Dismissed

M/S Rajesh Exports Limited v. Branch in Charge

Karnataka HC30 Nov 2022WP/16130/2022

Case brief

AI extract

What is this about?

Three writ petitions challenging DRT proceedings and attachment orders were dismissed. The High Court held that DRT proceedings were maintainable under the 1993 Act as the claim fell within the statutory definition of 'debt', drawing on Supreme Court precedents, and that writ jurisdiction was not the appropriate forum.

What did the court decide?

Writ petitions rejected as not entertainable as DRT proceedings were maintainable.

M/S Rajesh Exports Limited Vs Branch in Charge — Insolvency and Bankruptcy | Karnataka HC (2022)

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IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 30^TH DAY OF NOVEMBER, 2022

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BEFORE

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THE HON'BLE MR. JUSTICE M. NAGAPRASANNA WRIT PETITION No.16130 OF 2022 (GM – RES)

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C/W

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WRIT PETITION No.8603 OF 2021 (GM – RES)

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WRIT PETITION No.13136 OF 2021 (GM – RES)

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IN WRIT PETITION No.16130 OF 2022

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BETWEEN:

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1 . M/S. RAJESH EXPORTS LIMITED A COMPANY REGISTERED UNDER COMPANIES ACT 1956 HAVING REGISTERED OFFICE AT NO.4, BATAVIA CHAMBERS KUMARA KRUPA ROAD KUMAR PARK EAST BENGALURU – 560 001 REPRESENTED BY ITS CHAIRMAN MR.RAJESH MEHTA.

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2 . MR.RAJESH MEHTA

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S/O LATE JASVANTRAI MEHTA AGED ABOUT 57 YEARS, OCC:BUSINESS NO.578, 5^TH MAIN

SADASHIVNAGAR

BENGALURU – 560 080.

3 . MR.PRASHANT MEHTA S/O LATE JASVANTRAI MEHTA, AGED ABOUT 59 YEARS, OCC: BUSINESS NO.578, 5^TH MAIN SADASHIVANAGAR BENGALURU – 560 080. ... PETITIONERS

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(BY SRI GURUDAS KANNUR, SR.ADVOCATE A/W SRI RAGHU H.P., ADVOCATE)

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AND:

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BRANCH-IN-CHARGE CANARA BANK, LARGE CORPORATE BRANCH RAMANASHREE ARCADE 3^RD FLOOR, M.G.ROAD, BENGALURU – 560 001.

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CANARA BANK A COMPANY REGISTERED UNDER COMPANIES ACT 1956 PRIME CORPORATE BRANCH RAMANASHREE ARCADE 3^RD FLOOR, M.G.ROAD, BENGALURU – 560 001 REPRESENTED BY ITS AUTHORIZED SIGNATORY.

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... RESPONDENTS

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(BY SRI ARUN KUMAR K., SR.ADVOCATE FOR SRI B.C.GURU, ADVOCATE)

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THIS WRIT PETITION IS FILED UNDER ARTICLES 226 AND 227 OF THE CONSTITUTION OF INDIA PRAYING TO QUASH THE IMPUGNED COMMUNICATIONS DTD. 29.07.2022 BEARING COMMON REFERENCE NO.7575-BR/2636-615/2022 ISSUED BY THE R-1 AS PER ANNX-A, A1 AND A2 AS NULL AND VOID; QUASH THE WILFUL DEFAULT PROCEEDINGS INITIATED AGAINST THE PETITIONERS BY THE RESPONDENTS PURSUANT TO NOTICE DTD.31.07.2021 BEARING COMMON REFERENCE NO.7575BR/2636-432/238/2021 ISSUED BY THE R-1 AS PER ANNX-B, B1 AND B2 AS NULL AND VOID.

