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2008 DIGILAW 476 (DEL)

Raman Aggarwal v. Union of India

2008-05-07

S.RAVINDRA BHAT

body2008
JUDGMENT S. Ravindra Bhat, J. 1. In this writ petition the Petitioner seeks an order quashing a Notification, No. 1602 dated 4th May 2001 issued by the second Respondent including the Petitioners name in the O Specific Approval List ë maintained by it. 2. The facts relevant for the present case are as follows. The first, second and third Petitioners are partners of the fourth Petitioner, a partnership firm duly registered under the Indian Partnership Act (hereafter O the firm O). The second Respondent is a company, duly registered and wholly owned by the Government of India. It is the sole insurer of export business in India and no bank offer credit to exporters without obtaining insurance policy from it. The third Respondent is involved in the banking business and is one among the many banks who provide a range of export insurance services in collaboration with the second Respondent. 3. It is submitted that one of the policies issued by the second Respondent is the Whole Turnover Packing Credit Guarantee (WTPCG), which provide cover to the Banks in respect of Packing Credit Advance. According to the averments, under the scheme, the credit lending Bank obtains the cover for Packing Credit Advance granted to all its customers on an All India basis, and for the purpose, the second Respondent issues WTPCG; the Bank is only required to notify the limits sanctioned by it to all its customers from time to time. The bank does not have to seek approval of the second respondent for the limits, if they do not exceed the agreed value. In accordance with this scheme the third Respondent obtained cover for all its export finance and the premium was being charged on the customers. 4. It is averred that the first Petitioner has been dealing with the Respondent Bank since 1982. He had availed pre-shipment and post-shipment facilities for Rs. 245 lakhs and Rs. 300 lakhs respectively. It is also averred that since the beginning, the Petitioners were maintaining accounts for the facilities properly and within the terms and conditions of sanction issued by the third Respondent, and that there was no cause of complaint. Further, that for the said facilities WTPCG coverage was obtained and the Petitioners were paying the required premium. 300 lakhs respectively. It is also averred that since the beginning, the Petitioners were maintaining accounts for the facilities properly and within the terms and conditions of sanction issued by the third Respondent, and that there was no cause of complaint. Further, that for the said facilities WTPCG coverage was obtained and the Petitioners were paying the required premium. It is also submitted that the WTPCG policy obtained by the third Respondent from the second Respondent was on an All-India basis for all the existing and prospective borrowers in the export field and the premium was recovered from the petitioners. However, at no point of time, the terms and conditions of the above mentioned WTPCG Policy were ever communicated or referred to the Petitioners. .5. It is further averred that according to the law of contract and the principles of natural justice, unless the Petitioners were made a party to the said WTPCG Policy or its terms and conditions were made binding on the it by some contract with the second Respondent, the terms and conditions and the communications between the second and the third Respondent could not be binding or effective on the petitioners. It is further averred that since the inception of the export credit facility from the third Respondent, the Respondent No. 3 has charged at least a sum estimated about Rs. 100.00 lakhs as premium up to December 2005 from the petitioners. Also, that since the petitioners were carrying on their business of carpet exports in fairly good manner, due repayment was being made to the third Respondent. 6. It is submitted that one M/s. Maharaja Art Palace Pvt. Ltd. was also engaged in the business of manufacture and export of carpets. It had availed the pre-shipment and post shipment credit facilities from the Central Bank of India, and was doing good business with a turnover of Rs. 10 crores in the year 1999. This company was covered under the WTPCG policy and was paying premium to the second Respondent through the Central Bank of India. Due to some financial problems of this company, the second Respondent enlisted it in the Specific Approval List (SAL), together with its Directors; by Notification No. 1602, on 04.05.2001. 10 crores in the year 1999. This company was covered under the WTPCG policy and was paying premium to the second Respondent through the Central Bank of India. Due to some financial problems of this company, the second Respondent enlisted it in the Specific Approval List (SAL), together with its Directors; by Notification No. 1602, on 04.05.2001. It is averred that once a company is put under the SAL, automatic approval under the WTPCG will not be available and the respective Bank will have to take specific approval for obtaining the cover and for renewal of the same. 7. The Petitioners, through the impugned notification were included in the SAL, though there were no financial problems nor had their accounts gone bad due to non-payment or late payment. It is submitted that the Petitioners remained unaware of their being placed in the SAL; nor were they aware about the existence of an SAL system itself. It was in March 2003, that the Petitioners for the first time came to now from the third Respondent that they had been included in SAL and as such, for each renewal, a prior approval from the second Respondent had to be obtained, so as to keep the third Respondents finance covered under the WTPCG policy. It further averred that the third Respondent wrote to the second Respondent asking it to remove the Petitioners from the SAL list, keeping