SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA versus M/S. SIBCO INVESTMENT PVT. LTD.
[2022] 1 S.C.R. 913, Supreme Court of India, 2022
Outcome: Disposed off
Segment: Issues
[2022] 1 S.C.R. 913
913
SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA
v.
M/S. SIBCO INVESTMENT PVT. LTD.
(Civil Appeal No. 08 of 2022)
JANUARY 03, 2022
[R. SUBHASH REDDY AND HRISHIKESH ROY, JJ.]
Reserve Bank of India, 1934: Supervisory powers of RBI –
Held: RBI has wide supervisory powers over financial institutions
– For ‘public interest’ the RBI is empowered to issue any directive to
any banking institution, and monitor the conduct of every NBFC –
Banking Regulation Act, 1949 – s.35A.
Reserve Bank of India, 1934: s.45K – Authority of RBI to
issue directions for ensuring effective implementation of its orders
– Held: Any direction by the RBI, is compelling and enforceable
similarly like the provisions of the RBI Act by its very nature – For
ensuring effective implementation of relevant directions, RBI is not
only vested with curative powers but also preventive powers – RBI
can also issue directions to ensure that the relevant orders/directions
are effectively followed.
Negotiable Instruments Act, 1881: ss.8 and 9 – ‘Holder in
due course’ – 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.
Code of Civil Procedure, 1908: s.34 – Held: As per s.34 CPC,
award of interest is a discretionary exercise, steeped in equitable
considerations – Interest is payable for different purposes such as
compensatory, penal, etc.
Code of Civil Procedure, 1908: Necessary party – Held: On
facts, when a claim in the suit was relatable to 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.
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Doctrines/Principles: Principle of dominus litus – The plaintiff
is dominus litus, and cannot be compelled to seek relief against
anyone.
Doctrines/Principles: Principle of waiver/acquiescence –
Applicability – Held: Plaintiff accepted payment from defendant as
due settlement of its claims – Plaintiff’s failure to raise protest and
demand for interest at the earliest possible stage, amounted to
sub-silencio acceptance – Accordingly, plaintiff is barred from raising
this demand after several months applying the principle of waiver/
acquiescence.
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 cross-
appeal, 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.
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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 above-
mentioned 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
SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA v. M/S.
SIBCO INVESTMENT PVT. LTD.
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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
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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
SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA v. M/S.
SIBCO INVESTMENT PVT. LTD.
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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
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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]
SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA v. M/S.
SIBCO INVESTMENT PVT. LTD.
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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.
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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
SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA v. M/S.
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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]
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7. 
WHETHER 
PRESENT 
SUIT 
BARRED 
BY
CONSTRUCTIVE RES JUDICATA ?
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
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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-in-
interest. 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,
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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.
Case Law Reference
[2010] 12 SCR 644
referred to
Para 5.1
[1992] 1 SCR 406
referred to
Para 5.1
[2006] 2 Suppl. SCR 975
referred to
Para 5.3
(2020) 10 SCC 274
relied on.
Para 8
[2012] 11 SCR 1032
relied on.
Para 8.7
[1992] 1 SCR 406
relied on.
Para 8.8
[1961] SCR 679
referred to.
Para 8.10
AIR 1984 AP 75
referred to
Para 8.10
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[1996] 1 SCR 58
referred to
Para 8.12
[2006] 5 Suppl. SCR 437
relied on.
Para 8.13
(2020) 15 SCC 517
referred to
Para 9.2
[1990] 1 Suppl. SCR 542
referred to
Para 11.1
[2004] 3 Suppl. SCR 843
referred to
Para 12
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 8 of
2022.
From the Judgment and Order dated 25.11.2019 of the High Court
of Calcutta in APD No.291 of 2015.
With
Civil Appeal No. 9 of 2022.
K. V. Viswanathan, Sr. Adv., Ms. Uttara Babbar, Niki Kantawala,
Manan Bansal, M. G. Arvind Raj, Rahul Sangwan, Sabyasachi Chaudhury,
Rauf Rahim, Rajarshi Dutta, Ali Asghar Rahim, Advs. for the appearing
parties.
The Judgment of the Court was delivered by
HRISHIKESH ROY, J.
1. Leave granted.
2. The challenge in these appeals is to the judgment and order
dated 25.11.2019 of the Division Bench of the High Court of Calcutta,
whereby the decision of the Single Judge dismissing the suit i.e. CS No.
