State Bank Of India vs M/s. Supreme Overseas Exports India Private Limited

Term Loan

Export Packing Credit

Stand By Line of Credit:

(1)

Heard Ms. Vishaka, learned Counsel for the Petitioner and Shri Deepak Basavaraj, learned Counsel for the Respondent.

(2)

On 16.03.2022, the following order was passed:

"1.

Heard Ms. Vishaka, learned Counsel for the Petitioner and Mr. Prathap K., learned Counsel for the Respondent.

2.

On 08.02.2022 the following order was passed:

"1.

Heard Ms. Divya R., learned Counsel for the Petitioner and Shri Prathap K., learned Counsel for the Respondent.

2.

The learned Counsel appearing for the Respondent seeks time to file reply. He is permitted to file reply within three weeks from today, after service on the other side. The Petitioner shall file rejoinder, if any, thereto within two weeks from the date of receipt of a copy of reply, after service on the other side.

3.

If any of the parties failed to complete their part of pleadings, their respective right stand forfeited and the C.P. will be decided based on the record available on the next date of hearing.

4.

List the C.P. on 16.03.2022."

3.

In spite of the same, no reply is filed, hence, its right for filing the reply is forfeited.

4.

However, at the request of the learned Counsel for the Petitioner, list on 26.04.2022."

(3)

In spite of the forfeiture of the right of the Respondent for filing reply, the Respondent has not taken steps. However, oral submissions made on behalf of the Respondent were heard and permitted to file written submission if any, within one week from today.

(4)

Order Reserved.

(a)

It is stated that the Corporate Debtor is a Company incorporated under the Companies Act, 1956 and is in the business of manufacturing and exporting of leather garments and accessories for the last 44 years. The Corporate Debtor is registered under the Micro Small & Medium enterprises (MSME) on 09.01.2017 as small enterprise. The Corporate Debtor has received various awards for being the largest exporter of leather garments in India, including the national award and President's Award for the year 2013, 2014 and 2015 and "CLE Southern Regional Export Awards" presented on 31.01.2020 by the Executive Director of CLE Mr. R. Selvam, IAS. The Corporate Debtor has more than 500 employees and indirectly employed more than 200 people.

(b)

The Corporate Debtor has been banking with State Bank of Travancore, commercial branch now known as State Bank of India, In-Cube Branch for the last 21 years. The Corporate Debtor has availed the following facilities from the Financial Creditor:

Nature of Facility	Account Number
MC-CC Pre-Shipment Export Package Credit (EPC)	57035337953
FCSB NONLC Bills (C&I)	67343884390
MC-CC STANDBY LINE OF CREDIT C&I	67304457580
Term Loan	37772970329

(c)

It is submitted that the Corporate Debtor had submitted discounting of export bill for a sum of USD 470,000/- equivalent to Rs.3.3 Crores on 26.12.2019. The Financial Creditor after accepting the aforementioned export bill for discounting approved the discounting through Annexure-III Negotiation/Discounting of individual bills under NON-LC dated 27.12.2019.

(d)

It is submitted that the Financial Creditor after approving the discounting of the bill produced as Annexure-B, did not discount the said bill and on the contrary issued a letter stating that the Standby Line of Credit (SLC Account) had expired on 30.09.2019 and was overdue by 87 days and the said account would be regular on payment of 2.87 Crores, failing which the account would slip into NPA and proceedings under SARFAESI Act would be initiated.

(e)

The Financial Creditor in spite of having received the bill for discounting of USD 470,000 equivalent to Rs.3.33 Crores did not discount the said bill and on the contrary issued a Notice dated 01.01.2020 under Section 13(2) of the SARFAESI Act stating that the Corporate Debtor had been classified as a Non Performing Asset (NPA) on 28.12.2019 in accordance/guidelines relating to Asset Classifications issued by the Reserve Bank of India and called upon the Corporate Debtor to repay a sum of Rs.31,86,11,734/- within 60 days from the date of receipt of the Notice dated 01.01.2020.

(f)

The Corporate Debtor humbly submits that the Financial Creditor vide its e-mail dated 26.12.2019 had stated that the SLC Account limit had expired on 30.09.2019. As per the Master Circular-Prudential norms on Income Recognition, Asset Classification and provisioning pertaining to Advance dated 01.07.2015 issued by RBI, an asset can be declared as NPA if it has failed to pay the interest or installment of principal remains overdue for a period of more than 90 days. The Financial Creditor bring fully aware of the aforementioned facts declared the Corporate Debtor as an NPA even before the expiry of mandatory period of 90 days as prescribed by RBI.

