ICICI BANK LIMITED vs M/S DC MILLS LTD on 22 May 2024

J U D G M E N T

1. The Original Application has been filed by the Applicant against the Defendant before the Ld. DRT-III, Mumbai which stands transferred to this Tribunal on 06.10.2016 as per the Govt. Notification dated 26.09.2016. The OA has been filed for recovery of Rs.1,64,29,009/- (Rupees One Crore Sixty Four Lakh Twenty

Nine Thousand Nine only) with further interest at the rate of 18% p.a. from 01.08.2008 till its realization.

2. Facts as succinctly set out in the OA are that the Defendant Company is the largest coir player in the Indian coir industry. Other than pure coir products, Defendant Company rubberised coir, coir and timber furniture, car and other interior furnishing in jute, coir, rubber, sisel etc. Before entering into such export transactions, Defendant Company was desirous of hedging Defendant Company’s currency exposure arising due to its export business and was desirous of executing cost effective risk reduction structures to cover its long term borrowings.

3. It is stated that the representative of the Defendant Company had meetings with the Applicant, at which meetings, they requested the Applicant to execute certain derivative transactions to cover the foreign currency exposure of Defendant Company and long term liability. Thereafter, an ISDA Master Agreement alongwith its schedule dated 16.02.2007 was executed between the Applicant and Defendant Company. The said ISDA Agreement set out that each party will make payment or delivery specified in each confirmation to be made by it, subject to the other provisions of the ISDA Agreement. There was also detailed provisions in the ISDA Agreement as to the manner and time at which payment should be paid by Defendant Company. Clause 2(e) of the ISDA Agreement made provisions for default interest in the event of a party defaulting performance of any of its payment obligations. Through clause 3(e)(ii) of the ISDA Agreement, Defendant Company represented that it had the power to execute and deliver the agreement and other documents and had taken all necessary actions to authorize such execution, delivery and performance. Clause 5 of the ISDA Agreement set out the events of default and the termination events. Clause 6 of the ISDA Agreement empowered a party to terminate all transactions executed under the ISDA Agreement upon occurrence of an event of default or a termination event.

4. The ISDA Agreement was executed by Mr. P. Sunil General Manager of Defendant Company pursuant to a Board Resolution dated 03.10.2006 whereby the Board of Directors of Defendant Company duly authorized Mr. K. J. Dennis, Chairman and Managing Director, Mr. Sholly Dennis, Director and Mr. P. Sunil, General Manager of the Defendant Company to enter into derivative transactions to execute the said ISDA Agreement.

5. Thereafter, Defendant Company executed three derivative transactions being transaction bearing OP No.80021, 80023, 80025 and 80027 dated 13.04.2007, transaction bearing OP No.95442, 95444, 95446 and 95448 dated 06.06.2007 and transaction bearing OP No.105499-105502 dated 02.07.2007. Defendant Company benefited out of the first two transactions i.e. transactions dated 13.04.2007 and 06.06.2007 and was paid over by the Applicants a sum of Rs.5,10,500/- and Rs.4,30,290/- respectively. These amounts were duly credited by the Applicant to the account of the Defendant Company being account No.001005007112 (“Account”) and which amount has been unconditionally and without any demur accepted by the Defendant Company.

6. It is stated that the transaction dated 02.07.2007 was executed over the recorded phone lines through Voice Recording Machines (“VRM”). The Applicant duly forwarded the respective term sheet and confirmation as an acknowledgement of the execution of the said Transaction. The term sheet, confirmation and the VRM disclose that Defendant Company entered into the said Transaction with full consciousness of the risk. The commercial wisdom of the transaction and the attendant risk of the transaction were for the Defendant Company to decide. The authorized signatory of Defendant Company also executed a risk management policy for the purpose of Clause A 6(i) of the Circular on Risk Management and Inter Bank Dealings dated 01.07.2003.

7. As a result of fluctuation in currency exchange rates, the outstanding exposure of Defendant Company in respect of the said Transaction exceeded the permissible sanctioned limits. The currency movements required Defendant Company to furnish margin money to the Applicants and as per the Agreement the Defendant Company was bound and liable to provide the margin money as required by the Applicant. Based on the fluctuation in the market, the Applicant from time to time called upon the Defendant Company to furnish the required margin money.

