2025 (3) TMI 691 - HC - Companies Law

Seeking recall or review of order - legality of compromise under Order XXIII Rule 3 of the Code of Civil Procedure 1908 - legality of assignment of Shaila Clubs loan to Savannah - Savannah s contention is that the transaction involved in the present case is not governed by 2021 - delay in filing of Interim Application - HELD THAT - It is failed to understand as to how reliance on Clause 11 of the RBI directives assists the case of Savannah. All that Clause 11 provides is that loan transfer would result in transfer of economic interest without being accompanied by any change in underlying terms and conditions of the loan contract and in all cases where there are any modifications in the terms and conditions of the loan contract during or after transfer the same shall be evaluated against the definition of the term restructuring provided in Paragraph No.1 of the Annexure to Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019 dated 7 June 2019. Dr. Tulzapurkar has placed on record copy of the said Prudential Directions 2019 which again does not assist the case of Savannah in any manner. All that Clause 11 provides is that there would be no change in the terms and conditions of loan contract upon transfer of loan and whenever such terms or conditions are modified the same shall be evaluated against definition of the term restructuring in Prudential Directions. Thus Prudential Directions apply for limited purpose of definition of the term restructuring that too when there are modification of terms and conditions in loan agreement. The transaction of assignment of loan of Shaila Clubs by the Bank in favour of Savannah is specifically prohibited under the 2021 RBI Directives as Savannah is not an eligible transferee. One of the objectives behind the RBI Directives is to ensure that the Banks do not transfer loan accounts to ineligible transferees. Otherwise Banks would transfer loan accounts to private money lenders. Since Savannah is not one of the recognized transferees under the 2021 RBI guidelines transfer of loan account of Shaila Clubs in favour of Savannah would clearly be unlawful - the compromise entered into between the Bank and Savannah is something which this Court could not have accepted for the purpose of disposal of Writ Petition No. 11610 of 2022. On the basis of assignment of loan of Shaila Clubs in its favour Savannah has instituted CIRP against Shaila Clubs and would ultimately realise the outstanding loan amount alienating the property of Shaila Clubs. Thus the Minutes of Order directly affect the rights of Shaila Clubs. The objective behind RBI Directives of not permitting ineligible lender to purchase NPA is totally frustrated in the present case where Savannah is actually eyeing to secure ownership of property under its management as mere Conductor by paying sum of Rs.3.37 crores in Shaila Clubs loan account. The compromise effected between Bank and Savannah actually affects the interest of Shaila Clubs who is not the signatory to the compromise. Mere presence of Advocate of Shaila Clubs before the Court on 21 October 2022 or failure on the part of the Advocate to raise any objection to disposal of the petition in view of the Minutes of Order would not convert unlawful compromise into lawful one. Judgment of the Apex Court in Suleman Noormohamed 1978 (2) TMI 222 - SUPREME COURT is relied upon in support of contention of unlawful compromise. The Apex Court has dealt with the issue of eviction for the tenant on the basis of compromise where the tenant opposed execution of the decree on the ground that the decree was nullity as the compromise in absence of making out the ground for eviction under rent control legislation was itself unlawful. The Apex Court held If the agreement or compromise for the eviction of the tenant is found on the facts of a particular case to be in violation of a particular Rent Restriction or Control Act the Court would refuse to record the compromise as it will not be a lawful agreement. If on the other hand the Court is satisfied on consideration of the terms of the compromise and if necessary by considering them in the context of the pleadings and other materials in the case that the agreement is lawful as in any other suit so in an eviction suit the Court is bound to record the compromise and pass a decree in accordance therewith. Passing a decree for eviction on adjudication of the requisite facts or on their admission in a compromise either express or implied is not different. The Minutes of Order dated 20 October 2022 has a seal of this Court in the form of order dated 21 October 2022. If the compromise is itself unlawful the seal of this Court put on such compromise must be removed so that no party is permitted to rely on the same in any collateral proceedings by contending that that the compromise has been accepted by the High Court and that the same is therefore valid - the review petition filed by the Shaila Clubs cannot be dismissed by relegating it to remedy of raising objection in CIRP before NCLT which does not have the jurisdiction to declare that the compromise effected through the Minutes of Order accepted by this Court is unlawful. NCLT would always treat the Minutes of Order with seal of this Court to be lawful. It is therefore necessary that the order dated 21 October 2022 is recalled. The real issue involved in the present case is whether the compromise is lawful and whether the order dated 21 October 2022 deserves to be recalled and /or reviewed. After having arrived at the conclusion that compromise is unlawful and the order passed by this Court on 21 October 2022 deserves to be recalled it is not inclined to entertain the technical plea sought to be raised by Savannah about Liquidator s locus to file Interim Application for recall especially in the light of the fact that the order is otherwise reviewable on application filed by Shaila Clubs and its suspended director. On the issue of delay in filing of Interim Application No.13400 of 2024 and in filing the two Review Petitions it is well settled position of law that mere delay not involving latches acquiescence or estoppel would not prevent this Court from exercising inherent power of recalling its order. The inherent power of this Court in recalling an order is not circumscribed by considerations of delay. Once this Court arrives at a conclusion the compromise is unlawful and could not have been acted upon by this Court mere delay would not be a hurdle for this Court to recall and/review the recording of unlawful compromise - Once this Court arrives at a conclusion that the compromise itself is unlawful mere delay in filing applications for recall or review cannot be a reason for shutting the doors of this Court on technical ground of delay. The order passed by this Court on 21 October 2022 on the basis of Minutes of Order dated 20 October 2022 deserves to be recalled both in application filed by the Bank as well as in the Review Petitions filed by Shaila Clubs and its suspended director. Conclusion - i) The compromise recorded in the Minutes of Order was unlawful as it violated the RBI Directives which prohibit the transfer of loan accounts to ineligible transferees like Savannah. ii) The RBI Directives have statutory force and are binding on banks thus rendering the assignment of the loan to Savannah impermissible. iii) The order is recalled. Interim Application filed for seeking condonation of delay in filing Review Petition is allowed - Order dated 21 October 2022 passed in Writ Petition No. 11610 of 2022 in view of Minutes of Order dated 20 October 2022 is recalled - petition restored.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the judgment were:

