Associate Lumbers Private Limited Vs State By Central Bureau of Investigation (Karnataka High Court)
Karnataka High Court held that once an account is declared to be a fraud, bank can initiate criminal proceedings even after initiation of proceedings under SARFAESI Act and having a recovery certificate
Facts-
On account of the account becoming a non-performing asset, the Bank took several actions against the petitioner/ Company by initiating proceedings under the SARFAESI Act, through which a portion of the outstanding dues to the credit facility was recovered.
After initiation of proceedings under the SARFAESI Act and also getting in possession of the recovery certificate from, the hands of the competent fora, the Bank registered a complaint against the petitioner/Company on 15-02-2022 terming the account to be a fraud and alleging offences of cheating, criminal conspiracy by the petitioner and its Directors.
Conclusion-
Apex court in the case of Central Bank of India vs. Ravindra and others have held that the guidelines/directives issued by the RBI, to have a statutory flavour. If it is held by the Apex Court that those guidelines have statutory flavour, the contention of the learned senior counsel that the CBI would not get jurisdiction unless it is conferred by the statute tumbles down. The CBI does have jurisdiction in terms of what is depicted in the Master Circulars and such Master Circulars are held to have a statutory flavour.
Held that when the jurisdiction of the Tribunal is invoked by the Bank, unless such an action is declared to be a fraud, they cannot maintain two proceedings – one before the Debt Recovery Tribunal and the other setting the criminal law in motion. If the account is declared to be a fraud and the account holders to be willful defaulters, then it would become open to initiate such proceedings in terms of the Master Circular. Therefore, having initiated recovery proceedings before the Debt Recovery Tribunal and having a recovery certificate in their hand would not mean that the proceedings cannot be initiated against these petitioners, to iterate the matter is still at the state of investigation.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
The petitioners in these petitions call in question First Information Report registered on 17-02-022 by the Central Bureau Investigation in No. RC0782022E0001 for offences punishable under Sections 13(2) read with 13(1)(d) of the Prevention of Corruption Act, 1988 (hereinafter referred to as ‘the Act’ for short) and Section 120B read with Section 420 of the IPC.
2. The petitioner in Criminal Petition No.7325 of 2022 is the company/accused No.1. Petitioners in Criminal Petition No.7345 of 2022 who are accused 2 to 5 are Directors of the Company/accused 1. Since all the petitioners challenge the very same crime registered against them, these cases are taken up together and considered by this common order.
3. The petitioner in Criminal Petition No.7325 of 2022 is ‘Associate Lumbers Private Limited’ (hereinafter referred to as ‘the Company’ for short). The Company, one incorporated under the Companies Act, 1956, is engaged in the business of trading timber, teakwood, packing cases, plywood and other wood products. It is the claim of the Company that the Company had been a customer of the then Corporation Bank (‘the Bank’ for short) presently merged with the 2nd respondent/Union Bank of India since 1988. On 05-03-2003, on an application made by the Company, a loan facility was extended by Poonja Arcade Branch, Mangalore of the Bank. The same was sanctioned and a credit limit of Rs.23/- crores was granted on 05-03-2003. The credit limit was extended/enhanced from time to time at the request of the petitioner and on 21-09-2015 loan account was renewed and enhanced to Rs.60/- crores. The date 21-09-2015 was the last of the renewal made for a credit limit of Rs.60/- crores. It is the claim of the petitioner/Company that due to economic slowdown in the domestic market there was severe cash crunch generated and the Company was not in a position to pay the debt in time.
4. On account of the account becoming a non-performing asset, the Bank took several actions against the petitioner/ Company by initiating proceedings under the SARFAESI Act, through which a portion of the outstanding dues to the credit facility was recovered. Not stopping at that, the Bank in terms of Reserve Bank of India guidelines declared the account of the Company to be a fraud, and account holders to be willful defaulters and initiated several proceedings to recover the amount. Those proceedings are not the one that is the issue in the case at hand. After initiation of proceedings under the SARFAESI Act and also getting in possession of the recovery certificate from, the hands of the competent fora, the Bank registered a complaint against the petitioner/Company on 15-02-2022 terming the account to be a fraud and alleging offences of cheating, criminal conspiracy by the petitioner and its Directors.
