TaxTMI 
TaxTMI 
2025 (5) TMI 2009
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....al matrix of the present matter has been detailed in the judgment of which review is sought and not repeated herein for the sake of brevity, and may be read as a part and parcel of this order. Shorn of unnecessary details, the case of the petitioner is that he is the Chairman of Hindustan Power Group Private Limited, which operates 1200 MW [Megawatt] power plant and supplies electricity to three States viz., State of Uttar Pradesh, State of Madhya Pradesh and State of Haryana. It is stated that in order to run its business, the company was engaged in negotiations with SBI [State Bank of India] for availing certain loan facilities. To his shock, the petitioner discovered, through an email dated 22.02.2023 from the officers of the SBI, that his name appeared in the Central Fraud Registry [CFR] at the instance of the respondent/Bank of Baroda (hereinafter referred as the respondent-bank) with regard to the account of M/s. Moser Baer Solar Limited [hereinafter referred as "MBSL"]. The petitioner agitates that the actions of the respondent-bank are in complete violation of principles of natural justice, and therefore, void ab initio. 3. The petitioner states that his father founded M....
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....e banks, including the respondent-bank, were placed on notice regarding MBSL's financial condition, capital infusions, and reasons for decline. Pursuant thereto, independent stock audit and TEV studies were conducted, resulting in reports by M/s Feedback Infra (dated 27.09.2012) and M/s Mehrotra and Mehrotra Chartered Accountants (dated 29.08.2012). Based on these, the CDR-EG approved a Final Restructuring Scheme (FRS) on 21.01.2013, subsequent to the petitioner's resignation. The FRS led to execution of the MRA on 28.03.2013 (amended on 27.05.2014) and the TRA on 05.06.2013 (amended on 27.05.2014), after the petitioner's exit from Moser Baer Group. The petitioner emphasizes that during this period, no fund diversion or wilful default was reported by the banks, including the respondent-bank. 7. The petitioner further contends that the CDR efforts began declining from 26.10.2016 owing to the banks' decision to exit the restructuring process. Thereafter, proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016, were initiated by financial creditors and admitted by the NCLT on 14.11.2017, culminating in liquidation proceedings vide order dated 30.05.2019, appointing ....
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....assified as 'fraud' entities on 20.06.2019 and reported to the RBI on 08.07.2019. It is further submitted that a complaint was filed by the consortium of banks, including the respondent-bank, against the companies and their directors alleging fraud and cheating, culminating in registration of FIR No. RC2232020A0002 dated 25.06.2020. 12. The petitioner, by way of rejoinder dated 15.07.2024, submitted that he had instituted W.P.(C) 4128/2023 [Ratul Puri v. Bank of Baroda] challenging the order dated 23.03.2023 passed by the Review Committee of the respondent-bank affirming his classification as a 'wilful defaulter' under the RBI Master Circular of 2015. It is pointed out that the said writ petition was allowed vide judgment dated 01.03.2024, quashing the classification for being in derogation of the RBI Master Circular and contrary to the judgment in State Bank of India v. Rajesh Aggarwal (2023) 6 SCC 1. Similarly, the petitioner succeeded in W.P.(C) 9491/2023 against Punjab National Bank, wherein similar action was set aside vide judgment dated 29.02.2024. FINDINGS OF THIS COURT ON MERITS 13. This Court, vide judgment dated 25.10.2024, had allowed the present writ petition,....
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.... deposit of Rs. 135.50 Crores to Moser Baer India Limited (MBL), a group concern for a lease rental agreement as per the Forensic Audit Report submitted at ours. These security deposits were on the much higher side as compared to the yearly lease rental paid for land building and utilities deposits and such security deposits ranged upto 58.82 times higher than an agreed annual rental. d. The Lease rental income amounting to Rs. 142.69 Crores was booked by MBSL which lease rental relating to the utilities which were taken on finance lease from MB in 2010 and leased back as on operating lease to MBIL. The MBSL did not use the utilities taken on a finance lease from MBIL. It was immediately leased back as an operating lease to MBIL. e. On review of the agreement provided to the auditors, it was observed that 2 out of 9 agreements had expired before the review period. However, the expenses were booked against the expired agreement, which has impacted an amount of Rs. 3.16 crores. f. That total supplied advance and loan were given by MBSL as of 31.03.2012 to the tune of Rs. 25.60 Crores and as on 31.03.2015 to the tune of Rs. 26.97 Crores. No adequate recovery....
