Bank Of India vs Shrenuj & Company Ltd

Bank of India, Asset Recovery Management Branch, Bank of India Building, Ground Floor, 28, S.V. Road Andheri (West), Mumbai- 400 058 .. Appellant

Versus

Shrenuj & Company Limited 405, Dharam Place 100-103, N.S. Patkar Marg, Mumbai- 400 007 .. Respondent

Present:

For Appellant: Mr. Ashish Rana and Shri Ankit Paushyayan, Advocates

For Respondents: Mr. Mahesh Agarwal, Shri Arshit Anand, Shri Abhhijeet Sinha and Shri Saikat Sarkar, Advocates (for Intervener)

JUDGMENT

(25th February, 2020)

KANTHI NARAHARI, MEMBER (TECHNICAL)

That the present Appeal arises against the part of the order

dated 12.03.2019 passed by the Adjudicating Authority (National

Company Law Tribunal, Mumbai Bench) in CP No.

190/IPC/NCLT/MB/MAH/2018.

Company Appeal (Insolvency) No. 494 of 2019 Page 1 of 20

2. The Adjudicating Authority admitted the Application filed by the

Appellant herein.

BRIEF FACTS:

3. The Appellant- Bank filed an Application under Section 7 IBC

against the Corporate Debtor, namely, Shrenuj & Company

Limited/Respondent herein for initiating of Corporate Insolvency

Resolution Process (in short "CIRP") that the Corporate

Debtor/Respondent defaulted of debt in payment of loan advanced by

the Appellant. The Adjudicating Authority admitted the Application,

however made certain observations. According to the Appellant these

observations amount to disparaging unwarranted remarks against the

Appellant-Bank. Following are the observations made by the

Adjudicating Authority.

...

"31. Before we part with this order, this Bench

wishes to take a serious note on the conduct of the

bank authorities who have granted financial

facilities in thousands of crores of rupees on a mere

pledge of alleged fake diamonds, as per their own

allegations now levelled by the Financial Creditor. It

is worth to ponder upon the fact that if the diamonds

were fake, the bank authorities must not have been

inclined to grant the loan facilities. However, as held

in Director of Income Tax V. Bharat Diamond Bourse,

Company Appeal (Insolvency) No. 494 of 2019 Page 2 of 20 Order dated 16.12.2002 [(2003) 1 SCC 741], Para 36

says:

"....It is wholly unnatural, because one does

not expect hard-nosed businessmen to part

with an amount of 70 lacs without even

recording an agreement under which it is

paid, nor without agreeing upon the precise

terms of the lease. The story rings false from

beginning to end, and yet the tribunal

accepted it by saying, "as regards the

bonafides of the transactions, in our opinion

there is nothing to suspect the same". The

Tribunal says, "there is a transparency

about the entire transaction which nullifies

any attempt to make out the transaction as

something - unusual and out of the

ordinary." That diamonds are not

transparent, that they dazzle with a

brilliance that blinds the eye seems to have

escaped the notice of the tribunal. It

undeservingly accepted the glib explanation

of the assesse, though teeming with the

improbabilities and strenous on credulity.

37. We, therefore, are of the view that the

tribunal's conclusions on this issue are

Company Appeal (Insolvency) No. 494 of 2019 Page 3 of 20 perverse and need to be interfered with. We

affirm the conclusions arrived at by the

assessing officer and the appellate

authority to effect that ₹ 70 lakhs were lent

to Bharat S. Shah for substantial periods

during the previous years pertaining to the

relevant assessment years, without interest

and without adequate security."