(g)

The Financial Creditor has failed to take into consideration the bill submitted for discounting on 26.12.2019 for a sum equivalent to Rs.3.33 Crores, the Financial Creditor has also ignored the approval dated 27.12.2019 given for discounting the bill submitted on 26.12.2019 and has arbitrarily proceeded to declare the Corporate Debtor as an NPA on 28.12.2019 even before the expiry of 90 days prescribed by RBI.

(h)

As per Section 2(o) of the SARFAESI ACT, 2002, the account which are classified as “Non-performing Assets” i.e., Sub Standard, Doubtful, Loss Assets, Out of order, etc., then only on cancelling the entire limits, or recalling the entire advance, the account ought to have been classified as NPA. Then only the provision of the NPA Act, in other words SARFAESI ACT, 2002, is applicable. In the instant case, the limits were never classified as NPA as per Section 2(o) of the Act, nor the entire limits were recalled or cancelled. But, the Financial Creditor were kept on debiting the interest, merging the interest to the Principal amount and again reversed the entire, collected processing fees for renewal of the limits, etc. which is in contrary to the norms of the classification of the account as NPA.

(i)

The Financial Creditor has failed to taken into consideration the bill submitted for discounting on 26.12.2019 for a sum equivalent to Rs.3.33 Crores, the Financial Creditor has also ignored the sanction dated 27.12.2019 accorded by their own higher authority, for discounting the bill submitted on 26.12.2019 and has arbitrarily proceeded to declare the Petitioners as an NPA on 28.12.2019 even before expiry of 90 days prescribed by RBI. This is nothing but, disobeying the sanction accorded by their own higher authority. Further, there is no either modification or withdrawal or even cancellation of the said sanction, received by the Corporate Debtor.

(j)

The Financial Creditor has also consideration not taken into the Notification dated 17.03.2016 bearing FIDD.MSME & NFS.BC.No.21/06.02.31/2015-16 issued by RBI. The said notification provides a frame work for implementing corrective action plan by the lender i.e., the Financial Creditor Bank herein. The said Notification clearly mandates the Financial Creditor to classify and refer MSME’s to the committee for corrective action plan. This would help the already troubled manufacturing sectors especially MSME’s like the Corporate Debtor from being declared as an NPA. This notification recommends that the Financial Creditor should identify the stress faced by an MSME’s and to implement corrective action like (a) Rectification (b) Restructuring and (c) Recovery. The Financial Creditor has ignored this notification and has acted arbitrarily by proceeding to recover under SARFAESI Act without referring the Corporate Debtor to the Committee constituted for corrective action plan.

(k)

The Corporate Debtor submits that the Financial Creditor vide sanction letter dated 18.06.2018 had sanctioned the Export Packaging Credit(EPC), Standby 11 Line of Credit (SLC), Term Loan, Foreign Bill Discounting (FBD) and Letter of Credit of the Corporate Debtor. Para 2 of Annexure 1 to the sanction letter dated 18.06.2018 clearly states that “the facilities has been sanctioned on 15.06.2018 and is available for a period of 12 months and that the next date of renewal of facility is 14.06.2019”. The Financial Creditor deducted a sum of Rs.20,39,040/- towards Renewal of Limits processing charges from the account of the Corporate Debtor. In spite of the Financial Creditor deducting the processing charges of Rs.20,39,040/- the Financial Creditor has not issued the sanction letter for the year 2019-20.

(l)

The Financial Creditor on 01.01.2020 has also issued another Demand Notice to Guarantor under Section 13(2) of SARFAESI Act, to Director of the Corporate Debtor, demanding payment of Rs.31,86,11,734/- within a period of 60 days. The Corporate Debtor refuted and denied the contentions of the Financial Creditor’s demand notices by the reply dated 27.02.2020. Thereafter, the Financial Creditor through its advocate sent a reply dated 05.03.2020 to the Petitioners, merely denying the contention of the Corporate Debtor as false.