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IN WRIT PETITION No.8603 OF 2021

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BETWEEN:

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M/S RAJESH EXPORTS LIMITED A COMPANY REGISTERED UNDER COMPANIES ACT 1956 HAVING ITS REGISTERED OFFICE AT NO.4, BATAVIA CHAMBERS KUMARA KRUPA ROAD KUMAR PARK EAST BENGALURU – 560 001 REPRESENTED BY ITS CHAIRMAN MR.RAJESH MEHTA

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... PETITIONER

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(BY SRI GURUDAS KANNUR, SR.ADVOCATE A/W SRI RAGHU H.P., ADVOCATE)

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AND:

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1 . CANARA BANK A COMPANY REGISTERED UNDER COMPANIES ACT 1956 PRIME CORPORATE BRANCH RAMANASHREE ARCADE, 3^RD FLOOR M.G.ROAD

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BENGALURU – 560 001 REPRSENTED BY ITS AUTHORIZED SIGNATORY.

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2 . AUTHORIZED OFFICER CANARA BANK RAMANASHREE ARCADE 3^RD FLOOR, M.G.ROAD BENGALURU – 560 001.

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... RESPONDENTS

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(BY SRI ARUN KUMAR K., SR.ADVOCATE FOR SRI B.C.GURU, ADVOCATE)

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THIS WRIT PETITION IS FILED UNDER ARTICLES 226 AND 227 OF THE CONSTITUTION OF INDIA PRAYING TO QUASH THE IMPUGNED NOTICE DATED 01/04/2021 ISSUED BY THE RESPONDENT NO.2 UNDER SEC.13(2) OF THE SARFAESI ACT (AS PER ANNEXURE-A) AS VOID ABINITIO AND ETC.,

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IN WRIT PETITION No.13136 OF 2021 BETWEEN:

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M/S. RAJESH EXPORTS LIMITED A COMAPNY REGISTERED UNDER COMPANIES ACT 1956 HAVING REGISTERED OFFICE AT NO.4, BATAVIA CHAMBERS KUMARA KRUPA ROAD KUMAR PARK EAST BENGALURU – 560 001 RERPESENTED BY ITS CHAIRMAN MR. RAJESH MEHTA.

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... PETITIONER

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(BY SRI GURUDAS KANNUR, SR.ADVOCATE A/W SRI RAGHU H.P., ADVOCATE)

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AND: CANARA BANK HAVING ITS REGISTERED OFFICE AT J.C.ROAD, BENGALURU ALSO AT LARGE CORPORATE BRANCH RAMANASHREE ARCADE 3^RD FLOOR, M.G. ROAD, BENGALURU - 560 001 REPRESENTED BY ITS AUTHORISED SIGNATORY.

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... RESPONDENT

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(BY SRI ARUN KUMAR K., SR.ADVOCATE FOR SMT.P.CHITHRA NIRMALA, ADVOCATE)

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THIS WRIT PETITION IS FILED UNDER ARTICLES 226 AND 227 OF THE CONSTITUTION OF INDIA PRAYING TO QUASHING THE IMPUGNED PROCEEDINGS IN CP(IB)51/2021 AT ANNEXURE-A ON THE FILE OF NCLT BANGALORE INITIATED BY THE RESPONDENT UNDER SEC.7 OF INSOLVENCY AND BANKRUPTCY CODE AS VOID ABINITIO AND ETC.,

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THESE WRIT PETITIONS HAVING BEEN HEARD AND RESERVED FOR ORDERS ON 09.11.2022, COMING ON FOR PRONOUNCEMENT THIS DAY, THE COURT MADE THE FOLLOWING:-

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ORDER

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The petitioners are before this Court seeking the following

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prayer:

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“Wherefore, it is prayed that this Hon’ble Court be pleased to:

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a. Issue a writ of certiorari or any other appropriate writ, order or direction quashing the impugned communications dated 29-07-2022 bearing common Reference No.7575-BR/2636-615/2022 issued by the respondent No.1 as per Annexure-A, A1 & A2 as null and void.

