SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA versus M/S. SIBCO INVESTMENT PVT. LTD. on 3 January 2022

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 toany 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 toissue directions for ensuring effective implementation of its orders– Held: Any direction by the RBI, is compelling and enforceablesimilarly like the provisions of the RBI Act by its very nature – Forensuring effective implementation of relevant directions, RBI is notonly vested with curative powers but also preventive powers – RBIcan also issue directions to ensure that the relevant orders/directionsare effectively followed.

Negotiable Instruments Act, 1881: ss.8 and 9 – ‘Holder indue course’ – An obligation has been imposed on the transferee ofthe promissory notes, to be deemed to be a ‘Holder in due course’,that the notes should have been acquired in good faith; afterexercising 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 equitableconsiderations – Interest is payable for different purposes such ascompensatory, penal, etc.

Code of Civil Procedure, 1908: Necessary party – Held: Onfacts, when a claim in the suit was relatable to embargo by the RBI,it was necessary to implead RBI in the litigation, for getting moreclarity on the issue – The plaintiff omitted to do so at their own perildespite the defense set out on this basis.

ADoctrines/Principles: Principle of dominus litus – The plaintiffis dominus litus, and cannot be compelled to seek relief againstanyone.

Doctrines/Principles: Principle of waiver/acquiescence –Applicability – Held: Plaintiff accepted payment from defendant asBdue settlement of its claims – Plaintiff’s failure to raise protest anddemand for interest at the earliest possible stage, amounted tosub-silencio acceptance – Accordingly, plaintiff is barred from raisingthis demand after several months applying the principle of waiver/acquiescence.

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CDoctrines/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 delayedpayment – Since such a claim was not raised in the writ court, thesubsequent suit of plaintiff is barred by the principle of ConstructiveRes Judicata.D

Words and Phrases: Term “Public interest” – Meaning of –Held: The term ‘Public interest’ has no rigid definition – It has to beunderstood and interpreted in reference to the context in which it isused – The concept derives its meaning from the statute where itoccurs, the transaction involved, the state of society and its needs.E

Allowing SIDBI’s appeal and dismissing SIBCO’s cross-appeal, the Court HELD: 1. RBI’s 09.06.1997 COMMUNICATION-‘ADVICE’ OR ‘DIRECTIVE’:F

1.1 For efficient discharge of its functions, the RBI has beengranted special powers for controlling and regulating variousfinancial institutions, as is clear from different provisions of TheRBI Act, 1934 and The Banking Regulation Act, 1949. As perthe RBI Act, 1934, the RBI has wide supervisory jurisdictionGover all Banking Institutions in the country. [Para 8][934-A-B]

Internet and Mobile Association of India vs. RBI (2020)10 SCC 274 – relied on.

1.2 Through Chapter IIIB of the RBI Act, 1934, the RBI isempowered to regulate and also monitor the conduct of everyNon-Banking Financial Institutions (NBFC) in India. Under S.45-JA of the RBI Act, 1934, the RBI is empowered, in publicinterest or to protect the interests of the depositors or to regulatethe financial system of the country, to determine the policy andissue directions to NBFCs. S. 45-K grants authority to the RBIto collect information pertaining to the NBFCs and togive directions pertaining to deposits to them. Whereas, underS. 45-L, general powers are conferred on the RBI to call forinformation from the Financial Institution and issue directions toregulate the credit system of the country. S. 45-M of the RBIAct, 1934 casts an obligation upon the NBFCs, to furnish allinformation and details as required by the RBI and to complywith RBI’s direction given under Chapter IIIB of the RBI Act.Similar powers are granted to the RBI in respect of Banks underthe 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, tointer alia prohibit the acceptance of deposit and alienation of assetsby Non-Banking Financial Companies, when they fail to complywith RBIs direction or infringe any statutory provisions.[Para 8.3][935-E]

1.4 The RBI in its communication dated 09.06.1997 hasinformed SIBCO of the winding up proceedings initiated againstCRB Capital and categorically prohibited the defendant from, interalia, parting with the interest on securities. However, the RBIhas not mentioned any provision under which the above-mentioned communication was issued. This has encouraged theplaintiff to argue that it is merely an ‘advice’ from RBI, and not astatutorily enforceable directive. [Para 8.5][936-D-F]

1.5 In the case at hand, vide the previous Notification dated10.04.1997, the RBI restrained CRB Capital (an NBFC), fromalienating or creating charge over their assets in ‘public interest’,and through the consequential directive dated 09.06.1997 hasrestrained the defendant from parting with any money in relationto securities held by the said NBFC. Even though, on the date of AB

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Athe prohibitory Notification dated 10.04.1997, the Bonds were inShankar Lal Saraf’s ownership, and not held by CRB Capital, theNotification and subsequent directive dated 09.06.1997 was stillapplicable as there was a clear shadow over the Shankar Lal Saraf’stitle. [Para 8.6][936-F-H]

B 1.6 A conjoint reading of the statutory provisions makes itabundantly clear that for ‘public interest’ the RBI is empoweredto issue any directive to any banking institution, and to prohibitalienation of an NBFC’s property. The term ‘Public interest’ hasno rigid definition. It has to be understood and interpreted inreference to the context in which it is used. The concept derivesCits meaning from the statute where it occurs, the transactioninvolved, the state of society and its needs. [Para 8.7][936-H;937-A-B]

Bihar Public Service Commission vs. Saiyed HussainAbbas Rizwi and Anr. (2012) 13 SCC 61 : [2012] 11DSCR 1032; Peerless General Finance and InvestmentCo. Ltd. vs. RBI (1992) 2 SCC 343 : [1992] 1 SCR 406

– relied on.

1.7 It is not necessary for RBI to mention a specificprovision before issuing directions, for it to have statutoryEconsequences. 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, 1934and the Banking Regulation Act, 1949. Any direction by the RBI,is compelling and enforceable similarly like the provisions of theFRBI 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. Governmentof A.P. AIR 1984 AP 75 – referred to.

1.8 For ensuring effective implementation of relevantGdirections, RBI as was declared is not only vested with curativepowers but also preventive powers. Hence, it is not necessaryfor the bank to wait for a direction to be violated, and then launchpenal actions against the offenders. But the RBI can also issuedirections to ensure that the relevant orders/directions areH

effectively followed. Thus, the RBI under Ss. 45-MB of the RBIAct, 1934 and 35-A of the Banking Regulation Act, 1949 has therequisite 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 actionsin furtherance of grounds of ‘public policy’ by the RBI wasjustified, for issuing the Notification dated 10.04.1997. Thenotification itself clearly mentioned that it is issued for the benefitof depositors and creditors of CRB Capital. The RBI’scommunication dated 09.06.1997 was in fact a direction, with theappropriate statutory backing traceable to S. 45-MB of the RBIAct as well as S. 35-A of the Banking Regulation Act. The09.06.1997 direction was issued, in furtherance of and toeffectively implement the 10.04.1997 notification issued earlierby the RBI. As such the RBI’s 09.06.1997 Notification wasdefinitely binding on the defendant which as noted earlier, is abanking 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; GaneshBank of Kurundwad Ltd. vs. Union of India (2006) 10SCC 645 : [2006] 5 Suppl. SCR 437 – relied on.

