TaxTMI 
2026 (11) TMI 451
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....r arises from the loan given by the Syndicate Bank to the company in the year 2017 through the Lease Rental Discounting facility (LRD) on the company's property in a technology park at Thiruvananthapuram. The second Respondent is the Resolution Professional appointed in the Corporate Insolvency Resolution process. 3. The Petitioner has challenged the proceedings initiated vide the show-cause notice dated 23.06.2025 culminating into Declaration dated 01.04.2026 whereby the company's account and the transactions were classified as 'fraud' by the Respondent No. 1 bank. 4. Heard Mr. Gaurav Joshi, learned senior counsel for the Petitioner, Mr. Prakash Shinde, learned counsel for the Respondent No. 1-Canara Bank and Ms. Uma Chatterjee, learned counsel (through video conferencing) for the Respondent No. 2. BACKGROUND AS MENTIONED IN THE PETITION 5. The Company's account was declared as 'fraud' under the Reserve Bank of India Master Directions on Fraud Risk Management in Commercial Banks and All India Financial Institutions dated 15.07.2024 (RBI Master Directions). 6. In the year 2017, the company was in need of financial assistance and hence, approached the Syndicate Bank f....
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....collections, thereby adversely impacting the company's cash flows and its ability to service the loan in a timely manner. 9. On 01.04.2020, the Syndicate Bank merged with the Canara Bank i.e. the Respondent No. 1 herein. By virtue of the said amalgamation, all assets, liabilities, rights, claims, obligations and undertakings of Syndicate Bank stood transferred to and vested with the Canara Bank. The company made bona fide and diligent efforts to repay the loan obligations, but there was no meaningful relief or resolution extended by the Respondent Bank. At one point of time, the company tried to bring a purchaser but the deal had to be cancelled. The Respondent No. 1 failed to approve or reject the proposed transaction within reasonable time. 10. After referring to the company's transactions with the Respondent No. 1 and its predecessor in the petition, the Petitioner referred to the transactions with the Reliance Capital Ltd. (RCL). On 16.01.2017 RCL issued sanction letter in favour of the company along with Advantage Overseas Private Limited (AOPL) and Carnival Soft Private Limited (CSPL) as co-borrowers to provide financial assistance by way of term loan facility to the ex....
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....ndicate Bank. REPLY BY THE RESPONDENT NO. 1-BANK 14. The Respondent No. 1 Canara Bank filed a reply to the petition. It is mentioned that, the Petitioner was a Director of the company as on 30.09.2015 and accordingly was in charge of the affairs and decision making on behalf of the borrower company. The company approached the Syndicate Bank on 21.01.2017 without disclosing the RCL loan. The company requested for sanction of term loan (LRD facility) to the tune of Rs.135 crores. The company had concealed from the Syndicate Bank that prior to sanction of the facility, the company had already availed credit facility from RCL amounting to Rs.75 crores. That loan was disbursed by the RCL to the company on 27.01.2017. This fact was not disclosed by the company. 15. On 09.03.2017, the Company Secretary Mr. Kuldeep Jain submitted a due diligence report disclosing the financial position of the company as on 31.12.2016. In that report, the loan availed from the RCL could not have been disclosed as it was sanctioned after 31.12.2016. 16. On 17.03.2017, the Syndicate Bank sanctioned the term loan of Rs. 130 crores to the borrower. It was secured by way of First and Exclusive Assign....
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....ed the RCL loan and these statements were regularly submitted to the Respondent No. 1 bank. 18. In spite of being aware of the RCL loan, the Respondent No. 1 bank neither treated the alleged non-disclosure as an event of default nor recalled the loan, but continued the contractual relationship. There was no allegation of any diversion and misutilization of the money disbursed under the term loan of Rs. 130 crores sanctioned by the Respondent No. 1 bank. 19. The loan sanctioned by the Respondent No. 1 bank and the loan sanctioned by the RCL had different security and repayment arrangements. 20. Mere non-disclosure would not amount to deliberate concealment amounting to fraud. The essential ingredients of 'fraud' included concealment of the facts, intention to deceive or defraud and the consequent injury or loss. Mere non-disclosure in the absence of other ingredients cannot justify the classification as 'fraud'. 21. The RCL loan was backed by a separate security and independent cash flows, had no bearing on the Respondent No. 1's bank's credit risk or security cover. In support of this contention, Shri. Joshi relied on the observations of Madhya Pradesh High Court in the....