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b. Issue a writ of certiorari or any other appropriate Writ, order or direction quashing the willful default proceedings initiated against the petitioners by the respondents pursuant to Notice dated 31-07-2021 bearing common Reference No. 7575-BR/2636432/238/2021 issued by the respondent No.1 as per Annexure-B, B1 & B2 as null and void.

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c. Pass such other order or orders as deemed fit and proper in the circumstances of the case in the interest of justice and equity.”

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Heard Sri Gurudas Kannur, learned senior counsel appearing for the petitioners and Sri K. Arun Kumar, learned senior counsel appearing for the respondents.

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Brief facts that lead the petitioners to this Court, as borne out from the pleadings, are as follows:

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M/s Rajesh Exports Limited/1^st petitioner claims to be a public limited company engaged in the business of import and export of gold jewellery for close to 35 years and is claimed to be one of the finest companies in India, one of the 7 Global Fortune 500 companies from India and has earned accolades around the world for its ethical business practices. Petitioner Nos.2 and 3 are the Directors of the 1^st petitioner/Company.

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For the sake of convenience all the petitioners would be referred to as ‘the petitioner’ in the course of this order.

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The petitioner claims to be associated with the respondents/Canara Bank (‘the Bank’ for short) since 1989. The petitioner/Company has placed huge cash deposits with the Bank and against these deposits, the petitioner availed foreign letter of credit (hereinafter referred to as ‘the FLC’ for short) from the Bank. No term loan is availed by the petitioner or any credit facility from the Bank. It is alleged that officers of the Bank had made several incorrect entries and made huge payments into the Bank’s foreign branches in foreign exchange from the account of the

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petitioner/Company without the consent of the petitioner. It is further alleged by the petitioner that instead of correcting incorrect entries and crediting it into the account of the petitioner, the Officers of the Bank in order to wriggle out of their mistakes created a debit balance in the account of the petitioner and demanded the petitioner to make payment of certain amounts. The petitioner did not make any payment as was sought by the Bank and on the ground that the petitioner has not paid the money as demanded, the Bank initiated steps under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’ for short) and the Recovery of Debts and Bankruptcy Act, 1993 (‘the 1993 Act’ for short). The petitioner approached this Court in companion petitions in Writ Petition Nos.8603 of 2021 and 13136 of 2021 challenging the said allegedly incorrect and illegal action of the Bank. This Court had granted an interim order of stay of the proceedings impugned in both the petitions.

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The Bank claimed an amount of Rs.427.30 crores from the petitioner and the petitioner has claimed Rs.20456.36 crores from

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the Bank. Therefore, the entire dispute was sought to be adjudicated before the Debts Recovery Tribunal (‘DRT’ for short). The petitioner claims to have voluntarily secured the Bank for more than 142% of the alleged demand by deposit of title deeds. The DRT accepted the security and passed order to the effect that the entire alleged claim of the Bank had been fully secured along with interest on account of deposit of title deeds by the petitioner. Therefore, it is the case of the petitioner that the proceedings before the DRT in O.A.No.510 of 2021 were unnecessary and redundant. What drives the petitioner to this Court is proceedings pending before the DRT initiated by the Bank and an order of the DRT attaching 21,97,000 equity shares of the petitioner/Company in the National Securities Depository Limited with an order that the 2^nd respondent is restrained from dealing with 21,97,000 shares of the Company in any manner until further orders of the Tribunal. Therefore, the order directing attachment is what drives the petitioner to this Court in the subject petitions.

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The learned senior counsel Sri Gurudas Kannur, appearing for the petitioners would contend with vehemence that the

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proceedings before the DRT initiated by the Bank were itself not maintainable as there is no borrower - banker relationship between the petitioner and the respondent and if there is no borrower - banker relationship, the transaction between the parties cannot be called a debt and if the transaction between the parties cannot be called a debt, the 1993 Act under which the DRT is created, is inapplicable. Therefore, the order of attachment that is passed by the Tribunal is one without jurisdiction and if it is without jurisdiction the same has to be obliterated.

