Kotak Mahindra Bank Limited vs Ravindra Loonkar & Ors.

Justice Anant Bijay Singh;

This Appeal has been preferred by the Appellant being aggrieved and dissatisfied by the order dated 04.01.2021 passed by the Ld. Adjudicating Authority (National Company Law Tribunal), New Delhi, Principal Bench, in IA-2069(PB)/2020 in Company Petition (IB)-170(PB)/2018 whereby and where under the Application filed by the Resolution Professional (Respondent No. 1 herein) against ‘Kotak Mahindra Bank Limited’ under Section 60 (5) of the Insolvency and Bankruptcy Code, 2016 (for short IBC) ‘for closure of its Fixed Deposit in A/c. No. 7511872416 and 7511874557 on the ground that since Corporate Insolvency Resolution Process has been initiated against the Corporate Debtor’ was allowed IA-2069(PB)/2020 and further, the Respondent Bank i.e. the Appellant herein was directed to transfer the amount payable (including interest accrued thereon) on closure of Fixed Deposits in account Nos. 7511872416 and 7511874557 to TRA A/c No. 0127103000016223 held by the Corporate Debtor with IDBI Bank, Videocon Tower, 1^st Floor, E-1, Jhandewalan Extension, New Delhi-110055.

The facts giving rise to this Appeal are as follows:

The Learned Sr. Counsel for the Appellant during the course of argument and his memo of Appeal submitted that the Ld. Ld. Adjudicating Authority has failed to appreciate that the financial facilities availed by the Corporate Debtor, various loan documents were duly signed and executed in favour of Appellant Bank from the year 2001 and on each renewal separate loan documents were executed to that effect and Facility Agreements dated 02.07.2014 and 08.07.2014 are one amongst many such loan transection documents which were executed from time to time.

It is further submitted that the terms of the Facility Agreements relied upon by the Corporate Debtor and which are duly signed and executed by the Corporate Debtor in favour of the Appellant Bank, the Appellant Bank is at liberty to exercise its right over the Additional Security of the Appellant Bank. That in terms of Clause 1.1 of the facility Agreement “Additional Security” shall mean such additional security as may be posted pursuant to Clause 10(c) of the Facility Agreement.

It is further submitted that in terms of the Clause 10(c) “If, in the opinion of the Bank, the Security constituted by the Security Documents is insufficient or becomes insufficient to cover the Borrower’s obligation under this Agreement, the Bank may ask the Borrower to furnish or arrange such additional security as the Bank may determine/stipulate from time to time”.

It is further submitted that according to clause 18 of the Facility Agreement, the Appellant Bank has the right of set off. That as per the clause, "the borrower agrees without prejudice to all of the Bank's rights and remedies as bankers or otherwise against the Borrower, the Bank shall be entitled to set Bank under any transaction/agreement at any time in satisfaction of payment of any indebtedness or liability of the Borrower under or pursuant of this Agreement".

It is further submitted that the Appellant Bank started observing acts of misconduct on part of the Corporate Debtor including breach of term and conditions of the sanction. The Appellant Bank also observed acts of misappropriation of funds and falsification of accounts by the Corporate Debtor with a view of deceive and induce Appellant Bank in order to continue to avail credit facilities.

It is further submitted that the Appellant Bank in view of various defaults committed by the Corporate Debtor and the account of the Corporate Debtor being declared NPA, issued a Loan Recall Notice dated 22.09.2017 whereby the Appellant Bank recalled the facilities extended to the Corporate Debtor and demanded payment of Rs. 205,84,10,198.70 (Rupees Two Hundred Five Crores Eighty-Four Lakhs Ten Thousand One Hundred Ninety-Eight and Seventy paise only) as on 24.08.2017, together with further interest and other charges thereon at the contractual rates upon the footing of compound interest from 25.08.2017 within seven days from receipt of the Loan Recall Notice.

It is further submitted that the Corporate Debtor has failed to pay the outstanding amount and the current outstanding Financial Debt as on 01.06.2020 in Rs. 401,54,10,733.70 (Rupees Four Hundred and One Crores Fifty-Four Lacs Ten Thousand Seven Hundred Seventy-Three and Seventy paise only).

It is further submitted that the Ld. Adjudicating Authority passed an order commencing Corporate Insolvency Resolution Process (CIRP) of the Corporate Debtor on 08.08.2018 and appointed Mr. Ravinder Loonkar, the Respondent No. 1 herein, as the Interim Resolution Professional vide order dated 08.08.2018.