79/2006 of M/s. SIBCO Investment Pvt Ltd (for short SIBCO) was
reversed. The suit was filed against Small Industries Development Bank
of India (SIDBI) seeking interest on the alleged belated payment of
principal sum and accrued interest to the plaintiff for the Bonds issued
by SIDBI.
3. The question to be answered in this case is whether plaintiff
has set forth a just claim, based on the Bonds issued by the defendant or
is it a case of that trial in Shakespeare’s The Merchant of Venice
where Shylock is claiming the promised pound of
flesh in the form of
interest on delayed payment on the Bonds purchased by the plaintiff.
The 41 Bonds related to this case were initially issued by SIDBI to M/s.
CRB Capital Markets Ltd. (Hereinafter referred to as “CRB Capital”)
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in 1993. Those Bonds were then sold by CRB Capital to one Shankar
Lal Saraf in February, 1997 and those in turn were then sold on 1.7.1998
to SIBCO – the plaintiff and the respondent herein. In the meantime,
CRB Capital faced winding up proceedings at the instance of the RBI in
the Delhi High Court. The said proceeding will have a bearing on this
case.
4.  The following relevant facts necessary for consideration of
this appeal are broadly culled out from the judgment of the Calcutta
High Court:-
4.1  The Plaintiff SIBCO purchased the Bonds in the form of
promissory notes issued by the defendant SIDBI. These are termed as
SIDBI Bonds 2003 (4th Series) carrying 13.50% interest and SIDBI
Bonds 2004 (5th Series) generating interest at the rate of 12.50%, from
one Shankar Lal Saraf on 1st July, 1998. The interest is payable on a
half-yearly basis on/or before 21st day of June and 21st day of December
of every year. The 5th series Bonds were agreed to be redeemed on
21st December, 2004 whereas the 4th series Bonds were to be redeemed
on 21st December, 2003. The Bonds are freely tradable in the market.
M/s. SIBCO purchased 15 Bonds (interest payable @ 13.50%) and 26
Bonds (interest payable @12.50%) of face value of ten lakhs each for
an aggregate price of Rs. 3.69 crores on 1st July, 1998 by M/s. SIBCO
from the said Shankar Lal Saraf. The Bonds were deposited with M/s.
SIDBI (defendant) on July 2, 1998 with the request to endorse the name
of the
Plaintiff-purchaser on the said Bonds. On refusal to register and/
or record the name of the SIBCO by the defendant on the ground that
CRB Capital had gone into involuntary liquidation proceedings at the
instance of the RBI. At first the Plaintiff filed the W.P. No. 1456 of 1998
before the Calcutta High Court seeking a mandamus upon defendant to
transfer the aforesaid Bonds in favour of the plaintiff and also to pay the
interest accrued on them.
4.2  The Calcutta High Court on 09.01.2001 held that writ court is
not the proper forum and permitted the petitioner to approach the
Company Court, being the High Court at Delhi, seeking intervention in
the liquidation proceeding initiated against CRB Capital. Though an intra-
court appeal was preferred against the said order but it was not proceeded
with. On the request of the plaintiff, the Shankar Lal Saraf (the plaintiff’s
predecessor-in-interest) filed an interlocutory application in the pending
liquidation proceeding before the Company-Court, claiming that the
SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA v. M/S.
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aforesaid transactions should be treated as outside the purview of the
liquidation proceeding, under the Companies Act, 1956.
4.3  By a judgment dated 17th December, 2004, the Learned
Company Court held that the subject Bonds are beyond the purview of
the liquidation proceeding and directed Shankar Lal Saraf to put up the
matter before the defendant. On 17th February, 2005 the above judgment
of the Company Court was communicated and the Bonds were presented
to the defendant. Then on 21st February, 2005 the defendant made the
payment of the principal amount together with the interest calculated up
to the date, as promised in the said Bond to M/s SIBCO with TDS
deduction at around 20%. By a letter dated 24th February, 2005, the
Plaintiff raised an objection over the rate on which the TDS was deducted,
which was accepted by the defendant as it issued a further warrant
covering a sum of Rs. 58,86,833/- on account of excess TDS deductions.
4.4 The case projected in the plaint in the CS No. 79/2006, was
that the defendant during their audit detected that the interest was
calculated up to 31st October, 2005 and demand was raised on account
of interest on delayed payment of the principal amount and the interest
on Bonds through a letter dated November 10, 2005. The defendant
refused to accede to the demand made by the plaintiff in its reply letter
dated November 23, 2005. Aggrieved by the refusal, M/s SIBCO filed
the CS No.
