Nasser Mohammed M.F. Al Hajri v. Reliance Asset Reconstruction Company Ltd.
Delhi High Court·21 Nov 2022·2022:DHC:5166-DB
Najmi Waziri; Vikas Mahajan
W.P.(C) No. 225/2020
2022:DHC:5166-DB
civilappeal_allowedSignificant
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The High Court held that a person who neither borrowed money nor gave personal guarantee cannot be held liable in debt recovery proceedings and ordered deletion of his name with costs for vexatious litigation.
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2022/DHC/005166 W.P.(C)No. 225/2020 HIGH COURT OF DELHI
Pronounced on: 21.11.2022 W.P.(C) No.225/2020 & CM No. 715/2020
NASSER MOHAMMED M.F.AL HAJRI ..... Petitioner Through: Mr. Jayant Mehta, Sr. Advocate with Mr. Samar Singh Kachwaha, Ms.Ankit Khushu, Ms. Tara Shahani, Ms.Akanksha Mohan and Ms. Aanya Saluja, Advocates.
VERSUS
RELIANCE ASSET RECONSTRUCTION COMPANY LTD. ..... Respondent Through: Mr. Arvind Nayar, Sr. Advocate with Mr. Shahrukh, Ms. Usha Singh and Mr.Akshay Joshi, Advocates.
CORAM:
HON'BLE MR. JUSTICE NAJMI WAZIRI HON'BLE MR. JUSTICE VIKAS MAHAJAN
JUDGMENT
NAJMI WAZRI, J.
1. This petition seeks quashing of the order of the Debt Recovery Tribunal-II, ('DRT') Delhi, dated 06.05.2019 passed in O.A. No. 347 of 2014 and the orders of the Debt Recovery Appellate Tribunal ('DRAT') dated 07.08.2019 as well as 11.10.2019 passed in Appeal No. 341 of 2019, including all proceedings initiated under the Recovery Certificate No.246 of 2019 dated 15.05.2019.
2. On 13.01.2020, the following order was passed by this Court:- "1. xxx 2.xxx
3. Mr. Jayant Mehta, learned counsel appearing for the Petitioner states that against the order dated 7th August, 2019 passed by the Debt Recovery Appellate Tribunal (DRAT) in Appeal No.341/2019, filed by the present Petitioner, whereby the Petitioner's plea for waiver of pre-deposit was rejected, no steps were taken by the Petitioner at that stage. It is M/s. Hassan Foods, (sic Hassad) of which the Petitioner was the former Chairperson, which came before this Court with W.P. (C) 9578/2019 in which the present Petitioner was a proforma Respondent. The dismissal of that writ petition by this Court by its order dated 4th September, 2019 stands affirmed by the Supreme Court by the dismissal on 15th November, 2019 of the SLP filed against the said order.
4. The case of the present Petitioner is that even in the averments by the Respondent Bank in its original application before the Debt Recovery Tribunal (DRT) there was no case of the present Petitioner having either himself borrowed any money or stood as a guarantor for the loan advanced to Bush Foods Overseas Private Limited. He accordingly submits that the Petitioner being neither the borrower nor a guarantor, there could not have been a mandatory requirement of pre-deposit qua him by the DRAT. The DRAT dismissed the Petitioner's appeal No.341/2019 on 11th October, 2019 for failure to comply with the order dated 7th August, 2019.
5. As a result of the above orders, recovery proceedings have been initiated against the original borrowers and guarantors as well as the present Petitioner in which directions have been issued on 14th November, 2019 and 17th December, 2019 by the Recovery Officer (RO) attached to DRT-II for inter alia, the arrest of the Petitioner.
6. Till the next date of hearing, no coercive steps be taken against the Petitioner pursuant to the orders dated 14th November, 2019 and 17th December, 2019 of the RO attached to the DRT-II."