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On the other hand, the learned senior counsel Sri K.Arun

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Kumar, would vehemently refute the submissions to contend that the transaction between the parties though is not pursuant to creation of a mortgage by entering into an agreement, it is a debt as the letter of credit that is issued by the Bank is the reason on which other Banks would permit the transaction between them and the petitioner. But, for the letter of credit, the petitioner could not have generated any business as the petitioner’s Bank has paid to the other Banks before whom the letter of credit is produced and

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would submit that the proceedings are maintainable before the DRT

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as the petitioner has to pay the amount in default.

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I have given my anxious consideration to the submissions made by the respective learned senior counsel and perused the material on record.

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On hearing the petitioners and the respondents on the issue, as to whether there is a transaction between the petitioners and the respondents making them borrowers of the banker, the issue will have to be dealt with at the outset. Therefore, the judgment was reserved for dealing with the preliminary issue by recording as follows:

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“Heard Sri Gurudas Kannur, learned senior counsel appearing for the petitioners and Sri K. Arun Kumar, learned senior counsel appearing for respondents.

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The submissions have been made only with regard to whether the issue in the lis would generate a relation of the Bank and the borrower qua the transaction between the petitioners and the respondents and all other issues would be ancillary to the said issue as the decision on the said issue would cut at the root of the matter.

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The judgment is reserved for orders only on maintainability.”

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By observing as quoted hereinabove, the judgment was reserved on the issue of maintainability of the proceedings before the DRT. To consider the said issue, it is germane to notice certain provisions of the 1993 Act, in terms of which the DRT is established. Section 2(g) of the 1993 Act defines what is debt and reads as follows:

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“ 2. Definitions. - In this Act, unless the context otherwise requires,

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(g) “debt” means any liability (inclusive of interest) which is claimed as due from any person or a pooled investment vehicle as defined in clause (da) of Section 2 of the Securities Contracts (Regulation) Act, 1956, by a bank or a financial institution or by a consortium of banks or financial institutions during the course of any business activity undertaken by the bank or the financial institution or the consortium under any law for the time being in force, in cash or otherwise, whether secured or unsecured, or assigned, or whether payable under a decree or order of any civil court or any arbitration award or otherwise or under a mortgage and subsisting on, and legally recoverable on, the date of the application and includes any liability towards debt securities which remains unpaid in full or part after notice of ninety days served upon the borrower by the debenture trustee or any other authority in whose favour security interest is created for the benefit of holders of debt securities or;”

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(Emphasis supplied)

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A debt means any liability which is claimed as due from any person by a Bank or a financial institution or a consortium of Banks whether secured or unsecured or assigned or whether payable under a decree or order of any civil Court or any arbitration award or otherwise or under a mortgage subsisting on the date of the application, which would include any liability towards debt security, which remains unpaid in full or in part. Section 2(g) quoted hereinabove was considered by the Apex Court in the case of

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EUREKA FORBES LIMITED v. ALLAHABAD BANK AND OTHERS¹ . The Apex Court holds that Section 2(g) having been defined to mean any liability which is claimed as due from any person by any Bank is not restricted to the jurisdiction of DRT where the relationship is of creditor or debtor alone which would mean that any kind of debt found in Section 2(g), where it is the relationship between the creditor or the debtor i.e., the Bank or the borrower can be maintained before the DRT. The Apex Court in the said judgment has held as follows:

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“65. Another aspect of this case which required to be considered by this Court is, what was intended to be

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1 (2010) 6 SCC 193

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suppressed by the legislature by enacting the Recovery Act, 1993 and thereafter, by amending various provisions, including Section 2(g) in the year 2000. Obviously, the mischief which was intended to be controlled and/or prevention of wastage of securities provided to the Bank, was the main consideration for such enactment. The purpose was also to prevent wrongdoers from taking advantage of their wrong/mistakes, whether permissible in law or otherwise. These preventive measures are required to be applied with care and purposefully in accordance with law to ensure that the mischief, if not entirely extinguished, is curbed.