in view the conduct of the Petitioners and the soundness of their accounts. However, this request did not find favour with the second Respondent, through its letter dated 31.03.2003. In May 2003, the Petitioners also wrote separately to the second Respondent requesting it to remove them from the SAL. 8. Pursuant to the inclusion in the SAL, whenever the second Respondent sought specific approval to renew or enhance the pre-shipment limits, the first Respondent took a long time to grant such approval and the delay so caused, resulted in loses to the Petitioners, since they had to reduce production due to non-availability of funds. While granting approval on 21st May 2003, the first Respondent directed the third Respondent to cutback 2 % from all bills handled from that date onwards and directed it to keep it in a separate interest bearing account, with a lien in favour of the second Respondent. The said approval was granted for a period of six months. While granting approval on 21st May 2003, the first Respondent directed the third Respondent to cutback 2 % from all bills handled from that date onwards and directed it to keep it in a separate interest bearing account, with a lien in favour of the second Respondent. The said approval was granted for a period of six months. It is also averred that the first Petitioner contacted the officials of the second Respondent personally several times, with the request not to make the cut-back of 2-1/2% from the bills handled by the third Respondent on behalf of the petitioners, as it would reduce the liquidity in hand with the petitioners. However, it is submitted that the second Respondent did not pay any heed to the request of the petitioners. The Petitioners wrote to the second Respondent alleging high handedness in the manner it was dealing with matter and as it was a monopolistic concern, the Petitioners had to agree to the conditions. 9. The Petitioners allege that officials of the first Respondent informed the third Petitioner that cut-back from the bills of the Petitioner was resorted to recover dues allegedly payable by M/s. Maharaja Art Palace Pvt. Ltd., to the Central Bank of India. During discussions, officials of the first Respondent agreed that as far as the account of the Petitioners with the third Respondent was in order and that the second Respondent could have any grievance against it. Yet the Petitioners were asked to make good the money owed to the Central Bank of India, because M/S Maharaja Art Palace Pvt. Ltd. was its sister concern, of the Petitioners as two directors of the said company were also partners in the fourth Petitioner. It is submitted that the Petitioners are not party to any contract of insurance between the second and the third Respondent and that they were not informed about the terms and conditions of the insurance policy obtained by the third Respondent from the second Respondent. They aver that they obtained the operational guidelines of the WTPCG with great difficulty and that there is no provision to cutback any amount from the bills handled by any Bank to make the recovery of the third party, which allegedly may be the sister concern of the ongoing account. 10. They aver that they obtained the operational guidelines of the WTPCG with great difficulty and that there is no provision to cutback any amount from the bills handled by any Bank to make the recovery of the third party, which allegedly may be the sister concern of the ongoing account. 10. During further renewals of the policy the second Respondent increased the cut-back from 2 % to 3% and then to 5% in December 2004. The third respondent, realizing the financial constraints of the Petitioners, wrote on their behalf to the second Respondent to reduce the cut-back from 5% to 2%. It is submitted that the later reduced the cut-back from 5% to 3% through its letter dated 14th February 2005. However, in March 2005 the second Respondent wrote to the third Respondent to operate the account with a cut-back of 5%. It is alleged that such conduct of the third Respondent was arbitrary and whimsical, in order to recover the payment of a third party, which is altogether a. different entity: 11. It is submitted that the fourth Petitioner was a partnership firm whereas M/s Maharaja Art Palace was a private company registered under the Companies Act, 1956. The two entities were working separately and independently and have nothing to do with each others business transactions. Both firms were availing of export credit independently of each other and in different banks. 12. It is argued on behalf of the Petitioners by Mr. R.P. Vats that the actions of the second Respondent are arbitrary and fanciful; and there was no privity of contract between them nor had there been any statutory or regulatory procedure governing the operation of the SAL. The details of the SAL were never communicated to the Petitioners, no terms and conditions of the policy cover were ever communicated to them. It is also argued that before they were included in the SAL, the Petitioners were not informed, let alone heard. Also, the operational guidelines issued by the first Respondent to the Banks do not contain any provision enabling cut-back. It is urged that due to delay in credit facilities and also reduction in the same, the Petitioners have suffered huge losses to the tune of Rs. 1 crore. Till December 2005, the third Respondent had deducted Rs. 51, 59,169.00 in relation to cut-back. 13. It is urged that due to delay in credit facilities and also reduction in the same, the Petitioners have suffered huge losses to the tune of Rs. 1 crore. Till December 2005, the third Respondent had deducted Rs. 51, 59,169.00 in relation to cut-back. 13. It was contended by counsel that the Petitioners valuable right to secure credit from their banker and carry on business has been indirectly curtailed without granting them any explanation or opportunity, and directly affected, in view