2024 (1) TMI 77 - HC - Indian Laws

Company defrauds banks of Rs 900 crores while failing to pay farmers for sugar cane supplies

The Allahabad HC disposed of a petition involving a company that defrauded banks of approximately Rs. 900 crores while failing to pay farmers for sugar ... Fraud played by borrower in connivance with banks - failure to follow RBI guidelines on loan sanction, due diligence and post-disbursement supervision - mandatory reporting of bank frauds to CBI/SFIO/ED under RBI circular - exercise of writ jurisdiction in public interest to prevent unfair advantage and unjust enrichment - contempt for wilful breach of undertaking given to the CourtFraud played by borrower in connivance with banks - failure to follow RBI guidelines on loan sanction, due diligence and post-disbursement supervision - Findings as to whether the petitioner and the bank officers connived to permit diversion/siphoning of funds and whether banks sanctioned and disbursed loans in breach of mandatory RBI norms and their own procedures. - HELD THAT: - The High Court found on the material before it that the petitioner repeatedly obtained large loans from multiple banks despite earlier defaults and classification as NPA, and that several banks sanctioned and disbursed advances without adequate due diligence, credit appraisal, collateral or post-disbursement supervision. The court recorded that loans were granted despite prior defaults, that securities were inadequate or were allowed to be realised without enforcing escrow conditions, and that many banks failed to pursue timely recovery proceedings. Relying on the RBI circular of 1 July 2009 (including clauses addressing frauds by unscrupulous borrowers, multiple banking arrangements and reporting obligations), the court concluded that the course of conduct evidenced apparent connivance and a systemic failure to follow regulatory norms, amounting to a fraud against public funds and prejudice to farmers and other stakeholders. The court further observed that the affidavits filed by banks did not disclose compliance with mandatory reporting obligations under the RBI circular. [Paras 52, 54, 61, 63, 64]The Court held that the material disclosed a clear case of fraud and connivance, and that banks had failed to comply with RBI guidelines on sanction, supervision and fraud reporting.Mandatory reporting of bank frauds to CBI/SFIO/ED under RBI circular - exercise of writ jurisdiction in public interest to prevent unfair advantage and unjust enrichment - Whether an investigation by an appropriate central agency should be directed into the conduct of the banks and their officers in sanctioning and recovering the loans. - HELD THAT: - Applying principles permitting the High Court to grant equitable relief in matters involving public interest and unfair advantage, and having noted the absence of any recital in bank affidavits about reporting to RBI/CBI as required by the 2009 circular, the court directed that the Central Bureau of Investigation be requested to inquire into the circumstances in which loans were sanctioned, the officers who approved them, and the alleged failure to take effective recovery steps. The court recorded that, if the CBI finds material indicating money-laundering, it may refer the matter to the Enforcement Directorate. The court also clarified that the investigating agency would proceed de novo and that the petitioner must cooperate with the investigation. [Paras 54, 63, 64, 66, 68]The Court directed that the Registrar General communicate the order to the Director, CBI, and requested the CBI to investigate the banks, relevant officers and the loan-disbursement and recovery processes, with power to refer to ED if PMLA offences are made out; the petitioner must cooperate with such investigation.Contempt for wilful breach of undertaking given to the Court - Whether contempt proceedings should be initiated against the directors on whose behalf an undertaking was given and who failed to comply with the court-ordered deposit. - HELD THAT: - The Court recorded that counsel for the petitioner had undertaken to deposit specified amounts by stipulated dates to demonstrate bonafides and procure convening of the Joint Lenders' Forum, but the undertaking was not honoured. Relying on the principle that wilful breach of an assurance to the court may amount to civil contempt, the court found the petitioner's conduct to be contemptuous and prejudicial to the banks. Consequently, the Court issued notice to the named directors and directed them to file responses explaining why contempt proceedings should not be initiated, before any formal impleadment or reference to the competent contempt court. [Paras 10, 13, 14, 59]Notice was issued to the relevant directors to show cause why contempt proceedings should not be initiated; they were directed to file responses within the time fixed by the Court.Exercise of writ jurisdiction in public interest to prevent unfair advantage and unjust enrichment - Final disposal of the writ petition filed by the petitioner seeking quashing of the bank communication and NCLT proceedings, in the light of findings and public interest considerations. - HELD THAT: - The Court observed that while parts of the petition might have become infructuous due to consortium decisions and ongoing NCLT proceedings, the larger public interest and apparent fraud required the Court not merely to dismiss the petition as moot. Having recorded the findings about connivance and regulatory non-compliance and having directed investigation by the CBI, the Court disposed of the writ petition. The Court made incidental directions for investigation, cooperation and communication to investigative agencies, and clarified that its observations would not fetter de novo investigation by the agencies. [Paras 16, 64, 68, 69]The writ petition was disposed of; ancillary directions were issued for investigation, communication to CBI and cooperation by the petitioner.Final Conclusion: The High Court found a prima facie case of fraud and connivance between the petitioner and certain bank officers arising from sanction and disbursement of large loans without compliance with RBI norms, directed the Registrar General to communicate the order to the CBI and requested investigation (with referral to ED if PMLA offences emerge), issued notice to specified directors to explain non-compliance with an undertaking and potential contempt, required the petitioner to cooperate with investigation, and disposed of the writ petition while preserving the investigating agencies' freedom to proceed de novo. Issues Involved:1. Alleged connivance between the petitioner and bank officials in syphoning public money.2. Failure of banks to follow mandatory procedures before disbursing loans.3. Petitioner's repeated defaults and banks' lack of recovery efforts.4. Petitioner's request to quash SBI's communication rejecting settlement and to convene Joint Lenders' Forum.5. Petitioner's non-compliance with court's interim orders and alleged contemptuous conduct.6. Banks' non-compliance with RBI guidelines and lack of reporting to CBI.Summary:Issue 1: Alleged connivance between the petitioner and bank officials in syphoning public moneyThe court found a 'shocking case of clear connivance of unscrupulous businessman and banks,' where bank officials knowingly allowed the petitioner to syphon away approximately Rs. 1300 crores of public money. Despite the petitioner being declared NPA by other banks, new loans were granted without following mandatory procedures.Issue 2: Failure of banks to follow mandatory procedures before disbursing loansThe banks advanced loans to the petitioner without due diligence, adequate security, or following RBI guidelines. The court noted that loans were disbursed without proper credit approval, risk appraisal, or regulatory compliance. Post-disbursement supervision was also lacking, allowing the petitioner to syphon away the funds.Issue 3: Petitioner's repeated defaults and banks' lack of recovery effortsThe petitioner defaulted on loans repeatedly, moving from one bank to another. Despite being declared NPA, effective recovery steps were not taken by the banks. The court observed that no sincere efforts were made by the banks to recover the amounts, and actions taken were merely eyewash.Issue 4: Petitioner's request to quash SBI's communication rejecting settlement and to convene Joint Lenders' ForumThe petitioner sought to quash SBI's communication dated 26.07.2023, which rejected the settlement offer and indicated legal action. The petitioner also requested a mandamus directing SBI to convene a Joint Lenders' Forum to finalize the settlement proceedings. The court noted that the petitioner's proposal was rejected by the banks, and they were only trying to buy time to avoid insolvency proceedings.Issue 5: Petitioner's non-compliance with court's interim orders and alleged contemptuous conductThe court found the petitioner in contempt for not depositing the agreed Rs. 20 crores, thereby misleading the court and buying time. The court issued notice to the company's directors to respond as to why contempt proceedings should not be initiated against them.Issue 6: Banks' non-compliance with RBI guidelines and lack of reporting to CBIThe court highlighted that banks failed to follow RBI guidelines for loan disbursement and did not report the fraud to the CBI as mandated. The court directed the CBI to investigate the banks' actions and the officers involved in sanctioning and recovering the loans.Conclusion:The court disposed of the writ petition, directing the CBI to investigate the matter and report any instances of money laundering to the Enforcement Directorate. The court emphasized the need for banks to follow RBI guidelines and take effective steps to recover public money.