8. It is also stated that the Applicant as per the terms of the ISDA Agreement requested the Defendant Company to bring an additional cash margin as and when required depending upon the market movements. The Applicant’s request to bring additional margin is as follows: Date of Call Amount Due Date 26.11.2007 600,000.00 03.12.2007 27.11.2007 200,000.00 04.12.2007 15.01.2008 900,000.00 22.01.2008

16.01.2008 100,000.00 23.01.2008 24.01.2008 900,000.00 31.01.2008 25.01.2008 100,000.00 01.02.2008 04.03.2008 800,000.00 11.03.2008 05.03.2008 600,000.00 12.03.2008 06.03.2008 100,000.00 13.03.2008 07.03.2008 700,000.00 14.03.2008 10.03.2008 300,000.00 17.03.2008 11.03.2008 500,000.00 18.03.2008 14.03.2008 800,000.00 21.03.2008 17.03.2008 400,000.00 24.03.2008 18.03.2008 1,900,000.00 25.03.2008 27.03.2008 1,000,000.00 03.04.2008

9. However, the Defendant Company neglected and defaulted in making such payments to fulfill its margin requirements. The Defendant Company requested by letter dated 07.03.2008 for extension of time till the 45th day from the date of expiry of the call upto a limit of Rs.50,00,000/-. By the aforesaid extension letter Defendant Company acknowledged and accepted its obligations to pay the margin money as and when demanded by the Applicant under the ISDA Agreement. The Defendant’s extension request was not approved by the Applicant as the Defendant Company had not honoured any of its margin call requests and have defaulted under the ISDA Agreement which under clause 5(a)(i) of the ISDA Agreement constitutes an event of default.

10. It is also stated that in an attempt to bring the MTM (Mark to Market) exposure of the Defendant Company within the permissible sanctioned limits, the said Transaction was partially unwound on 18.03.2008 by the Applicant. The partial termination advice in respect of the partial unwind were duly forwarded by the Applicant to the Defendant Company pursuant to the partial termination, losses were booked by the Defendant Company which amounts were crystalised and became due from and payable by the Defendant Company within two days of the partial unwind date. The aggregate amount which is due and payable by the Defendant Company pursuant to such partial termination is Rs.49,55,330/-.

11. The said transaction matured on 25.06.2008 and as per the terms of the confirmation dated 02.07.2007 the option exercise advice dated 25.06.2008 was duly sent to the Defendant Company setting out the amount of Rs.11,027,678.69 as due and payable. The Defendant Company vide its mail dated 25.06.2008 tried to repudiate the transactions executed by the Defendant Company with the Applicant as described hereinabove on the false pretext and grounds that the same are in violation of various laws as stated therein. The Defendant Company also alleged that the agreement entered into between was not an approved contract. The Defendant Company alleged various other reasons to justify non-payment of the legally recoverable dues of the Applicant. Therefore, the Applicant through their Advocates issued a demand notice dated 08.07.2008 and called upon the Defendant Company to make payment of the amounts due and payable pursuant to ISDA Agreement. The Defendant Company replied to the said notice vide letter dated 05.08.2008 and admitted that it has made profits of US$ 12,500/- and US 10,500/- in two transactions however, in respect of the losses incurred by it in the transactions, the Defendant Company has denied its liability towards the Applicant in respect thereof. Hence, the present OA.

12. Notice was issued to the Defendant. Defendant put its appearance through counsel and filed Affidavit in Reply.

13. In the Affidavit in Reply, the Defendant has raised the following objections that:

(i) This Tribunal has no jurisdiction to try and entertain the present OA;

(ii) Whether the claim of the Applicant premised on losses arising out of the execution of a derivative transaction, that is transaction that are undisputedly, speculative in nature and wager, are valid and enforceable as per the law and public policy in India;

(iii) The alleged profits from the two transactions have never been withdrawn or made use by the Defendant, and are lying in the Bank Account of the Defendant with the Applicant and these sums automatically credited to this account.

14. The Applicant Bank has filed its Claim Affidavit through Sourav Kundu, Manager of the Applicant who has proved all the relevant documents as Exb.A to Exb.M-1 of the COD.

15. I have heard the Ld. Counsel for the parties and perused the record.

16. Now hereinafter, I would like to decide the issue raised by the Defendant in Affidavit in Reply of OA.

(i) The first objection raised by the Defendant is that this Tribunal has no jurisdiction to try and entertain the present OA.

There is no dispute among the parties that the transaction which is the subject matter of the present O.A has been carried out through voice recording machines. The ISDA agreement alongwith the schedule dated 16.02.2007 was executed at Mumbai. Pursuant to the said ISDA Master Agreement, the Defendant executed various derivative transactions with the Applicant. All such transactions were also executed at Mumbai. Further, the Margin calls have been sent by the Applicants to the Defendant Company from Mumbai. The Applicant issued instructions for credit and debit of the amounts from Mumbai into the account of the Defendant. Moreover the branch of the Applicant Bank is Mumbai, which is within the jurisdiction of this Tribunal. Hence, this Tribunal has territorial jurisdiction to entertain the present O.A

(ii)

(a) The next objection raised by the Defendant is that the said contracts are in the nature of “derivative contracts” are not binding upon the Defendant and are void ab-initio and unenforceable as also violative of public policy in India.