79/2006 for a sum of Rs. 3,25,54,483/- from M/s SIDBI.
4.5  The defendant disputed the claim on account of delayed
payment or in other words, delayed redemption of the aforesaid Bonds.
It was categorically pleaded that a liquidation proceeding was initiated
against CRB Capital, who at one point of time was the holder of the
aforesaid Bonds and sold it to the said Shankar Lal Saraf on February
20, 1997 and on April 7, 1997. The RBI issued a facsimile dated June 9,
1997 advising the defendant not to affect any transfer, register any lien
or otherwise deal with such security invested by CRB Capital and its
Group Companies, without prior permission of the Official Liquidator
appointed by the Company Court at Delhi. Since Shankar Lal Saraf as
well as the plaintiff were pressing hard for enfacing their name on the
said Bonds, a clarification was sought on December 23, 1997 by the
defendant from the RBI seeking advice for further action in the matter
on January 29, 1998. The RBI advised the defendant to take up the
matter with the Official Liquidator which was accordingly done on April
3, 1998.
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4.6  The defendant stated that despite multiple reminders till July
18, 2001 no reply was received from the Official Liquidator in this regard.
The specific stand is that due to the embargo imposed by RBI, the
defendant couldn’t act in defiance of the RBI’s directions. It is further
stated that because of the pendency of the writ petition before the
Calcutta High Court, the matter was not taken up and, therefore, neither
the interest nor the redemption was paid. According to the defendant,
after the Company Court order in the liquidation proceeding, the plaintiff’s
name was put down upon the said Bonds and the holder was paid the
principal, as well as the interest up to the date of redemption. As such
there is no latches, negligence and delay on the part of the defendant to
honour the Bonds to the plaintiff.
4.7 The central case projected by the plaintiff was that the amount,
both principal and interest, were paid beyond the maturity period and,
therefore, the defendant is liable to pay the interest for delayed payment.
According to the plaintiff, the defendant has unreasonably withheld the
said amount, whereas, the defendant says that because of the embargo
and restriction by the RBI and the pending proceedings, the maturity
amount was not paid on the date of maturity. The reliance appeared to
have been placed by both the sides on the facsimile dated 9th June, 1997
issued by the RBI.
I. TRIAL COURT FINDINGS
5. The learned Trial Judge in his judgment
noted that there is a
clear stipulation against affecting any transfer, register any lien or
otherwise deal with, the securities of CRB Capital with further stipulation
that it should not part with the interest, dividend or principal without the
permission of the Official Liquidator. Additionally it appears from the
order passed by the Company Court that there was a notification issued
on 10th April 1997 under Section 45-MB of the RBI (Amendment) Act,
1997 directing the said Company not to sell, transfer, create charge or
mortgage or deal in any manner with any of its profits and assets without
the permission of the RBI for a period of six months from the date of the
said notification. The Official Liquidator was appointed on 22nd May,
1997 who subsequently treated the subject Bonds as fraudulent
preference under Section 531 of the Companies Act, 1956. Though it
was held by the Company Court vide its judgment dated 17.12.2004,
that the transactions are genuine and cannot be declared as fraudulent
preference at the instance of the Official Liquidator, the fact remains
that there was some claim over the subject Bonds.
SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA v. M/S.
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5.1 The RBI is found to be empowered to control the management
of the Banking Company in certain situations and can lay down the
parameters enabling Banking Companies to expand business and regulate
the paid up capital, reserve funds, cash funds and above all policies in
the matter of advances to be made by the Banking Companies and
allocation of resources etc. The RBI is authorized by the Parliament to
enact the policy and to issue directions/guidelines which have statutory
force, as held in case of ICICI Bank Ltd. Vs. Official Liquidator of
APS Star Industries Ltd.1 In support for the aforesaid proposition, the
Trial Court also relied on the ratio in Sudhir Shantilal Mehta Vs. Central
Bureau of India2 to comment on the Regulatory role of the RBI vis-à-
vis the business of the banking companies.
5.2 This suggests that once the RBI has issued directions, any
action contrary thereto, may not only attract the civil liability but might
also invite criminal breach of trust. According to the Trial Court the
defendant was not sitting in slumber after receiving the RBI instructions
but sought advice immediately thereafter and was directed to approach
the Official Liquidator. The defendants sought clarification from the
Official Liquidator but did not receive any reply. Ultimately on 17th
December, 2004, the application of Shankar Lal Saraf before the
Company-Court succeeded and within a short span of time, the
redemption
value along with interest was paid to the plaintiff. The Learned
Trial Judge did not agree with the submission of the plaintiff that there
was any deliberate attempt to delay the payment of the maturity amount
by the defendant. It would be worth noting that the Trial Court relied on
defendants’ witness to hold that the accrued interest was transferred to
the accrued interest head and, therefore, it was not utilized nor any benefit
was taken therefrom.