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

1.10 That apart, when the claim in the Suit is relatable tothe embargo by the RBI, it was necessary to implead RBI in thelitigation, for getting more clarity on the issue. The plaintiff omittedto do so at their own peril despite the defense set out on thisbasis. The plaintiff is dominus litus, and they cannot be compelledto seek relief against anyone. The plaintiff cannot be grantedparity with its predecessor-in-interest, Shankar Lal Saraf, who AB

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Awas paid interest which accrued in July, 1997 despite the RBIdirective of 09.06.1997. The defendant has explained thisaberration by clarifying that the payment to Shankar Lal Sarafwas made before the defendant was in receipt of the RBI directive.Hence, the plaintiff cannot claim any advantage for themselvesor parity with its predecessor-in-interest, on this cause.B[Paras 8.16 and 8.17][940-F-H]2. SHADOW OVER SHANKAR LAL SARAF’STRANSACTION:

2.1 S. 441(2) of the Companies Act, 1956 reveals thatCwinding-up proceedings other than voluntary winding-up, are saidto 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 theCompanies Act, 1956 prima facie reveals that any transfer ofDproperty by or against a company in involuntary winding up, thesuspect spell for deemed fraudulent transaction is six monthsbefore presentation of the winding up petition. In the presentcase, the petition for winding-up was submitted by RBI on22.05.1997 and admittedly, the transfer in Shankar Lal Saraf’sfavor was executed in February, 1997. Hence, the defendant’sEprima 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 – reliedon.F

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

2.4 Significantly it has been admitted by Shankar Lal Sarafin his Application (CA 1380/1998) to the Delhi Company Courtthat the defendant was acting under the advice of RBI, whichtreated the transfer of Bonds as fraudulent. Additionally, the SingleJudge of the Calcutta High Court, in his judgment dated H

13.03.2015 recorded a finding that initially both, RBI and theOfficial Liquidator, treated the transfer in Shankar Lal Saraf’sfavor, as fraudulent in the following words:- …On a winding uppetition having moved on 22nd May, 1997, the Company Courtappointed a Professional Liquidator. The RBI issued a letter tothe bank not to deal with the subject bonds as the liquidator hastreated the same as fraudulent preference under S. 531 of theAct… Though it was held that the transactions are genuine andcannot be declared as fraudulent preference at the instance ofthe Official Liquidator, but the fact remains that there was someclaim over the subject bonds…” [Para 9.4][942-E-H]

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

2.6 The cloud over the issue was cleared by the CompanyCourt judgment (17.12.2004) wherein, the defendant’s claim thatthe transfer in Shankar Lal Saraf’s favor was ‘fraudulentpreference’, was rejected. Significantly as soon as this decisionwas communicated to the defendant, payment was promptly madeby the defendant to the plaintiff, without hesitation. [Para 9.6][943-B]

2.7 At this juncture it is apposite to mention, that the validityof the Company Court judgment dated 17.12.2004 has not beenchallenged by either party. Hence, the judgment has attainedfinality and the issue whether the transfer in Shankar Lal Saraf’sfavor was fraudulent, is therefore put to rest. [Para 9.7][943-C]

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

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A3. WHETHER WITHHOLDING PAYMENT BONAFIDE?

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

3.2 The plaintiff has failed to show how the defendantderived any undue benefit by withholding the payment accruedDon the Bonds. The amount due on the Bonds was immediatelytransferred to the ‘Accrued Interest’ head and was not used bythe defendant for their business. Hence, the plaintiff’s contentionthat the defendant’s actions of withholding payment were malafide, is not acceptable to us. [Para 10.1][943-G-H; 944-A]

E3.3 The plaintiff also argues that the Company Courtjudgment (17.12.2004) has attained finality and the defendant isbarred by res judicata from raising the issue of fraudulentpreference. The issue of fraudulent preference is no longer resintegra and none sought to challenge the Company Court’sjudgment and re-agitate the issue. Hence, this contention will beFof no advantage for the plaintiff. [Para 10.2][944-B-C]4. BOND STATUS AND OBLIGATION: “HOLDER INDUE 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 entitledGto the possession of the note and to recovery of due amount,pursuant to the said note. [Para 11]

U. Ponnappa Moothan Sons, Palghat vs. CatholicSyrian Bank Ltd. and Ors. (1991) 1 SCC 113 : [1990]1 Suppl. SCR 542 – referred to.H

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

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

5. ENTITLEMENT FOR INTEREST ON DELAYEDPAYMENT AND PENDENTE LITE INTEREST.

5.1 The defendant was justified in withholding the accrueddues. The actions of SIDBI were bona fides, in furtherance ofRBI directives, which were issued in public interest. In the caseof Clariant International Ltd. Vs. SEBI, this court speakingthrough Justice S B Sinha held that two conditions need to besatisfied before awarding interest. First, that money should bewrongfully withheld from the rightful owners; Second, that thereshould be equitable considerations for awarding said interest. Inthe case at hand, neither of these conditions are found to besatisfied. [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 equitableconsiderations. Interest is payable for different purposes suchas compensatory, penal, etc. but these are not the situations in AB

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Athe case in hand. Here firstly, the defendant was justified inwithholding payment, as they were under RBI’s direction to doso; secondly, the defendant hasn’t derived any undue benefit bytheir act and; thirdly, due payment was promptly made to theplaintiffs upon settlement of rights by the court. Moreover, theconcerned transactions were during the “suspect spell”. ThisBshows that the defendant acted bona fide and there was no unduedelay on their part, to remit the dues. [Para 12.1][946-A-C]

5.3 The plaintiff did pray for pendente lite interest in theTrial Court but neither did the trial court frame any issue in thisregard, nor were any arguments recorded. This shows that suchCclaim was not pressed by the plaintiff. Further, no ground is urgedin 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 forpendente lite interest. The issue is rested accordingly.[Para 12.2][946-C-D]

D6. WAS PLAINTIFF’S DEMAND BARRED BY WAIVER/ACQUIESCENCE?

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

7. WHETHER PRESENT SUIT BARRED BYACONSTRUCTIVE RES JUDICATA ?

The defendant has argued that the principle of constructiveres judicata would also offset the plaintiff’s claim. Pertinently,the previous Bond holder Shankar Lal Saraf could not possiblyhave claimed interest on delayed payment before the CompanyCourt for it lacked the jurisdiction to adjudicate claims unrelatedto the liquidation proceedings, against CRB Capital. But, thesuccessor Bond holder i.e. the plaintiff could have claimed intereston delayed payment from the writ court. SIBCO’s submission isnot acceptable that the cause of action arose only on 23.11.2005,when the defendant refused to heed to the demand of interest ondelayed payment. The cause of action for the plaintiff accrued thefirst time, when the defendant allegedly failed to pay timelyinterest. Since such a claim was not raised in the writ court, thesubsequent Suit of SIBCO is barred by the principle ofConstructive Res Judicata. [Para 14][947-B-D]

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8.1 It is clear that the RBI has wide supervisory powersover financial institutions like SIDBI, in furtherance of which,any direction issued by the RBI, deriving power from the RBIAct or the Banking Regulation Act is statutorily binding on thedefendant. Admittedly, the RBI issued Notification dated10.04.1997, deriving power from S. 45-MB(2) of the RBI Act.Thereby, the RBI froze the assets of CRB Capital on the groundsof public policy, for the purpose of protecting interests of creditorsand depositors of CRB Capital. [Para 15][947-E-F]

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8.2 The RBI did not cite any provision in its Direction dated09.06.1997 to the defendant, as it was not under any compulsionto do so. It was sufficient that the RBI’s power to issue such adirection could be traced to either S.45-MB(2) of the RBI Act,or S. 35-A of the Banking Regulation Act. Hence, the saiddirection was statutorily binding on the defendant. Without thesaid direction, the Notification dated 10.04.1997, would have beenrendered toothless, causing irreparable harm to the creditorsand depositors of CRB Capital. In reference to the Directivedated 09.06.1997, the defendant proactively sought advice from F

