Bombay High Court Rejects Pvt Company's Plea Challenging Declaration Of Account As NPA By IL&FS Subsidiaries [Read Judgment]

Division bench of Justice Nitin Jamdar and Justice Milind Jadhav was hearing a petition filed by Wavell Investments Private Limited, a company that entered into three loan agreements with the IL&FS Financial Services Limited (IFIN) and IL&FS Transportation Network Limited (ITNL).

Petitioner challenged the respondent's decision to decline benefit of RBI moratorium on loans with regard to the first two loans and declaration of third loan account as NPA.

Case Background

First term loan facility was of Rs. 52 Crores dated September 22, 2016. The second term loan facility was of Rs.15 Crores dated April 28, 2017 and third term loan facility was of Rs.100 Crores dated March 23, 2018.

The petitioner requested IFIN to extend the benefit of RBI's Moratorium Policy to them in respect of term the first and second loan. IFIN informed the petitioner on June 23, 2020 and August 5, 2020 that since the account in respect of the third loan transaction valued at Rs.100 crores was classified as a Non-performing Asset by communication dated May 7, 2019, the benefit of moratorium cannot be extended. Petitioner company challenged these communications.

In the year 2018, the Union of India filed a petition under section 241(2) of the Companies Act, 2013 in NCLT, Mumbai, stating that the directors were mismanaging the functioning of IL&FS group and there was a large scale fraud. The NCLT, by order dated October 1, 2018 superseded the Board of Directors and appointed a new Board of Directors.

The Union filed an application seeking a comprehensive moratorium regarding IL&FS group companies. NCLT rejected this application by order dated October 12, 2018. The Union filed an appeal before the appellate tribunal. The NCLAT by order dated October 15, 2018 placed an embargo to institute and continue proceedings against IL&FS Limited and its group companies and issued various other directions.

The loan facility number three (100 cr) became due on September 28, 2018, and IFIN issued demand notice to the petitioner company on November 2, 2018 demanding repayment of Rs.100 crores in respect of the loan transaction.

An account is declared as NPA after ninety days. The petitioner wrote to IFIN on November 22, 2018 seeking to square off the loan. The petitioner company also sought repayment of the outstanding facility in respect of the loan transactions number 1 and 2. However, the account was declared as NPA on December 25, 2018 and by letter dated May 7, 2019, petitioner was informed that default under any one of the three accounts would be considered as default for all.

Submissions

Senior Advocates Navroz Seervai and Amit Sibal appeared on behalf of Wavell Investments. Whereas, Senior Advocate Dr.Birendra Saraf appeared for IFIN and Advocate Vaibhav Bhure for ITNL.

It was argued on behalf of the petitioner that they should be discharged from the obligation to repay the third term loan of Rs.100 cr. Neither in the proceeding before NCLT and NCLAT or during an investigation by SFIO anything adverse is recorded against the petitioner. Not only there is nothing adverse, but even the assertions made in the petition also have not explicitly been controverted. There is an embargo imposed by NCLAT to proceed against IL&FS, and its group and the petitioner is therefore remedy-less, Seervai contended.

He further argued that during the pendency of this petition, an application filed before the NCLAT to revoke the embargo has been rejected by the order dated March 12, 2020. The amount of Rs.100 crores has been returned, and the petitioner cannot be considered as debtor in respect of this loan account. Once that position is clear, there is no impediment to grant the benefit of the moratorium to the petitioner regarding loan transaction no. 1 and 2, Seervai reasoned.

On the other hand, Dr.Saraf contended the petitioner's claim that loan transaction worth Rs.100 cr is wrongly classified as NPA occurred on September 28, 2018 and the petition was filed in August 2020 only when the respondents refused to extend the benefit of the RBI's moratorium.

There was large scale fraud in IL&FS group, which is being investigated, and at this stage, no finding can be given that the Petitioner was an innocent victim. There is no finding by any authority that the petitioner was innocent. It is not believable that the petitioner received the amount of Rs.100 crores, executed the documents and claims to be not part of the bogus back to back transactions. In the record, the loan has been given to the petitioner of Rs.100 crores, and the petitioner has not repaid the same, Dr.Saraf submitted.

Judgment

After examining the submissions and facts of the case, Court refused to accept the petitioner's argument that there is a delay in challenging the classification of the account as Non-Performing Asset as the petitioner company believed that NCLT or NCLAT would decide the issue. Court said-

"This cannot be a satisfactory explanation. If the petitioner is of the opinion that the NCLAT would give the very same relief, then the application of the petitioner is still pending. The petitioner could have approached the writ jurisdiction much earlier. It was only when IFIN refused to extend the benefit of the moratorium because of the account of the Petitioner as NPA, a challenge was raised in August 2020. There is a substance in the contention of the Respondent of delay and latches by the Petitioner."

Court then looked into the investigation report placed on record by the SFIO, Ministry Of Corporate Affairs regarding IL&FS Financial Services Ltd. and its subsidiaries under Section 212 (1)(c) of the Companies Act, 2013 dated May 28, 2019. The investigation revealed that IFIN from November 2017 onwards, instead of directly lending to group companies deceptively lent loans to external parties which were transferred to the IFIN's Group companies, mainly IL&FS Transportation Networks Limited to circumvent RBI directives and exposure to group companies with no fresh lending.

Court noted that the SFIO report nowhere indicates that the petitioner was not part of the deception and was not aware of the implications. Nowhere from the report, we get that SFIO has concluded the investigation regarding how third parties were involved, the bench said.

The bench further referred to the copy of complaint filed by SFIO in the year 2019 before Sessions Judge, Mumbai-

"The complaint indicates that the transaction of which the petitioner claims to be innocent was done in a highly irregular manner. Loans were given based on Letters of Comfort and without securities. Lending was done without any due diligence, without the actual requirement of funds. Most of the intermediaries were transferring the funds in the same way. There was a fraudulent modus operandi of giving loans to defaulting borrowers. Accounts are placed on record to demonstrate how the transaction took place. The complaint clearly shows that the entire transaction, of which the Petitioner was a part, was questionable."

Finally, rejecting the claim that merely because there is fraud at IL&FS, Court cannot proceed on the basis that the petitioner is guilty, the bench noted-

"The Petitioner's claim can be examined from a commonsense point of view. No prudent commercial entity would enter into a transaction of such a large amount without making necessary enquiries regarding bonafides and legality of the transactions. This is not a case of an innocent individual investor. Petitioner urged that it has suffered a loss in this transaction. The obvious question arises why then the Petitioner chose to be part of the transaction? Why would a commercial entity enter into a transaction of Rs.100 crores and then suffer loss willingly?

The simplistic explanation of the Petitioner is that it innocently believed the words of the leadership of the IL&FS. The Petitioner's behaviour is contrary to ordinary commercial prudence. It is not possible to believe that the Petitioner was not aware of the implications of the transactions. We find it difficult to believe that the Petitioner would be commercially so naive to simply rely on the assurance and accept the liability of Rs.100 crores."

Thus, the petition was rejected.

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