5.3 As can be seen, the Suit was dismissed primarily on two
grounds: -
(A) The bonds in question could not be transferred by the petitioner
since the RBI had initiated winding up proceedings against CRB Capital
before the Delhi High Court, whereafter the RBI has issued a directive
dated 9.6.1997 to the petitioner herein directing not to register transfer
of CRB Capital’s Bonds in question, or to part with any payment pertaining
1 (2010) 10 SCC 1.
2 (1992)2 SCC 343.
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to the said Bonds, without consent of the Official Liquidator. The learned
Judge therefore found that the petitioner had acted entirely in accordance
with the directive of the RBI, by requesting permission from the Official
Liquidator, and thereby promptly making the payment of the amounts
due under the Bonds after appropriate orders were passed by the Delhi
High Court where winding up proceedings were going on. Hence, the
defendant could not be held liable for the delayed payment.
(B) The learned Trial Judge also noted the conduct of the plaintiff,
in accepting the payment under the Bonds, including interest, without
any protest in February, 2005. The plaintiff thereafter slept over this
issue for almost 8 months, and for the first time claimed interest for the
delayed payment in October 2005. The court therefore found that since
the plaintiff had accepted the encashment without protest the law laid
down by this Court in Bhagwati Prasad Pawan Kumar v. Union of
India3 would apply, since there was acceptance by conduct. In Bhagwati
Prasad(supra), the Court has held: -
“19. It is well settled that an offer may accepted by conduct.
But conduct would only amount to acceptance if it is clear
that the offeree did the act with the intention (actual or
apparent) of accepting the offer. The decision which we have
noticed above also proceed on this principle. Each case must
rest on its own facts. The courts examine the evidence to find
out whether in the fact and
circumstances of the case the
conduct of the “offeree” was such an amounted to an
unequivocal acceptance of the offer made. If the facts of the
case disclose that there was no reservation in signifying
acceptance by conduct. On the other hand, if the evidence
discloses that the “offeree” had reservation in accepting the
offer, his conduct may not amount to acceptance of the offer
in terms of Section 8 of the Contract Act.”
II. APPELLATE COURT PROCEEDINGS:
6. Aggrieved by the order of the learned Trial Judge of the Calcutta
High Court, the plaintiff preferred an intra-court appeal which was
numbered as APD 291/2015. On 25th November 2019, The Learned
Division Bench, allowed the plaintiff’s appeal, and set-aside the judgment
favoring the defendant. The High Court observed in the appeal that,
3 (2006) 5 SCC 311.
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even after the RBI communication dated 09th June 1997, the defendant
had paid interest accruing in June, 1997 to the plaintiff’s predecessor-in-
interest, Shankar Lal Saraf. The court relied on a letter issued by the
defendant to RBI dated 23rd December 1997, wherein the defendant
had admitted that it was impossible to withhold payment forever. Based
on these observations, the learned Division bench held that the RBI
communication dated 09th June, 1997 was merely a suggestion to the
defendant and not an order passed by the RBI exercising its statutory
authority. Hence, the defendant was without a reasonable cause, when
it chose to withheld payment duly accrued to the respondent.
6.1 It was accordingly held that the suit was not barred either by
accord or satisfaction as the plaintiff gave no acknowledgment that all
claims stood satisfied at the time of receiving the payment warrants on
21st February 2005. Hence, the plaintiff was at liberty to raise further
demands including demand for interest on delayed payment. The Learned
Division Bench further held that reliance on Bhagwati Prasad (Supra)
by the trial judge was misplaced as it was not cited by either parties and
was relied on without giving the parties a chance to rebut it. The defendant
was accordingly directed to pay simple interest @ 6% per annum on
interest, from date of accrual and 8% simple interest per annum on
principal amount from date of maturity of
respective Bonds by 29.02.2020.
III. DISCUSSION AND DECISION:
7. The present appeals are filed impugning the above judgment of
the Division Bench of the Calcutta High Court. The defendant seeks
relief of setting aside the judgment of the Division Bench in toto. Whereas,
the plaintiff seeks pendente lite interest over and above the interest
already awarded, and is disputing the rate of interest awarded by the
Learned Division bench on interest and Principal amount.