32. Therefore, I am constrained to make an adverse

observation, needless to mention, subject to

correction on the final outcome of the investigation,

that the shine/gleam of diamonds have blinded the

eyes of the bank authorities that they did not even

check the veracity of the securities pledged. When a

loan is granted as a "cash credit limit/loan" to

facilitate the running of a business, the bank

authorities pledge the stock in trade. Against the

pledge/hypothecation of the stock in trade, cash

credit facility is granted, therefore, the stock is

always under the strict scrutiny of the bankers. It is

a general practice that the stock is valued at regular

intervals and on the basis of the analysis of the

value of the stock, the facility of the cash credit limit

gets fluctuated. In the present case, naturally a

Company Appeal (Insolvency) No. 494 of 2019 Page 4 of 20 valuable stock was subject to hypothecation/pledge,

stated to be diamonds valuing Rs. 959.04 Crores,

because a huge loan of Rs. 205 Crores was

sanctioned. While granting loan it was obligatory on

the bank authorities to check and verify the stock

hypothecated by preparing an inventory of the stock

in trade duly certified by the management and if

deemed necessary, by a valuer. It is also strange

that a valuable stock was seized by the authorities

but without proper recording of inventories and

without obtaining the signatures of the management

of the debtor company. All such allegations and

many more are definitely to be investigated in-depth.

33. That the above discussion, thus leads to one

conclusion that first this Corporate Debtor be put

under insolvency proceedings and thereafter

simultaneously investigation be carried out so that

the interest of all the stakeholders can be watched

and protected. The appointed IRP shall communicate

this order to all the connected Authorities namely,

Enforcement Directorate, Economic Offences Wing,

Income Tax Department and Serious Fraud

Investigation Office etc. to take due cognizance of

this insolvency order for further action."

Company Appeal (Insolvency) No. 494 of 2019 Page 5 of 20 ..

4. Learned Counsel for the Appellant submits that the Adjudicating

Authority once it reached a conclusion that there is admission of

default by the Corporate Debtor and admitting the Corporate Debtor to

CIRP, adverse remarks were blatantly unwarranted and unwanted. It

is submitted that the Appellant/Financial Creditor had extended

various financial facilities and non- fund based facilities to the tune of

Rs. 205.00 Crores from the year 2005 onwards. The Appellant

preferred an Application under Section 7 of IBC on 06.01.2008

committing default by the Respondent herein. The Respondent filed

Reply Affidavit to the said Application contesting its admission to CIRP.

In the Reply, the Respondent alleged that upon an Application of ICICI

Bank to the Debt Recovery Tribunal, where recovery proceedings are

pending against the Corporate Debtor the Debt Recovery Tribunal,

Mumbai-I appointed a 'Receiver to take possession of the movables.

The ICICI Bank subsequently sub-delegated its responsibilities to some

of its Officer to work in the capacity as Receiver. The Officer of the ICICI

Bank along with Police personnel visited the premises of the

Respondent and seized diamonds. The Respondent had further alleged

that the High Value Fancy coloured original Diamonds have been

replaced with coloured stone having hardly any market value. It is

further submitted that while the actual market value of the total stone

seized was Rs. 1561.87 Crores at the time of seizure, the valuation

report valued the stock only to Rs. 199.51 Crores. The Respondent

further contended that the stock has been tampered and

Company Appeal (Insolvency) No. 494 of 2019 Page 6 of 20 misappropriated. The Respondent has further stated that it has filed a

Complaint before Economic Offences Wing, Mumbai (in short 'EOW')

against ICICI Bank and the Appellant (Bank of India) for fraud cheating

the Respondent and the investigation is in progress. Learned Counsel

further submitted that when the investigation is in progress by some

other authority, the Adjudicating Authority, before whom an

Application seeking initiation of CIRP filed and having admitted the

Application, would not have passed adverse remarks against the

Appellant-Bank and the same is out of context and unwarranted.

Further the learned Counsel submitted that there was no occasion or

requirement for the Adjudicating Authority to examine or appreciate

the evidence in this regard especially when the Corporate Debtor has

already made a Complaint with the Economic Offences Wing. The said

adverse remarks may affect and prejudice the investigation which are

being carried out by the Economic Offences Wing as well as harm and

spoil the reputation enjoyed by the Appellant. Further, learned Counsel

submitted that the Adjudicating Authority failed to appreciate that the

written words in official orders form permanent record which can affect

severely jeopardise the reputation and goodwill of the Appellant Bank.