(b) On the other hand, Ld. Counsel for the Applicant has submitted that the transactions executed between the parties have force of law and permitted by the RBI Act, 1934, FEMA Act, 1999, FEMA Regulations, 2000 and RBI circulars issued from time to time.

(c) Considered the submissions of both sides and perused the record.

(d) Record reveals that the present OA has been filed by the Applicant for enforcement of its debt arising out of the derivative transaction executed between the Defendant and Applicant pursuant to the Master ISDA Agreement dated (Exb.A of COD). The Master Agreement envisages that the ICICI Bank Ltd. and the Defendant have entered into and/or induced into entertaining one and more transactions that are/or will be governed by the said Agreement which includes the schedule.

(e) Thereafter, the Defendant Company executed three derivative transactions being transaction bearing OP No.80021, 80023, 80025 and 80027 dated 13.04.2007, transaction bearing OP No.95442, 95444, 95446 and 95448 dated 06.06.2007 and transaction bearing OP No.105499-105502 dated 02.07.2007.

(f) According to the Applicant the Defendant Company has benefited from the three derivative transactions therefore, the claim of the Applicant arising out of legally executed transactions between the parties and which are binding upon the Defendant Company.

(g) Whereas, Ld. Counsel for the Defendant has stated that the derivative transactions have been executed in violation of the guidelines, regulations and circulars issued by the RBI under the Foreign Exchange Management Act, 2002. He submitted that the derivative transactions in India are subject to the Foreign Exchange Management (Foreign exchange derivative contracts) Regulations and Reserve Bank of India circular on Comprehensive Guidelines on Derivatives. What is permitted in India as per law and directions of the Reserve Bank of India, is a transaction that derives its value from an underlying transaction. As per law and regulation, what was permitted at the time was hedging of export or import foreign currency risk exposure therefore, he submitted that whether the claim of the Applicant premised on losses arising out of the execution of a derivative transaction, that is transaction that are undisputedly, speculative in nature and wager, are valid and enforceable as per the law and public policy in India.

(h) Admittedly, under the RBI Act certain powers have been conferred on the RBI to issue certain directives to all the market participants including the Applicant herein. In view of the same, the RBI Act has been amended in the year 2006 by incorporating section 45(U) and Section 45(V) which specifically deals with “derivatives”.

(i) The Hon’ble Supreme Court in the judgment of Kotak Mahindra Bank Ltd. Vs. Hindustan National Glass & Ind. Ltd. & Ors. Civil Appeal No.8916 of 2012 (arising out of SLP (C) NO. 29599 of 2009) while considering the similar issue has interalia observed as under: “36. The scheme of Collection and Dissemination of information on cases of wilful default of Rs.25 lakhs and above was framed by the RBI in the year 1999 when the derivative transactions were not part of the country’s economy. Under the FEMA Regulations, 2000 only the banks were authorized to deal with the derivative transactions. Section 45V introduced along with other provisions of Chapter IIID in the 1934 Act by the Reserve Bank of India (Amendment) Act, 2006 declared that transactions in derivatives, as may be specified by the RBI from time to time, shall be valid, if at least one of the parties to the transaction is the bank, a scheduled bank, or such other agency falling under the regulatory purview of the RBI under the 1934 Act, FEMA Act or any other Act or instrument having the force of law, as may be specified by the RBI from time to time. Derivative transactions in India thus were valid only if they were with any bank or any other agency falling under the regulatory purview of the RBI because they would have a substantial bearing on the credit system and credit policy in respect of which the RBI has regulatory powers under the and

Acts. Such derivative transactions may not involve a lender-borrower relationship between the bank and its constituent, but dues by a constituent remaining unpaid to a bank may affect the credit policy and the credit system of the country. Information relating to defaulters of dues under derivative transactions who intend to take additional finance from the bank obviously will come within the meaning of credit information under Section 45A(c)(v) of the 1934 Act.

(j) Hon’ble Supreme Court therefore, held that: In the result, we hold that wilful defaults of parties of dues under a derivative transaction with a bank are covered by the Master Circular and this we hold not because the RBI wants us to take this view, because this is our judicial interpretation of the Master Circular.” (emphasis provided)

(k) Similarly, in the judgement of Rajashree Sugar & Chemical Ltd. Reported in (2008) 8 MLF 261, the Hon’ble Madras High Court also held that the derivative contracts are legal and binding on the parties.

(l) In view of the above dictum, I am of the considered opinion that the derivative transaction of the impugned account is permissible under law and binding upon the parties. Accordingly, the contention raised by the Defendant in this respect stands rejected.

(iii) (a) The next objection raised by the Defendant is that the Defendant engaged in three transactions and/or structures which were entirely on the risk assessment of the Applicant. The two alleged profitable transactions alluded to by the Applicant dated 13.04.2007 and 06.06.2007 were executed under the same conditions and in or about the same period as the transaction/structure in dispute. The alleged profits from the two transactions have never been withdrawn or made use by the Defendant, and are lying in the Bank Account of the Defendant with the Applicant and these sums automatically credited to this account. It is also stated that Defendant has not neglected margin calls.