7.1 Assailing the legality of the judgment of the appellate Bench
of the Calcutta High Court, Mr K V Viswanathan, learned Senior
Counsel for the defendant makes the following arguments:-
(i)
SIDBI acted entirely in accordance with the directives issued
by the RBI, as any prudent financial institution would;
(ii)
Withholding of payment under the Bonds in question, was
justified in light of possibility of transfer of the Bonds by
CRB Capital being a Fraudulent Preference under S. 531
of the Companies Act, 1956;
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(iii)
SIBCO bought the bonds in question in ‘suspect spell’ with
the knowledge that two installments of interest had accrued
and not been paid; not established that he is a “holder in
due course”; there is a cloud on its title;
(iv)
Petitioner acted proactively by preferring numerous letters
to RBI/Official Liquidator; amounts cannot be said to have
been wrongfully withheld;
(v)
Neither Saraf nor SIBCO claimed interest for delayed
payment of interest or the maturity amounts under the Bonds
in previous litigation; barred by constructive res judicata;
(vi)
The payments made were accepted by Respondent without
protest and amount to accord and satisfaction;
(vii)
The Respondent/SIBCO’s claim for interest pendente lite
is a clear after-thought, and in any event, not justified;
7.2 Per contra, Mr. Sabyasachi Chaudhury, learned Senior Counsel
representing the plaintiff (respondent) contends that:
(i)
The RBI merely issued an advice which pertained to assets
held by CRB Capital and was inapplicable to the Bonds in
question, which were owned by plaintiff when the advice
was issued;
(ii)
SIDBI’s action of withholding payment, on apprehension
of fraudulent preference by M/s. CRB Capital was not bona
fide, in absence of any objection by the Official Liquidator;
(iii)
SIDBI is barred by res judicata from arguing fraudulent
preference, as this issue is settled by the judgment of
Company Court dated 17th December, 2004;
(iv)
The payment was made in furtherance of
promissory notes,
which are unconditional undertakings, and not in pursuance
of any reciprocal promise. Thus, the issue of ‘accord and
satisfaction’ doesn’t arise;
(v)
Plaintiff has claimed interest pendente lite consistently at
trial, as well as appellate level.
IV. RBI’s 09.06.1997 COMMUNICATION- ‘ADVICE’ OR
‘DIRECTIVE’:
8. In order to ascertain the effect of the RBI Communication on
the Bonds in question, it will be beneficial to examine the statutory
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provisions which empower the RBI. 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, we find that the RBI has wide supervisory jurisdiction
over all Banking Institutions in the country. This court speaking through
Justice V. Ramasubramaniyan, in the case of Internet and Mobile
Association of India vs. RBI4, elucidated on the position of the RBI as
a statutory body, with immense power in financial/ monetary field:
“190. But given the scheme of the RBI Act, 1934 and the
Banking Regulation Act, 1949, the above argument appears
only to belittle the role of RBI. RBI is not just like any other
statutory body created by an Act of legislature. It is a creature,
created with a mandate to get liberated even from its
creator…Therefore, RBI cannot be equated to any other
statutory body that merely serves its master. It is specifically
empowered to do certain things to the exclusion of even the
Central Government. Therefore, to place its decisions at a
pedestal lower than that of even an executive decision, would
do violence to the scheme of the Act. “
8.1 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.
8.2 Similar powers are granted to the RBI in respect of Banks
under the Banking Regulation Act, 1949. In the case at hand, we are
4 (2020) 10 SCC 274.
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concerned with S. 35-A of The Banking Regulation Act, 1949 which
enables the RBI to give directions to banking companies: -
“35A. Power of the Reserve Bank to give directions:
(1) Where the Reserve Bank is satisfied that-
(a) in the public interest; or
(aa) in the interest of banking policy; or
(b) to prevent the affairs of any banking company being
conducted in a manner detrimental to the interests of the
depositors or in a manner prejudicial to the interests of
the banking company; or
(c) to secure the proper management of any banking
company generally, it is necessary to issue directions to
banking companies generally or to any banking company
in particular, it may, from time to time, issue such directions
as it deems fit, and the banking companies or the banking
company, as the case may be, shall be bound to comply
with such directions.”
8.3 The Section S. 45-MB of the RBI Act, 1934 being relevant
in the above context which 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, is extracted for ready reference as under:
“45MB. Power of Bank to prohibit acceptance of deposit and
alienation of assets:
(1) If any non-banking financial company violates the
provisions of any section or fails to comply with any direction
or order given by the Bank under any of the provisions of
this Chapter, the Bank may
prohibit the non-banking financial
company from accepting any deposit.
