Atul Punj v. IDBI Bank

1. The petitioner is invoking the extraordinary jurisdiction of this Court under Article 226 of the Constitution of India seeking issuance of an appropriate writ, thereby seeking setting aside/quashing of the impugned order dated 05.07.2024 passed by the respondent classifying him as „fraud‟ in respect of loans/advances/financial transactions by the corporate borrowers viz. Punj Lloyd Limited [“PLL”] purportedly in exercise of its power as per the Master Directions passed by the RBI[1].

2. Mr. Sandeep Sethi, learned Senior Advocate for the petitioner has alluded to the previous order dated 02.04.2024 passed by this Court in Atul Punj v. IDBI Bank[2], whereby the earlier Show Cause Notice [“SCN”] dated 07.02.2024 issued by the respondents-banks against the petitioner was assailed.

3. In a nutshell, it was urged that as per clause 8.9.[4] of the Master RBI Circular dated 3rd July 2017, it is clearly stipulated that the banks which have financed the borrower under „multiple banking‟ arrangement, should take co-ordinated action, based on commonly agreed strategy; and the process to declare banking transactions/ accounts as „fraud‟ could only be based on the majority rule of agreement amongst the banks with at least 60% share in the total lending.

4. It was argued that the earlier SCN fell foul in the teeth of the directions of the Supreme Court in the case of State Bank of India v. Rajesh Agarwal[3] not only for non-supply of relied upon documents but also for not affording any opportunity of hearing to the petitioner; and this Court in a detailed order dated 02.04.2024, considered the fact that there had been conducted three forensic reports by three different agencies with regard to the review period i.e. 01.07.2017 to 31.03.2019, and nothing wrong was found so much so that a meeting had been convened by as many as 29 member banks of the consortium on 20.11.2023 in which, 61.16% of the banks found that “no fraud”

1 Reserve Bank of India W.P. (C) 4643/2024, CM APPL 19018/2024 dated 02.04.2024 had been committed by the petitioner and the other promoter directors or whole time directors of the corporate borrower, while 21.09% were yet to take any decision”.

5. Mr. Sethi, learned Senior Advocate for the petitioner pointed out that this Court vide earlier order dated 02.04.2024, disposed of the petition, thereby quashing the SCN and further directed the respondent to provide relevant documents including forensic audit reports and arrive at an appropriate decision in accordance with law within four weeks after affording an opportunity of hearing to the petitioner. It was emphasized that vide paragraph (38) of the earlier order, it was also provided by this Court that the “respondent-IDBI bank” shall take a decision considering all the submissions made by the petitioner including the submissions which have been recorded in the order”.

6. Mr. Sethi, learned Senior Advocate of the petitioner, taking this Court through the contents of the impugned order dated 05.07.2024, vehemently urged that although the competent authority took note of the objections preferred by the petitioner in terms of his representations dated 31.05.2005 as also delineated the issues which were countenanced before this Court in earlier proceedings between the parties, there is no decision thereupon so as to deal with each of the issues raised. In his submissions, Mr. Sethi relied on the decision in the case of Rajesh Agarwal (supra) as also another decision by a Co-ordinate Bench in the case of Hem Singh Bharana v. Reserve Bank of India[4]. 2023 SCC OnLine SC 342 4 WP(C) 2240/2024 dated 15.02.2024

