Rajesh Jhunjhunwala and Ors. v. The Jammu and Kashmir Bank Limited and Ors.

1. These three writ petitions have been preferred by the same set of petitioners, namely,Mr.Rajesh Jhunjhunwala,Mr.Navin Jhunjhunwala and Mr. Sajjan Kumar Jhunjhunwala. These three writ petitions stem out of three different final orders passed by the Debt Recovery Tribunal-I,Delhi in O.A. Nos. 500/2017(subject of matter of W.P.(C)10949/2019), 501/2017 (subject matter of W.P.(C) 10952/2019) and 502/2017 (subject matter of W.P.(C)10975/2019),all dated 24.06.2019.

2. Whatis challenged in all these petitions are the orders passed by the DRT-I in three Original Applications,and the DRAT,Delhi in the appeals arising therefrom i.e. Appeal No. 344/2019, (arising out of O.A. NO. 500/2017(subject matter ofW.P.(C)10949/2019)),346/2019(arising out ofO.A.No.502(subject matter ofW.P.(C)10952/2019))and 345/2019, (arising out of O.A. No. 501/2017(subject matter of W.P.(C) 10975)). The three petitioners before us were arrayed as defendant Nos.8(Rajesh Jhunjhunwala), 4 (Navin Jhunjhunwala), and 7 (Sajjan Kumar Jhunjhunwala)in the aforesaid three original applications.

3. By the identical impugned orders passed by the learned DRAT on 24.09.2019 in each case, the DRAT directed the petitioners to make a predeposit of 50% ofthe outstanding amount within a period of[4] weeks for entertainment ofthe aforesaid appeals under Section 21 ofthe Recovery of Debts and Bankruptcy Act, 1993.

4. Faced with the judgment passed by the Supreme Court in Kotak Mahindera Bank Pvt. Ltd. vs AmbujA. Kasliwal & Ors. [2021 (3)SCO Page2of10 549], Mr. Rajiv Nayar, learned Senior Counsel for the petitioner submits that the said decision would not be applicable in the facts of the present cases. He points out that the recovery proceedings were initiated by the respondent-bank i.e. the Jammu and Kashmir Bank Limited, in respect of loans advanced to respondent No.2i.e. REI Agro Limited. He submits that so far as the present petitioners are concerned, the position was that the petitioner Mr. Rajesh Jhunjhunwala had resigned from the Board of ""3 Directors of the said company on 18.03.1995. The other two petitioners, namely,Mr.Navin Jhunjhunwala and Mr.Sajjan Kumar Jhunjhunwala were never the members ofthe Board ofDirectors ofthe petitioner company,and were mere shareholders. It is further pointed out that all three had ceased to be even the shareholders of the said company in the year 1995, when the said company came out with a public issue, and they had, absolutely, no concern or interest left in the said company. It is also their case that they had not executed any loan document for obtainment of loan by the said company, and they had not offered their personal guarantees to secure the ^ saidloans.Theloantransactionswereundertaken bythesaid companywith the Respondent bank only in the year2010 and thereafter.

5. It is pointed out that when the petitioners came to know of the pendency of the proceedings before the DRT-I, they had also moved applications under Order I Rule X CPC and under Order VII Rule XI CPC for their deletion from the array ofdefendants,and for rejection ofthe plaint of the respondent-bank against them. However, those applications were never decided, and DRT proceeded to pass the final order on 24.06.2019 in all the three original applications on a completely untenable premise. The only reason why the petitioners have been made liable in respect of the Page3of10 1^ outstanding amounts ofloan advanced to the aforesaid company is that the petitioners were amongstthe original shareholders ofthe said company,and formed part ofthe same family.In this regard, our attention has been drawn to the following paragraphs in the final order passed by the Tribunal, which reads as follows: "e)The main thrustofthe defense by the defendants Nos.2to 8 in the instant OA,is that there is no privity ofcontract between them and the applicant bank. Admittedly defendant No. 2 was the Chairman and Managing Director at the time of its incorporation of defendant No. 1 and defendant No. 2 to 8 along with defendant No. 2 are thefounders andpromoters of the defendant No. 1 company. Record reveals that defendant Nos.2and3are the sons ofdefendantNo.6and defendantNo. 4and[8] are the son ofdefendant No. 7and also defendantNo. 6and 7are brothers, defendantNo.5is wife ofdefendantNo. 3, therefore, all these defendants are members ofa closely knit family. It is also matter of record that defendant No. 2 has signed all documents pertaining to the facilities on behalf of defendant No. 1 and defendant No. 3 is also one ofthe persons to substantially manage the day to day affair ofdefendantNo.1. Record reveals that these defendants have also obtained facilities from other banks including foreign banks and financialinstitutions and the same modus operandi was adopted by them, as has been done in the present matter i.e. they have created shell companies on the basis ofthefixed commission and through a group of brokers, created false invoices, documents of money transfer for non existence transactions. Recordfurther reveals that the answering defendants have also played afraud in similar manner with a consortium offourteen banks led by UCO Bank.