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Athe Official Liquidator in regards to the payment of interestincome to the defendant. But, in absence of the OfficialLiquidator’s consent and guidance, the defendant could not havemade the payment without inviting onerous consequences foritself. Hence, it can be said that the defendant acted prudently,being conscious of the legal obligation, to withhold such paymentBto the plaintiff. [Para 15.1][947-F-H; 948-A-B]

8.3 Further, in reference to S. 531 of Companies Act, 1956read with S. 441(2) of the same act, it cannot be denied that therewas a suspicion over the title of the plaintiff’s predecessor-in-interest. Ipso facto, the plaintiff’s title with transaction during theC“suspect spell” was also under a cloud. It is clear from thediscussion above that such suspicion was not misplaced, as itwas 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 theDclear for the concerned transactions, the defendant has dulyensured compliance with the said order. Hence, it is clear thatthe defendant acted bona fide in withholding the payment.[Para 15.2][948-B-D]

8.4 The elements that could have weighed on the defendantEfor not making timely payments are: I) Contravention of the RBIDirectives; II) Issue being related to the ongoing litigation inthe Delhi Company Court; III) Concerns with the defendant’stitle over the Bonds/promissory notes transacted during the“suspect spell” and these perturbing elements can’t be brushedaside as not relevant. We are therefore of the view that evenFthough the payment was demanded in furtherance of anunconditional undertaking in the Bonds, the defendant was notentitled 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 LalGSaraf does not sound right in this court’s estimation, with purchasebeing made during the “suspect spell” and concurrent alarm bellsrung by the RBI, and the Court in that duration. When SIBCOapproached the Writ Court to validate their transaction, they failedto put forth any claim for interest on delayed payment. Curiously, H

SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA v. M/S.SIBCO INVESTMENT PVT. LTD.

the plaintiff chose not to approach the Company Court directlyand instead relied upon Shankar Lal Saraf to secure a favourableverdict on the issue. They even chose to forgo the very firstopportunity that arose for claiming interest on delayed payment,when the defendant was remitting the amount due to the plaintiffwhile complying with the Company Court verdict. Pertinently thepayment was accepted without protest and only after about 7months, additional sums were demanded on the Bonds. Despiteall these disquieting factors, the plaintiffs, like the Shakespeareancharacter of Shylock, have raised the demand “I’ll have my bond.Speak not against my bond.” As we see the situation, the holderof the Bond has received their ‘pound of flesh’, but they seem towant more. Additional sum in our estimation is not merited asSIBCO has already received their just entitlement and burdeningthe defendant with any further amount towards interest would beakin to Shylockian extraction of blood from the defendant.Therefore the question formulated in paragraph 3 of thisjudgment is answered accordingly against the plaintiff.[Para 15.4][948-F-H; 949-A-B]

ICICI Bank Ltd. v. Official Liquidator of APS StarIndustries 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; BhagwatiPrasad Pawan Kumar v. Union of India (2006) 5 SCC311 : [2006] 2 Suppl. SCR 975 – referred to.

Case Law Reference

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From the Judgment and Order dated 25.11.2019 of the High Courtof Calcutta in APD No.291 of 2015.C

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,DRauf Rahim, Rajarshi Dutta, Ali Asghar Rahim, Advs. for the appearingparties.

The Judgment of the Court was delivered by HRISHIKESH ROY, J.E1. Leave granted.

2. The challenge in these appeals is to the judgment and orderdated 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) wasFreversed. The suit was filed against Small Industries Development Bankof India (SIDBI) seeking interest on the alleged belated payment ofprincipal sum and accrued interest to the plaintiff for the Bonds issuedby SIDBI.

3. The question to be answered in this case is whether plaintiffGhas set forth a just claim, based on the Bonds issued by the defendant oris it a case of that trial in Shakespeare’s The Merchant of Venicewhere Shylock is claiming the promised pound of flesh in the form ofinterest 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”)H

in 1993. Those Bonds were then sold by CRB Capital to one ShankarLal Saraf in February, 1997 and those in turn were then sold on 1.7.1998to SIBCO – the plaintiff and the respondent herein. In the meantime,CRB Capital faced winding up proceedings at the instance of the RBI inthe Delhi High Court. The said proceeding will have a bearing on thiscase.

4. The following relevant facts necessary for consideration ofthis appeal are broadly culled out from the judgment of the CalcuttaHigh Court:-

4.1 The Plaintiff SIBCO purchased the Bonds in the form ofpromissory notes issued by the defendant SIDBI. These are termed asSIDBI Bonds 2003 (4th Series) carrying 13.50% interest and SIDBIBonds 2004 (5th Series) generating interest at the rate of 12.50%, fromone Shankar Lal Saraf on 1st July, 1998. The interest is payable on ahalf-yearly basis on/or before 21[st] day of June and 21[st] day of Decemberof every year. The 5th series Bonds were agreed to be redeemed on21[st] December, 2004 whereas the 4th series Bonds were to be redeemedon 21st December, 2003. The Bonds are freely tradable in the market.M/s. SIBCO purchased 15 Bonds (interest payable @ 13.50%) and 26Bonds (interest payable @12.50%) of face value of ten lakhs each foran aggregate price of Rs. 3.69 crores on 1st July, 1998 by M/s. SIBCOfrom the said Shankar Lal Saraf. The Bonds were deposited with M/s.SIDBI (defendant) on July 2, 1998 with the request to endorse the nameof 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 thatCRB Capital had gone into involuntary liquidation proceedings at theinstance of the RBI. At first the Plaintiff filed the W.P. No. 1456 of 1998before the Calcutta High Court seeking a mandamus upon defendant totransfer the aforesaid Bonds in favour of the plaintiff and also to pay theinterest accrued on them.

4.2 The Calcutta High Court on 09.01.2001 held that writ court isnot the proper forum and permitted the petitioner to approach theCompany Court, being the High Court at Delhi, seeking intervention inthe liquidation proceeding initiated against CRB Capital. Though an intra-court appeal was preferred against the said order but it was not proceededwith. On the request of the plaintiff, the Shankar Lal Saraf (the plaintiff’spredecessor-in-interest) filed an interlocutory application in the pendingliquidation proceeding before the Company-Court, claiming that the A

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Aaforesaid transactions should be treated as outside the purview of theliquidation proceeding, under the Companies Act, 1956.

4.3 By a judgment dated 17th December, 2004, the LearnedCompany Court held that the subject Bonds are beyond the purview ofthe liquidation proceeding and directed Shankar Lal Saraf to put up theBmatter before the defendant. On 17th February, 2005 the above judgmentof the Company Court was communicated and the Bonds were presentedto the defendant. Then on 21st February, 2005 the defendant made thepayment of the principal amount together with the interest calculated upto the date, as promised in the said Bond to M/s SIBCO with TDSdeduction at around 20%. By a letter dated 24th February, 2005, theCPlaintiff raised an objection over the rate on which the TDS was deducted,which was accepted by the defendant as it issued a further warrantcovering 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, wasthat the defendant during their audit detected that the interest wasDcalculated up to 31st October, 2005 and demand was raised on accountof interest on delayed payment of the principal amount and the intereston Bonds through a letter dated November 10, 2005. The defendantrefused to accede to the demand made by the plaintiff in its reply letterdated November 23, 2005. Aggrieved by the refusal, M/s SIBCO filedEthe 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 delayedpayment or in other words, delayed redemption of the aforesaid Bonds.It was categorically pleaded that a liquidation proceeding was initiatedagainst CRB Capital, who at one point of time was the holder of theFaforesaid Bonds and sold it to the said Shankar Lal Saraf on February20, 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 lienor otherwise deal with such security invested by CRB Capital and itsGroup Companies, without prior permission of the Official Liquidatorappointed by the Company Court at Delhi. Since Shankar Lal Saraf asGwell as the plaintiff were pressing hard for enfacing their name on thesaid Bonds, a clarification was sought on December 23, 1997 by thedefendant from the RBI seeking advice for further action in the matteron January 29, 1998. The RBI advised the defendant to take up thematter with the Official Liquidator which was accordingly done on AprilH3, 1998.