• Whether the compromise recorded in the Minutes of Order dated 20 October 2022, which led to the order dated 21 October 2022, was lawful under Order XXIII Rule 3 of the Code of Civil Procedure, 1908.
• Whether the assignment of the loan account of Shaila Clubs to Savannah was in violation of the Reserve Bank of India (RBI) Directives, specifically the 2021 Directives on Transfer of Loan Exposures.
• Whether the Liquidator had the authority to file the Interim Application No. 13400 of 2024 given the statutory limitations on the duration of liquidation proceedings under the Maharashtra Co-operative Societies Act, 1960 (MCS Act).
• Whether the delay in filing the Interim Application and Review Petitions was a bar to the exercise of the Court's inherent power to recall the order.

ISSUE-WISE DETAILED ANALYSIS

1. Lawfulness of the Compromise under Order XXIII Rule 3

The Court examined whether the compromise recorded in the Minutes of Order was lawful. Under Order XXIII Rule 3, a compromise must be lawful to be recorded by the Court. The compromise involved the assignment of Shaila Clubs' loan account to Savannah, a private entity, which was challenged as unlawful.

• Relevant Legal Framework and Precedents: The Court referred to the RBI Directives issued under Sections 21 and 35A of the Banking Regulation Act, 1949, which regulate the transfer of loan exposures. The Directives specify that only certain entities can be transferees of stressed loans.
• Court's Interpretation and Reasoning: The Court found that the assignment of the loan to Savannah was unlawful under the RBI Directives as Savannah was not an eligible transferee. The Directives aim to prevent banks from transferring loan accounts to ineligible entities.
• Application of Law to Facts: The Court concluded that the compromise was unlawful because it violated the RBI Directives, which are binding on banks.
• Conclusions: The compromise could not be accepted by the Court as it was not lawful, thus warranting the recall of the order based on it.

2. Violation of RBI Directives

The Court analyzed whether the assignment of the loan account to Savannah violated the RBI Directives.

• Relevant Legal Framework: The RBI's 2021 Directives on Transfer of Loan Exposures apply to stressed loans, defined as non-performing assets (NPAs) or special mention accounts (SMAs).
• Court's Interpretation and Reasoning: The Court noted that Shaila Clubs' loan account was classified as an NPA, making the RBI Directives applicable. Savannah was not listed as a permitted transferee under the Directives.
• Conclusions: The assignment of the loan account to Savannah was in violation of the RBI Directives, rendering the transaction unlawful.

3. Authority of the Liquidator

The Court considered whether the Liquidator had the authority to file the Interim Application given the statutory limits on liquidation proceedings.

• Relevant Legal Framework: Section 109 of the MCS Act limits the duration of liquidation proceedings to 15 years.
• Court's Interpretation and Reasoning: The Court noted that the liquidation proceedings were deemed terminated after 15 years unless extended by the Registrar. However, the Court found it unnecessary to delve deeply into this issue, given the review petition filed by Shaila Clubs.
• Conclusions: The Court did not base its decision solely on the Liquidator's application, as the review petition independently warranted consideration.

4. Delay in Filing Applications

The Court addressed whether the delay in filing the applications was a bar to recalling the order.

• Relevant Legal Framework: The Court has inherent power to recall orders, which is not circumscribed by delay unless it involves laches, acquiescence, or estoppel.
• Court's Interpretation and Reasoning: The Court found that mere delay, without more, should not prevent the exercise of its inherent power to correct an unlawful order.
• Conclusions: The delay was not a bar to recalling the order, especially given the unlawful nature of the compromise.

SIGNIFICANT HOLDINGS

• The Court held that the compromise recorded in the Minutes of Order was unlawful as it violated the RBI Directives, which prohibit the transfer of loan accounts to ineligible transferees like Savannah.
• The Court emphasized that the RBI Directives have statutory force and are binding on banks, thus rendering the assignment of the loan to Savannah impermissible.
• The Court recalled the order dated 21 October 2022, restoring Writ Petition No. 11610 of 2022 for further proceedings.
• The Court allowed the applications for recall and review, emphasizing that the unlawful nature of the compromise justified the recall of the order.