5. On the basis of the said complaint, the Central Bureau of Investigation (‘CBI’ for short) registered FIR in Crime No. RC0782022E0001 for offences punishable under Section 13(2) r/w Section 13(1)(d) of the Act and Section 120B r/w 420 of the IPC. The petitioners in both these petitions called in question the action of the Bank in declaring the account of the petitioner to be a fraud in terms of the Master Circular issued by the RBI before this Court in Writ Petition No.5223 of 2022. A Division Bench of this Court directed that no coercive action shall be taken against the petitioners pursuant to the fraud classification. After passing of the aforesaid interim order, the present petitions are preferred by the petitioners calling in question the very registration of crime. This Court by an order dated 12-08-2022 following, what the Division Bench had directed i.e., not to take coercive steps, directed that no coercive steps shall be taken against the petitioners.
6. Heard Sri Ashok Haranahalli, Sri Hashmath Pasha and Sri C.V.Nagesh, learned senior counsel appearing for the petitioners, Sri P.Prasanna Kumar, learned Special Public Prosecutor for respondent No.1 and Sri V.B.Ravishankar, learned counsel for respondent No.2.
7. The learned senior counsel Sri Ashok Haranahalli and Sri Hashmath Pasha, in unison, would contend that the complaint itself narrates that there is no staff accountability issue in the case at hand and the classification of fraud of the petitioner/Company is after 4 years of getting recovery certificate by the Bank at its They would submit once having initiated proceedings under the SARFAESI Act and having obtained recovery certificate against the petitioners, the account could not have been declared to be a fraud and complaint of the nature that is found could not have been registered against the petitioners. The counsel would submit that the Bank has sold immovable properties and other securities that were available with them. The crime is registered on a solitary score that those properties did not fetch the amount that the Bank was entitled to get and, therefore, would submit that the entire proceedings should be obliterated.
8. The learned senior counsel Sri C.V.Nagesh would take this Court through the complaint so registered. The complaint is registered for offences punishable both under the Act and the IPC. For invoking the Act, there is no public servant involved in the case at hand. The public servants are given a clean chit in the complaint itself. For the IPC offences, the CBI would not get jurisdiction to register a complaint against the petitioner/ Company and when the CBI had no jurisdiction to register the complaint the entire proceedings have to be quashed. He would further emphasise the fact that the CBI draws its strength for entering into these proceedings only on the basis of Master Circular issued by the Reserve Bank of India which cannot confer jurisdiction, as any circular or Master Circular issued under any enactment will not confer jurisdiction, but only in cases where the statute itself confers. Therefore, he would submit that the entire registration of crime by the CBI is rendered without jurisdiction.
9. Joining the issue, the learned senior counsel Sri Hashmath Pasha would submit that the offence punishable under Section 120B of the IPC cannot be a standalone offence as the FIR is for the offences punishable under Section 120B r/w 420 of the IPC; the substantive offence being Section 120B of the IPC. Therefore, the entire proceeding is vitiated. He would also place reliance on a judgment rendered by this Court in the case of STEEL HYPERMART INIDA PRIVATE LIMITED AND OTHERS v. CBI AND ANOTHER – Criminal Petition No.919 of 2021 decided on 08.2022 to contend that once a writ petition is pending against declaration of the account of the petitioner to be a fraud, the entire action of registration of crime is vitiated.
10. On the other hand, the learned Special Public Prosecutor representing the respondent/CBI Sri P.Prasanna Kumar would vehemently refute the submissions to contend that the Circular itself empowers the CBI to register the crime. In fact, the Bank has to complain to the CBI in terms of the Master Circular if the loan transaction or the amount that has slipped into becoming an NPA/fraud is between Rs.25/- crores to Rs.50/- crores. Admittedly in the case at hand, the amount does come within the said figure. The circular also directs that even if a public servant is not involved, such cases shall be entrusted to the CBI only. He would, therefore, contend that the question of CBI having no jurisdiction is imaginary and deserves to be rejected. He would place reliance upon the judgments of the Apex Court which have recognized the said Master Circular and entrustment of case to the CBI in the case of PEERLESS GENRAL FINANCE AND INVESTMENT CO.LTD. AND ANOTHER v. RESERVE BANK OF INDIA – (1992)2 SCC 343; Five Judge Bench judgment of the Apex Court in the case of CENTRAL BANK OF INDIA v. RA VINDRA AND OTHERS – (2002) 1 SCC 367 and a judgment of the Apex Court in the case of R.VENKATKRISHNAN v. CBI – (2009)11 SCC 737. The learned counsel would further submit that Section 120B of the IPC is a standalone offence and can definitely be charged with and proceeded in a trial. He would contend that FIR is now registered. It cannot be an encyclopedia of offences or the offenders. The matter is now under investigation. Public servants who are now given a clean chit can also be added later, at the time when the charge sheet is filed. Therefore, it is too early in the day to contend that in the absence of public servant, there cannot be a crime under the Act. He would also submit that the petition be dismissed, as there is no scope for entertainment of the petition at this juncture.