4.6 The defendant stated that despite multiple reminders till July18, 2001 no reply was received from the Official Liquidator in this regard.The specific stand is that due to the embargo imposed by RBI, thedefendant couldn’t act in defiance of the RBI’s directions. It is furtherstated that because of the pendency of the writ petition before theCalcutta High Court, the matter was not taken up and, therefore, neitherthe interest nor the redemption was paid. According to the defendant,after the Company Court order in the liquidation proceeding, the plaintiff’sname was put down upon the said Bonds and the holder was paid theprincipal, as well as the interest up to the date of redemption. As suchthere is no latches, negligence and delay on the part of the defendant tohonour 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 thesaid amount, whereas, the defendant says that because of the embargoand restriction by the RBI and the pending proceedings, the maturityamount was not paid on the date of maturity. The reliance appeared tohave been placed by both the sides on the facsimile dated 9[th] June, 1997issued by the RBI.

I. TRIAL COURT FINDINGS

5. The learned Trial Judge in his judgment noted that there is aclear stipulation against affecting any transfer, register any lien orotherwise deal with, the securities of CRB Capital with further stipulationthat it should not part with the interest, dividend or principal without thepermission of the Official Liquidator. Additionally it appears from theorder passed by the Company Court that there was a notification issuedon 10[th] April 1997 under Section 45-MB of the RBI (Amendment) Act,1997 directing the said Company not to sell, transfer, create charge ormortgage or deal in any manner with any of its profits and assets withoutthe permission of the RBI for a period of six months from the date of thesaid notification. The Official Liquidator was appointed on 22[nd] May,1997 who subsequently treated the subject Bonds as fraudulentpreference under Section 531 of the Companies Act, 1956. Though itwas held by the Company Court vide its judgment dated 17.12.2004,that the transactions are genuine and cannot be declared as fraudulentpreference at the instance of the Official Liquidator, the fact remainsthat there was some claim over the subject Bonds.

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A5.1 The RBI is found to be empowered to control the managementof the Banking Company in certain situations and can lay down theparameters enabling Banking Companies to expand business and regulatethe paid up capital, reserve funds, cash funds and above all policies inthe matter of advances to be made by the Banking Companies andallocation of resources etc. The RBI is authorized by the Parliament toBenact the policy and to issue directions/guidelines which have statutoryforce, as held in case of ICICI Bank Ltd. Vs. Official Liquidator ofAPS Star Industries Ltd.[1] In support for the aforesaid proposition, theTrial Court also relied on the ratio in Sudhir Shantilal Mehta Vs. CentralBureau of India[2] to comment on the Regulatory role of the RBI vis-à-Cvis the business of the banking companies.

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5.2 This suggests that once the RBI has issued directions, anyaction contrary thereto, may not only attract the civil liability but mightalso invite criminal breach of trust. According to the Trial Court thedefendant was not sitting in slumber after receiving the RBI instructionsDbut sought advice immediately thereafter and was directed to approachthe Official Liquidator. The defendants sought clarification from theOfficial Liquidator but did not receive any reply. Ultimately on 17[th]December, 2004, the application of Shankar Lal Saraf before theCompany-Court succeeded and within a short span of time, theredemption value along with interest was paid to the plaintiff. The LearnedETrial Judge did not agree with the submission of the plaintiff that therewas any deliberate attempt to delay the payment of the maturity amountby the defendant. It would be worth noting that the Trial Court relied ondefendants’ witness to hold that the accrued interest was transferred tothe accrued interest head and, therefore, it was not utilized nor any benefitFwas taken therefrom.5.3 As can be seen, the Suit was dismissed primarily on twogrounds: - (A) The bonds in question could not be transferred by the petitionersince the RBI had initiated winding up proceedings against CRB CapitalGbefore the Delhi High Court, whereafter the RBI has issued a directivedated 9.6.1997 to the petitioner herein directing not to register transferof CRB Capital’s Bonds in question, or to part with any payment pertaining 1 (2010) 10 SCC 1.H2 (1992)2 SCC 343.

to the said Bonds, without consent of the Official Liquidator. The learnedJudge therefore found that the petitioner had acted entirely in accordancewith the directive of the RBI, by requesting permission from the OfficialLiquidator, and thereby promptly making the payment of the amountsdue under the Bonds after appropriate orders were passed by the DelhiHigh Court where winding up proceedings were going on. Hence, thedefendant 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, withoutany protest in February, 2005. The plaintiff thereafter slept over thisissue for almost 8 months, and for the first time claimed interest for thedelayed payment in October 2005. The court therefore found that sincethe plaintiff had accepted the encashment without protest the law laiddown by this Court in Bhagwati Prasad Pawan Kumar v. Union ofIndia[3] would apply, since there was acceptance by conduct. In BhagwatiPrasad(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 clearthat the offeree did the act with the intention (actual orapparent) of accepting the offer. The decision which we havenoticed above also proceed on this principle. Each case mustrest on its own facts. The courts examine the evidence to findout whether in the fact and circumstances of the case theconduct of the “offeree” was such an amounted to anunequivocal acceptance of the offer made. If the facts of thecase disclose that there was no reservation in signifyingacceptance by conduct. On the other hand, if the evidencediscloses that the “offeree” had reservation in accepting theoffer, his conduct may not amount to acceptance of the offerin terms of Section 8 of the Contract Act.”

II. APPELLATE COURT PROCEEDINGS:

6. Aggrieved by the order of the learned Trial Judge of the CalcuttaHigh Court, the plaintiff preferred an intra-court appeal which wasnumbered as APD 291/2015. On 25[th] November 2019, The LearnedDivision Bench, allowed the plaintiff’s appeal, and set-aside the judgmentfavoring the defendant. The High Court observed in the appeal that, A

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Aeven after the RBI communication dated 09[th] June 1997, the defendanthad paid interest accruing in June, 1997 to the plaintiff’s predecessor-in-interest, Shankar Lal Saraf. The court relied on a letter issued by thedefendant to RBI dated 23[rd] December 1997, wherein the defendanthad admitted that it was impossible to withhold payment forever. Basedon these observations, the learned Division bench held that the RBIBcommunication dated 09[th] June, 1997 was merely a suggestion to thedefendant and not an order passed by the RBI exercising its statutoryauthority. Hence, the defendant was without a reasonable cause, whenit chose to withheld payment duly accrued to the respondent.

6.1 It was accordingly held that the suit was not barred either byCaccord or satisfaction as the plaintiff gave no acknowledgment that allclaims stood satisfied at the time of receiving the payment warrants on21[st] February 2005. Hence, the plaintiff was at liberty to raise furtherdemands including demand for interest on delayed payment. The LearnedDivision Bench further held that reliance on Bhagwati Prasad (Supra)Dby the trial judge was misplaced as it was not cited by either parties andwas relied on without giving the parties a chance to rebut it. The defendantwas accordingly directed to pay simple interest @ 6% per annum oninterest, from date of accrual and 8% simple interest per annum onprincipal amount from date of maturity of respective Bonds by 29.02.2020.