3. It is the petitioner's (defendant No.3 in the OA) case that no personal liability against him was pleaded by the lender Bank in the OA, therefore, no personal or individual liability could have been cast upon nor could any relief have been granted to the creditor against him, as a sequitor the relief sought in para 6(i) of the OA is not made out.
4. Referring to para 5 of the impugned order dated 06.05.2019, the learned Senior Advocate for the petitioner (defendant No.3) submits that there is an obvious error of fact inasmuch as it has recorded that:-
"5. Defendants no.3 & 4 have filed their joint Written Statement submitting that defendant no.4 Hassad Food Company, Q.S.C. being represented by its authorized signatory / defendant no.3, acquired 69.5% of the issued share capital of defendant Company which was originally promoted by defendant no.2.....".
5. He further submits that (i) the petitioner (defendant No.3) never acquired any share capital, let alone majority stake in defendant No.4,
(ii) that the petitioner is a natural person whereas defendant No.4 is an incorporated company, and (iii) the two cannot be equated as one entity. The acquisition of shares, as may be, by defendant No.4 is entirely of that entity and cannot be attributed to the petitioner (defendant No.3), who may at best have facilitated acquisition of legitimate business interests of D-4, as its authorized signatory.
6. The learned Senior Advocate for the Petitioner/Defendant No.3 places reliance on Space Enterprises v. M/s. Srinivasa Enterprises Ltd. 72 (1998) DLT 666, which while dealing with the liability of the Directors of a company for the dishonour of cheques of the company, in a suit filed under Order XXXVII of the Code of Civil Procedure, made the following observations: -
“11. In so far as the liability of defendant No. 2 is concerned, the effect of the registration of a company under Section 34 of the Companies Act is that it is a distinct and independent person in law and is endowed with special rights and privileges; a person distinct from its members. Consequently, the company is enabled to contract with its shareholders also, to use common seal and acquire and hold property in its corporate name. The company is distinct from its shareholders and its directors. Neither the shareholders nor the director can treat the companies assets as their own. Directors of a company are liable for misappropriation of company's funds and other misfeasance, but not for an ordinary contractual liability of the company. The liability of the members or the shareholders or the directors is limited to the capital invested by them. So long the liability is not unlimited under Sections 322 and 323 of the Companies Act and no special resolution of the limited company making liability of the directors or the managing directors unlimited is alleged. The doctrine of lifting of the corporate veil could be applied in cases of tax evasion, or to circumvent tax obligation or to perpetuate fraud or trading with an enemy are concerned. It is not alleged that the director has lost the privilege of limited liability and has become directly liable to the plaintiff i.e. creditor of the company on the ground that with his knowledge the company carries on business six months after the number of its members was reduced below the legal minimum number. In absence of such a case it would be totally inappropriate and improper to say that defendant No. 2 is patently covered under Order 37 CPC.
7. Also in Indian Overseas Bank vs R. M. Marketing and Services
Pvt. Ltd., AIR 2002 Del 344, this court dealt with a similar issue and held, inter-alia, as under:-
5. The defendants 4 to 6 are also impleaded on the ground that they were Directors of the defendant No. 1. However, these defendants did not give any personal guarantee for due payment of loan and simply because they were Directors of the defendant No. 1 they could not be fastened with the liability as the defendant No. 1 which is a Company incorporated under the Companies Act is separate legal entity. The defendants 2 and 3 would be liable as Guarantors. Since the defendant No. 3 has also been absolved from the liabilities no decree needs to be passed against the defendant No. 3 as well.