Further the Adjudicating Authority erred in directing the Interim

Resolution Professional to communicate the Impugned Order to all the

concerned authorities namely, Enforcement Directorate, EOW, Income

Tax Department and SFIO to take due cognizance of this Insolvency

Order for further action. Learned Counsel relied upon the judgment of

the Hon'ble Supreme Court in the matter of "State of Uttar Pradesh

Company Appeal (Insolvency) No. 494 of 2019 Page 7 of 20 Vs. Mohammad Naim" reported in AIR 1964 SC 703. The Hon'ble

Supreme Court at paragraph 11 held:

"It has been judicially recognised that in the matter of making

disparaging remarks against persons or authorities whose

conduct comes into consideration before courts of law in

cases to be decided by them, it is relevant to consider

(a) Whether the party in question had the

opportunity of explaining or defending itself,

(b) whether there is any evidence on record

bearing on that conduct justifying the remarks

and

(c) whether the remarks were necessary for the

decision of the case, as an integral part of it.

5. Hon'ble Supreme Court in the matter of 'Om Prakash Chautala

Vs. Kanwar Bhan and Ors." in Civil Appeal No. 1785 of 2014 on

31.01.2014 at paragraphs 13 & 14 held as under:

..

"13. At this juncture, it may be clearly stated that

singularly on the basis of the aforesaid principle the

disparaging remarks and directions, which are going

to be referred to hereinafter, deserve to be annulled

but we also think it seemly to advert to the facet

whether the remarks were really necessary to

render the decision by the learned single Judge and

Company Appeal (Insolvency) No. 494 of 2019 Page 8 of 20 the finding recorded by the Division Bench that the

observations are based on the material on record

and they do not cause any prejudice, are legally

sustainable. As far as finding of the Division Bench

is concerned that they are based on materials

brought on record is absolutely unjustified in view of

the following principles laid down in Mohammad

Naim (supra):

It has been judicially recognized that in the

matter of making disparaging remarks

against persons or authorities whose

conduct comes into consideration before

courts of law in cases to be decided by

them, it is relevant to consider (a) whether

the party whose conduct is in question is

before the court or has an opportunity of

explaining or defending himself; (b) whether

there is evidence on record bearing on that

conduct justifying the remarks; and (c)

whether it is necessary for the decision of

the case, as an integral part thereof, to

animadvert on that conduct.

14. On a perusal of the order we find that two

aspects are clear, namely, (i) that the Appellant was

Company Appeal (Insolvency) No. 494 of 2019 Page 9 of 20 not before the court, and (ii) by no stretch of logic the

observations and the directions were required to

decide the lis. We are disposed to think so as we find

that the learned single Judge has opined that the

order of suspension was unjustified and that is why

it was revoked. He has also ruled that there has

been arbitrary exercise of power which was

amenable to judicial review and, more so, when the

charges were dropped against the employee.

Commenting on the second charge-sheet dated

15.3.2004 the learned single Judge, referring to the

decisions in State of Andhra Pradesh v. N.

Radhakishan MANU/SC/0278/1998 : (1998) 4 SCC

154, State of Punjab and Ors. v. Chaman Lal Goyal

MANU/SC/0628/1995: (1995) 2 SCC 570, The

State of Madhya Pradesh v. Bani Singh and Anr.

MANU/SC/0251/1990: JT 1990 (2) SC 54 and P.V.

Mahadevan v. M.D.T.N. Housing Board

MANU/SC/0483/2005: (2005) 6 SCC 636, thought

it appropriate to quash the same on the ground of

delay. The conclusion could have been arrived at

without making series of comments on the Appellant,

who, at the relevant time, was the Chief Minister of

the State."

Company Appeal (Insolvency) No. 494 of 2019 Page 10 of 20

6. The learned Counsel relied upon a judgment of the Hon'ble High

Court of Chhattisgarh at Bilaspur in the matter of "Lambodar Patel Vs.