EIII. DISCUSSION AND DECISION:

7. The present appeals are filed impugning the above judgment ofthe Division Bench of the Calcutta High Court. The defendant seeksrelief of setting aside the judgment of the Division Bench in toto. Whereas,the plaintiff seeks pendente lite interest over and above the interestFalready awarded, and is disputing the rate of interest awarded by theLearned Division bench on interest and Principal amount.

7.1 Assailing the legality of the judgment of the appellate Benchof the Calcutta High Court, Mr K V Viswanathan, learned SeniorCounsel for the defendant makes the following arguments:-G(i)SIDBI acted entirely in accordance with the directives issuedby the RBI, as any prudent financial institution would;

(ii) Withholding of payment under the Bonds in question, wasjustified in light of possibility of transfer of the Bonds byCRB Capital being a Fraudulent Preference under S. 531Hof the Companies Act, 1956;

(iii) SIBCO bought the bonds in question in ‘suspect spell’ withthe knowledge that two installments of interest had accruedand not been paid; not established that he is a “holder indue course”; there is a cloud on its title;

(iv) Petitioner acted proactively by preferring numerous lettersto RBI/Official Liquidator; amounts cannot be said to havebeen wrongfully withheld;

(v) Neither Saraf nor SIBCO claimed interest for delayedpayment of interest or the maturity amounts under the Bondsin previous litigation; barred by constructive res judicata;

(vi) The payments made were accepted by Respondent withoutprotest and amount to accord and satisfaction;

(vii) The Respondent/SIBCO’s claim for interest pendente liteis a clear after-thought, and in any event, not justified;7.2 Per contra, Mr. Sabyasachi Chaudhury, learned Senior Counselrepresenting the plaintiff (respondent) contends that:

(i) The RBI merely issued an advice which pertained to assetsheld by CRB Capital and was inapplicable to the Bonds inquestion, which were owned by plaintiff when the advicewas issued;

(ii) SIDBI’s action of withholding payment, on apprehensionof fraudulent preference by M/s. CRB Capital was not bonafide, in absence of any objection by the Official Liquidator;

(iii) SIDBI is barred by res judicata from arguing fraudulentpreference, as this issue is settled by the judgment ofCompany Court dated 17[th] December, 2004;

(iv) The payment was made in furtherance of promissory notes,which are unconditional undertakings, and not in pursuanceof any reciprocal promise. Thus, the issue of ‘accord andsatisfaction’ doesn’t arise;

(v) Plaintiff has claimed interest pendente lite consistently attrial, 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 onthe Bonds in question, it will be beneficial to examine the statutory A

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Aprovisions which empower the RBI. For efficient discharge of itsfunctions, the RBI has been granted special powers for controlling andregulating various financial institutions, as is clear from different provisionsof The RBI Act, 1934 and The Banking Regulation Act, 1949. As perthe RBI Act, 1934, we find that the RBI has wide supervisory jurisdictionover all Banking Institutions in the country. This court speaking throughBJustice V. Ramasubramaniyan, in the case of Internet and MobileAssociation of India vs. RBI[4], elucidated on the position of the RBI asa statutory body, with immense power in financial/ monetary field:

“190. But given the scheme of the RBI Act, 1934 and theBanking Regulation Act, 1949, the above argument appearsConly to belittle the role of RBI. RBI is not just like any otherstatutory body created by an Act of legislature. It is a creature,created with a mandate to get liberated even from itscreator…Therefore, RBI cannot be equated to any otherstatutory body that merely serves its master. It is specificallyDempowered to do certain things to the exclusion of even theCentral Government. Therefore, to place its decisions at apedestal lower than that of even an executive decision, woulddo violence to the scheme of the Act. “

8.1 Through Chapter IIIB of The RBI Act, 1934, the RBI isEempowered to regulate and also monitor the conduct of every Non-Banking Financial Institutions (NBFC) in India. Under S. 45-JA of TheRBI Act, 1934, the RBI is empowered, in public interest or to protectthe interests of the depositors or to regulate the financial system of thecountry, to determine the policy and issue directions to NBFCs. S. 45-Kgrants authority to the RBI to collect information pertaining to the NBFCsFand to give directions pertaining to deposits to them. Whereas, underS. 45-L, general powers are conferred on the RBI to call for informationfrom the Financial Institution and issue directions to regulate the creditsystem of the country. S. 45-M of the RBI Act, 1934 casts an obligationupon the NBFCs, to furnish all information and details as required by theGRBI and to comply with RBI’s direction given under Chapter IIIB ofthe RBI Act.8.2 Similar powers are granted to the RBI in respect of Banksunder the Banking Regulation Act, 1949. In the case at hand, we are H4 (2020) 10 SCC 274.

concerned with S. 35-A of The Banking Regulation Act, 1949 whichenables 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 beingconducted in a manner detrimental to the interests of thedepositors or in a manner prejudicial to the interests ofthe banking company; or

(c) to secure the proper management of any bankingcompany generally, it is necessary to issue directions tobanking companies generally or to any banking companyin particular, it may, from time to time, issue such directionsas it deems fit, and the banking companies or the bankingcompany, as the case may be, shall be bound to complywith such directions.”

8.3 The Section S. 45-MB of the RBI Act, 1934 being relevantin the above context which empowers the RBI, to inter alia prohibit theacceptance of deposit and alienation of assets by Non-Banking FinancialCompanies, when they fail to comply with RBIs direction or infringe anystatutory provisions, is extracted for ready reference as under:

“45MB. Power of Bank to prohibit acceptance of deposit andalienation of assets:

(1) If any non-banking financial company violates theprovisions of any section or fails to comply with any directionor order given by the Bank under any of the provisions ofthis Chapter, the Bank may prohibit the non-banking financialcompany from accepting any deposit.

(2) Notwithstanding anything to the contrary contained inany agreement or instrument or any law for the time being inforce, the Bank, on being satisfied that it is necessary so todo in the public interest or in the interest of the depositors,may direct, the non-banking financial company against whichan order prohibiting from accepting deposit has been issued, A

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Anot to sell, transfer, create charge or mortgage or deal in anymanner with its property and assets without prior writtenpermission of the Bank for such period not exceeding sixmonths from the date of the order.”

8.4 At this juncture, it is pertinent to extract the exact wordings ofBthe RBI communication dated 09.06.1997 addressed to the defendant:

“We understand that M/s. CRB Capital Markets Ltd. and itsassociates have invested in the shares/bonds/other securitiesof your institution. As you are aware, RBI has filed a petitionfor the winding up of the said company in the High Court,CDelhi. We, therefore, advise you not to effect any transfer,register any lien, or otherwise deal with such securities andalso not to part with the interest/dividends or principal withoutthe permission of the Official Liquidator, appointed by theHigh Court of Delhi. Please confirm and advise the amountof investments so held by the company/companies with yourDinstitution.”

8.5 As is apparent from above, the RBI in its communication hasinformed SIBCO of the winding up proceedings initiated against CRBCapital and categorically prohibited the defendant from, inter alia, partingwith the interest on securities. However, the RBI has not mentioned anyEprovision under which the above-mentioned communication was issued.This has encouraged the Learned Counsel for the plaintiff to argue thatit is merely an ‘advice’ from RBI, and not a statutorily enforceabledirective.