It is further submitted that the Respondent No. 1 vide letter dated 21.08.2018 requested the Appellant Bank for closure of fixed deposit placed by the Corporate Debtor with the Appellant Bank and transfer of funds to TRA A/c No. 0127103000016223 held by Corporate Debtor with the Appellant prior to 02.07.2014.

It is further submitted that the Appellant Bank submitted its financial claim i.e. FORM-C on 27.08.2018 to the Interim Resolution Professional wherein the Appellant Bank declared the details of any mutual credit, mutual debts, or other mutual dealings between the Corporate Debtor and the creditor which may be set off against the claim. The Appellant Bank clearly mentioned that as part of the Security over which the Appellant Bank has a right of general lien, Corporate Debtor fixed deposits with the Appellant Bank as on date: FD No. 75118774557 for an amount of Rs. 97,66,718.40 and FD No. 75118724116 for an amount of Rs. 43,39,304.99.

It is further submitted that on 14.08.2019 the Final Resolution Plan was approved by the Committee of Creditors (CoC) by e-voting with a majority of 88.56% and the said Plan was taken on record by the Hon'ble Tribunal vide order dated 16.08.2019. The Appellant Bank has a total voting right of approx. 14.81% in the CoC formed by the Resolution Professional to govern the CIRP of the Corporate Debtor herein and the Appellant Bank had assented for the Resolution Plan being submitted by M/s Ramkrisha Forgings Ltd. and thus the Resolution Plan was approved by the CoC in its commercial wisdom.

It is further submitted that the Ld. Adjudicating Authority has failed to consider that the based on the clause of additional security and bank’s right of set off as per the terms and conditions of the Facility Agreement duly singed and acknowledged by the Corporate Debtor.

It is further submitted that in view of the facts and submissions the impugned order cannot be sustained in the eye of law, therefore the impugned order is set aside and the Appeal be allowed.

The Learned Counsel for the Respondent No. 1 during the course of argument and his Reply Affidavit along with Written Submissions submitted that the Fixed Deposits are the assets of the Corporate Debtor and were never offered as additional security to the Appellant Bank for availing facilities in terms of Clause 10(c) of the Facility Agreements (at page 86 of the Appeal Paper Book), as the same requires the Appellant Bank to first ask from the Corporate Debtor to furnish additional security.

It is further submitted that the Appellant has failed to place on record any document to establish that a request was ever made for creating additional security in terms of Clause 10(c).

It is further submitted that the Appellant has relied on Clause 14 of the Facility Agreements (at page 90 of the Appeal Paper Book) which states that in the event of default in repayment of the financial facilities, the Appellant has the right to take possession of Charged Assets. Charged Assets as per Clause 1.1 (at page 81 of the Appeal Paper Book) mean “the assets over which Security is expressed to be created pursuant to any Security Document”.

It is further submitted that the asset in question must therefore be charged to the Appellant. Since the Fixed Deposits were never charged to the Appellant neither originally as “Charged Assets” nor subsequently as “Additional Security”, the Bank has no right over these Fixed Deposits even when loan is recalled by the Bank. Further, no such charge was registered by the Corporate Debtor or even by the Appellant in terms of Section 77 of the Companies Act, 2013.

It is further submitted that the purported right of “set off” in terms of Clause 18 of Facility Agreements (at page 91 of the Appeal Paper Book) has never been invoked by the Appellant on default committed by the Corporate Debtor in failing to repay the loan.

It is further submitted that even if a right of set-off was available, it should have been exercised when the Loan Recall Notice was issued on 24.08.2017 (at page 49 to 53 of the Reply Affidavit)

It is further submitted that the right of set off was exercised by the Appellant only after initiation of CIRP and when the Resolution Professional, the Respondent No. 1 herein requested to transfer the amounts in Fixed Deposits.

It is further submitted that the Appellant cannot unilaterally withhold the possession of Fixed Deposits after the commencement of CIRP in view of the Judgment passed by Hon’ble High Court of Bombay in the case of “State Bank of India Vs. Javed Akhtar Hussain and Anr. AIR 1993 130M 87”.

It is further submitted that even the statement/Certificate of Balance for the Fixed Deposits as on 31.01.2021 and 31.03.2020 issued by the Appellant (at page 67-68 of the Reply Affidavit) do not show or carry any charge or lien over the Fixed Deposits.

It is further submitted that the right of lien cannot be exercised over Fixed Deposits since money placed in Fixed Deposit is a debt in the hands of the bank, and therefore a debt cannot be subjected to lien nor a debtor can exercise such a right in view of the Judgment passed by Hon’ble High Court of Kerala in the case of “Union Bank of India Vs. K.V. Venugopalan, 1990 SCC OnLine Ker 12”.