11. The learned counsel appearing for the Bank Sri V.B.Ravishankar, taking this Court through the documents appended to the statement of objections would contend that the account of the petitioners though was old, it is on the auditing that took place in the year 2015 the Bank gets to know that hypothecated movable goods – timber and wood articles were clandestinely sold by the petitioners. Though the Bank also had sold movables, the sale of goods by the Company has generated a loss of Rs.23/- crores to the Bank and therefore, it was declared to be a fraud, as out of deceit they have sold hypothecated goods. Therefore, the learned counsel would contend that it is a matter of trial as the petitioners have defrauded the Bank. Both the counsel appearing for the respondents, in unison, seek dismissal of the petitions.
12. I have given my anxious consideration to the submissions made by the respective learned counsel and perused the material on record.
13. The afore-narrated facts are not in dispute as they are all a matter of record, but they would require reiteration with little The Company and the Directors of the Company are the petitioners in the cases at hand. The business of the Company is not in dispute. The loan that was sanctioned to the petitioners’ right from 2003 is also not in dispute. Last of the renewal and sanction of the enhanced capital is on 21.09.2015 is an undisputed fact. The sanction accorded to the petitioners for extension of credit limit up to Rs.60/- crores was on the following conditions:
“For CC (Hyp)/Demand Loan: (Sub Limit)
Purpose: Working Capital Finance
Margin: 25% (Existing)
Security: Hypothecation of stocks/book debts of
the Company.
Rate of Interest: BR+3.10% i.e., 13.35% p.a. at present subject to revision from time to time. The Bank reserves the right to vary the negative spread, at any future date.
Repayment: On Cash Credit terms.
Other terms:
1. Drawings to be regulated within available Drawing Power.
2. The goods procured on DA basis under LC, if any, shall be shown separately in the stock statements and the same shall not be reckoned for computation of drawing power until such raw materials are fully paid for by the
3.The Company shall submit monthly statement on stock/receivables within 45 days from the close of the month to which it pertains. The Book Debt statements submitted monthly shall contain age wise breakup of receivables and details of bills discounted/purchased, if any.
4. The book debts of upto 180 days are to be reckoned for the purpose of arriving drawing power. Branch to inspect regularly and deeply at least in every month the entire receivables quality to ensure that the entire receivable is realizable while computing for DP.
5. The Company shall; arrange to submit once in six months the statement of Book debt duly certified by a Chartered Accountant., with age-wise break-up.
6. Working capital demand loan shall be carved out as per our extant internal guidelines.”
… … … …
Other Terms and Conditions
1. Releases under the limit be made only against irrevocable LCs/con firmed orders.
2. Advance under the limit shall be covered under WTPCG of Necessary reporting requirement shall be complied with.
3. No PCL shall be released if earlier PCL/export bill has become overdue.
4. In the event of non-shipment/non-export of goods covered under the packing credit loan, the rate of interest shall be charged at commercial rate as per the Bank/RBI rules.
5. Packing credit shall not be granted for exports to Countries placed under restricted cover by ECGC.
6. Stock statement shall be submitted by the Company at monthly intervals.
Branch is permitted extension of the period of the PCFC facility of USD 250000 which has fallen due for closure on 31 -12-2013 by another 90 days subject to compliance of requirements of reporting to ECGC.”
(Emphasis added)
After the enhancement of loan in terms of conditions stipulated therein, a stock audit report of the Company was undertaken by one M/s Kamath & Kamath Associates. What comes out is the opinion or summary of the said audit which reads as follows:
“SUMMARY:
Availability of adequate drawing power in relation to limits sanctioned/availed from the Banking system:
