company has made out valid^grounds For grant of stay of taking^{physical possession} of^petition schedule propefty in pursuance of vacate notice dated 19.06.2023 issued by advocate commissioner appointed in Crl MP No.135/2023 on the file of learned Chief Metropolitan Mag istrate, Medcha l^- Ma I kajg iri? 1K*

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Page 8 of 12

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^:tl,:1liii;;ll

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A^perusal of the correspondence^{referredby both parties confirms that} there was default in^payment of term^{loan since August, 2019} Subsequently by breaking^{DSRA the overdueamount was adjustedin} the term loan account. According to^{respondentbank,as no further} payment was made thereafter, the account slipped lnto^sub-standard category. Whereas, the^{petitionerclaimsthat the amountappropriated} on 01.11.2019 by breaking^{DSRA made the payment up-to-dateand} hence the account was not^{NPA. As observedfrom tabulationof} payments provided at page 12 of the written arguments filed^by learned counsel for^petitioner, there^{was entirely no paymentin} August and September,2019 and^{whatever part-payments made in a} piecemeal manner in August, 2019^pertained to July, 2019 andⁱⁿ October, 2019^pertained to^{same month. This default forced the} respondent bank to recover the overdues by^{breaking DSRA and it is} not the case of^petitloner companymade the^{payments on its own.The} e-mail communication of respondent^{bank dated08.03.2020conflrms} that by breaking the DSRA the irregular amount^{in term loanwas} recovered for the^period from August, 2019 to^{December, 2019.Vide} same mail, the respondent bank advised the^{petitioner company to} regularize the term loan account by making^payments due as^on 31.01.2020 and 29.02.2020 i.e., instalment amount of^{Rs.21,00,000/-} and interest amount of Rs.36,03,617l- and also to clear dues^of Rs.22,56,O92/- in cash credit account. The^petitioner has not^provided any^proof document as to^payment of said amounts. without^clearing the past dues prior to 01.03.2020, the^petitioner company^ran correspondence for grant of moratorlum,^{1070 additlonallimit, OTS} etc.

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As regards non-grant of moratorium, I feel it^{necessary to refer to} relevant^portion of the RBI Circular dated^{27.03.2020as hereunder:}

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Page 9 of 12

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lA No.7927 /2023 in SANo.226/2022

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"(i) Rescheduling of Payments - Term Loans and Working Capital Facilities

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In respect of all term loans (including agricultural term loans, retail and crop loans), all commercial banks (including regional rural banks, small finance banks and local area banks), co-operative banks, all-India Financial Institutions, and NBFCS (including housing finance companies) ("lending institutions") are permitted to grant a moratorium of three months on payment of all instalmentsl falling due between March 1, 2020 and May 31, 2020. The repayment schedule for such loans as also the residual tenor, will be shifted across the board by three months after the moratorium period. Interest shall continue to accrue on the outstanding portion of the term loans during the moratorium period.

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In respect of working capital facilities sanctioned in the form of cash credit/overdraft ('CC/OD"), lending institutions are permitted to defer the recovery of interest applied in respect of all such facilities during the period from March 1, 2020 upto May 31,2020 ("deferment"). The accumulated accrued interest shall be recovered immediately after the completion of this period,

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(ii) Easing of Worklng Capital Financing

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In respect of working capital facilities sanctioned in the form of CC/OD to borrowers facing stress on account of the economic fallout of the pandemic, lending institutions may recalculate the'drawing power' by reducing the margins and/or by reassessing the working capital cycle. This relief shall be available in respect of all such changes effected up to May 31, 2020 and shall be contingent on the lending institutions satisfying themselves that the same is necessitated on account of the economic fallout from COVID-1g. Further, accounts provided relief under these instructions shall be subject to subsequent superyisory review with regard to their justifiability on account of the economic fallout from COVID-19.

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Classification as Special Mention Account (SMA) and Non-performing Asset (NPA)

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5, Since the moratorium/deferment/recalculation of the 'drawing power' is being provided specifica y to enable the borrowers to tide over economic fallout from COVID-19, the same will not be treated as concession or change in terms and conditions of loan agreements due to financial difficulty of the borrower under paragraph 2 of the Annex to the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions, 2019 dated lune 7, 2019 ("Prudential Framework"). Consequently, such a measure, by itself, shall not result in asset classification downgrade.

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The asset classification of term loans which are granted relief as per paragraph 2 shall be determined on the basis of revised due dates and the revised repayment schedule. Similarly, working capital facilities where relief is provided as per paragraph 3 above, the SMA and the out of order status shall be evaluated considering the application of accumulated interest immediately aFter the completion of the deferment period as well as the revised terms, as permitted in terms of paragraph 4 above.

