Small Industries Development Bank of India vs M/s. Sibco Investment Pvt. Ltd.

Doctrines/Principles: Principle of Constructive Res Judicata – Held: The cause of action for the plaintiff accrued the first time, when the defendant allegedly failed to pay timely interest on delayed payment – Since such a claim was not raised in the writ court, the subsequent suit of plaintiff is barred by the principle of Constructive Res Judicata.

Words and Phrases: Term “Public interest” – Meaning of – Held: The term ‘Public interest’ has no rigid definition – It has to be understood and interpreted in reference to the context in which it is used – The concept derives its meaning from the statute where it occurs, the transaction involved, the state of society and its needs. Allowing SIDBI’s appeal and dismissing SIBCO’s crossappeal, the Court HELD: 1. RBI’s 09.06.1997 COMMUNICATION‘ADVICE’ OR ‘DIRECTIVE’:

1.1 For efficient discharge of its functions, the RBI has been granted special powers for controlling and regulating various financial institutions, as is clear from different provisions of The RBI Act, 1934 and The Banking Regulation Act, 1949. As per the RBI Act, 1934, the RBI has wide supervisory jurisdiction over all Banking Institutions in the country. [Para 8][934-A-B] Internet and Mobile Association of India vs. RBI (2020)

10 SCC 274 – relied on.

1.2 Through Chapter IIIB of the RBI Act, 1934, the RBI is empowered to regulate and also monitor the conduct of every Non-Banking Financial Institutions (NBFC) in India. Under S. 45-JA of the RBI Act, 1934, the RBI is empowered, in public interest or to protect the interests of the depositors or to regulate the financial system of the country, to determine the policy and issue directions to NBFCs. S. 45-K grants authority to the RBI to collect information pertaining to the NBFCs and to give directions pertaining to deposits to them. Whereas, under S. 45-L, general powers are conferred on the RBI to call for information from the Financial Institution and issue directions to regulate the credit system of the country. S. 45-M of the RBI Act, 1934 casts an obligation upon the NBFCs, to furnish all information and details as required by the RBI and to comply with RBI’s direction given under Chapter IIIB of the RBI Act. Similar powers are granted to the RBI in respect of Banks under the Banking Regulation Act, 1949. [Paras 8.1 and 8.2][934-E-H]

1.3 S.45-MB of the RBI Act, 1934 empowers the RBI, to inter alia prohibit the acceptance of deposit and alienation of assets by Non-Banking Financial Companies, when they fail to comply with RBIs direction or infringe any statutory provisions. [Para 8.3][935-E]

1.4 The RBI in its communication dated 09.06.1997 has informed SIBCO of the winding up proceedings initiated against CRB Capital and categorically prohibited the defendant from, inter alia, parting with the interest on securities. However, the RBI has not mentioned any provision under which the abovementioned communication was issued. This has encouraged the plaintiff to argue that it is merely an ‘advice’ from RBI, and not a statutorily enforceable directive. [Para 8.5][936-D-F]

1.5 In the case at hand, vide the previous Notification dated 10.04.1997, the RBI restrained CRB Capital (an NBFC), from alienating or creating charge over their assets in ‘public interest’, and through the consequential directive dated 09.06.1997 has restrained the defendant from parting with any money in relation to securities held by the said NBFC. Even though, on the date of the prohibitory Notification dated 10.04.1997, the Bonds were in Shankar Lal Saraf’s ownership, and not held by CRB Capital, the Notification and subsequent directive dated 09.06.1997 was still applicable as there was a clear shadow over the Shankar Lal Saraf’s title. [Para 8.6][936-F-H]

1.6 A conjoint reading of the statutory provisions makes it abundantly clear that for ‘public interest’ the RBI is empowered to issue any directive to any banking institution, and to prohibit alienation of an NBFC’s property. The term ‘Public interest’ has no rigid definition. It has to be understood and interpreted in reference to the context in which it is used. The concept derives its meaning from the statute where it occurs, the transaction involved, the state of society and its needs. [Para 8.7][936-H; 937-A-B]

Bihar Public Service Commission vs. Saiyed Hussain Abbas Rizwi and Anr. (2012) 13 SCC 61 : [2012] 11 SCR 1032; Peerless General Finance and Investment Co. Ltd. vs. RBI (1992) 2 SCC 343 : [1992] 1 SCR 406 – relied on.