7. Per contra, Mr. Sidhartha B., learned counsel for the respondent referred to the directions in Chapter-VIII and alluding to clauses 8.9.1, 8.9.2, 8.9.35 and 8.9.46, vehemently urged that a conjoint and harmonious reading of the aforesaid clauses would bring out that the respondent bank, in its individual capacity, is not precluded from conducting an independent inquiry and come to a different conclusion than the one reached by other member banks of the consortium/CLF. It was pointed out that the forensic audit by three different firms had not been conducted at their behest but at the behest of some other member banks in the consortium. It was pointed out that the respondent had audited the accounts of the firm for the period 8.9.[3] In case of consortium arrangements, individual banks must conduct their own due diligence before taking any credit exposure and also independently monitor the end use of funds rather than depend fully on the consortium leader. However, as regards monitoring of Escrow Accounts, the details may be worked out by the consortium and duly documented so that accountability can be fixed easily at a later stage. Besides, any major concerns from the fraud perspective noticed at the time of annual reviews or through the tracking of early warning signals should be shared with other consortium / multiple banking lenders immediately as hitherto. While some of the due diligence measures have been illustrated in paragraph 8.4.[2] above, due diligence broadly encompasses all measures to be taken by a bank to understand the nature of business of the borrower, identifying and assessing any risks associated in the financial, commercial, legal and operational aspects of the business and also the measures taken to mitigate the risks found after such exercise. Due diligence also includes but is not limited to developing Standard Operating Procedures, with checklists to be followed by the operating functionaries, updating any manual that has been written and sensitizing staff for strict adherence to such procedures. 8.9.[4] The initial decision to classify any standard or NPA account as RFA or Fraud will be at the individual bank level and it would be the responsibility of this bank to report the RFA or Fraud status of the account on the CRILC platform so that other banks are alerted. In case it is decided at the individual bank level to classify the account as fraud straightaway at this stage itself, the bank shall then report the fraud to RBI within 21 days of detection and also report the case to CBI/Police, as is being done hitherto. Further within 15 days of RFA/Fraud classification, the bank which has red flagged the account or detected the fraud would ask the consortium leader or the largest lender under MBA to convene a meeting of the JLF to discuss the issue. The meeting of the JLF so requisitioned must be convened within 15 days of such a request being received. In case there is a broad agreement, the account should be classified as a fraud; else based on the majority rule of agreement amongst banks with at least 60% share in the total lending, the account should be red flagged by all the banks and subjected to a forensic audit commissioned or initiated by the consortium leader or the largest lender under MBA. All banks, as part of the consortium or multiple banking arrangement, shall share the costs and provide the necessary support for such an investigation. from 09.03.2018 to 08.03.2019 and taking this Court through various transactions indulged into by the petitioner and other promoter directors or whole time directors of the corporate borrower forming Annexure (P-9) vis-a-vis conclusions reached by the competent authority in the impugned order dated 05.07.2024, it was urged that reasons advanced are not only detailed by all means but also unassailable inasmuch as the manner in which funds have been diverted to borrower companies, which were sister concern or related parties, and the manner in which the property & the funds of the borrower company were pilfered and siphoned off, are quite naked to the eyes particularly when there was no explanation afforded by the petitioner or anyone else. It was vehemently urged that this Court cannot sit as a appellate Court to examine the merits of the decision.

8. Having heard the submissions advanced by the learned counsels for the parties, at this stage of the case, first things first, it is clearly brought out that no opportunity of hearing was ever afforded to the petitioner. Secondly, though the impugned order dated 05.07.2024 is quite elaborate and certainly, this Court cannot go into the merits or justifiability of the same, prima facie, there is a jurisdictional issue inasmuch as on a conjoint perusal of clauses 8.9.[3] and 8.9.[4] of the RBI Master Directions, it appears that while an individual bank is entitled to get the accounts of the corporate borrower examined and audited independently, and it can certainly reach a different conclusion with regard to status of the accounts of the corporate borrower and thereby, could “red flag” the same. However, the remedy is only to report the fraud to the RBI within 20 days of detection and also report the matter to the CBI[7] or the Police for criminal action. A careful perusal of the aforesaid RBI directions bring out that the individual bank has no jurisdiction to unilaterally declare the account as „fraud‟ in the absence of consent accorded by the member banks in the consortium who have given more than 60% of the lending.

9. The issues raised by the learned counsels for the parties require deeper examination.

10. Issue notice. Notice is accepted by the learned counsel for the respondent. Let reply be filed within four weeks from today.

11. In the meanwhile, the operation of the impugned order dated 05.07.2024, wherein the declaration or classification of the account of the petitioner as „fraud‟ is concerned, be kept in abeyance till the next date of hearing. However, the respondent shall be at liberty to file a report with the RBI as also with the CBI/Police for initiation of appropriate proceedings against the petitioner in accordance with law. The aforesaid action may be undertaken without prejudice to the rights and contentions of the parties. If the respondent elects to review their decision in view of the findings recorded hereinabove, this Court shall also be at liberty to afford an opportunity of hearing to the petitioner and take appropriate decision in accordance with law.

12. Re-notify on 17.09.2024.