2019 (7) TMI 1942 - Tri - Indian Laws

Tribunal rules in favor of applicant, finds Nirav Modi liable for fraudulent scheme, orders payment of INR 7029 crore debt.

Punjab National Bank Versus Stellar Diamonds and Ors.

The tribunal ruled in favor of the applicant, finding Nirav Modi and associated entities liable for a significant fraudulent scheme involving unauthorized ... Recovery of dues alongwith the interest - credit facilities availed by unlawful means, conspiracy and deceit - allegation is that modus operandi of Nirav Modi a luxury diamond jewellery designer and others (the Economic Offenders/the fraudsters) made fraudulent and unauthorized transactions with the applicant which is one of the largest Public Sector Banks in India in collusion and connivance with the applicant's employees - misuse of NOSTRO account of the applicant bank - Order VI Rule 4 of the Code of Civil Procedure, 1908. HELD THAT:- The applicant has made the averments demonstrating and indicating financial irregularities, dishonest and fraudulent transaction that have taken place in the affairs of the applicant Bank. The number of diamond import Firms are associated with Nirav Modi who have orchestrated a massive financial fraud. The fraud perpetrated by Nirav Modi is of a very huge magnitude which cannot be ignored or overlooked. The judicial pronouncement in the case of NIMMAGADDA PRASAD VERSUS CENTRAL BUREAU OF INVESTIGATION [2013 (5) TMI 920 - SUPREME COURT] is remembered where the Hon'ble Supreme Court observed that the economic offence having deep-rooted conspiracies and involving huge loss of public funds needs to be viewed seriously and considered as a grave offence affecting the economy of the country a whole and thereby posing serious threats to the financial health of the country. Fraudulent debt is a debt or not - HELD THAT:- Undoubtedly, the debt would include fraudulent debt obtained by the debtor in collusion and connivance with the bank employees. The issuance of LOUs is clearly the business activity of the applicant bank. The essence of the definition of debt under section 2(g) is the existence of the liability which is claimed to be due by the applicant which is legally recoverable - The amount claimed by the applicant though fraudulent in nature is a debt within the provisions of the 1993 Act. The liability arisen out of the unauthorized LOUs issued during the course of business activity of the applicant bank constitutes 'debt'. This Tribunal therefore, has the jurisdiction to entertain and try the present application. Nirav Modi and Nirav Modi Firms, partners, Nirav Modi Companies, trust, beneficiaries have taken financial benefits for the purpose of business and by utilizing the bank money for the business. The benefits so taken in a fraudulent manner, still such a person can be said to be a debtor of the bank. Defendant nos. 1 to 16 though have not signed and executed the loan and security documents have enjoyed the benefit of the amount under the LOUs are nevertheless, debtor as per the judicial pronouncement. Defendant nos. 1 to 16 cannot escape the liability to repay the debt in any manner whatsoever. Defendant nos. 1 to 16 were the ultimate beneficiaries in getting the financial assistance though in fraudulent manner, cannot escape the repayment of the liability to the applicant - the law laid down by the Hon'ble Calcutta High Court in the case of State Bank of India [2002 (7) TMI 820 - CALCUTTA HIGH COURT], is relied upon, that debt includes fraudulent debt and whether the debt is fraudulent or not can very well be ascertained before this Tribunal. The LOUs were issued during the course of business activity undertaken by the applicant. The LOUs may have been issued fraudulently but the applicant's business activity of issuing LOUs is permissible by virtue of the law in force. There is no dispute that the LOUs were issued by the delinquent employees from their Mid Corporate Branch, Brady House, Fort, Mumbai. There is also no dispute that the LOUs were issued by the delinquent employees in collusion and connivance with Nirav Modi and Nirav Modi Group from time to time as set out in the original application. There is also no dispute that Nirav Modi and Nirav Modi Group are the recipient of the LOUs. The transactions though fraudulent in nature is covered by the definition of 'debt' as provided under section 2(g) of the 1993 Act. The amount under the unauthorized LOUs is due and payable by defendant nos. 1 to 16. Thus, the jural relationship between the debtor and creditor is established by the applicant bank. In the present law suit Nirav Modi and Nirav Modi Group have admitted the issuance of LOUs in the communication made by them. Understood thus, the LOUs were issued by the delinquent employees during the course of business activities undertaken by the applicant bank - the applicant is well within its right to file the application for the legally recoverable debt. This Tribunal has the exclusive jurisdiction under Section 17 of the 1993 Act to entertain and try the present application. Admission of Liability - HELD THAT:- The communication addressed by Nirav Modi and the balance sheets amounts to unequivocal admission of the documents as well as the quantum of the liability more particularly stated in the balance sheet of defendant nos. 1 to 3 - The averments made in the pleading clearly demonstrate that the admission of liability made by defendant nos. 1 to 3 in their respective balance sheet and the written communications made by Nirav Modi. All the documents read together constitutes unequivocal admission. In view of the admission of liability also, the applicant is entitled for the issuance of recovery certificate. Acquisition of properties - HELD THAT:- The applicant has pleaded that it is very likely that defendant nos. 1 to 16 may have purchased and acquired the movable and/or immovable properties worldwide from the