8.6 In the case at hand, vide the previous Notification datedF10.04.1997, the RBI restrained CRB Capital (an NBFC), from alienatingor creating charge over their assets in ‘public interest’, and through theconsequential directive dated 09.06.1997 has restrained the defendantfrom parting with any money in relation to securities held by the saidNBFC. Even though, on the date of the prohibitory Notification datedG10.04.1997, the Bonds were in Shankar Lal Saraf’s ownership, and notheld by CRB Capital, the Notification and subsequent directive dated09.06.1997 was still applicable as there was a clear shadow over theShankar 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 empoweredH

to issue any directive to any banking institution, and to prohibit alienationof an NBFC’s property. The term ‘Public interest’ has no rigid definition.It has to be understood and interpreted in reference to the context inwhich it is used. The concept derives its meaning from the statute whereit occurs, the transaction involved, the state of society and its needs.[5]Justice V. Ramasubramanian, speaking for a three judges Bench inInternet and Mobile Association of India[6], (Supra), gave a widemeaning to ‘public interest’, in context of S. 35-A of the BankingRegulation Act, 1949:

“176. ………As we have indicated elsewhere, the power underSection 35-A to issue directions is to be exercised under fourcontingencies, namely, (i) public interest, (ii) interest ofbanking policy, (iii) interest of the depositors and (iv) interestof the banking company. The expression “banking policy” isdefined in Section 5(ca) to mean any policy specified by RBI(i) in the interest of the banking system, (ii) in the interest ofmonetary stability and (iii) sound economic growth. Publicinterest permeates all these areas…”

8.8 On the omission to advert to the statutory provisions on thebasis of which the RBI acted, we can seek guidance from the ratio inPeerless General Finance and Investment Co. Ltd. Vs. RBI[7 ]wherethis court, speaking through Justice N. M. Kasliwal, held that:

“71. It is settled law that so long as the power is traceable tothe statute, mere omission to recite the provision does notdenude the power of the legislature or rule making authorityto make the regulations, nor considered without authority oflaw. Section 114(e) of the Evidence Act draws a statutorypresumption that official acts are regularly performed andreached satisfactorily on consideration of relevant facts. Theabsence of reiteration of objective satisfaction in the preambleas of one under Section 45-L does not denude the powers, theRBI admittedly has under Section 45-L, to justify the actions.Though Section 45-L was neither expressly stated normentioned 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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Arecitation of satisfaction of objective facts to issue thedirections from the facts and circumstances it is demonstratedthat the RBI had such satisfaction in its consideration of itspower under Section 45-L, when the Directions were issued.Even otherwise Section 45-K(3) itself is sufficient to upholdthe directions.” (Emphasis added)

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8.9 The above makes it clear that, it is not necessary for RBI tomention a specific provision before issuing directions, for it to havestatutory consequences. All that is required is the authority under thelaw, to issue such direction.

C8.10 The learned Senior Counsel for the defendant in our estimationis correct in his submission that RBI directives carry statutory force,gathering authority from the provisions of both the RBI Act, 1934 andthe 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 thiscourt, speaking through Justice N M Kasliwal, relied on State of U.P.DVs. Babu Ram Upadhya[9], and D.K.V. Prasada Rao vs. Governmentof A.P.[10 ]to significantly pronounce that directions issued by RBI, areincorporated and become a part of the act and must therefore be governedby the same principles as the statute itself. This view was further affirmedby this court in case of Internet and Mobile Association of India[11]E(Supra). Hence, it is undisputed that any direction by the RBI, iscompelling and enforceable similarly like the provisions of the RBI Actby its very nature.

8.11 In Sudhir Shantilal Mehta[12] (Supra), Justice S. B. Sinhainterpreting the implications of actions under S. 35-A of The BankingFRegulation, 1949 and the intention of legislature, rightly observed thatthe directions under the said provision are binding upon banking companies:

“57. The distinction between exercise of jurisdiction underthe enabling provisions contained in Section 36(1) and theones under Sections 21 and 35-A of the Banking RegulationGAct 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.H12 Supra at 2.

Bank of India, 1934 is absolutely clear and unambiguous. Interms of Section 36, Reserve Bank of India may caution orprohibit the banking companies but in terms of Sections 21and 35-A of the 1949 Act it can issue binding directions …

58. Whether a circular letter issued by a statutory authoritywould be binding or not or whether the same has a statutoryforce, would depend upon the nature of the statute. For thesaid purpose, the intention of the legislature must beconsidered. Having regard to the fact the Reserve Bank ofIndia exercised control over the banking companies, we areof the opinion that the said circular letter was binding on thebanking 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 thecontext of S. 45-K of the RBI Act, 1934, that RBI has the authority toissue 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 theprinciple applicable is that if the Legislature enables somethingto be done, it gives power at the same time, by necessaryimplication, to do everything which is indispensable for thepurpose of carrying out the purpose in view. (See Craies onStatutes, 7th Edn. p. 258.) It has been held that the power tomake a law with respect to any subject carries with it all theancillary and incidental powers to make the law effective andworkable 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 alsopreventive 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 fora direction to be violated, and then launch penal actions against theoffenders. But the RBI can also issue directions to ensure that the relevantorders/directions are effectively followed.

13 (1996) 1 SCC 642.

14 (2006) 10 SCC 645.

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A8.14 Based on the discussion above, the RBI under Ss. 45-MB ofthe RBI Act, 1934 and 35-A of the Banking Regulation Act, 1949 inour understandinghas the requisite authority to issue the communicationdated 09[th] June, 1997. The omission by the RBI to mention any enablingprovision, doesn’t change the nature and status of the direction. Thestatutory arrangement and interpretation as above persuade us to holdBthat actions in furtherance of grounds of ‘public policy’ by the RBI wasjustified, for issuing the Notification dated 10.04.1997. The notificationitself clearly mentioned that it is issued for the benefit of depositors andcreditors of CRB Capital. The RBI’s communication dated 09.06.1997was in fact a direction, with the appropriate statutory backing traceableCto S. 45-MB of the RBI Act as well as S. 35-A of the BankingRegulation Act. The Learned Senior Counsel for the defendant is thereforecorrect in saying that the 09.06.1997 direction was issued, in furtheranceof and to effectively implement the 10.04.1997 notification issued earlierby the RBI. As such the RBI’s 09.06.1997 Notification was definitelybinding on the defendant which as noted earlier, is a banking institution.D

8.15 Situated thus, the actual status of the RBI Notification wouldhave a bearing on the claim against the defendant in the suit and thelater proceeding. The plaintiff, as can be noted, always had the option ofchallenging its legality but they have never specifically challenged thosein the Suit. Therefore, when the legality of the RBI Notification is notEunder challenge, relief can’t be granted in the Suit without determiningits legality. This in our perception can by itself, put a quietus on the issueat hand.

8.16 That apart, when the claim in the Suit is relatable to theembargo by the RBI, it was necessary to implead RBI in the litigation,Ffor getting more clarity on the issue. The plaintiff omitted to do so attheir own peril despite the defense set out on this basis. Here we need toobserve that the plaintiff is dominus litus, and they cannot be compelledto seek relief against anyone.

8.17 According to us, the plaintiff cannot be granted parity withGits predecessor-in-interest, Shankar Lal Saraf, who was paid interestwhich accrued in July, 1997 despite the RBI directive of 09.06.1997.The defendant has explained this aberration by clarifying that the paymentto Shankar Lal Saraf was made before the defendant was in receipt ofthe RBI directive. Hence, the plaintiff cannot claim any advantage forHthemselves or parity with its predecessor-in-interest, on this cause.