(2) Notwithstanding anything to the contrary contained in
any agreement or instrument or any law for the time being in
force, the Bank, on being satisfied that it is necessary so to
do in the public interest or in the interest of the depositors,
may direct, the non-banking financial company against which
an order prohibiting from accepting deposit has been issued,
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not to sell, transfer, create charge or mortgage or deal in any
manner with its property and assets without prior written
permission of the Bank for such period not exceeding six
months from the date of the order.”
8.4 At this juncture, it is pertinent to extract the exact wordings of
the RBI communication dated 09.06.1997 addressed to the defendant:
“We understand that M/s. CRB Capital Markets Ltd. and its
associates have invested in the shares/bonds/other securities
of your institution. As you are aware, RBI has filed a petition
for the winding up of the said company in the High Court,
Delhi. We, therefore, advise you not to effect any transfer,
register any lien, or otherwise deal with such securities and
also not to part with the interest/dividends or principal without
the permission of the Official Liquidator, appointed by the
High Court of Delhi. Please confirm and advise the amount
of investments so held by the company/companies with your
institution.”
8.5 As is apparent from above, the RBI in its communication 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 above-mentioned communication was issued.
This has encouraged the Learned Counsel for the plaintiff to argue that
it is merely an ‘advice’ from RBI, and not a
statutorily enforceable
directive.
8.6  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.
8.7 A conjoint reading of the statutory provisions mentioned above,
makes it abundantly clear that for ‘public interest’ the RBI is empowered
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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.5
Justice V. Ramasubramanian, speaking for a three judges Bench in
Internet and Mobile Association of India6, (Supra), gave a wide
meaning to ‘public interest’, in context of S. 35-A of the Banking
Regulation Act, 1949:
“176. ………As we have indicated elsewhere, the power under
Section 35-A to issue directions is to be exercised under four
contingencies, namely, (i) public interest, (ii) interest of
banking policy, (iii) interest of the depositors and (iv) interest
of the banking company. The expression “banking policy” is
defined in Section 5(ca) to mean any policy specified by RBI
(i) in the interest of the banking system, (ii) in the interest of
monetary stability and (iii) sound economic growth. Public
interest permeates all these areas…”
8.8 On the omission to advert to the statutory provisions on the
basis of which the RBI acted, we can seek guidance from the ratio in
Peerless General Finance and Investment Co. Ltd. Vs. RBI7 where
this court, speaking through Justice N. M. Kasliwal, held that:
“71. It is settled law that so long as the power is traceable to
the statute, mere omission to
recite the provision does not
denude the power of the legislature or rule making authority
to make the regulations, nor considered without authority of
law. Section 114(e) of the Evidence Act draws a statutory
presumption that official acts are regularly performed and
reached satisfactorily on consideration of relevant facts. The
absence of reiteration of objective satisfaction in the preamble
as of one under Section 45-L does not denude the powers, the
RBI admittedly has under Section 45-L, to justify the actions.
Though Section 45-L was neither expressly stated nor
mentioned in the preamble of the Directions of the required
5 Bihar Public Service Commission vs. Saiyed Hussain Abbas Rizwi and Anr.; (2012)
13 SCC 61.
6 Supra at 4.
7 (1992)2 SCC 343.
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recitation of satisfaction of objective facts to issue the
directions from the facts and circumstances it is demonstrated
that the RBI had such satisfaction in its consideration of its
power under Section 45-L, when the Directions were issued.
Even otherwise Section 45-K(3) itself is sufficient to uphold
the directions.” (Emphasis added)
8.9 The above makes it clear that, 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.
8.10 The learned Senior Counsel for the defendant in our estimation
is correct in his submission that RBI directives carry statutory force,
gathering authority from the provisions of both the RBI Act, 1934 and
the Banking Regulation Act, 1949. In Peerless General Finance
(I)8, in the context of S. 45-K and S. 45-L of the RBI Act, 1934 this
court, speaking through Justice N M Kasliwal, relied on State of U.P.
Vs. Babu Ram Upadhya9, and D.K.V. Prasada Rao vs. Government
of A.P.10 to significantly pronounce that directions issued by RBI, are
incorporated and become a part of the act and must therefore be governed
by the same principles as the statute itself. This view was further affirmed
by this court in case of Internet and Mobile Association of India11
(Supra). Hence, it is undisputed that any direction by the RBI, is
compelling and enforceable
similarly like the provisions of the RBI Act
by its very nature.