(I) Record reveals that defendant No. 1 through its Directors/

Founders/ Shareholders viz. defendant No. 2 to 8 had fraudulently induced the applicant bank to sanction and allow the line' of credit in the form of creditfacility ofShort Term Loan, Bill Discounting Facility and Crop loans. However, the Page4of10 n defendants fraudulently misappropriated the funds of these facilities. The Bill Discounting Facility was misused by these defendants by availing the same against manipulated bills of exchanges 'drawn by the suppliers. Further the companies manager wasfalsely certifying to the bank that supplies have been receivedfrom the JLGs and the payment be made to them. Also End-User Certificate in respect ofCrop Loans to the effect that the same have been transferred to the individuals JLGs members(farmers)was alsofraudulently issued. (t) Sofar as defendant Nos. 4, 7& 8 are concerned, they are also the founding members and then shareholders of the defendant No. 1 company and the investigation ofthe CBI as well as the ED clearly established that the defendant No.l company was established in furtherance to the fraudulent activities ofitsfounders. According to defendant Nos. 4, 7& 8 since defendant No. 8 has already been retired before the sanction of the loan by the applicant herein and also now defendant Nos. 4 & 7are not the shareholder ofthe company therefore,they are notliablefor the claim ofthe applicant bank andfor the said submission Ld. Counselfor the defendantNos. 4,7& 8have relied upon thejudgments ofHon'ble DelhiHigh Court in the matter of Indian Overseas Bank Vs. R. M. Marketing Services Pvt. Ltd. [AIR 2002 Delhi 344], Mukesh Hans &Ors. Vs. Smt. Uma Bhasin &Ors.[RFA 14/2010 and CM No. 495/2010] Ranbeer Kumar Gugneja Vs. M/s Continental Engines Ltd. & Ors;[CS(OS) No. 24/2005]; M/s Raj Cylinder & Containers Pvt. Ltd. Vs. Mis Hindustan General Industries and Ors. [RFA(OS) 5/1999], Judgment of Hon'ble Punjab & Haryana High Court in the matter ofL.Shiv Dayal Kapoor & Ors. Vs. Union ofIndia.[AIR 1963P H538] andjudgment ofHon'ble DRAT, Delhi in the matter ofParneet Bhardwaj Vs.Punjab NationalBank & Am.[Misc. Application No. 692/18 arising out of OA No. 3024/2016 (DRT-I, Chandigarh)]. (u)I have given my thoughtful consideration on the contentions ofdefendant Nos.4, 7& 8. However,looking to the Page5of10 fact that the defendant No.1 was incorporated with a malafide intention and which was perpetuated with the passage oftime therefore, thefounders who were instrumental in establishing the said company are also liablefor thefraud committed by the company. It is also important to note here that the defendant No. 1 company is a privately held company by the family members only. Therefore, now the defendant Nos. 4, 7 & 8 cannot be exoneratedfor their liabilities. Hon'ble Delhi High Courtin the matter ofSaurabh Exports Vs. Blaze Finlease and CreditsPvt.Ltd.[129(2006)DLT429], while dealing the matter ofpersonal liability ofthe amount claimed in the plaint has held that:- "16. Learned counsel emphasised the fact that defendant No. 1 company was in the nature ofafamily company and, thus, where the actual nature oftransaction was a loan or deposit with all the defendants, the cloak ofdefendant No. 1 should not be used to defeat the claim ofthe plaintijfand in this behalfreferred to the observations ofthe Supreme Court in Subhra Mukheriee andAnr. v. Bharat Coking CoalLtd. and Ors. where in para 11, it was observed as under:

11. Mr. Srivastava submitted that undue emphasis was given to thefact that the Directors ofthe Company were brothers i and the appellants are their wives. He argued that the Company is a separate legal entity which is independent of its Directors andshareholders and repeatedly referred to the quoted decision in Salomon v. Salomon. The principle laid down in Salomon case more than a century ago in 1897 by the House ofLords that the company is at law a different person altogether from the subscribers who have limited liability, is thefoundation ofjointstock company and a basic incidence of incorporation both under English law and Indian law. Lifting the veil ofincorporation under statutes and decisions ofthe courts is an equally settled position of law. This is more readily done under American law. To look at the realities ofthe situation and to know the real state of affairs behind the facade of the principle of the corporate Page6of10 9-1 personality, the courts havepierced the veil ofincorporation. Where a transaction ofsale ofits immovable property by a company infavor ofthe wives ofthe Directors is alleged to be sham and collusive, as in the instant case, the court will bejustified in piercing the veil ofincorporation to ascertain the true nature ofthe transaction as to who were the real parties to the sale and whether it was genuine and bonafide or whether it was between the husbands and the wives behind the facade ofseparate entity ofthe company. That is what was done by the High Courtin this case.