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66. The maxim nullus commodum capere potest de injuria sua propria has a clear mandate of law that, a person who by manipulation of a process frustrates the legal rights of others, should not be permitted to take advantage of his wrong or manipulations. In the present case Respondents 2 and 3 and the appellant have acted together while disposing off the hypothecated goods, and now, they cannot be permitted to turn back to argue, that since the goods have been sold, liability cannot be fastened upon Respondents 2 and 3 and in any case on the appellant. The Bench of this Court in Ashok Kapil v. Sana Ullah [(1996) 6 SCC 342] referred to rule of mischief and while explaining the word “building”, held as under: (SCC p. 346, para 11)

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“11. Stroud's Judicial Dictionary (Vol. I of the 5th Edn.) states that ‘what is a building must always be a question of degree and circumstances’. Quoting from Victoria City Corpn. v. Bishop of Vancouver Island [(1921) 2 AC 384 (PC)] (AC at p. 390), the celebrated lexicographer commented that ‘the ordinary and natural meaning of the word “building” includes the fabric and the ground on which it stands’. In Black's Law Dictionary (5th Edn.) the meaning of ‘building’ is given as ‘A structure or edifice enclosing a space within its walls, and usually, but not necessarily, covered with a roof’. (emphasis in original). The said description is a recognition of the fact that roof is not a necessary and indispensable adjunct for a building because there can be roofless buildings. So a building, even after losing the roof, can continue to be a building in its general

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meaning. Taking recourse to such general meaning in the present context would help to prevent a mischief.”

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67. The learned counsel for the appellant also relied upon the judgment of the Gujarat High Court in Bank of India v. Vijay Ramniklal Kapadia [AIR 1997 Guj 75] , in support of the contention, that claim of the Bank was not “debt” within the meaning of Section 2(g) of the Act so as to give jurisdiction to the Tribunal. We are not impressed by this argument. Firstly, the judgment of the Gujarat High Court is entirely on different facts and in that case an employee of the Bank had misappropriated the amount of the Bank, the Bank had instituted an application under the provisions of the Recovery Act. Rightly so it was held by the High Court, that it was not a “debt” within the meaning of Section 2(g) and therefore, could not be tried before the Tribunal.

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68. We may state another illustration to demonstrate the case where the Tribunal may not have jurisdiction. Some persons commit a theft in a bank and take away the money and/or the goods hypothecated to the bank or the goods in the custody of the bank. Upon the bank's lodging a first information report (FIR) to the police, those persons are traced, arrested and tried in accordance with law for theft. In such a case, the Tribunal may not have jurisdiction to entertain and decide an application for recovery of money or value of goods in terms of Section 17 of the Recovery Act. That is neither the case here nor in any of the judgments which have been relied upon by the parties before us, except in the case of the Gujarat High Court.

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69. In the case in hand, the goods were hypothecated to the Bank and the appellant admittedly had knowledge prior to the sale of the goods, that they were hypothecated to the Bank. If the contention of the appellant is accepted, it will amount to giving advantage or premium to the wrongdoers. It would also further perpetuate the mischief intended to be suppressed by the enactment. This could completely defeat the very object and purpose of the Act. A party which had pledged or mortgaged properties in favour of the Bank, then

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would transfer such properties in favour of a third party. In the event, the Bank takes action under the provisions of the Recovery Act, they would take the objection like the present appellant. This would tantamount to travesty of justice and would frustrate the very legislative object and intent behind the provisions of the Recovery Act. Therefore, such an approach or interpretation would be impermissible.

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70. We have already noticed that the legislature has not used words of a restrictive or definite nature. It has intentionally made use of the expressions which are quite general and can be construed widely in their common parlance. There is no occasion for this Court to read the word other than the one intended by the legislature in the provisions of Section 2(g) of the Recovery Act. Wherever the legislature requires, it uses the expressions of definite connotations and consequences, for example, in the Interest Act, 1978, the word “debt” has been defined under Section 2(c) of that Act by using specific terms of restricted character. It means “any liability for an ascertained sum of money and includes a debt payable in any kind but does not include a “judgment debt”. In this definition, the “ascertained sum” obviously means a sum which has been determined under any methods of the adjudicative process while, on the other hand, the expression “payable in kind” is a general expression, again the excluding clause in relation to “judgment debt” is specific. Such is not the language or the purport of Section 2(g) of the Recovery Act.