(m)

The Financial Creditor instead of abruptly insisting for repaying a sum of Rs.2.87 Crores, in a phased manner could have collected 10% of the discounted export bill value into the SLC account and thus the said Loan account would have been closed. Thereby, the ulterior motive behind in classifying the account as NPA can be visualized.

(n)

The Corporate Debtor filed a Writ Petition before the Hon'ble High Court of Karnataka, challenging the aforementioned acts of the Financial Creditor. The Financial Creditor has also filed similar Petition before the Hon'ble Debt Recovery Tribunal II, bearing S.A. No.49/2021, the same is pending consideration before the Hon'ble Tribunal.

(o)

Further the Financial Creditor has not produced the relevant documents required like the Loan Agreement, Renewal of Loan Agreement if any. Further, the NeSL records produced by the Financial Creditor shows many of the transactions as failed authentication.

(p)

The Corporate Debtor submits that it is one of the leading manufacturer and exporter of leather garments in India employing more than 500 workman and has received numerous national and state awards including the largest exporter award on 31.01.2020 grave injustice would be caused to the Corporate Debtor if the Financial Creditor is allowed to continue under SARFAESI Act. The Financial Creditor by initiating this drastic measures have not only made the Long Standing Industry to suffer financially, but also their good will and reputation in the market is tarnished, on account of ignoring "LENDERS' POLICY AND PUBLIC POLICY".

(q)

The Corporate Debtor left with no other alternate but to retrench/terminate the services of the employees, with a heavy heart, who have also served the Company for more than 20-25 years. The Financial Creditor have thereby ignored their Social Responsibility.

(r)

The Corporate Debtor since falls under the category of MSME units, the Financial Creditor ought to have extended all the benefits announced by the Ministry of Finance and RBI master circulars issued from time to time.

"27.

The scheme of the Code is to ensure that when a default takes place, in the sense that a debt becomes due and is not paid, the insolvency resolution process begins. Default is defined in Section 3(12) in very wide terms as meaning non-payment of a debt once it becomes due and payable, which includes non-payment of even part thereof or an instalment amount. For the meaning of "debt", we have to go to Section 3(11), which in turn tells us that a debt means a liability of obligation in respect of a "claim" and for the meaning of "claim", we have to go back to Section 3(6) which defines "claim" to mean a right to payment even if it is disputed. The Code gets triggered the moment default is of rupees one lakh or more (Section 4). The corporate insolvency resolution process may be triggered by the corporate debtor itself or a financial creditor or operational creditor. A distinction is made by the Code between debts owed to financial creditors and operational creditors. A financial creditor has been defined under Section 5(7) as a person to whom a financial debt is owed and a financial debt is defined in Section 5(8) to mean a debt which is disbursed against consideration for the time value of money. As opposed to this, an operational creditor means a person to whom an operational debt is owed and an operational debt under Section 5 (21) means a claim in respect of provision of goods or services.

28.

When it comes to a financial creditor triggering the process, Section 7 becomes relevant. Under the explanation to Section 7(1), a default is in respect of a financial debt owed to any financial creditor of the corporate debtor – it need not be a debt owed to the applicant financial creditor. Under Section 7(2), an application is to be made under sub-section (1) in such form and manner as is prescribed, which takes us to the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Under Rule 4, the application is made by a financial creditor in Form 1 accompanied by documents and records required therein. Form 1 is a detailed form in 5 parts, which requires particulars of the applicant in Part I, particulars of the corporate debtor in Part II, particulars of the proposed interim resolution professional in part III, particulars of the financial debt in part IV and documents, records and evidence of default in part V. Under Rule 4(3), the applicant is to dispatch a copy of the application filed with the adjudicating authority by registered post or speed post to the registered office of the corporate debtor. The speed, within which the adjudicating authority is to ascertain the existence of a default from the records of the information utility or on the basis of evidence furnished by the financial creditor, is important. This it must do within 14 days of the receipt of the application. It is at the stage of Section 7(5), where the adjudicating authority is to be satisfied that a default has occurred, that the corporate debtor is entitled to point out that a default has not occurred in the sense that the "debt", which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or in fact. The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant to rectify the defect within 7 days of receipt of a notice from the adjudicating authority. Under sub-section (7), the adjudicating authority shall then communicate the order passed to the financial creditor and corporate debtor within 7 days of admission or rejection of such application, as the case may be."