Supreme Court Upholds RBI’s Authority in Bond Dispute: SIDBI vs. Sibco Investment (2022)

Date of the Judgment: 03 January 2022

Citation: [2022] INSC 1

Judges: R. Subhash Reddy, J. and Hrishikesh Roy, J.

Can a financial institution withhold payment on bonds based on a directive from the Reserve Bank of India (RBI), even if the bonds are an unconditional undertaking? The Supreme Court of India recently addressed this question in a dispute between the Small Industries Development Bank of India (SIDBI) and M/s. Sibco Investment Pvt. Ltd. (SIBCO). The core issue revolved around whether SIDBI was justified in delaying payment on bonds purchased by SIBCO, given an RBI directive to freeze assets of the original bond issuer, CRB Capital Markets Ltd. The judgment was delivered by a two-judge bench comprising Justices R. Subhash Reddy and Hrishikesh Roy, with the majority opinion authored by Justice Hrishikesh Roy.

Case Background

In 1993, SIDBI issued bonds to CRB Capital. These bonds were later sold to Shankar Lal Saraf in February 1997, and subsequently to SIBCO on July 1, 1998. The bonds, with interest payable semi-annually, were to mature in December 2003 and 2004. However, CRB Capital faced winding-up proceedings initiated by the RBI in the Delhi High Court, which led to complications in the transfer and redemption of the bonds.

SIBCO, upon purchasing the bonds, requested SIDBI to register the transfer in their name. However, SIDBI refused, citing the RBI’s directive due to the winding-up proceedings against CRB Capital. This led SIBCO to file a writ petition in the Calcutta High Court, which was later directed to the Company Court in Delhi. The Company Court eventually ruled that the bonds were outside the purview of the liquidation proceedings, and directed Shankar Lal Saraf to approach SIDBI.

Following the Company Court’s order, SIDBI paid the principal and interest to SIBCO in February 2005, after deducting TDS. SIBCO initially objected to the TDS deduction, which was later rectified by SIDBI. Subsequently, SIBCO claimed interest on the delayed payment, which SIDBI refused, leading to the filing of a suit by SIBCO for recovery of the interest.

Timeline

Course of Proceedings

The suit filed by SIBCO was initially dismissed by the Single Judge of the Calcutta High Court. The Single Judge held that SIDBI had acted in accordance with the RBI’s directives and that SIBCO had accepted the payment without protest, thus barring any further claims. However, the Division Bench of the Calcutta High Court reversed this decision, holding that the RBI’s communication was merely an advice and not a binding order. The Division Bench directed SIDBI to pay interest on the delayed payment. This order was challenged by SIDBI in the Supreme Court.

Legal Framework

The judgment extensively discusses the powers of the RBI under the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949. Key provisions include:

• Section 45-JA of the RBI Act, 1934: Empowers the RBI to determine policy and issue directions to Non-Banking Financial Institutions (NBFCs) in public interest or to protect the interests of depositors.
• Section 45-K of the RBI Act, 1934: Grants authority to the RBI to collect information pertaining to the NBFCs and to give directions pertaining to deposits to them.
• Section 45-L of the RBI Act, 1934: Confers general powers on the RBI to call for information from the Financial Institution and issue directions to regulate the credit system of the country.
• Section 45-M of the RBI Act, 1934: Obligates NBFCs to furnish all information and details as required by the RBI and to comply with RBI’s direction.
• Section 45-MB of the RBI Act, 1934: Empowers the RBI to prohibit the acceptance of deposit and alienation of assets by Non-Banking Financial Companies, when they fail to comply with RBIs direction or infringe any statutory provisions. Specifically, Section 45-MB(2) allows the RBI to direct an NBFC not to sell, transfer, or deal with its property without prior permission. The court noted, “the Bank, on being satisfied that it is necessary so to do in the public interest or in the interest of the depositors, may direct, the non-banking financial company against which an order prohibiting from accepting deposit has been issued , not to sell, transfer, create charge or mortgage or deal in any manner with its property and assets without prior written permission of the Bank for such period not exceeding six months from the date of the order.”
• Section 35-A of the Banking Regulation Act, 1949: Enables the RBI to issue directions to banking companies in the public interest, in the interest of banking policy, or to prevent actions detrimental to the interests of depositors or the banking company. The court noted, “it may, from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions.”
• Section 531 of the Companies Act, 1956: Deals with fraudulent preference, stating that any transfer of property by a company within six months before the commencement of its winding up can be deemed a fraudulent preference. The court noted, “Any transfer of property, movable or immovable, delivery of goods, payment, execution or other act relating to property made, taken or done by or against a company within six months before the commencement of its winding up which , had it been made, taken or done by or against an individual within three months before the presentation of an insolvency petition on which he is adjudged insolvent, would be deemed in his insolvency a fraudulent preference, shall in the event of the company being wound up, be deemed a fraudulent preference of its creditors and be invalid accordingly…”
• Section 441(2) of the Companies Act, 1956: States that winding-up proceedings other than voluntary winding-up, are said to have commenced from the date of presentation of petition. The court noted, “In any other case, the winding up of a company by the Tribunal shall be deemed to commence at the time of the presentation of the petition for the winding up.”