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71. Mr R.F. Nariman, the learned Senior Counsel appearing for the appellant, while referring to the provisions of Section 19(8) and Section 19(11) respectively, of the Recovery Act contended, that these sections clearly postulate that, a non-applicant in proceedings before the Tribunal can raise a plea of set-off, as well as a counterclaim, but where the counterclaim is objected to on the ground that it ought not to be disposed off by way of a counterclaim, as it is an independent action, then the person raising a counterclaim can take leave of the Tribunal for exclusion of such counterclaim.

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With reference to the language of these two provisions, it is contended that, the claim like the one raised by the respondent Bank against the appellant, is a claim which cannot be raised in the proceedings before the Tribunal and the Bank ought to have taken independent steps, if any, in accordance with law. On the other hand, Mr Jaideep Gupta, learned Senior Counsel for the respondent Bank argued that, this argument has no bearing on the matter in controversy before us, inasmuch as, the claim of the Bank is maintainable within the definition of “debt” under the Recovery Act.

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72. This contention of the appellant needs to be noticed only for being rejected. In our detailed discussion above, we have clearly held that, the claim raised by the Bank falls well within the ambit and scope of Section 2(g) of the Recovery Act and the jurisdiction of the Tribunal cannot be ousted on this ground.

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73. Thus, in our opinion, the provisions of Section 2(g) have to be construed, so as to give it liberal meaning. The general expressions used in this provision will have to be understood generally. Neither there is scope to hold nor is the legislative intent that these provisions should be given a narrower or a restricted meaning. In our considered view, the claim of the Bank relatable to the hypothecated goods was well within the jurisdiction of the Tribunal exercising its power under Section 17 of the Recovery Act.”

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(Emphasis supplied)

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In the light of the aforementioned judgment rendered by the Apex Court, the contention of the learned counsel for the petitioner that issuance of letter of credit and the finance rendered by the Bank in terms of the letter of credit would not constitute a debt and consequently, proceedings instituted under the SARFAESI Act would

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not be maintainable before the DRT, is unacceptable. The definition of debt as quoted hereinabove clearly indicates that it is not only relationship of mortgagor and mortgagee and the borrower and the Bank, every other relationship of debt between the banker and its customer would be within the jurisdiction of DRT. Therefore, the proceedings initiated before the DRT by the Bank is not the one which is without jurisdiction but is the one which is within its jurisdiction on the very definition of the statute and its interpretation by the Apex Court in the case of Allahabad Bank.

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11. In the light of maintainability of the proceedings before the DRT for the issue that is raised before this Court qua the order of attachment, the proceedings are maintainable only before the DRT and if the petitioner is aggrieved with the order of the DRT, appeal under Section 18 of the SARFAESI Act, 2002 is always available before the Debts Recovery Appellate Tribunal. The writ petition in the peculiar facts of this case is not maintainable as the application before the DRT is what is maintainable in the case at hand. Therefore, the issue on which the matter was reserved is now resolved holding that the DRT was well within its jurisdiction to

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have passed the said order. Whether the DRT could have passed attachment order in the facts of the case is one that the petitioner has to agitate before the DRAT.

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12. For the aforesaid reasons, I hold that the proceedings before the DRT were maintainable and it is for the petitioner to call in question the order of the DRT before the appropriate forum in accordance with law. Therefore, these writ petitions are rejected as not entertainable.

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Sd/JUDGE

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nvj CT:MJ

M/S Rajesh Exports Limited v. Branch in Charge

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M/S Rajesh Exports Limited v. Branch in Charge

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