It is further submitted that once an order of moratorium in terms of Section 14(1)(c) is declared, it creates a bar on enforcement of any security interest in respect of Corporate Debtor. No recovery action in form of lien or set-off can be exercised by banks in discharge/settlement of their pre-CIRP dues as held by this Appellate Tribunal in the case of “Indian Overseas Bank Vs. Mr. Dinkar T. Venkatsubramaniam, Company Appeal (AT) (Insolvency) No. 267 of 2017” .

The Learned Counsel for the Respondent No. 1 further submitted that based on these submissions the Ld. Adjudicating Authority has rightly passed the impugned order. There is no merit in the instant Appeal, the Appeal is fit to be dismissed.

After hearing the parties and having gone through the pleadings made on behalf of the parties, we are of the considered view that the following facts are admitted in the instant Appeal.

 The Corporate Insolvency Resolution Process (CIRP) was initiated against Respondent No. 2 (Corporate Debtor) on 08.08.2018 and appointed Mr. Ravinder Loonkar, the Respondent No. 1 herein, as the Interim Resolution Professional.

 The Respondent No. 2 have two Fixed Deposits with the Appellant Bank for amount of Rs. Rs. 97,66,718.40 and FD No. 75118724116 for an amount of Rs. 43,39,304.99.

 The Respondent No. 1 vide letter dated 21.08.2018 requested the Appellant Bank for closure of fixed deposit placed by the Corporate Debtor with the Appellant Bank and transfer of funds to TRA A/c No. 0127103000016223 held by Corporate Debtor with the Appellant prior to 02.07.2014.

 The Appellant Bank submitted its financial claim i.e. FORM-C on 27.08.2018 to the Interim Resolution Professional wherein the Appellant Bank declared the details of mutual credit, mutual debts, or other mutual dealings between the Corporate Debtor and the creditor which may be set off against the claim.

 The Appellant Bank clearly mentioned that as part of the Security over which the Appellant Bank has a right of general lien, Corporate Debtor fixed deposits with the Appellant Bank.

 From the perusal of Clause 10(c) of the Facility Agreements (at page 86 of the Appeal Paper Book), the Appellant Bank is required to first ask from the Corporate Debtor to furnish additional security.

 It is an admitted fact that the Appellant has failed to place on record any document to establish that a request was ever made for creating additional security in terms of Clause 10(c).

 From the perusal of the Clause 14 of the Facility Agreements (at page 90 of the Appeal Paper Book) which states that in the event of default in repayment of the financial facilities, the Appellant has the right to take possession of Charged Assets. Charged Assets as per Clause 1.1 (at page 81 of the Appeal Paper Book) mean “the assets over which Security is expressed to be created pursuant to any Security Document”.  The Fixed Deposits were never charged to the Appellant neither originally as “Charged Assets” nor subsequently as “Additional Security”, hence the Bank has no right over these Fixed Deposits even when loan is recalled by the Bank. No such charge was registered by the Corporate Debtor or even by the Appellant in terms of Section 77 of the Companies Act, 2013.

 Order of moratorium in terms of provisions of Section 14(1)(c) is declared, it creates a bar on enforcement of any security interest in respect of Corporate Debtor. No recovery action in form of lien or set-off can be exercised by banks in discharge/settlement of their pre-CIRP dues.

 The Final Resolution Plan was approved by the Committee of Creditors (CoC) on 14.08.2019 by e-voting with a majority of 88.56% and the said Plan was taken on record by the Ld. Adjudicating Authority vide order dated 16.08.2019. The Appellant Bank has a total voting right of 14.81% in the CoC formed by the Resolution Professional to govern the CIRP of the Corporate Debtor herein and the Appellant Bank had assented for the Resolution Plan being submitted by M/s Ramkrisha Forgings Ltd. and the Resolution Plan was approved by the CoC in its commercial wisdom.

Taking all these facts and circumstances of the case, we are of the considered view that there is no illegality committed by the Ld. Adjudicating Authority while passing the impugned order, therefore, we do not need to interfere in the impugned order. The impugned order dated 04.01.2021 passed by the Ld. Adjudicating Authority (National Company Law Tribunal), New Delhi, Principal Bench, in IA-2069(PB)/2020 in Company Petition (IB)-170(PB)/2018 is hereby affirmed. There is no merit in the Appeal. The Appeal is hereby dismissed. No order as to costs.

Registry to upload the Judgment on the website of this Appellate Tribunal and send the copy of this Judgment to the Ld. Adjudicating Authority (National Company Law Tribunal), New Delhi, Principal Bench, forthwith.