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TMI Blog2021 (12) TMI 1501X X X X Extracts X X X X X X X X Extracts X X X X ..... lly gone through the Audit Report and it is not a case where there is no whisper against the petitioner company. This Court does not find any reason to interfere with the action of the respondent Bank in declaring the petitioner s account as fraud , which has been done by following due process of law as prescribed under the Master Circular issued by the Reserve Bank of India. The writ petitions are dismissed. - The Hon ble The Chief Justice Satish Chandra Sharma And The Hon ble Sri Justice N. Tukaramji For the Petitioner : Kailash Nath PSS. For the Respondent : R. Sridhar. COMMON ORDER: PER THE HON BLE THE CHIEF JUSTICE SATISH CHANDRA SHARMA 1. Regard being had to the similitude in the controversy involved in the present cases, the writ petitions were analogously heard and by this common order, they are being disposed of by this Court. 2. The petitioner is common in all the three writ petitions. The facts of W.P. No. 22588 of 2019 reveals as follows:- The petitioner, a company registered under the Companies Act, has filed the present writ petitions being aggrieved by the action of the respondent No.3/Andhra Bank (now merged with Union Bank of India) in declaring the petitioner s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat after the account of the petitioner company became NPA, the consortium of lenders in the JLF Meeting dated 10.08.2018 proposed to conduct forensic audit of the petitioner company for the period till 31.03.2019. The petitioner company, as stated, has submitted all the requisite information as required by the forensic auditor appointed in the matter from time to time and it is the contention of the petitioner company that no adverse observations or detection of fraud activity by the petitioner company was noticed in the forensic audit. However, the respondent No.3 Bank kept on pushing the auditor to look deeper into the books so that the petitioner company is declared as fraud . It has also been stated that the respondent No.3 Bank also initiated recovery proceedings before the Debt Recovery Tribunal and finally an e-mail dated 23.09.2019 was initiated by Tamilnad Mercantile Bank Limited to the respondent No.3/Union Bank of India with a copy to the petitioner company declaring the petitioner s account as fraud . The petitioner company has further stated that the petitioner company contacted the Officers of the respondent No.3 Bank and it was informed to the petitioner that the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2016, the Reserve Bank of India has started issuing Master Directions on each subject covering all instructions on that subject and the Master Directions are being updated suitably whenever there is a change in the policy. It has been further stated that Master Directions on Frauds Classification and Reporting by Commercial Banks and select FIs (hereinafter called as Master Directions on Frauds / Master Circular ) was issued on 01.07.2016 and it is nothing but updation of the existing Master Circular on Frauds Classification and Reporting, dated 01.07.2015. It has been further stated that subsequently Master Directions on Frauds was updated on 03.07.2015. 8. The Reserve Bank of India has also stated that the Master Circular does not violate the principles of natural justice and fair play nor it is arbitrary. The information in the Central Fraud Registry does not cause injury to the borrower s reputation or his/her business and the information is shared with other banks on private and confidential basis, which is in the nature of a Bankers Report on an account. The Reserve Bank of India has further stated that it is done with an intention to share the information for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is confirmed by the said Review Committee. Meaning thereby, lot of checks and balances have been provided under the Master Circular and no case for interference by this Court is made out and therefore, the Reserve Bank of India sought for dismissal of the present writ petitions. 12. The respondent No.3/Andhra Bank (Union Bank of India), Lead Bank of the consortium, has filed a detailed counter affidavit and it has been stated that action has been taken in the matter keeping in view the Master Directions on Fraud, dated 01.07.2016. It has been further stated that clause 1.3 of the Circular clearly establishes that the classification is purely an administrative exercise meant not only as an exercise necessary for follow up action in accounts classified as Fraud Account but also as a preventive exercise. The classification of account is thus necessary and required to be undertaken in the circumstances. The Master Circular is in the nature of directions to the Banks as regards classification of account, its reporting to the Reserve Bank of India and follow up action and closure of account classified as Fraud Account . It has been further stated that the petitioner has been enjoying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facilities from a consortium of banks with Andhra Bank (Union Bank of India) as a Lead Bank for a sum of Rs.675 Crores. The account of the petitioner company was declared as NPA on 14.05.2018 and the consortium of banks has taken steps to realise the securities and also filed an Application before the Debt Recovery Tribunal for recovery of a sum of Rs.617,40,94,702.61/-. The petitioner company is aggrieved by the action of the respondent No.3/Andhra Bank (Union Bank of India) in declaring the petitioner s account as fraud . The Reserve Bank of India is a Statutory Corporation constituted by the provisions of Section 3 of the Reserve Bank of India Act, 1934, for the purpose of regulating the issue of Bank Notes and keeping the reserves with a view to secure monetary stability in the country and generally to operate currency and credit system of the country. The Reserve Bank of India has been, inter alia, entrusted with the statutory obligation of administering the provisions of Banking Regulation Act, 1949. In the Banking Regulation Act, the Reserve Bank of India has been vested with various powers with respect to banking companies, such as granting licences, conducting