1.7 It is not necessary for RBI to mention a specific provision before issuing directions, for it to have statutory consequences. All that is required is the authority under the law, to issue such direction. RBI directives carry statutory force, gathering authority from the provisions of both the RBI Act, 1934 and the Banking Regulation Act, 1949. Any direction by the RBI, is compelling and enforceable similarly like the provisions of the RBI Act by its very nature. [Para 8.9 and 8.10][938-B-D; 938-E] State of U.P. v. Babu Ram Upadhya AIR 1961 SC 751 : [1961] SCR 679; D.K.V. Prasada Rao v. Government of A.P. AIR 1984 AP 75 – referred to.

1.8 For ensuring effective implementation of relevant directions, RBI as was declared is not only vested with curative powers but also preventive powers. Hence, it is not necessary for the bank to wait for a direction to be violated, and then launch penal actions against the offenders. But the RBI can also issue directions to ensure that the relevant orders/directions are effectively followed. Thus, the RBI under Ss. 45-MB of the RBI Act, 1934 and 35-A of the Banking Regulation Act, 1949 has the requisite authority to issue the communication dated 09th June, 1997. The omission by the RBI to mention any enabling provision, doesn’t change the nature and status of the direction. The actions in furtherance of grounds of ‘public policy’ by the RBI was justified, for issuing the Notification dated 10.04.1997. The notification itself clearly mentioned that it is issued for the benefit of depositors and creditors of CRB Capital. The RBI’s communication dated 09.06.1997 was in fact a direction, with the appropriate statutory backing traceable to S. 45-MB of the RBI Act as well as S. 35-A of the Banking Regulation Act. The 09.06.1997 direction was issued, in furtherance of and to effectively implement the 10.04.1997 notification issued earlier by the RBI. As such the RBI’s 09.06.1997 Notification was definitely binding on the defendant which as noted earlier, is a banking institution. [Paras 8.13 and 8.14][939-F-G; 940-A-D]

RBI vs. Peerless General Finance and Investment Co. Ltd. (II) (1996) 1 SCC 642 : [1996] 1 SCR 58; Ganesh Bank of Kurundwad Ltd. vs. Union of India (2006) 10 SCC 645 : [2006] 5 Suppl. SCR 437 – relied on.

1.9 Situated thus, the actual status of the RBI Notification would have a bearing on the claim against the defendant in the suit and the later proceeding. The plaintiff, always had the option of challenging its legality but they have never specifically challenged those in the Suit. Therefore, when the legality of the RBI Notification is not under challenge, relief can’t be granted in the Suit without determining its legality. This can by itself, put a quietus on the issue at hand. [Para 8.15][940-D-F]

1.10 That apart, when the claim in the Suit is relatable to the embargo by the RBI, it was necessary to implead RBI in the litigation, for getting more clarity on the issue. The plaintiff omitted to do so at their own peril despite the defense set out on this basis. The plaintiff is dominus litus, and they cannot be compelled to seek relief against anyone. The plaintiff cannot be granted parity with its predecessor-in-interest, Shankar Lal Saraf, who was paid interest which accrued in July, 1997 despite the RBI directive of 09.06.1997. The defendant has explained this aberration by clarifying that the payment to Shankar Lal Saraf was made before the defendant was in receipt of the RBI directive. Hence, the plaintiff cannot claim any advantage for themselves or parity with its predecessor-in-interest, on this cause. [Paras 8.16 and 8.17][940-F-H]

2. SHADOW OVER SHANKAR LAL SARAF’S

TRANSACTION:

2.1 S. 441(2) of the Companies Act, 1956 reveals that winding-up proceedings other than voluntary winding-up, are said to have commenced from the date of presentation of petition. [Para 9.1][941-D-E]

2.2 A conjoint reading of ss. 531 and 441(2) of the Companies Act, 1956 prima facie reveals that any transfer of property by or against a company in involuntary winding up, the suspect spell for deemed fraudulent transaction is six months before presentation of the winding up petition. In the present case, the petition for winding-up was submitted by RBI on 22.05.1997 and admittedly, the transfer in Shankar Lal Saraf’s favor was executed in February, 1997. Hence, the defendant’s prima facie suspicion that the transfer during the suspect spell, may be deemed fraudulent, is not misplaced. [Para 9.2][941-H; 942-A-B]

IDBI vs. Official Liquidator (2020) 15 SCC 517 – relied on.