8.11 In Sudhir Shantilal Mehta12 (Supra), Justice S. B. Sinha
interpreting the implications of actions under S. 35-A of The Banking
Regulation, 1949 and the intention of legislature, rightly observed that
the directions under the said provision are binding upon banking companies:
“57. The distinction between exercise of jurisdiction under
the enabling provisions contained in Section 36(1) and the
ones under Sections 21 and 35-A of the Banking Regulation
Act and the provisions contained in Section 45-L of the Reserve
8 ibid.
9 AIR 1961 SC 751.
10 AIR 1984 AP 75.
11 Supra at 4.
12 Supra at 2.
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Bank of India, 1934 is absolutely clear and unambiguous. In
terms of Section 36, Reserve Bank of India may caution or
prohibit the banking companies but in terms of Sections 21
and 35-A of the 1949 Act it can issue binding directions …
58. Whether a circular letter issued by a statutory authority
would be binding or not or whether the same has a statutory
force, would depend upon the nature of the statute. For the
said purpose, the intention of the legislature must be
considered. Having regard to the fact the Reserve Bank of
India exercised control over the banking companies, we are
of the opinion that the said circular letter was binding on the
banking companies. The officials of UCO Bank were,
therefore, bound by the said circular letter.” (Emphasis added)
8.12 Justice S. C. Agarwal, speaking for this Court in RBI vs.
Peerless General Finance and Investment Co. Ltd. (II)13 held in the
context of S. 45-K of the RBI Act, 1934, that RBI has the authority to
issue any directions for ensuring effective implementation of its orders,
and to achieve the object of the Act:
“27. …In the matter of construction of enabling statutes the
principle applicable is that if the Legislature enables something
to be done, it gives power at the same time, by necessary
implication, to do everything which is indispensable for the
purpose of carrying out the purpose in view. (See Craies on
Statutes, 7th Edn. p. 258.) It has been held that the power to
make a law with respect to
any subject carries with it all the
ancillary and incidental powers to make the law effective and
workable and to prevent evasion.”
8.13 For ensuring effective implementation of relevant directions,
RBI as was declared is not only vested with curative powers but also
preventive powers, as was held in Ganesh Bank of Kurundwad Ltd.
Vs. Union of India.14 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.
13 (1996) 1 SCC 642.
14 (2006) 10 SCC 645.
SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA v. M/S.
SIBCO INVESTMENT PVT. LTD. [HRISHIKESH ROY, J.]
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8.14 Based on the discussion above, the RBI under Ss. 45-MB of
the RBI Act, 1934 and 35-A of the Banking Regulation Act, 1949 in
our understandinghas 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
statutory arrangement and interpretation as above persuade us to hold
that 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 Learned Senior Counsel for the defendant is therefore
correct in saying that 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.
8.15 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, as can be noted, 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 in our perception can by itself, put a quietus on the issue
at hand.
8.16 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. Here we need to
observe that the plaintiff is dominus litus, and they cannot be compelled
to seek relief against anyone.
8.17 According to us, 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.
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V. SHADOW OVER SHANKAR LAL SARAF’S
TRANSACTION:
9. The S. 531 of the Companies Act, 1956 (Corresponding ss.
328 and 329 of the Companies Act, 2013) being relevant for the
question, is extracted:
“531. Fraudulent Preference:
(1) Any transfer of property, movable or immovable, delivery
of goods, payment, execution or other act relating to property
made, taken or done by or against a company within six
months before the commencement of its winding up which,
had it been made, taken or done by or against an individual
within three months before the presentation of an insolvency
petition on which he is adjudged insolvent, would be deemed
in his insolvency a fraudulent preference, shall in the event
of the company being wound up, be deemed a fraudulent
preference of its creditors and be invalid accordingly…  ”
(Emphasis added)
9.1 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. For quick reference,
S. 441 of the Companies Act, 1956 is extracted herein:
“441. Commencement of winding up by tribunal:
(1) Where, before the presentation of a petition for the winding
up of a company by the Tribunal, a resolution has been passed
by the company for voluntary winding up, the winding up of
the company shall be deemed to have commenced at the time
of the passing of the resolution, and unless the Tribunal, on
proof of fraud or mistake, thinks fit
to direct otherwise, all
proceedings taken in the voluntary winding up shall be
deemed to have been validly taken.
(2) In any other case, the winding up of a company by the
Tribunal shall be deemed to commence at the time of the
presentation of the petition for the winding up.”
9.2 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
SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA v. M/S.