17. Iam in agreement with the submission oflearned counselfor the plaintiffinsofar as the liability ofdefendant No. 2is concerned. Defendant No. 2 was extremely evasive during his crossexamination. Defendant No. 2 as DW-2 stated that the building, namely. Sunder Plaza where defendant No. 1 Company had its office was demolished by the MCD in the year 1997. Hefurther stated that after demolition, there was no registered office of defendantPage 1061 No. 1 and the company was notfunctionalfor aboutthe lasttwo years. He even denied the knowledge aboutfiling ofreturns or signing balance-sheets though he admitted to signing the acknowledgment of deposits as Director of defendant No. 1 Company. The witness also did not remember whether any permissionfrom the Reserve Bank ofIndia was soughtfor seeking deposits. He admitted to Mr. Virendra Uppal being afamilyfriend who had approached himfor the deposit.

20. Iam, thus, ofthe considered view that the principles laid in thejudgments referred to aforesaidfor lifting ofthe corporate veil are satisfied in the present case. It has already been observed that the concept of corporate entity was evolved to encourage and promote trade and commerce, but not to defraud people. The present case is one where clearly the plaintiff is sought to be defraud of the amount of Rs. 15 lakhs under the cloak of a corporate entity of defendant No. 1 company and, thus, such a Page 7of10 2^ corporate veil must be lifted especially taking into consideration that defendantNo.1 company was only afamily arrangementofthe remaining defendants (emphasis supplied)

6. Mr. Saxena who appears for the respondent-bank is not in a position to claim that there is any valid legal basis for fastening any liability on the three petitioners in so far as the claim ofthe respondentbank is concerned. It was not the case of the respondent bank, and that does not appear to be the basis ofthe impugned order passed by the DRT qua three petitioners/defendants (who were, defendant Nos. 8, 4 and 7 respectively) that these defendants were party to, or beneficiaries of the siphoning of the funds of the said company. In the aforesaid circumstances,we are shocked to read the final order passed by the DRT-I dated 24.06.2019 qua the three petitioners. The same demonstrates complete lack of knowledge and understanding on the part of the Presiding Officer with regard to the concepts of limited liability of shareholders and Directors of a corporate entity, as codified in the Companies Act, 2013. Merely, because the three petitioners may have been promoter members ofthe aforesaid company i.e. REI Agro Limited, would not,in any event, make them liable in respect ofloans advanced to the said company decades later, by when they had ceased to be not only directors, but even simple shareholders ofthe said company. Admittedly, they did not stand guarantee and did not execute any loan documents. They were not in the management ofthe said company at any point of time, especially between the period when the loans were applied for, granted and utilized,or even when the loans were defaulted. As aforesaid, they had ceased to be the shareholders ofthe said company much prior to Page8of10 the loan transactions entered into between the said company and the respondent-bank and other lenders.

7. The order passed by the DRT-I, qua the petitioners, suffers from complete non-application of mind and lack of understanding and appreciation of the facts of the law. This Court exercises the power of superintendence over all courts and tribunals throughout the territories in relation to which it exercises jurisdiction under Article 227 of the Constitution ofIndia. When an order ofthis kind,as passed by the DRT-I in the present eases is placed before us, and brought to our notice, in our view, we would be failing in our duty ifwe do not examine and deal with the same, particularly when it appears to us that the said order is completely perverse and unsustainable, and its continuation on the file seriously infringes the valuable rights ofthe petitioner. It is clear to us that the DRT-I while passing the said final orders has failed to exercise the jurisdiction vested in it. The DRT-I did not address the issues raised by the petitioners as their applications under Order I Rule X CPC and under Order VII Rule XI CPC, which remained unaetioned while the Tribunal proceeded to pass the final orders dated 24.06.2019. Atthe same time it is purported to exercise its jurisdiction most irregularly, by not examining the pleas of the Petitioners in the context of the law, and it proceeded to fix the liability ofthe Petitioners on considerations unknown to law.

8. In exercise ofpowers under Article 227 ofthe Constitution ofIndia, we,therefore, quash the said final orders dated 24.06.2019 passed by the DRT-I, Delhi in O.A. Nos. 500/2017, 501/2017 and 502/2017, qua the Page9of10 7^^ petitioners only. Consequential proceedings arising from the said final orders qua the petitioners also stand quashed.

9. However,we make it clear that we have not examined,or set aside the said orders qua the other defendants in the original applications.

10. Since the said final orders stand set aside qua the petitioners, their appeals preferred before the DRAT become infructuous, and the same also stands disposed of.