proceeds of the fraudulent debt. These properties may have been acquired in the name(s) of other person(s) or Firms or Companies or its Subsidiaries or Entities affiliated, owned and controlled by Nirav Modi. The statements and averments also find place in the Complaint filed by the Enforcement Directorate before the City Civil & Sessions Court - the applicant is therefore, fully justified in seeking orders and reliefs in this regard also. Accordingly, the order for attachment of the properties and to recover the claim made by the applicant, are granted. Claim of Interest - HELD THAT:- The applicant has claimed relief for interest at the rate of 14.30% per annum with monthly rest. The prayer is contrary to the pleading as regards monthly rest - interest is granted at the rate of 14.30% per annum from 30th June, 2018 till payment/realization. Upon careful scrutiny and the examination of the Original Application, analyzing the evidence and giving due weightage to the documentary evidence adduced by the applicant, it is concluded there is no reason to disbelieve the claim made by the applicant bank. Application allowed. Issues Involved:1. Fraudulent and unauthorized transactions.2. Issuance of Letters of Undertaking (LOUs) without sanction.3. Misuse of NOSTRO account.4. Failure to detect fraud due to non-entry in Core Banking System.5. Admission of liability by Nirav Modi.6. Legal actions initiated by various agencies.7. Recovery of fraudulent debt.8. Jurisdiction of Debts Recovery Tribunal.9. Admission of liability and fraudulent debt as legally recoverable debt.10. Interest on the fraudulent debt.11. Disclosure of properties and assets.12. Publication of order and names of defaulters.Detailed Analysis:1. Fraudulent and Unauthorized Transactions:The judgment details a significant fraudulent scheme orchestrated by Nirav Modi and associated entities in collusion with certain employees of a major public sector bank. The fraud involved unauthorized transactions and the misuse of banking facilities, specifically the issuance of Letters of Undertaking (LOUs) without proper sanction or approval.2. Issuance of Letters of Undertaking (LOUs) without Sanction:Nirav Modi, with the help of delinquent employees, obtained 150 LOUs without any sanction or requisite authority. These LOUs were issued in violation of the SWIFT System and Core Banking System guidelines. The fraudulent LOUs facilitated the import of diamonds and other valuable items, but the funds were misappropriated.3. Misuse of NOSTRO Account:The NOSTRO account of the applicant bank was misused to settle the buyer’s credit by making payments for previously issued unauthorized LOUs. This systematic misuse was part of the broader fraudulent scheme.4. Failure to Detect Fraud Due to Non-entry in Core Banking System:No entries were made in the Trade Finance Module of the Core Banking System, allowing the fraud to go undetected. The fraudulent transactions were circulated between Nirav Modi Firms and Companies, avoiding detection by the bank’s internal systems.5. Admission of Liability by Nirav Modi:Nirav Modi admitted in various communications that the LOUs were obtained and suggested the sale of assets to recover the debt. Despite these admissions, there was no intention to repay the debt, leading to the issuance of a demand notice by the applicant.6. Legal Actions Initiated by Various Agencies:Complaints were lodged with the Central Bureau of Investigation (CBI) and the Enforcement Directorate (ED), leading to investigations and legal actions against Nirav Modi and associated entities. The Ministry of Corporate Affairs also directed investigations into the affairs of the Nirav Modi Group.7. Recovery of Fraudulent Debt:The applicant sought recovery of the fraudulent debt amounting to INR 7029,06,87,951/- (inclusive of interest). The tribunal found that the applicant made a case of fraud perpetrated by Nirav Modi and others, leading to the issuance of a Recovery Certificate.8. Jurisdiction of Debts Recovery Tribunal:The tribunal asserted its jurisdiction to entertain and try the application, stating that the fraudulent debt constitutes a 'debt' under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. The tribunal referenced various legal precedents to support its jurisdiction over fraudulent debts.9. Admission of Liability and Fraudulent Debt as Legally Recoverable Debt:The tribunal emphasized that admitted facts need not be proved under Section 58 of the Indian Evidence Act, 1872. It was established that the fraudulent debt is legally recoverable from the defendants, who were the ultimate beneficiaries of the unauthorized LOUs.10. Interest on the Fraudulent Debt:The tribunal granted interest at the rate of 14.30% per annum from 30th June, 2018, till payment/realization. This was based on the applicant’s claim that similar interest rates are charged in clean overdraft facilities in the normal course.11. Disclosure of Properties and Assets:The tribunal ordered the defendants to disclose on oath the properties and assets, both movable and immovable, belonging to them and their affiliates, situated worldwide within one month from the date of the judgment.12. Publication of Order and Names of Defaulters:The applicant was granted permission to publish the names of the defendants as per Rule 15A of the Debts Recovery Tribunal (Procedure) Rules, 1993. This measure aims to create a deterrent effect and ensure transparency.Conclusion:The tribunal allowed the Original Application with costs, ordering the defendants to pay the aggregate sum of INR 7029,06,87,950.65 with interest @ 14.30% per annum from 30th June, 2018, till payment/realization. The tribunal also issued a Recovery Certificate and directed the defendants to disclose their assets. The applicant was granted liberty to publish the names of the defaulters and to apply for the appointment of a Receiver to implement the judgment in execution.