of the direction to the third respondent bank to retain certain amounts in a separate account. These were properties of the petitioner, and could not have been affected without any recourse to procedure established by law. The direction to retain the amounts virtually amounted to deprivation of property and confiscation, which is both arbitrary and unsupported in law. 14. The second respondent denies any privity of contract with the petitioners; it avers to having been established by the Central Government to provide credit insurance cover subject to terms and conditions of the concerned insurance policy, to exporters, protecting them from the risk of non-payment by overseas buyers. It denies being a monopoly organization, or the only entity engaging in such business. It also avers that even banks do not have any role to play in the insurance policies, which are between the Corporation and the exporters. The corporation also adverts to providing insurance cover to the banks, to secure the risk of losses on account of non-payment by exporters/borrowers. 15. Learned Counsel for the Corporation submitted that the relationship between the bank and the corporation did not give rise to any actionable claim with the petitioner. The Corporation had to assess the worth of the account or export, or the institution it had to deal in. Under the WTPCG policy, the banks are insured for the export transactions financed by them. Apart from premium payment stipulations, in terms of the policy, the Corporation fixes a Discretionary limit up to which the participating bank can advance monies to an exporter without its prior approval. Amounts in excess of that limit have to be referred to the Corporation for approval, if the benefit of the policy should be availed. Since the Corporation merely insures the transaction, non-approval would imply that its policy cannot be availed; the banker is, of course, in accordance with its practices free to advance amounts. .16. Amounts in excess of that limit have to be referred to the Corporation for approval, if the benefit of the policy should be availed. Since the Corporation merely insures the transaction, non-approval would imply that its policy cannot be availed; the banker is, of course, in accordance with its practices free to advance amounts. .16. Learned Counsel relied upon averments in the Corporations counter affidavit for the contention that the petitioners are a sister concern of M/s Maharaja Art Palace (P) Ltd and the Petitioners 1 and 3, besides being partners in M/s Raman Carpets are directors in that company. That concern had defaulted in payments of its dues to Central Bank of India, which led to claims made to the Corporation. As a consequence, the corporation was entitled to place the Petitioner No 4s name in the SAL. The default in its commitments by M/s Maharaja Art could have adverse impact on the fiancs of the petitioner, both having common partners and directors. It is averred that in terms of the WTCPG it is not necessary that the related or sister concern should be a defaulter; the associate corporation or firm only has to be a defaulter, to enable the corporation to assess whether or not the sister or related concern should be kept in the SAL. 17. It was submitted that the outstandings owed by M/s Maharaja Art led to the Central Bank of India suing it for recovery, before the Debt Recovery Tribunal (DRT). In these circumstances, to insure that the risk of the Corporation in relation to the petitioners transactions were minimized, the third respondent was asked to cut bank a certain percentage from the proceeds of the bills handled by it (the bank). Such a measure of prudence would avoid greater risk and financial loss to the corporation, and in the longer run, minimize the petitioners losses; it is not arbitrary. 18. It is apparent from the above discussion that the petitioners are aggrieved by their inclusion in the SAL by the second respondent corporation: As a result of this arrangement, the credit limits being ordinarily availed by them are scrutinized with greater care and a specific approval of the second respondent. There is no dispute that the banker or financial institution which funds the petitioners in their export trade is the third respondent. There is no dispute that the banker or financial institution which funds the petitioners in their export trade is the third respondent. However, having regard to the peculiar vagaries of the trade a specialized agency to insure the risk of such contracts has been set up; it is the second respondent. The latter covers risks of individual exporters which is not the case, in the present proceedings; it also covers the risks of transactions entered into by banks. It is the latter kind of transaction which the court is concerned with, in this petition. 19. The second respondent placed the petitioners in the SAL through the impugned notification. The provision for SAL and consideration for inclusion of exporters in that list have been outlined in Para 11.2 of the O Wholeturnover Packing Credit Guarantees which are guidelines of the Corporation, i.e. the second respondent It contemplates, inter alia situations whereby upon an exporter defaulting to a bank owing to financial difficulties or some other serious problems in its business (Clause 11.2(i)); the concern is placed in the SAL. This includes cases where a claim has been filed under a guarantee on account of the exporter by a bank (Clause 11.2(ii)). The clause also provides: While placing the name of an exporter under SAL, Corporation may also consider including the names of sister concerns as the financial difficulties of the exporter might adversely affect their financial position as well. Names of proprietor/partners and guarantors/directors are also included in SAL with a view to prevent them from obtaining finance in the name of some other concerns floated by them. .20. The above guidelines and policy of the Corporation