2.3 The suspicion harboured by the defendant is during the suspect spell as supported by the Calcutta High Court in its order dated 09.01.2001, where the Writ Court refused to interfere on the grounds that the issue was in the teeth of the litigation pending in the Delhi Company Court. [Para 9.3][942-D]

2.4 Significantly it has been admitted by Shankar Lal Saraf in his Application (CA 1380/1998) to the Delhi Company Court that the defendant was acting under the advice of RBI, which treated the transfer of Bonds as fraudulent. Additionally, the Single Judge of the Calcutta High Court, in his judgment dated 13.03.2015 recorded a finding that initially both, RBI and the Official Liquidator, treated the transfer in Shankar Lal Saraf’s favor, as fraudulent in the following words:- …On a winding up petition having moved on 22nd May, 1997, the Company Court appointed a Professional Liquidator. The RBI issued a letter to the bank not to deal with the subject bonds as the liquidator has treated the same as fraudulent preference under S. 531 of the Act… Though it was held that the transactions are genuine and cannot be declared as fraudulent preference at the instance of the Official Liquidator, but the fact remains that there was some claim over the subject bonds…” [Para 9.4][942-E-H]

2.5 While the Division Bench of the Calcutta High Court has set-aside the order of the Learned Single Judge, the finding mentioned above at the relevant time, is not refuted by the contesting party. [Para 9.5][943-A]

2.6 The cloud over the issue was cleared by the Company Court judgment (17.12.2004) wherein, the defendant’s claim that the transfer in Shankar Lal Saraf ’s favor was ‘fraudulent preference’, was rejected. Significantly as soon as this decision was communicated to the defendant, payment was promptly made by the defendant to the plaintiff, without hesitation. [Para 9.6] [943-B]

2.7 At this juncture it is apposite to mention, that the validity of the Company Court judgment dated 17.12.2004 has not been challenged by either party. Hence, the judgment has attained finality and the issue whether the transfer in Shankar Lal Saraf’s favor was fraudulent, is therefore put to rest. [Para 9.7][943-C]

2.8 It is clear that the defendant’s impression that the transfer in favour of Shankar Lal Saraf was not legitimate, was a reasonable opinion, shared by many, including the RBI and the Official Liquidator. The defendant was in receipt of the RBI’s directions, not to part with payment as the Official Liquidator had treated the transaction as fraudulent. This had clearly placed a shadow over the plaintiff’s title to the Bonds and consequences must flow therefrom. [Para 9.8][943-D-E]

3. WHETHER WITHHOLDING PAYMENT BONA

FIDE?

3.1 Assuming ad arguendo, that the RBI directions could be disregarded yet the Bonds and the interest accrued thereon, were in the teeth of the litigation, pending in the Company Court. The defendant proactively applied to the Official Liquidator on multiple occasions seeking clarification on interest payment. But, the Official Liquidator did not respond. Hence, it is clear that despite the defendant’s best intentions and proactive efforts, it would be imprudent for the defendant to release the payment accrued on the suspect Bonds. When the Bonds were released from dispute pending before the Company Court, the defendant promptly complied with the order of the Company Court. [Para 10][943-F-G]

3.2 The plaintiff has failed to show how the defendant derived any undue benefit by withholding the payment accrued on the Bonds. The amount due on the Bonds was immediately transferred to the ‘Accrued Interest’ head and was not used by the defendant for their business. Hence, the plaintiff’s contention that the defendant’s actions of withholding payment were mala fide, is not acceptable to us. [Para 10.1][943-G-H; 944-A]

3.3 The plaintiff also argues that the Company Court judgment (17.12.2004) has attained finality and the defendant is barred by res judicata from raising the issue of fraudulent preference. The issue of fraudulent preference is no longer res integra and none sought to challenge the Company Court’s judgment and re-agitate the issue. Hence, this contention will be of no advantage for the plaintiff. [Para 10.2][944-B-C]

4. BOND STATUS AND OBLIGATION: “HOLDER IN

DUE COURSE”.