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L7. In view of the observation in the preceding two paragraphs, there lies no ambiguity that the account of petitioner companywas not a

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'standard asset' as on 01.03.2020 as relentlessly argued by learned /w"

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PaBe 10 of¹²

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lA No.192712023ⁱⁿ sA No.22612022

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counsel for the^{petitioner. Therefore, the non-applicationof benefitsto} petitioner companyby^{the respondentbank under RBI Circularsin} respect of Covid-19^{related stressed accountsor moratoriumcannot} be faulted.

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Apart from^{default,it appearsthe respondent bankis dissatisfied with} conduct ofloan^{account due to fraud detected by their auditteam' The} contention of^{petitioner is that it was not given notice at the time of} branding the^{toan accountas fraud and thereforethe account ought} not to be treated^{as SI4A basingon declarationof account as fraud in} the light^{of judgmentin state Bankot rndia & ors' vs' RaieshAsarwat&} ors. case and^{SBI ecirculardated 26'05'2023 regardingreverse} classificationoffraudaccountspriorto2T'03'2023inpursuanceof said^{judgment. Learned counsel for respondentbank said that the} judgment as well as RBI ecircular^{are of 2023whereas the fraud} detection^{happened much before and that the respondentbank would} followwhateverdirectionshenceforthpassedonlnfact'videletters dated 18.02.2022^{and 05.05.2022the petitionercompanywhile} askinq for^{settlementof accountunder OTS,admittedof committing} default in^{repaymentand acknowledged classificationof accountas} Fraudand also^{requestedthe bank to remove classificationof account} as Fraud.In my^{consideredvlew, itis the inherent mechanism} available with the^{secured creditor institutionsto conductperiodlcal} investigations^{by thorough examination about conduct of the account'} stock statements. funds^{movement, financialdata etc'As and when} guidelines received, the^{respondentbank wouldbe boundto follow the} same. As my observation^{goes, the irregular conduct of the loan} account wasalso^{the reason for classificationof loan account as} Stressed Asset/SMA/NPA^{and suchclassiflcation was not based on the} ./'^/r*;-'

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Page 1L of 12

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lA No.192712023 in SANo.22612022

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single cause of fraud.Hence, involvement of thls Tribunal with regard to classification of account as fraud is unwarranted.

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The learned counsel for the respondent bank took specific objection that the item no.2 property does not belong to the petitioner and the petitioner herein cannot challenge any action against the same in view of the^judgmenl in M/s Prince Corrugated case. The objection is sustainable since the item no.2 schedule property is in the name of M/s Jaithra Tripura Jnana Samardha Enterprises LLP which is third party to this petition. The relevant portion of the judgment is extracted hereunder:

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".....When the actual owner of the property brought to sale is not aggrieved and does not come forward, it is not open to a third party, even if he be the principal borrower at whose behest the owner of such propefty offered a guarantee, to maintain a challenge under Section 77 of the SARFAESI Act. Therefore, in this statutory scheme, if the guarantors had any grievance with regard to sale of their plots which were offered by them as security for repayment of the loan by Prince Corrugated Packaging, Hyderabad, they had an independent right to approach the Tribunal under Section 17 of the SARFAESI Act.

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In the light of cited^judgement, the petition is not maintainable against item no.2 schedule property.

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Another specific objection raised by the learned counsel for respondent is that the petitioner obtained interim stay order on 09.05.2023 by making SBI, Saifabad Branch as respondent whereas SBI, Kacheguda issued the sale notice under challenge and hence the interim stay has to be vacated and petition may be dismissed on this ground alone. The learned counsel has rightly taken the objection and the interim stay is liable to be vacated as the petition is not maintainable against SBI, Saifabad Branch. aw

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Page 12 of 12

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lA No.1927./2023 in SA No.226/2022

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As far as action of respondent bank in approaching learned Chief Metropolitan Magistrate for physical possession, I find no irregularity or illegality in the action since it filed Crl Mp No.135/2023 under Sec.14 of the SARFAESI Act,2002.

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In view of the above discussion, the petitioner company failed to make out any valid ground to grant stay of proceedings pursuant to vacate notice dated 79.06.2023 lssued in pursuance of orders passed in Crl N4P No.135/2023 on the File of learned Chief Metropotitan Magistrate, Medchal-Malgajg iri and accordingly the petition is liable to be dismissed.

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In the result, IA No.t927/2023 fails and is hereby dismissed. Consequently, the interim stay granted on 09.05.2023 stands vacated.

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(Typed to my dictation by the PS, corrected, signed and pronounced by me tn the open court on this thelBk day of August, 2023).

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6-wlo) ESHWAR KOTHE) PRESIDING OFFICER

Auraleafs Labs Private Limited v. State Bank of India

Case brief

What is this about?

What did the court decide?

Auraleafs Labs Private Limited v. State Bank of India

Case brief

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What did the court decide?

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