have riot been challenged by the petitioners. Their grievance is as to their inclusion in the SAL. It is not denied that some of them have a business relationship with M/s Maharaja Art (P) Ltd. If the court keeps these circumstances in mind, the corporations action cannot be faulted. In State Bank of Bikaner and Jaipur v. Ballab Das 1999 (7) SCC 539 , the Supreme Court held that the borrower (of the bank) is a stranger to the type of transaction between the bank and the corporation, as in this case. The corporation is engaging in a special risk cover business. Its business model, of insuring the bank for its exports credit, contains spelling out mutual terms, between it and the banker. The corporation is engaging in a special risk cover business. Its business model, of insuring the bank for its exports credit, contains spelling out mutual terms, between it and the banker. In such cases, unless the corporations actions are shown to be palpably unreasonable or plainly arbitrary, the courts jurisdiction to interfere in its commercial activities would not arise. Therefore, the corporations action in requiring the bank to exercise a greater degree of care while advancing monies, for which it seeks cover, in relation to the petitioners having regard to their undeniable relationship with M/s Maharaja Art, cannot be termed as illegal. The jural relationship with the latter concern may not be in issue directly; yet the nature of the Corporations business is such that it may have to be circumspect in extending cover to all transactions, indiscriminately. The conditions it may impose upon the banker, for granting cover, even in respect of sister or related concerns are not ordinarily a matter of judicial review. No special features exist in this case, persuading this Court to hold that placing the petitioners in the SAL is arbitrary or illegal. 21. The next question is about the cut-back ordered by the Corporation, from the petitioners bills. Here, the facts are that the Corporation had suggested retention of 2 per cent from proceeds of each bill received by the petitioner. The letters on record suggest that this was accepted by the petitioners; later this cut back was increased to 3% on 20-8-2004; still later it was increased to 5% on 21-12-2004; at the petitioners request it was again brought down to 3% on 14-2-2005. That letter was withdrawn on 14-3-2005, thus restoring the cut back to 5%. On 11-7-2005, the Corporation directed the bank to transfer an amount of Rs. 33, 73,906/-accumulated through the cut backs to the Central bank of India, on account of M/s Maharaja Art Palace Ltd. 22. While it may be one thing to put the lending bank to terms (as a condition for extending cover to its transactions) the Corporation, to justify its directions to deposit amounts in a separate account of some other business entity, would have to show some legal basis. It is not denied that the petitioner received amounts from various bills, in the course of its export trade. It is not denied that the petitioner received amounts from various bills, in the course of its export trade. No doubt, it did not protest when the amount of cut back was kept at a level of 2.5% of the bill amount. However, it felt aggrieved once that level was increased. The Corporation could as a measure of prudence have asked the bank to retain a reasonable amount to minimize potential losses from doubtful contracts having regard to probabilities of recovering the consideration from foreign buyers. However, it had to justify the increases, in cut back and-could not fall back on the performance of M/s Maharaja Articles While the reasonableness of keeping the petitioners in the SAL for ensuring heightened scrutiny to avoid future losses may be justified, it is another thing entirely to ask a banker, in the course of its dealings to retain significant amounts from the bills admittedly paid by the foreign buyer, to liquidate some other entitys liabilities. Here, the objection to legality appears to be well founded. It is well established that every action of a state agency should be relatable to or founded on law or a statutory rule, regulation or instrument. In this case, the direction to keep apart significant amounts, in excess of what was accepted by the petitioner (2%) from each bill, and credit it to someone elses account to liquidate its (the latters) liability has nowhere been justified in law. In the circumstances, the direction of the Corporation to the third respondent bank to resort to a c;»t-back in excess of 2% from the bills payable to the petitioners, and also to deposit them with the Central Bank of India, to liquidate the liabilities of M/s Maharaja Arts Ltd (against which the said bank had instituted recovery proceedings) is without authority of law and arbitrary; it also amounts to the Corporation styling itself as a recovery agent on behalf of the Central Bank of India, even when the latter had instituted a recovery case, against its borrower. 23. 23. In view of the above discussion, it is held that the action of the second respondent corporation in placing the petitioners in the SAL is not illegal; however, the direction of the Corporation to the third respondent bank to resort to a cutback in excess of 2% from the bills payable to the petitioners, and also to deposit them with the Central Bank of India, to liquidate the liabilities of M/s Maharaja Arts Ltd (against which the said bank had instituted recovery proceedings) is without authority of law and arbitrary. A direction is accordingly issued to the respondents to ensure that amounts credited with the Central Bank of India, in a separate account are given back to the petitioner and the Corporation reviews its decision vis-à-vis cut backs pertaining to the petitioners contract, within 6 weeks and communicates its decision directly to the third respondent, with a copy to the petitioner. 24. The writ petition is partly allowed in the above terms; no costs.