4.1 S. 8 of the Negotiable Instruments Act defines a ‘Holder’ of promissory note as any person who in his own name is entitled to the possession of the note and to recovery of due amount, pursuant to the said note. [Para 11]

U. Ponnappa Moothan Sons, Palghat vs. Catholic Syrian Bank Ltd. and Ors. (1991) 1 SCC 113 : [1990]

1 Suppl. SCR 542 – referred to.

4.2 An obligation has been imposed on the transferee of the promissory notes, to be deemed to be a ‘Holder in due course’, that the notes should have been acquired in good faith; after exercising reasonable care and caution about the holder’s title. In the present case, while the Shankar Lal Saraf’s (holder) title over the Bonds/Promissory Notes is not in dispute but Shankar Lal Saraf’s holding stood cleared by the Company Court only on 17.12.2004 but before the said judgment, there was a cloud over his title. Consequently, the plaintiff’s status as ‘holder in due course’ was suspect at the relevant point of time. [Para 11.2][945-C-D]

4.3 The defendant bank was therefore justified in withholding payment till conclusion of dispute in Company Court, even though the relief claimed was in respect of an ‘unconditional undertaking’, as there were reasonable legal concerns for the transaction during the suspect spell, for making such payments. [Para 11.3][945-E]

5. ENTITLEMENT FOR INTEREST ON DELAYED

PAYMENT AND PENDENTE LITE INTEREST.

5.1 The defendant was justified in withholding the accrued dues. The actions of SIDBI were bona fides, in furtherance of RBI directives, which were issued in public interest. In the case of Clariant International Ltd. Vs. SEBI, this court speaking through Justice S B Sinha held that two conditions need to be satisfied before awarding interest. First, that money should be wrongfully withheld from the rightful owners; Second, that there should be equitable considerations for awarding said interest. In the case at hand, neither of these conditions are found to be satisfied. [Para 12][945-F-H]

Clariant International Ltd. vs. SEBI (2004) 8 SCC 524 : [2004] 3 Suppl. SCR 843 – referred to.

5.2 As per S. 34 of the Code of Civil Procedure (CPC), award of interest is a discretionary exercise, steeped in equitable considerations. Interest is payable for different purposes such as compensatory, penal, etc. but these are not the situations in the case in hand. Here firstly, the defendant was justified in withholding payment, as they were under RBI’s direction to do so; secondly, the defendant hasn’t derived any undue benefit by their act and; thirdly, due payment was promptly made to the plaintiffs upon settlement of rights by the court. Moreover, the concerned transactions were during the “suspect spell”. This shows that the defendant acted bona fide and there was no undue delay on their part, to remit the dues. [Para 12.1][946-A-C]

5.3 The plaintiff did pray for pendente lite interest in the Trial Court but neither did the trial court frame any issue in this regard, nor were any arguments recorded. This shows that such claim was not pressed by the plaintiff. Further, no ground is urged in the appeal memo, that such an issue ought to have been framed. Hence, it is clear that the plaintiff is not serious on its claim for pendente lite interest. The issue is rested accordingly. [Para 12.2][946-C-D]

6. WAS PLAINTIFF’S DEMAND BARRED BY WAIVER/

ACQUIESCENCE?

It is evident from the record, that when the payment warrants were received by the plaintiff, it effaced the warrants by handwritten remark ‘Received’. Pertinently, in the first instance, protest was only raised in reference to excessive TDS deduction by the defendant while remitting the dues. The demand for interest on delayed payment, was raised after passage of 7 months, when the books of SIBCO were allegedly audited. This justification does not appear to be reasonable. In fact, as has been stated previously in this judgment, the plaintiff was entitled to demand interest for delayed payment in its writ petition as well. But SIBCO has consistently failed to raise this demand at every stage including at the stage of accepting the sum tendered by the defendant, without any protest. Hence, it is clear that the plaintiff accepted the payment from the defendant as due settlement of its claims. SIBCO’s failure to raise protest and demand for interest at the earliest possible stage, amounted to sub-silencio acceptance. Accordingly, the plaintiff is barred from raising this demand after several months applying the principle of waiver/acquiescence. [Paras 13, 13.1][946-E-H; 947-A]

7. WHETHER PRESENT SUIT

CONSTRUCTIVE RES JUDICATA ?

BARRED

BY

The defendant has argued that the principle of constructive res judicata would also offset the plaintiff’s claim. Pertinently, the previous Bond holder Shankar Lal Saraf could not possibly have claimed interest on delayed payment before the Company Court for it lacked the jurisdiction to adjudicate claims unrelated to the liquidation proceedings, against CRB Capital. But, the successor Bond holder i.e. the plaintiff could have claimed interest on delayed payment from the writ court. SIBCO’s submission is not acceptable that the cause of action arose only on 23.11.2005, when the defendant refused to heed to the demand of interest on delayed payment. The cause of action for the plaintiff accrued the first time, when the defendant allegedly failed to pay timely interest. Since such a claim was not raised in the writ court, the subsequent Suit of SIBCO is barred by the principle of Constructive Res Judicata. [Para 14][947-B-D]