State of Chhattisgarh and Ors.' 2016 CrLJ 2814 wherein the Hon'ble

High Court held as under:

..

"though judge has unrestricted right to express his

views in any matter before him but there is

corresponding duty in a judge not to make unmerited

and underserving remarks specially in case of

witnesses or the parties who are not before him

affecting their character and reputation unless it is

absolutely necessary for just and proper decision of

the case and that too after affording an opportunity

of explaining or defending that witness or the party

as the case may be, judicial decisions must be

judicial in nature and it must show judicial respect

to the litigant/party, witnesses who come before the

court for their cause. It is also well settled that this

Court in exercise of inherent or extraordinary

jurisdiction can expunge those remarks made by

subordinate court following the three tests laid down

in Mohammad Naim (supra), if it is really necessary

to do so or prevent abuse of the process of the court

or to secure the ends of the justice in exceptional

Company Appeal (Insolvency) No. 494 of 2019 Page 11 of 20 cases, where those remarks would cause

irreparable injury to the witness or party not before

the court holding that retention of those undeserving

remarks will cause harm to the person referred and

the expunction will not affect the judgment rendered

by the court"

..

7. In view of the reasons as stated and relying upon the judgment

of Hon'ble Supreme Court and Hon'ble Chhattisgarh High Court, the

Appellant prays this Bench to expunge the remarks.

8. Learned Counsel for the Respondent submits that the learned

Adjudicating Authority at paragraph-32 of the Judgment clearly

stated:

"32. Therefore, I am constrained to make an

adverse observation, needless to mention,

subject to correction on the final outcome of the

investigation, that the shine/gleam of

diamonds have blinded the eyes of the bank

authorities that they did not even check the

veracity of the securities pledged". ...

9. Learned Counsel submitted that the said observations will be

subject to the outcome of the final investigation and the Respondent-

Corporate Debtor had complained to the Economic Offences Wing with

Company Appeal (Insolvency) No. 494 of 2019 Page 12 of 20 respect to the valuation of the diamond against ICICI Bank and the

Appellant-Bank. Learned Counsel submitted that they have filed Reply

before the Adjudicating Authority and they have a clear stand against

admission of the Application under Section 7 of IBC and also on the

merits of the case that the valuation of the stock took over six months

i.e., from April, 2016 to February, 2017. ICICI Bank and the Appellant-

Bank caused further process of valuation to be unreasonable,

prolonged and protracted so as to hide/facilitate the misappropriation

or tampering or loss or replacement with other goods of the stock

which was in the custody and physical possession of the Joint

Receivers.

10. The Respondent in their Reply filed before the Adjudicating

Authority stated that on receipt of the valuation report on 02.04.2017,

the Company detected glaring discrepancies/mistake in the value,

quantity and quality of the stock. While the actual market value of the

total stock seized was Rs. 1561.87 cores, at the time of seizure, the

Valuation Report appeared to have valued the stock worth only Rs.

199.51 Crores. The Respondent contended that a comparison of the

Valuation Report and the Panchnama/statement reveals huge

discrepancy/loss in the stock taken from the Company's premises in

terms of quantity, quality and value.

11. The learned Counsel for Respondent relied upon the Judgement

of Hon'ble Supreme Court in the matter of "ICICI Bank Vs. Shanti

Company Appeal (Insolvency) No. 494 of 2019 Page 13 of 20 Devi Sharma and Others" reported in (2008) 7 SCC 532 at paragraph

9 held as under:

...

"9. Given that the investigation had not been

completed, the High Court could have prefaced its

observations by stating that the facts were alleged.

It did, however, note that '... perusal of the

Complaint would reveal that the proximate cause of

death ... was on account of humiliation caused by

the Bank people..." Reference to the "complaint"

implies that its contents contain allegations, not

facts. Moreover, the investigation was ongoing.

Thus, it should have been understood that the High

Court was referring to the alleged facts. That said,

the Court could have been more careful to note that

the facts that it discussed were alleged. Recognising

as such, the Court clarified that its observations

were not to influence or affect the proceedings."