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....isting liabilities etc. The concealment of material facts has effect of influencing the bank's decision to sanction credit and it leads to criminal or civil liability, and also results in the account being declared as 'fraud' under RBI Master Directions. 29. The order declaring the account as 'fraud' under RBI Master Directions, is an internal/regulatory administrative order. The administrative proceedings is distinct from the criminal proceedings. Therefore, the principles applicable to the criminal proceedings regarding criminal intent are not applicable to the administrative proceedings. The result of 'fraud' classification is that the person associated with such entities shall be debarred from raising of funds or seeking credit facilities from the financial entities regulated by RBI. 30. The knowledge of RCL loan to the Respondent No. 1 in the year 2021 or on a later date is not relevant. The said information regarding RCL loan was important at the time of taking decision of sanction of the loan, as the bank was required to assess the overall risk profile, credit worthiness of the borrower etc. If the company had informed the Respondent No. 1 regarding RCL liability, the ....
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....een whether in this case the non-concealment of RCL loan by the company to the Syndicate Bank amounted to cheating by concealment of fact with the intention to deceive the Syndicate Bank. Thus, requirement of this particular category is not mere concealment of facts, but it is coupled with the intention to deceive any person. Thus, in this case, it has to be decided whether concealment of RCL loan to the Syndicate Bank was made by the company with the intention to deceive Syndicate Bank. 33. The show-cause notice refers as to why it was issued for declaring the Petitioner's account as 'fraud'. The exact statement in the show-cause notice is as follows: "The borrower and its directors Sh. Prashanth Narayanan and Sh. Sony Ravindranath have actively concealed the fact that they have availed an unsecured loan from M/s. Reliance Capital Limited at the time of sanction of loan from our bank. The matter came to light only after the admission of the company petition bearing No.383/2023 before Hon'ble NCLT, Mumbai." The contention, that matter came to light only after the admission of the company petition in the year 2023 before NCLT, Mumbai is not correct as can be seen from....
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....ears from 2017 onwards. Shri. Shinde, learned counsel for the Respondent No. 1 submitted that the subsequent disclosure would not make any difference as the disclosure before sanction of loan was important, as it could have impacted the decision to grant loan and the bank could have imposed certain other security measures. 36. In this case, we are testing whether said non-disclosure was with intent to cheat the bank. If the company had never disclosed this fact and if the Bank was never aware of the fact of sanction of RCL loan, it would have been a different matter. But as stipulated in the sanction letter of the bank itself it was compulsory for the company to have furnished the audited report. There are no allegations that there was concealment in the audited report regarding the RCL loan. The bank never raised the issue of non-disclosure of RCL loan at the time of sanctioning there own loan for a long period from the year 2017. In that context, we find force in the reliance of Mr. Joshi on the observations of the Hon'ble Supreme Court in the case of Harjas Rai Makhija. Paragraph-20 of the said judgment is important; which reads thus: "20. We agree that w....
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....nce, what is essential, is the conduct of the parties. We only dealt with the distinction involving a mere acquiescence. When acquiescence is followed by delay, it may become laches. Here again, we are inclined to hold that the concept of acquiescence is to be seen on a case-to-case basis." 39. The clauses in the original agreement between the Syndicate Bank and the company are important. Clause-10 of the said agreement dated 28.03.2017 has a heading "OTHER TERMS AND CONDITIONS". Sub-clause 10 of Clause-10 reads thus: "10. The Borrower shall submit Due Diligence Report from Company Secretary or Chartered Accountant or Cost Accountant of the borrower Company, on an annual basis." Sub-clause 13 of Clause-10 reads thus: "13. The Lender reserves the right to periodically inspect their records and books of accounts to ensure the correctness of information furnished by them. Further, the Lender shall have a right to appoint any other independent consultants / agencies / auditors etc. as desired by them at any time during the tenor of the loan, the cost of which shall be borne by the Borrower." Sub clause 15 of Clause-10 reads thus: "15. ....
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....and upon and take possession of the Leased Units and any future assets comprised in the Indenture of Mortgage and after the taking of such action, the Mortgagor (under the Indenture of Mortgage) shall take no action inconsistent with or prejudicial to the right of the Lender quietly to possess, use and enjoy the same and to receive the income, profits and benefits thereof without interruption or hindrance by the Mortgagor (under the Indenture of Mortgage) or by any person or persons whomsoever, and upon the taking of such action, the Lender shall be freed and discharged from or otherwise by the Mortgagor (under the Indenture or Mortgage) well and sufficiently saved and kept harmless and indemnified of, from and against all former and other estates, titles, claims, demands and encumbrances whatsoever." 41. The important question is whether such non-disclosure would amount to 'fraud' and whether it was made with the intent to deceive the bank, as we have set out in our discussion. 42. From the above discussion, it is clear that the company had to disclose this RCL loan within a short period and not later than seven months from the closure of financial year 2017. Thus, at the co....