Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2024 Supreme(Guj) 214

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
SANGEETA K. VISHEN, J.
AMIT DINESHCHANDRA PATEL – Petitioner
Versus
RESERVE BANK OF INDIA – Respondent
Special Civil Application No. 19008 of 2022
Decided On : 02-01-2024

Advocates:
Advocate Appeared:
For the Petitioners: MIHIR THAKORE, RHEA J. SEVAK, ARJUN R. SHETH.
For the Respondents: DHRUVKUMAR S. CHAUHAN, A.J. SAIYAD, AMAR N. BHATT, ANIP A. GANDHI, K.I. KAZI, LALIT M. PATEL, S.N. SOPARKAR, MASOOM K. SHAH, A.B. CHATURVEDI.

The main legal point established in the judgment is the requirement to provide an opportunity to the borrower by furnishing a copy of the audit reports, allow the borrower to submit a representation, and pass a reasoned order before classifying the account as fraud, in conformity with the principles of natural justice.

Headnote:
Fraud - Declaration of Company Account as Fraud - Insolvency and Bankruptcy Code, 2016 - [Insolvency and Bankruptcy Code, 2016, Chapter VIII, Clause 8.9.4, Clause 8.9.5] - The court quashed the decision of the respondent banks declaring the company's account as fraud due to the violation of principles of natural justice. The court directed the respondent banks to provide the petitioners with copies of the forensic audit reports, allow them to submit a representation, and pass a reasoned order, in conformity with the principles laid down by the Apex Court.
Fact of the Case:
The petitioners challenged the decision of the respondent banks declaring the account of the company as fraud, alleging that they were not offered an opportunity to deal with the forensic audit report, as mandated by the recent judgment in the case of State Bank of India and Others vs. Rajesh Agarwal and Others. The petitioners were only provided with the observations of the draft forensic audit report, and not the actual reports.
Finding of the Court:
The court found that the decision of the respondent banks declaring the account of the company as fraud was quashed and set aside due to the violation of principles of natural justice. The court directed the respondent banks to provide the petitioners with copies of the forensic audit reports, allow them to submit a representation, and pass a reasoned order, in conformity with the principles laid down by the Apex Court.
Issues: Violation of principles of natural justice in declaring the company's account as fraud without providing the petitioners with copies of the forensic audit reports and an opportunity to submit a representation.
Ratio Decidendi: The court held that the decision of the respondent banks declaring the account of the company as fraud was quashed and set aside due to the violation of principles of natural justice. The court directed the respondent banks to provide the petitioners with copies of the forensic audit reports, allow them to submit a representation, and pass a reasoned order, in conformity with the principles laid down by the Apex Court.
Final Decision: The court partly allowed the petition, quashed the decision of the respondent banks declaring the account of the company as fraud, and directed the respondent banks to provide the petitioners with copies of the forensic audit reports, allow them to submit a representation, and pass a reasoned order, in conformity with the principles laid down by the Apex Court. No order as to costs.

JUDGMENT :

SANGEETA K. VISHEN, J.

1. The petitioners are aggrieved by the decision of the respondent banks taken in the Joint Lenders Meeting dated 29.09.2020 declaring the account of M/s Syntex Industries Limited (hereinafter referred to as “the Company”) as fraud.

2. Facts, in brief, are that, the petitioners are the promoters, suspended directors and share holders of the company. Company vide order dated 06.04.2021 is currently in the Corporate Insolvency Resolution Process (CIRP) under the provisions of Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “the Code of 2016”). It is around 04.07.2020, the company came to know about the South Indian Bank i.e. a member of the consortium banks i.e. respondent nos. 3 to 19 having taken steps to notify fraud in relation to the loan account of the company.

2.1 It is the case of the petitioners that meetings were convened on 18.08.2020 and 29.09.2020 and during that period, forensic audit reports dated 11.08.2020 and 18.09.2020 were discussed. Also, issues were discussed including the issue about the account being declared as a fraud by the South Indian Bank. In the meeting dated 29.09.2020 on the basis of the forensic audit report dated 11.08.2020 and supplementary forensic audit report dated 18.09.2020, the account of the company was declared as fraud illegally. Moreover, the petitioners have learnt about the said declaration of fraud by the Punjab National Bank, Punjab ans Sind Bank, Karnataka Bank Limited on 30.09.2020, 24.12.2020 and 09.10.2020 respectively. Writ petitions, were filed before the Hon’ble Delhi High Court challenging the action of declaration of fraud by the respondent banks and the Hon’ble Delhi High Court was pleased to stay the operation and implementation of the declaration of fraud. Various other connected writ petitions were also filed challenging the action of the purported declaration of fraud by the respondent banks. All the proceedings were withdrawn, without prejudice to the rights and contentions of the petitioners and with a liberty to avail other remedies in law and hence the captioned writ petition.

3. Mr. Mihir J. Thakore, learned senior counsel with Ms Rhea J. Sevak, learned advocate for the petitioners submitted that in the consortium meeting held on 18.08.2020, the petitioner no. 1 being the promoter and director was present, followed by the meeting dated 29.09.2020. It is submitted that the draft forensic audit report and supplementary forensic audit report were discussed with the member banks and they were of the view that the account of the company, shall be declared as a fraud on the basis of finding and opinion of the forensic auditor. It is submitted that all the member banks agreed in principle to declare the account of the company as a fraud and the main reason behind declaring the account of the company as a fraud was based on the forensic audit report dated 11.08.2020 and supplementary forensic audit report dated 18.09.2020 namely, (i) Breach of trust, sudden disappearance of stock etc. (ii) Misfeasance; (iii) Embezzlement; (iv) Misappropriation of funds/Diversion of funds outside the borrowing units etc. and (v) Siphoning off funds through fake telegraphic/mail transfers. It is submitted that the Punjab National Bank i.e. respondent no. 2 has addressed a communication dated 30.09.2020 to the stock exchange, inter-alia, pointing out that fraud of Rs. 1203.26 crores is being reported by the bank to the Reserve Bank of India in the accounts of the company which, was according to the bank, was disclosure under Regulation 30 of the Securities Exchange Board of India (LODR) Regulations, 2015.

3.1 It is submitted that it is not in dispute that the copies of the forensic audit report dated 11.08.2020 including supplementary forensic audit report dated 18.09.2020 which were the basis for declaring the account of the company as fraud were never supplied to the petitioners and what was shared, was the observations of the draft forensic

Click Here to Read the rest of this document