...

12. Heard learned Counsel appearing for the respective parties.

Perused the pleading and documents filed in their support. Prima

facie, we are not dealing with the admission of the Application under

Section 7 IBC in this case. We are, however, confined to whether the

observations made at paragraphs 31, 32 & 33 of the impugned order

Company Appeal (Insolvency) No. 494 of 2019 Page 14 of 20 is germane in the context of admission of Application. The Application

was filed under Section 7 of IBC by the Appellant.

13. A Financial Creditor, who intends to initiate CIRP, should file an

Application before the Adjudicating Authority in Form-I under Section

7 read with Rule-IV of IBC (Application to Adjudicating Authority

Rules, 2016). Form-1 contains V parts for adjudication the Application

under Section 7 IBC. It is to be seen whether the Applicant is a

Financial Creditor and the Debt duly payable in law by the Corporate

Debtor.

When this Appeal came up for Admission as (Fresh Case), the

Bench passed the following order on 06.05.2019. Paragraph-2 of the

Order reproduced hereunder:

...

"2. In the present case, we have to decide as to

whether the Adjudicating Authority is empowered to

make any observations as it goes through the Form-

1, wherein a person is not supposed to write

anything relating to fraud and fraudulent action

taken by one or other party. It is also not clear

whether the 'Corporate Debtor' will appear and state

that they have acted in fraud for getting the loan

sanctioned. In such situation, whether the

Adjudicating Authority has jurisdiction to make any

observation, though it gives notice where it has

Company Appeal (Insolvency) No. 494 of 2019 Page 15 of 20 referred the matter before the Reserve Bank of India

or the Central Government, which is a regulating

body and may have taken a decision."

...

14. In view of the above, we need to decide whether the observation

made by learned Adjudicating Authority will have any impact on the

Appellant-Bank and on investigation which stated to be in progress.

15. Application under Section 7 of IBC, the Financial Creditor to

initiate CIRP against the Corporate Debtor before the Adjudicating

Authority when a default has occurred. The 'Creditor' has been defined

in Section 3(10) of IBC means any person to whom a debt is owed and

includes a Financial Creditor, an Operational Creditor, a Secured

Creditor, an unsecured Creditor and a Decree holder. 'Debt' has been

defined in Section 3(11) means a liability or an obligation in respect of

a claim which is due from any person and includes a Financial Debt

and Operational Debt. The 'Default' has been defined in Section 3(12)

of IBC means non-payment of debt when whole or any part or

instalment of the amount of debt has become due and payable and is

not paid by the Debtor or the Corporate Debtor as the case may be.

16. In view of default made by the Respondent-Corporate Debtor,

the Appellant filed the Application before the Adjudicating Authority

and the Adjudicating Authority admitted the Application and observed

that the debt and default is concerned, the Corporate Debtor does not

Company Appeal (Insolvency) No. 494 of 2019 Page 16 of 20 deny the same. Further it is observed that the financial facilities have

been duly granted and the amounts have been disbursed.

17. It appears that the learned Adjudicating Authority made certain

observations at paragraphs 31,32 & 33 in the impugned order on the

basis of the Reply filed by the Corporate Debtor therein. It is not out of

place to mention that the Appellant-Bank granted cash credit

facility/loan for running business of the Corporate Debtor against the

pledge/hypothecation of the stock. The observation of the Adjudicating

Authority is that the shine/gleam of diamonds have blinded the eyes

of the bank authorities that they did not even check the veracity of the

securities pledged. Further, it was observed that when the value stock

was seized by the authorities, there was no proper record of inventories

and without obtaining the clearance of the management of the Debtor

Company, and all such allegations are needed to be investigated in

depth.

18. It is apparent from the record that the Respondent-Corporate

Debtor filed Counter Claims bearing Counter Claim (L) No. 793/2017

and counter Claim (L) No. 156/2018 against Appellant Bank and

Members of BOI consortium. The Respondent also filed complaint

against Appellant before EOW, Mumbai with respect to inter-alia the

theft and criminal misappropriation of the Company's stock of Rs.