(b) On the other side, the Applicant has stated that the Defendant Company is well aware of the transaction entered into between the parties and such transactions were executed by the Defendant Company on its own commercial wisdom and exercising its own discretion being fully aware of the rights and obligations arising therefrom. It is also stated that the Defendant Company made profits out of the transactions in question factual details whereof are stated in paragraph 5.4.6 of the OA and the amount of the profits made has been unconditionally accepted by the Defendant Company without objection of any nature whatsoever. It is also stated that it cannot be accepted that after the date on which the profit amount was credited in the account of the Defendant Company, the Defendant did not transact in ordinary course and utilize the funds lying in the bank account.

(c) I have gone through the record.

(d) Record reveals that the Defendant Company vide its reply to the notice dated 08.04.2007 issued by the Applicant, has admitted that the Defendant has benefited by receiving amounts of US$12,500/- and US$10,500/- respectively.

(e) It is also reveals from the record that the Applicant as per the terms of the ISDA Agreement vide their various emails (Exb.I of the COD) requested the Defendant Company to bring an additional cash margin as and when required depending upon the market movements (details provided in “para 8 of this final order”), however, the Defendant failed and neglected in making such payments to fulfill its margin requirements. Defendant Company admitted its default committed on the margin call money and sought extension of time vide its letter dated 07.03.2008 (Exb.H of the COD) and also requested for extension of time till the 45th day from the date of expiry of the call upto a limit of Rs.50,00,000/-.

(f) However, the said request was refused by the Applicant in terms of the clause 5(a)(i) of the ISDA Master Agreement. Thereafter, the Applicant forwarded Partial Unwind Advice dated 18.03.2008 (Exb.K of the COD) to the Defendant Company. Pursuant to the partial termination, losses were booked by the Defendant Company which amounts were crystallized and Rs.49,55,330/- became due from and payable by the Defendant Company within two days of the partial unwind date, but the Defendant failed to pay the dues and on the other hand, vide email dated 25.06.2008 raised various grounds pertaining to violation of RBI rules and regulations.

(g) In these facts of the case, it is clear that the Defendant Company acknowledged and accepted its obligations to pay the Margin money as and when demanded by the Applicant under the said Agreement vide emails and letters however, committed defaulted in making the payment of the margin money thus, the objection of the Defendant that it has not neglected margin calls is not sustainable.

(h) Moreover, the Applicant has duly provided the original Statement of Account alongwith certificate under Banker’s Book of Evidence Act, (Exb.M of the COD) whereas the Defendant neither provided any documentary evidence to prove the allegations made in the Written Statement nor raise any objection or point out any of the single entry in the statement of account. Thus, I find no merit in the objection raised by the Defendant hence, declined accordingly.

17. The witness of the Applicant Bank has fully corroborated the averments made in the OA, even otherwise the whole case of the Applicant Bank is based on documents and the witness has duly proved all these documents as against the Defendant. In my view there is no question of disbelieving the evidence led by the Applicant Bank and the Applicant Bank has proved its case beyond reasonable doubt against the Defendant.

18. During the pendency of the OA, Mr. K. J. Dennis, Managing Director of the Defendant Company given Surety (Exb.11) for Defendant and agreed that in the event this Tribunal hold that the alleged debt due and payable, he shall ensure that if the Defendant is unable to satisfy the award, he shall in his personal capacity, do so on their behalf.

19. In the light of the above discussions, the present OA deserves to be allowed against the Defendant.

O R D E R

(i) I allow the present O.A. and direct the Defendant to pay to the Applicant, within a period of days, a sum of Rs.1,64,29,009/- (Rupees One Crore Sixty Four Lakh Twenty Nine Thousand Nine only) with further interest at the rate of 18% p.a. from 01.08.2008 till its realization.

(ii) Failing which the aforesaid amount shall be recovered from the sale of the personal moveable and immoveable assets of the Defendant.

(iii) In the event of failure on the part of the Defendant to make the above payment, the amount due shall be recovered from Mr. K. J. Dennis, Managing Director of the Defendant in terms of the Surety given by him (Exb.11 of OA).

(iv) Defendant is hereby directed not to deal with their properties till further direction of Ld. Recovery Officer.

(v) Defendant shall also pay the cost and expenses of the OA.

(vi) Recovery Certificate be issued forthwith and be sent to the Recovery Officer of this Tribunal. Copy of this order be sent to the parties as per rules. File be consigned to record. Place: Mumbai. (Dr. Rekha G. Dhakar) Date : 22.05.2024

Presiding Officer,

DRT-1, Mumbai. sc/-