V. SHADOW OVER SHANKAR LAL SARAF’STRANSACTION:

9. The S. 531 of the Companies Act, 1956 (Corresponding ss.328 and 329 of the Companies Act, 2013) being relevant for thequestion, is extracted:

“531. Fraudulent Preference:

(1) Any transfer of property, movable or immovable, deliveryof goods, payment, execution or other act relating to propertymade, taken or done by or against a company within sixmonths before the commencement of its winding up which,had it been made, taken or done by or against an individualwithin three months before the presentation of an insolvencypetition on which he is adjudged insolvent, would be deemedin his insolvency a fraudulent preference, shall in the eventof the company being wound up, be deemed a fraudulentpreference 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 havecommenced 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 windingup of a company by the Tribunal, a resolution has been passedby the company for voluntary winding up, the winding up ofthe company shall be deemed to have commenced at the timeof the passing of the resolution, and unless the Tribunal, onproof of fraud or mistake, thinks fit to direct otherwise, allproceedings taken in the voluntary winding up shall bedeemed to have been validly taken.

(2) In any other case, the winding up of a company by theTribunal shall be deemed to commence at the time of thepresentation of the petition for the winding up.”

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Afraudulent transaction is six months before presentation of the windingup petition. In the present case, the petition for winding-up was submittedby RBI on 22.05.1997 and admittedly, the transfer in Shankar Lal Saraf’sfavor was executed in February, 1997. Hence, the defendant’s primafacie suspicion that the transfer during the suspect spell, may be deemedfraudulent, is not misplaced. Relevant here would be to note that in 2019,Ba Division bench of this court speaking through Justice MohanShantanagoudar in the case of IDBI vs. Official Liquidator[15 ]clarifiedthat two conditions need to be satisfied for a transaction to be qualifiedas fraudulent preference: First, Company’s dominant motive to prefer aparticular creditor; Second, transfer executed within six month, precedingCfiling of winding-up petition. The issue of fraudulent preference is thereforeno longer res integra, andit is unnecessary to labour on the issue anyfurther.

9.3 The suspicion harboured by the defendant is during the suspectspell as supported by the Calcutta High Court in its order datedD09.01.2001, where the Writ Court refused to interfere on the groundsthat the issue was in the teeth of the litigation pending in the Delhi CompanyCourt.

9.4 Significantly it has been admitted by Shankar Lal Saraf in hisApplication (CA 1380/1998) to the Delhi Company Court that theEdefendant was acting under the advice of RBI, which treated the transferof Bonds as fraudulent. Additionally, the Learned Single Judge of theCalcutta High Court, in his judgment dated 13.03.2015 recorded a findingthat initially both, RBI and the Official Liquidator, treated the transfer inShankar Lal Saraf’s favor, as fraudulent in the following words:- F“…On a winding up petition having moved on 22[nd] May, 1997,the Company Court appointed a Professional Liquidator. TheRBI issued a letter to the bank not to deal with the subjectbonds as the liquidator has treated the same as fraudulentpreference under S. 531 of the Act…

GThough it was held that the transactions are genuine andcannot be declared as fraudulent preference at the instanceof the Official Liquidator, but the fact remains that there wassome claim over the subject bonds…”

9.5 While the Division Bench of the Calcutta High Court has set-aside the order of the Learned Single Judge, the finding mentioned aboveat the relevant time, is not refuted by the contesting party.

9.6 The cloud over the issue was cleared by the Company Courtjudgment (17.12.2004) wherein, the defendant’s claim that the transferin 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, withouthesitation.

9.7 At this juncture it is apposite to mention, that the validity of theCompany Court judgment dated 17.12.2004 has not been challenged byeither party. Hence, the judgment has attained finality and the issuewhether the transfer in Shankar Lal Saraf’s favor was fraudulent, istherefore put to rest.

9.8 Based on the above discussion, it is clear that the defendant’simpression that the transfer in favour of Shankar Lal Saraf was notlegitimate, was a reasonable opinion, shared by many, including the RBIand the Official Liquidator. The defendant was in receipt of the RBI’sdirections, not to part with payment as the Official Liquidator had treatedthe transaction as fraudulent. This had clearly placed a shadow over theplaintiff’s title to the Bonds and consequences must flow therefrom.

VI. WHETHER WITHHOLDING PAYMENT BONAFIDE?

10. Assuming ad arguendo, that the RBI directions could bedisregarded yet the Bonds and the interest accrued thereon, were in theteeth of the litigation, pending in the Company Court. The defendantproactively applied to the Official Liquidator on multiple occasions seekingclarification on interest payment. But, the Official Liquidator did notrespond. Hence, it is clear that despite the defendant’s best intentionsand proactive efforts, it would be imprudent for the defendant to releasethe payment accrued on the suspect Bonds. When the Bonds werereleased from dispute pending before the Company Court, the defendantpromptly complied with the order of the Learned Company Court.

10.1 The Learned Counsel for the plaintiff has failed to showhow the defendant derived any undue benefit by withholding the paymentaccrued on the Bonds. The amount due on the Bonds was immediatelytransferred to the ‘Accrued Interest’ head and was not used by the A

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Adefendant for their business. Hence, the plaintiff’s contention that thedefendant’s actions of withholding payment were mala fide, is notacceptable to us.

10.2 The plaintiff also argues that the Company Court judgment(17.12.2004) has attained finality and the defendant is barred byBres judicata from raising the issue of fraudulent preference. The issueof fraudulent preference is no longer res integra and none sought tochallenge 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 DUECCOURSE”:

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 thepossession of the note and to recovery of due amount, pursuant to thesaid note. For ready reference, the relevant S.9 of the NegotiableDInstruments Act, 1881 which defines a ‘holder in due course’is extractedas under:

“9. “Holder in due course”—

“Holder in due course” means any person who forconsideration became the possessor of a promissory note, billEof exchange or cheque if payable to bearer, or the payee orindorsee thereof, if payable to order, before the amountmentioned in it became payable, and without having sufficientcause to believe that any defect existed in the title of the personfrom whom he derived his title.”F

11.1 This court speaking through Justice K Jayachandra Reddy inthe context of a cheque in the case of U. Ponnappa Moothan Sons,Palghat Vs. Catholic Syrian Bank Ltd. and Ors.[16 ]juxtaposed theIndian position on ‘holder in due course’ with the position in English Lawto declare the following:-G“17…Under the Indian law a holder, to be a holder in duecourse, must not only have acquired the bill, note of chequefor valid consideration but should have acquired the chequewithout having sufficient cause to believe that any defect

H16 (1991) 1 SCC 113.

existed in the title of the person from whom he derived histitle. This condition required that he should act in good faithand with reasonable caution. However, mere failure to provebona fide or absence of negligence on his part would notnegative his claim. But, in a given case it is left to the Court todecide whether the negligence on part of the holder is so grossand extraordinary as to presume that he had sufficient causeto believe that such title was defective…”(Emphasis added)

11.2 The principles stated above in the context of cheques can beextrapolated for promissory notes as well. Resultantly an obligation hasbeen imposed on the transferee of the promissory notes, to be deemedto be a ‘Holder in due course’, that the notes should have been acquiredin good faith; after exercising reasonable care and caution about theholder’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 discussedearlier, Shankar Lal Saraf’s holding stood cleared by the Company Courtonly on 17.12.2004 but before the said judgment, there was a cloud overhis 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 withholdingpayment till conclusion of dispute in Company Court, even though therelief claimed was in respect of an ‘unconditional undertaking’, as therewere reasonable legal concerns for the transaction during the suspectspell, for making such payments.