1561.87 Crores. Basing on above, the Respondent made allegations

against Appellant Bank even before the Adjudicating Authority. It is

also stated that the investigation is in progress. It is one of the

Company Appeal (Insolvency) No. 494 of 2019 Page 17 of 20 submissions of the learned Counsel for the Appellant that Debt

Recovery Tribunal on an application made by the ICICI Bank

appointed a Receiver to take stock of the Corporate Debtor and in

compliance thereof, the Receiver taken possession of the seized stock

of the Corporate Debtor. It is submitted that the Appellant-Bank and

Consortium have acted in pursuance of the directions of the Debt

Recovery Tribunal. However, the proceedings before the Adjudicating

Authority are completely different. With respect to the Complaint

made by the Corporate Debtor before the EOW and the investigation

into the alleged fraud and misappropriation is concern, it is

independent to the proceedings before the Adjudicating Authority. The

investigation by EOW and the proceedings initiated by the Appellant

before Adjudicating Authority are completely different and the learned

Adjudicating Authority cannot take a view on the basis of the

investigation by the other agencies.

19. We are of the view that the learned Adjudicating Authority while

recording the observations at paragraph-32 has stated that the

adverse observation is subject to correction on the final outcome of the

investigation. Therefore, the Adjudicating Authority had categorically

stated that the observations made in paragraphs 31,32 & 33 are

subject to outcome of the investigation. We are of the view that the

Adjudicating Authority expressed its anguish in relation to the alleged

averments made in the Reply. However, the general observations made

as to what is done when such loans are granted were avoidable.

Company Appeal (Insolvency) No. 494 of 2019 Page 18 of 20 Similarly, the observations made with regard to stock seized in

proceeding before Debt Recovery Tribunal at the instance of other

Bank ICICI were also avoidable as it was not matter before

Adjudicating Authority. In any case, the Investigating Agencies are to

act independently and the observations are not have any impact on

the Insolvency Resolution Process which is under progress. The

Hon'ble Supreme Court in the matter of "State of Uttar Pradesh Vs.

Mohd. Naim" (supra) in paragraph - 11 held that ... matter of making

disparaging remarks against persons or authorities whose conduct

comes into consideration before courts of law in cases to be decided by

them, it is relevant to consider

(a) Whether the parties in question had the

opportunity of explaining or defending itself,

(b) whether there is any evidence on record

bearing on that conduct justifying the remarks

and

(c) whether the remarks were necessary for the

decision of the case, as an integral part of it.

...

20. Learned Counsel for the Appellant relied upon the above

decision. However, in the facts of the present case, the Adjudicating

Authority has already observed that the adverse observation will be

subject to final outcome of the investigation. The Hon'ble Supreme

Court in the matter of "ICICI Bank Vs. Shanti Devi Sharma and

Company Appeal (Insolvency) No. 494 of 2019 Page 19 of 20 Others" reported in (2008) 7 SCC 532 (supra) held in paragraph-9 ......

"the Court could have been more careful to note that the facts that it

discussed were alleged. Recognising as such, the Court clarified that its

observations were not to influence or affect the proceedings."

21. We find that the adverse observations made by Adjudicating

Authority, being admittedly subject to correction in investigation, were

avoidable. They will not affect investigation in any manner or be basis

to hold adversely against Appellant Bank or its officials. For the

purpose of finding debt due and default for admitting Application it

was not possible to accept defence of valuation claimed in averments

vis-à-vis valuation done in record of seizure referred. Adjudicating

Authority could not have decided such averments.

22. The Appeal is disposed accordingly. No orders as to costs.

[Justice A.I.S. Cheema] Member (Judicial)

(Kanthi Narahari) Member(Technical)

(V P Singh) Member(Technical) Aks

Company Appeal (Insolvency) No. 494 of 2019 Page 20 of 20