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.... this Court, in paragraph (17) of the Judgment dated 25.10.2024, referred to the findings of Coordinate Benches of this Court in two writ petitions, viz., W.P.(C) no. 4128 of 2023 & W.P.(C) No 9491 of 2023. While this Court, in the judgment under review, concurred with the said decisions to the extent that no grounds ever existed for declaring, classifying, or categorizing the petitioner as a 'wilful defaulter' on account of the non-payment of institutional loans on the part of the MBSL to the respondent-bank, however, it is contended that no separate detailed findings were rendered with respect to the declaration of the account of the petitioner as "fraud". 21. In this regard, learned counsel for the applicant/petitioner relied on decision in Radha Raman Samanta v. Bank of India (2004) 1 SCC 605, wherein it was held that it is not improper for the High Court to examine undisputed documents and draw an inference as to the status of the parties concerned. The argument appears to be that, inasmuch as a finding has already been rendered by the Coordinate Benches that the grounds relied upon by the respondent Bank for declaring of the petitioner's account as a 'wilful defaulter' wer....
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....ped from alleging that such investments constitute an act of wilful default. (iv) That it was found that the investment in HPVL was a strategic business decision, being integral to MBSL's operations in the manufacture and supply of photovoltaic cells, a critical component in its solar cell assembly line, which were duly disclosed in the audited financial statements and balance sheets of MBSL, to which the lender banks, including the respondent Bank, had continuous access pursuant to the terms of loan sanctions from September 2007 onwards and all relevant information had been shared from time substantiated by via email dated 06.10.2008, whereby the respondent Bank had addressed a letter to MBSL noting that the balance sheet of MBSL reflected investments made in HPVL and the relevant details were duly furnished by MBSL through its email dated 07.10.2008; (v) That prior to MBSL's admission into the CDR mechanism, MBSL had submitted its Flash Report in the year 2012 to the consortium of lender banks, which inter alia disclosed the said investments in HPVL so much so that during the deliberations leading to the consideration of the CDR package, a Joint Lenders' Meeting....
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.... dated 25.10.2024, the petitioner along with other Directors besides the company MBSL have since been discharged of all the offences on the same grounds by the learned CJM, Rouse Avenue Courts, New Delhi vide order dated 17.01.2025 in case titled as CBI V. M/s. Moser Baer Solar Ltd. CBI/31/2022. 24. At the outset, there is considerable weight in the submissions advanced by the learned counsel for the applicant/petitioner. To put it succinctly, the Coordinate Benches of this Court, in their decisions in W.P.(C) No. 4128 of 2023 and W.P.(C) No. 9491 of 2023, have dealt with allegations substantially similar to those raised by the respondent bank in the counter affidavit filed in the present matter. It is a matter of record that, upon conducting a detailed analysis of the undisputed documents, the Coordinate Benches found none of the grounds to be sustainable. In fact, in the second writ petition, W.P.(C) No. 9491 of 2023, the respondent-Punjab National Bank also sought to justify the declaration of the petitioner as a 'wilful defaulter' on similar grounds, which were again held to be unsustainable. Consequently, in both cases, this Court quashed the declarations of the petitioner ....
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....nvestments amount to "diversion" and "siphoning" of funds as per Clauses 2.1.3(b) and (c) of the Master Circular. As discussed above, the definition of "diversion of funds" and "siphoning of funds" in Clause 2.2.1 and Clause 2.2.2 of the Master Circular makes it explicitly clear that the event of "diversion of funds" or "siphoning of funds" can take place only when the "borrowed funds" are deployed or used for a purpose other than for which the loan was sanctioned. In other words, the Master Circular is not triggered unless the allegation of "diversion" or "siphoning" pertains to borrowed funds from the bank. A bank has no jurisdiction to invoke the Master Circular unless the allegations pertain to funds borrowed from the bank. The said provision also places an obligation on the bank to make the judgment about "diversion of funds" or "siphoning of funds" based on objective facts and circumstances of the case. 120. The question regarding the source of the funds which were invested by MBIL in its subsidiaries is answered by the lender banks including the respondent-Bank in their admittedly "own document" i.e., the FRS. 121. The FRS, is a document prepared by the len....