VIII. ENTITLEMENT FOR INTEREST ON DELAYEDPAYMENT AND PENDENTE LITE INTEREST:

12. It flows from the above discussion, that the defendant wasjustified in withholding the accrued dues. The actions of SIDBI werebona fides, in furtherance of RBI directives, which were issued in publicinterest. In the case of Clariant International Ltd. Vs. SEBI[17], thiscourt speaking through Justice S B Sinha held that two conditions needto be satisfied before awarding interest. First, that money should bewrongfully withheld from the rightful owners; Second, that there shouldbe equitable considerations for awarding said interest. In the case athand, neither of these conditions are found to be satisfied.

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A12.1 As per S. 34 of The Code of Civil Procedure (CPC), awardof 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 underRBI’s direction to do so; secondly, the defendant hasn’t derived anyBundue benefit by their act and; thirdly, due payment was promptly madeto the plaintiffs upon settlement of rights by the court. Moreover, theconcerned transactions were during the “suspect spell”. This in ourview shows that the defendant acted bona fide and there was no unduedelay on their part, to remit the dues.C

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12.2 The plaintiff did pray for pendente lite interest in the TrialCourt but neither did the trial court frame any issue in this regard, norwere any arguments recorded. This shows that such claim was not pressedby the plaintiff. Further, no ground is urged in the appeal memo, thatsuch an issue ought to have been framed. Hence, it is clear that theDplaintiff is not serious on its claim for pendente lite interest. The issue is rested accordingly.

IX. WAS PLAINTIFF’S DEMAND BARRED BY WAIVER/ACQUIESCENCE?:-

rested accordingly.

IX. WAS PLAINTIFF’S DEMAND BARRED BY WAIVER/ACQUIESCENCE?:-

13. It is evident from the record, that when the payment warrantsEwere received by the plaintiff, it effaced the warrants by handwrittenremark ‘Received’. Pertinently, in the first instance, protest was onlyraised in reference to excessive TDS deduction by the defendant whileremitting the dues. The demand for interest on delayed payment, wasraised after passage of 7 months, when the books of SIBCO wereFallegedly audited. This justification does not appear to be reasonable. Infact, as has been stated previously in this judgment, the plaintiff wasentitled to demand interest for delayed payment in its writ petition aswell. But SIBCO has consistently failed to raise this demand at everystage including at the stage of accepting the sum tendered by thedefendant, without any protest.G

13.1 Hence, it is clear that the plaintiff accepted the paymentfrom the defendant as due settlement of its claims. SIBCO’s failure toraise protest and demand for interest at the earliest possible stage,amounted to sub-silencio acceptance. Accordingly, the plaintiff is barred H

from raising this demand after several months applying the principle ofwaiver/acquiescence.

X. WHETHER PRESENT SUIT BARRED BYCONSTRUCTIVE RES JUDICATA ?:

14. The defendant has argued that the principle of constructiveres judicata would also offset the plaintiff’s claim. Pertinently, the previousBond holder Shankar Lal Saraf could not possibly have claimed intereston delayed payment before the Company Court for it lacked thejurisdiction to adjudicate claims unrelated to the liquidation proceedings,against CRB Capital. But, the successor Bond holder i.e. the plaintiffcould have claimed interest on delayed payment from the writ court.SIBCO’s submission is not acceptable that the cause of action aroseonly on 23.11.2005, when the defendant refused to heed to the demandof interest on delayed payment. The cause of action for the plaintiffaccrued the first time, when the defendant allegedly failed to pay timelyinterest. Since such a claim was not raised in the writ court, thesubsequent Suit of SIBCO in our view, is barred by the principle ofConstructive Res Judicata.

XI. CONCLUSION:

15. It is clear from the discussion above, that the RBI has widesupervisory powers over financial institutions like SIDBI, in furtheranceof which, any direction issued by the RBI, deriving power from the RBIAct or the Banking Regulation Act is statutorily binding on the defendant.Admittedly, the RBI issued Notification dated 10.04.1997, deriving powerfrom S. 45-MB(2) of the RBI Act. Thereby, the RBI froze the assets ofCRB Capital on the grounds of public policy, for the purpose of protectinginterests of creditors and depositors of CRB Capital.

15.1 The RBI did not cite any provision in its Direction dated09.06.1997 to the defendant, as it was not under any compulsion to doso. It was sufficient that the RBI’s power to issue such a direction couldbe traced to either S.45-MB(2) of the RBI Act, or S. 35-A of theBanking Regulation Act. Hence, the said direction was statutorily bindingon the defendant. Without the said direction, the Notification dated10.04.1997, would have been rendered toothless, causing irreparableharm to the creditors and depositors of CRB Capital. In reference to theDirective dated 09.06.1997, the defendant proactively sought advice fromthe Official Liquidator in regards to the payment of interest income to A

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Athe defendant. But, in absence of the Official Liquidator’s consent andguidance, the defendant could not have made the payment without invitingonerous consequences for itself. Hence, it can be said that the defendantacted prudently, being conscious of the legal obligation, to withhold suchpayment to the plaintiff.B15.2 Further, in reference to S. 531 of Companies Act, 1956read with S. 441(2) of the same act, it cannot be denied that there wasa suspicion over the title of the plaintiff’s predecessor-in-interest. Ipsofacto, the plaintiff’s title with transaction during the “suspect spell”was also under a cloud. It is clear from the discussion above that suchsuspicion was not misplaced, as it was shared by the RBI as well as theCOfficial Liquidator. Immediately after the Company Court vide its decision(17.12.2004), clarified the position that the plaintiff was in the clear forthe concerned transactions, the defendant has duly ensured compliancewith the said order. Hence, it is clear that the defendant acted bona fidein withholding the payment.D

15.3 The elements that could have weighed on the defendant fornot making timely payments are: I) Contravention of the RBI Directives;II) Issue being related to the ongoing litigation in the Delhi CompanyCourt; III) Concerns with the defendant’s title over the Bonds/promissorynotes transacted during the “suspect spell” and these perturbing elementsEcan’t be brushed aside as not relevant. We are therefore of the viewthat even though the payment was demanded in furtherance of anunconditional undertaking in the Bonds, the defendant was not entitledto it till the Company Court’s order dated 17.12.2004.

15.4 The plaintiff’s transaction of Bonds with Shankar Lal SarafFdoes not sound right in this court’s estimation, with purchase being madeduring the “suspect spell” andconcurrent alarm bells rung by the RBI,and the Court in that duration. When SIBCO approached the Writ Courtto validate their transaction, they failed to put forth any claim for intereston delayed payment. Curiously, the plaintiff chose not to approach theCompany Court directly and instead relied upon Shankar Lal Saraf toGsecure a favourable verdict on the issue. They even chose to forgo thevery first opportunity that arose for claiming interest on delayed payment,when the defendant was remitting the amount due to the plaintiff whilecomplying with the Company Court verdict. Pertinently the paymentwas accepted without protest and only after about 7 months, additionalHsums were demanded on the Bonds. Despite all these disquieting factors,

the plaintiffs, like the Shakespearean character of Shylock, have raisedthe demand “I’ll have my bond. Speak not against my bond.”[18] Aswe see the situation, the holder of the Bond has received their ‘poundof flesh’, but they seem to want more. Additional sum in our estimationis not merited as SIBCO has already received their just entitlement andburdening the defendant with any further amount towards interest wouldbe akin to Shylockian extraction of blood from the defendant. Thereforethe question formulated in paragraph 3 of this judgment is answeredaccordingly against the plaintiff.

15.5 In view of the forgoing, the defendant’s appeal against theimpugned judgment is allowed by restoring the judgment of the TrialCourt. 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 A

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