8.1 It is clear that the RBI has wide supervisory powers over financial institutions like SIDBI, in furtherance of which, any direction issued by the RBI, deriving power from the RBI Act or the Banking Regulation Act is statutorily binding on the defendant. Admittedly, the RBI issued Notification dated 10.04.1997, deriving power from S. 45-MB(2) of the RBI Act. Thereby, the RBI froze the assets of CRB Capital on the grounds of public policy, for the purpose of protecting interests of creditors and depositors of CRB Capital. [Para 15][947-E-F]

8.2 The RBI did not cite any provision in its Direction dated 09.06.1997 to the defendant, as it was not under any compulsion to do so. It was sufficient that the RBI’s power to issue such a direction could be traced to either S.45-MB(2) of the RBI Act, or S. 35-A of the Banking Regulation Act. Hence, the said direction was statutorily binding on the defendant. Without the said direction, the Notification dated 10.04.1997, would have been rendered toothless, causing irreparable harm to the creditors and depositors of CRB Capital. In reference to the Directive dated 09.06.1997, the defendant proactively sought advice from the Official Liquidator in regards to the payment of interest income to the defendant. But, in absence of the Official Liquidator’s consent and guidance, the defendant could not have made the payment without inviting onerous consequences for itself. Hence, it can be said that the defendant acted prudently, being conscious of the legal obligation, to withhold such payment to the plaintiff. [Para 15.1][947-F-H; 948-A-B]

8.3 Further, in reference to S. 531 of Companies Act, 1956 read with S. 441(2) of the same act, it cannot be denied that there was a suspicion over the title of the plaintiff’s predecessor-ininterest. Ipso facto, the plaintiff’s title with transaction during the “suspect spell” was also under a cloud. It is clear from the discussion above that such suspicion was not misplaced, as it was shared by the RBI as well as the Official Liquidator. Immediately after the Company Court vide its decision (17.12.2004), clarified the position that the plaintiff was in the clear for the concerned transactions, the defendant has duly ensured compliance with the said order. Hence, it is clear that the defendant acted bona fide in withholding the payment. [Para 15.2][948-B-D]

8.4 The elements that could have weighed on the defendant for not making timely payments are: I) Contravention of the RBI Directives; II) Issue being related to the ongoing litigation in the Delhi Company Court; III) Concerns with the defendant’s title over the Bonds/promissory notes transacted during the “suspect spell” and these perturbing elements can’t be brushed aside as not relevant. We are therefore of the view that even though the payment was demanded in furtherance of an unconditional undertaking in the Bonds, the defendant was not entitled to it till the Company Court’s order dated 17.12.2004. [Para 15.3][948-D-F]

8.5 The plaintiff’s transaction of Bonds with Shankar Lal Saraf does not sound right in this court’s estimation, with purchase being made during the “suspect spell” and concurrent alarm bells rung by the RBI, and the Court in that duration. When SIBCO approached the Writ Court to validate their transaction, they failed to put forth any claim for interest on delayed payment. Curiously, the plaintiff chose not to approach the Company Court directly and instead relied upon Shankar Lal Saraf to secure a favourable verdict on the issue. They even chose to forgo the very first opportunity that arose for claiming interest on delayed payment, when the defendant was remitting the amount due to the plaintiff while complying with the Company Court verdict. Pertinently the payment was accepted without protest and only after about 7 months, additional sums were demanded on the Bonds. Despite all these disquieting factors, the plaintiffs, like the Shakespearean character of Shylock, have raised the demand “I’ll have my bond. Speak not against my bond.” As we see the situation, the holder of the Bond has received their ‘pound of flesh’, but they seem to want more. Additional sum in our estimation is not merited as SIBCO has already received their just entitlement and burdening the defendant with any further amount towards interest would be akin to Shylockian extraction of blood from the defendant. Therefore the question formulated in paragraph 3 of this judgment is answered accordingly against the plaintiff. [Para 15.4][948-F-H; 949-A-B]

ICICI Bank Ltd. v. Official Liquidator of APS Star Industries Ltd. (2010) 10 SCC 1 : [2010] 12 SCR 644; Sudhir Shantilal Mehta v. Central Bureau of India (1992) 2 SCC 343 : [1992] 1 SCR 406; Bhagwati Prasad Pawan Kumar v. Union of India (2006) 5 SCC

311 : [2006] 2 Suppl. SCR 975 – referred to.