inspections, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Reserve Bank of India has issued a Master Circular on Frauds dated 01.07.2016 incorporating the earlier circulars issued on the subject and the Reserve Bank of India updates the Master Circular on Frauds annually, generally in July incorporating the instructions issued till then. In 2016, the Reserve Bank of India has started issuing Master Directions of each subject covering all the instructions on that subject and the Master Directions are also updated suitably whenever there is a change in the policy. All the changes so made are reflected in the Master Directions available on the Reserve Bank website and finally Master Directions on Frauds Classification and Reporting of Commercial Banks and select FIs was issued on 01.07.2016. It is, in fact, more or less an updation of the existing Master Circular on Frauds Classification and Reporting, dated 01.07.2015. Subsequently, Master Directions on Frauds was updated on 03.07.2017. 18. Clause 1.3 of the Master Directions on Frauds is reproduced as under:- 1.3 Purpose These directions are issued with a view to providing a framework to banks enabling them to detect and report frauds early and taking timely consequent actions like report ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not to be acted upon. The High Court insofar as it observed that a personal hearing be given is stayed. 21. In the considered opinion of this Court, as the issue of principle of natural justice and fair play is pending before the Hon ble Supreme Court, the same is not being dealt with at present. However, the facts of the case reveal that the forensic audit, which was conducted, was not a unilateral exercise on the part of the auditor. The audit was conducted with full participation of the petitioner company and based upon the audit report, which was certainly prepared with the participation of the petitioner, the petitioner account has been classified as fraud . 22. Learned counsel for the petitioner has much argued upon the Conclusion part of the Audit Report and the same is reproduced as under:- Conclusion: The Company SARL which is in edible oil and rice business has continuously progressed its turnover and reached to a peak turnover of Rs.2450 Cr in the last year ending 31.03.2018. To sustain high turnover at ultra low profitability, the request for enhancement of working capital was made but was rejected. The results of the business at every year end has been very bleak i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it the entire edible oil industry and was beyond the control of management, where over leveraging without adequate control and absence of strong risk mitigation measures led to the down fall. The company has conveyed that it has taken legal action against debtors recovery but being civil suits, law will take its own time and on the other hand counter claim of the debtors indicate long drawn futile process of recovery. The above observation and also key finding and executive summary narrated in this report leaves a question on management system control and lack in adopting adequate risk measures in areas such as recovery from debtors, legal documentations with the brokers and trails of transaction adequate which are essential for the recovery of receivables, results in bleak recovery of the same. SARL was a profitable Company as there has been positive increase in its revenue, but with high leverage and thin margins, it would be difficult to run and operate the units in the current situation without incurring major repairs and renovation cost and further deterioration will make the plants unviable for operations. The majority of investment made by the company with a prime objective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anding as on date. - Subsequent to account being declared as NPA, the Company ahs approached the third party financiers who have opened fresh LCs on behalf of the Company under the arrangement as explained in the Key findings section. - Multiple devolvement of LCs simultaneously resulted in huge shortage of cash flow in the Company and increased the bankers stress to recover the loans disbursed. - Also, due to such implications the Company has been liable to pay 2% additional interest on the amount due to the banks increasing their liabilities. - This indicates that the Company continued to make procurements and open LC's without having any financial arrangement for repaying the same on timely basis. As a result, once the banks stopped opening new LC accounts, the Company could not repay the commitments for the lack of availability of funds. The Company had obtained finance from third party financiers, however could not sustain for long due to additional finance costs. - Approaching third party financiers for additional LCs, when there has been devolvement of the existing ones increases the liability and risk potentials. - The Company has repaid the LCs of third party NBFCs, ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re amount was repaid by Ekakshara to SARL during 10.09.2018 to 14.09.2018. Obs No Observation Unusual Indicators Conclusion based on Audit Findings Level of Unusual Indications 8 - Qualified opinion and Emphasis of matter in FY 2017-18 by new Auditors: - The Company has reported a loss of INR 223.33 Crores due to which net worth of the Company has been fully eroded from INR 204.72 Crores to negative net worth of INR 25.61 crores. Further devolvement of LC s on a large scale followed with lower scale of production/No production in certain units gives doubts about the continuity of business. So the Company s ability to continue the business as going concern is significantly dependent upon the viability of the restructuring plan to be approved by Consortium Banks. - The Company s rating by Brickwork Ratings India in its report Rating Rationale dated 23 February 2018, wherein it downgraded the ratings of the Company to BWR BBB for the Fund Based Bank Loan Facilities of INR 106.61 Crores of the Company and to BWR A3+ for Non-Fund Based Bank Loan Facilities of INR 635.11 Crores. - With respect to the liability on account of post-retirement medical benefits of employees including retired ..... X X X X Extracts X X X X X X X X Extracts X X X X
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