SIBCO INVESTMENT PVT. LTD. [HRISHIKESH ROY, J.]
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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. Relevant here would be to note that in 2019,
a Division bench of this court speaking through Justice Mohan
Shantanagoudar in the case of IDBI vs. Official Liquidator15 clarified
that two conditions need to be satisfied for a transaction to be qualified
as fraudulent preference: First, Company’s dominant motive to prefer a
particular creditor; Second, transfer executed within six month, preceding
filing of winding-up petition. The issue of fraudulent preference is therefore
no longer res integra, andit is unnecessary to labour on the issue any
further.
9.3 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.
9.4 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 Learned 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…”
15 (2020) 15 SCC 517.
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9.5 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.
9.6 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.
9.7 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.
9.8 Based on the above discussion, 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.
VI. WHETHER WITHHOLDING PAYMENT BONA
FIDE?
10. 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 Learned Company Court.
10.1 The Learned Counsel for 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
SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA v. M/S.
SIBCO INVESTMENT PVT. LTD. [HRISHIKESH ROY, J.]
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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.
10.2 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.
VII. BOND STATUS AND OBLIGATION: “HOLDER IN DUE
COURSE”:
11. 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. For ready reference, the relevant S.9 of the Negotiable
Instruments Act, 1881 which defines a ‘holder in due course’is extracted
as under:
“9. “Holder in due course”—
“Holder in due course” means any person who for
consideration became the possessor of a promissory note, bill
of exchange or cheque if payable to bearer, or the payee or
indorsee thereof, if payable to order, before the amount
mentioned in it became payable, and without having sufficient
cause to believe that any defect existed in the title of the person
from whom he derived his title.”
11.1 This court speaking through Justice K Jayachandra
Reddy in
the context of a cheque in the case of U. Ponnappa Moothan Sons,
Palghat Vs. Catholic Syrian Bank Ltd. and Ors.16 juxtaposed the
Indian position on ‘holder in due course’ with the position in English Law
to declare the following:-
“17…Under the Indian law a holder, to be a holder in due
course, must not only have acquired the bill, note of cheque
for valid consideration but should have acquired the cheque
without having sufficient cause to believe that any defect
16 (1991) 1 SCC 113.
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existed in the title of the person from whom he derived his
title. This condition required that he should act in good faith
and with reasonable caution. However, mere failure to prove
bona fide or absence of negligence on his part would not
negative his claim. But, in a given case it is left to the Court to
decide whether the negligence on part of the holder is so gross
and extraordinary as to presume that he had sufficient cause
to believe that such title was defective…”(Emphasis added)
11.2 The principles stated above in the context of cheques can be
extrapolated for promissory notes as well. Resultantly 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 as discussed
earlier, 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.
11.3 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.
VIII. ENTITLEMENT FOR INTEREST ON DELAYED
PAYMENT AND PENDENTE LITE INTEREST:
12. It flows from the above discussion, that 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. SEBI17, 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.
17 (2004) 8 SCC 524.
SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA v. M/S.
SIBCO INVESTMENT PVT. LTD. [HRISHIKESH ROY, J.]
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12.1 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 before us. 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 in our
view shows that the defendant acted bona fide and there was no undue
delay on their part, to remit the dues.
12.2 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.
IX. WAS PLAINTIFF’S DEMAND BARRED BY WAIVER/
ACQUIESCENCE?:-
13. 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.
13.1 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
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from raising this demand after several months applying the principle of
waiver/acquiescence.
X. 
WHETHER 
PRESENT 
SUIT 
BARRED 
BY
CONSTRUCTIVE RES JUDICATA ?:
14. 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 in our view, is barred by the principle of
Constructive Res Judicata.
XI. CONCLUSION:
15. It is clear from the discussion above, 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.
15.1 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
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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.
15.2 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-in-interest. 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.
15.3 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.
15.4 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” andconcurrent 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,
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the plaintiffs, like the Shakespearean character of Shylock, have raised
the demand “I’ll have my bond. Speak not against my bond.”18 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.
15.5 In view of the forgoing, the defendant’s appeal against the
impugned judgment is allowed by restoring the judgment of the Trial
Court. The plaintiff’s cross-appeal is however rejected.
15.6 With all the legal consequences flowing from the above order,
the appeals stand disposed of without any order on cost.
Devika Gujral
Appeals disposed of.
18 Act 3 Scene 3 – The Merchant of Venice
SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA v. M/S.
SIBCO INVESTMENT PVT. LTD. [HRISHIKESH ROY, J.]