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8. A perusal of the Deed of Corporate Guarantee dated 16.05.2013 (page 114 of the writ petition) shows that (i) it has been signed by the petitioner (defendant No.3) not in his personal capacity but as representative of M/s Hassad Food Company Q.S.C., therefore, no liability was intended/contacted upon or fastened upon the signatory of the document, who was only the representative of D-4, (ii) there is nothing on the record to show that the petitioner/defendant No.3, in his personal capacity, took a majority stake in M/s Bush Foods Overseas Private Limited/defendant No.1 – another corporate entity, which had availed some credit facilities from the lender Bank and (iii) the petitioner was arraigned as defendant No. 3 in the OA for reasons best known to the applicant Bank/lender. The OA refers to the petitioner/defendant No.3 simply as Chairman of M/s Bush Foods Overseas Private Limited. However, he signed the Deed of Corporate Guarantee and as authorised representative of M/s Hassad Food Company Q.S.C. He signed not in his personal capacity. There is no averment in the OA of petitioner/defendant No.3 having taken any credit facility from the applicant Bank/lender or having extended any personal guarantee or personal security against any such borrowings. It is in these admitted circumstances that the petitioner moved an application seeking deletion of his name as defendant No.3 in the OA, since no personal relief was sought against him.
9. The Recovery of Debts and Bankruptcy Act, 1993 ('RDB Act') is undoubtedly a special law and a complete code by itself with regard to expeditious recovery of dues to banks and financial institutions. However, proceedings under section 19 read with section 2(g) of the RDB Act can be taken out only against a legally recoverable debt. The said provision reads as under:- "S.19(2)(g) debt means any liability (inclusive of interest) which is claimed as due from any person 4 [or a pooled investment vehicle as defined in clause (da) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956)] by a bank or a financial institution or by a consortium of banks or financial institutions during the course of any business activity undertaken by the bank or the financial institution or the consortium under any law for the time being in force, in cash or otherwise, whether secured or unsecured, or assigned, or whether payable under a decree or order of any civil court or any arbitration award or otherwise or under a mortgage and subsisting on, legally recoverable on, the date of the application [and includes any liability towards debt securities which remains unpaid in full or part after notice of ninety days served upon the borrower by the debenture trustee or any other authority in whose favour security interest is created for the benefit of holders of debt securities" (Emphasis supplied)
10. It is apropos the said legally recoverable debt that the procedure under section 19 of the RDB Act is available to a claimant. To proceed against the petitioner/defendant No.3, the applicant Bank in OA would need to show that there was a legally recoverable debt against him.
11. As discussed hereinabove, no loan or credit facility was enjoyed by the petitioner/defendant No.3 nor was any debt secured nor mortgage given by him against any such debt in his personal capacity, therefore, the proceedings against him under section 19 of the RDB Act, that is filing of the OA against him not being maintainable, his application for deleting his name from the array of parties ought to have been allowed by the DRT. This is a fundamental aspect which ought to have been examined, it was not done.
12. On a specific query put to the learned counsel for the respondent: Whether the petitioner/defendant No.3 had borrowed any monies in his personal or extended any personal guarantee in lieu thereof ? The answer is in the negative. That being the admitted position, the impugned order has erred in (para 19) casting and extending liability upon the petitioner (defendant No. 3) along with defendant No.4. There was no legally recoverable debt against petitioner, therefore, no debt recovery proceedings would lie against him. Yet the OA proceedings were pursued against him by the lender/OA applicant. Such proceedings against him can be deemed to be as vexatious.
13. In view of the above, it is evident that petitioner (defendant No.3) would have no personal liability apropos the claim/repayment of debt towards the original applicant Bank as adjudicated by the DRT in the impugned order dated 06.05.2019. Accordingly, the said order needs to be modified. Consequently, the order dated 07.08.2019 passed by the DRAT is set aside and the Recovery Certificate No.246/2019 dated 15.05.2019, insofar as they pertains to personal liability upon the petitioner (defendant No.3) stand modified.
14. Also the court imposes a cost of Rs.2,00,000/- (Rupees two lacs only) on the respondent to be paid to the petitioner for having pursued the vexatious proceedings under section 19 of the RDB Act against the petitioner (defendant No.3) who, admittedly, had neither borrowed any monies nor extended any guarantee for credit facilities given to corporate entities.
15. The petition, alongwith pending application, is allowed and disposed off in the above terms.
NAJMI WAZIRI, J.
VIKAS MAHAJAN, J.
NOVEMBER 21, 2022
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