Loan Fraud | Bank Can't Initiate Criminal Proceedings When Borrower's Declaration As 'Wilful Defaulter' Is Stayed By Court: Karnataka HC

A single judge bench of Justice M Nagaprasanna observed that the company's declaration as a 'wilful defaulter' was stayed by the Court and the matter is pending before the Review Committee of the Indian Bank. It thus remarked,

"if the very root is to be reconsidered according to the Bank, it can hardly be justified as to how a crime could be registered in the teeth of subsistence of interim order..."

The Bengaluru-based company had availed credit facilities from a consortium of banks led by the Indian Bank. It was declared as a "wilful defaulter" back in 2020 after its loans slipped into becoming Non-Performing Asset.

The action was stayed by the High Court in proceedings initiated by the company and the petition was finally disposed of on an assurance by the Indian Bank to remit the matter to its Review Committee for consideration in terms of Supreme Court's decision in SBI v. Jah Developers.

In this case the Apex Court had held that Bank has to discover whether a 'unit' has defaulted in making its payment obligations even when it has the capacity to honour the said obligations; or that it has borrowed funds which are diverted for other purposes, or siphoned off funds so that the funds have not been utilized for specific purpose for which the finance was made available and to further analyze whether the default is intentional, deliberate and calculated.

However, soon thereafter, the consortium filed a complaint with the CBI which registered a FIR under Sections 420, 468, 471 r/w Section 120B of the IPC and Sections 7, 13(2) r/w 13(1)(d) of the Prevention of Corruption Act, 1988.

In this background, the High Court held,

"The entire issue of declaration of the petitioner as willful defaulter and subsequent action of registration of a crime was on the basis of the declaration of the petitioner to be a willful defaulter or a fraudulent borrower. That having been stayed by this Court and the stay being in operation up to 15-04-2021, the 2nd respondent concealing the said fact of pendency of the case, could not have registered the crime.

As the basis for registration of crime was the account being slipped into NPA on whatever score it would be, and the declaration of the petitioner as willful defaulter having been stayed, it could not have appeared before the Court without divulging the fact that a complaint had already been registered before the CBI, get the matter disposed of, to re-consider the very root that led to registration of the crime. It is not the merit of the matter that needs consideration at the hands of this Court, but it is the act of the 2nd respondent/Bank in trying to overreach the interim order of this Court by registering the crime."

Senior Advocate Sandesh J.Chouta for the company argued that the procedure stipulated by RBI in terms of its circulars for declaration of a Company to be a 'willful defaulter' was not followed.

The Bank argued that it cannot lose its right of filing a complaint for offences punishable under the IPC, before any competent investigating authority as declaration of willful defaulter and registration of crime for offences under the IPC are entirely different. If the case of the petitioners is considered on the plea of technicalities Rs.200 crores would be at stake which is public money.

The court referred to the broad framework of Master Circulars issued by RBI for declaration as willful defaulters and borrowers who had indulged in fraud. It then said,

"if the facts narrated, in the case at hand are considered, the unmistakable inference would be that the entire proceedings having been initiated against the petitioners in terms of the afore-quoted circulars, the submission that the circulars are not applicable to the facts of the case at hand is rendered unsustainable, as it is fundamentally flawed."

The Court observed that permitting continuation of impugned criminal proceedings would become an abuse of the process of law and result in permitting an action which is initiated in an attempt to overreach the orders of the Court.

Thus it allowed the petition and quashed the CBI case. It however granted liberty to the Bank to initiate appropriate proceedings against the Company subject to the outcome of the decision of the Review Committee.

Case Title: STEEL HYPERMART INDIA PVT. LTD. & Others v. CENTRAL BUREAU OF INVESTIGATION

Case No: CRIMINAL PETITION No.919 OF 2021

Citation: 2022 LiveLaw (Kar) 314

Date of Order: 02ND DAY OF AUGUST, 2022

Appearance: Senior Advocate SANDESH J.CHOUTA, A/W Advocate AKSHAY RAVINDRA PRABHU for petitioners; Special Public Prosecutor PRASANNA KUMAR P., FOR R1; Senior Advocate SHASHI KIRAN SHETTY K., a/w Advocate U.S.YOGESH KUMAR, FOR R2

Click Here To Read/Download Order