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....rofit. No one expected the unprecedented disruptions. These investments were made by MBIL from its substantial cash surpluses generated in earlier years of FY 2006 and FY 2008. It is, therefore, the lender banks' own stand that the investments in the subsidiaries were made from the internal accruals/cash surpluses of MBIL. In other words, the investments were not made from the borrowed funds. 123. In this view of the matter, there cannot be any applicability of the Master Circular. As discussed above, the jurisdiction under the Master Circular can be invoked only in respect of borrowed funds. The lender banks' own internal document of FRS admits the knowledge of investments from the inception, as also the source of such investments being the cash surpluses of MBIL from previous years. The issuance of show cause notice in respect of allegation no. 1, which does not pertain to borrowed funds, in itself is without jurisdiction. x x x x x x x 148. As discussed above, Clauses 2.1.3(b) and (c) read with Clauses 2.2.1 and 2.2.2 of the Master Circular, "diversion" and siphoning" can be triggered by a bank only in respect of the borrowed funds. The respondent-Bank....
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.... relate to cases of diversion of funds and the said categorisation has to be done by the lenders on their own. 153. The classification has a direct bearing on eligibility as also the conditions to be imposed upon the borrower. The lower the category, the more stringent the conditions to be imposed upon a borrower in accordance with paragraphs C and D of Annexure IV. Significantly, "Before CDR Reference/Approval", Clause 3.3 of CDR Scheme expressly empowers banks to commission a Forensic Audit "wherever necessary and specially in cases of diversion of funds." 154. The aforesaid provisions in the CDR scheme lead to the conclusion that the categorization of a borrower in one of the categories between A and D has to be based on an objective satisfaction. 155. This Court is of the view that it is incumbent upon banks who are dealing with public funds and discharging a public duty to make appropriate enquiries as to whether a borrower is in genuine financial difficulty or whether there exists any event(s) of fraud and malfeasance. If the lender banks find fraud or malfeasance, the CDR-EG must either refuse CDR completely or impose such additional onerous condit....
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....ets worth Rs. 1,159.06 crores as on 31.03.2012. 30. In response to Ground 7(c), the learned counsel for the applicant/petitioner submitted that the allegation pertains to a leasing transaction between MBIL and its 100% subsidiary, MBSL. Taking this Court through the documents on record, including the rejoinder and supplementary affidavit, it has been pointed out that during the financial years 2008-09 and 2009-10, MBSL had established two manufacturing plants, one for thin film solar modules and another for crystalline silicon solar modules. It has been clearly demonstrated that MBSL availed loans from the respondent Bank and other financial institutions after duly informing them of the projected costs associated with these two projects. MBIL had constructed the buildings and utilities for these projects, and subsequently leased them to MBSL. In this regard, MBSL paid a sum of Rs. 133.50 crores to MBIL as security towards leases, including land, buildings, utilities, etc., which stands substantiated by the balance sheets of MBSL for the financial years 2008-09 and 2009-10. 31. It would not be out of place to mention here that the respondent bank's own Identification Committee....
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..... Lastly, the allegation under Ground 7(f) in the counter affidavit, that supplier advances and loans were extended by MBSL to VSEL to the tune of Rs. 25.60 crores as of 31.03.2012, and a further Rs. 26.97 crores as of 31.03.2015, with no adequate recovery steps taken prior to making provisions amounting to Rs. 26.24 crores, is also found to be unsustainable. Firstly, no SCN was issued to the applicant/petitioner in respect of this allegation. Secondly, the case of the applicant/petitioner stands substantiated to the effect that VSEL was engaged in the business of solar products, including wafers used as raw material in the production of modules. As per the available records, MBSL was, in fact, liable to pay Rs. 7.2 crores to VSEL. The averment made by the applicant/petitioner that no amount was recoverable from VSEL and that no financial loss was caused to MBSL appears to be plausible and is not controverted by the respondent Bank. 35. Before finally drawing curtains on the present review petition, it is necessary to note that the learned counsel for the applicant/petitioner took this Court through the company's balance sheets for the financial years 2006-07 to 2011-12. These d....
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.... insufficient or unsustainable on merits for declaring the petitioner's account as 'wilful defaulter', the same grounds cannot be re-agitated to lay the foundation for declaring the petitioner's account as 'fraud' in terms of Circulars 8.9.4^2and 8.95^3 in the absence of additional independent material. No such additional independent material has been evidently pleaded and produced in the instant matter. The declaration of the account of a person or entity as "fraud" requires a greater degree of criminality. The bottom line is that once the very substratum of the imputations is held to be unsustainable for lesser civil consequences such as being labelled a 'wilful defaulter' under the RBI Master Guidelines, the same grounds or imputations cannot form the foundation for declaring a person's or entity's account as 'fraud', which requires a greater degree of proof to be established. 39. In view of the aforesaid discussion, the present application is allowed and the earlier judgment dated 25.10.2024 passed by this Court in W.P.(C) 2765/2023 is hereby reviewed, and thus, apart from correcting the typographical mistakes as indicated in p....