The Court emphasized that RBI’s directives have statutory force and are binding on financial institutions.

Arguments

Arguments by SIDBI (Appellant):

• SIDBI acted in accordance with RBI directives, as any prudent financial institution would.
• Withholding payment was justified due to the possibility of the bond transfer by CRB Capital being a fraudulent preference under Section 531 of the Companies Act, 1956.
• SIBCO bought the bonds in a ‘suspect spell’ with knowledge of unpaid interest, and its title was clouded.
• SIDBI proactively communicated with RBI and the Official Liquidator; amounts were not wrongfully withheld.
• Neither Saraf nor SIBCO claimed interest for delayed payments in previous litigation, thus barred by constructive res judicata.
• Payments were accepted by SIBCO without protest, amounting to accord and satisfaction.
• SIBCO’s claim for interest pendente lite is an afterthought.

Arguments by SIBCO (Respondent):

• The RBI’s communication was merely an advice, not a binding order, and pertained to assets held by CRB Capital, not the bonds owned by SIBCO.
• SIDBI’s action of withholding payment was not bona fide, as there was no objection from the Official Liquidator.
• SIDBI is barred by res judicata from arguing fraudulent preference, as the Company Court settled this issue.
• Payment was made in furtherance of promissory notes, which are unconditional undertakings, and not in pursuance of any reciprocal promise, thus, the issue of ‘accord and satisfaction’ doesn’t arise.
• SIBCO has consistently claimed interest pendente lite.

[TABLE] of Submissions

Issues Framed by the Supreme Court

The Supreme Court framed the core issue as:

1. Whether the plaintiff has set forth a just claim, based on the Bonds issued by the defendant or is it a case of that trial in Shakespeare’s The Merchant of Venice where Shylock is claiming the promised pound of flesh in the form of interest on delayed payment on the Bonds purchased by the plaintiff.

The court also dealt with the following sub-issues:

• Whether the RBI communication dated 09.06.1997 was an ‘advice’ or a ‘directive’.
• Whether the withholding of payment by SIDBI was bona fide.
• Whether SIBCO was a ‘holder in due course’.
• Whether SIBCO was entitled to interest on delayed payment and pendente lite interest.
• Whether SIBCO’s demand was barred by waiver/acquiescence and constructive res judicata.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• ICICI Bank Ltd. Vs. Official Liquidator of APS Star Industries Ltd. [2010] 10 SCC 1: The Court relied on this case to emphasize the regulatory role of the RBI.
• Sudhir Shantilal Mehta Vs. Central Bureau of Investigation [1992] 2 SCC 343: The Court relied on this case to emphasize the regulatory role of the RBI and binding nature of its directions.
• Bhagwati Prasad Pawan Kumar v. Union of India [2006] 5 SCC 311: The Court discussed and distinguished this case, finding that the principle of acceptance by conduct did not apply.
• Internet and Mobile Association of India vs. RBI [2020] 10 SCC 274: The Court relied on this case to emphasize RBI’s role as a statutory body with immense power in the financial field.
• Peerless General Finance and Investment Co. Ltd. Vs. RBI [1992] 2 SCC 343: The Court relied on this case to emphasize RBI’s power to issue directions and their statutory consequences.
• State of U.P. Vs. Babu Ram Upadhya AIR 1961 SC 751: The Court relied on this case to emphasize that directions issued by RBI are incorporated and become a part of the act.
• D.K.V. Prasada Rao vs. Government of A.P. AIR 1984 AP 75: The Court relied on this case to emphasize that directions issued by RBI are incorporated and become a part of the act.
• RBI vs. Peerless General Finance and Investment Co. Ltd. (II) [1996] 1 SCC 642: The Court relied on this case to emphasize RBI’s authority to issue directions for effective implementation of its orders.
• Ganesh Bank of Kurundwad Ltd. Vs. Union of India [2006] 10 SCC 645: The Court relied on this case to emphasize RBI’s preventive powers to ensure effective implementation of directions.
• Bihar Public Service Commission vs. Saiyed Hussain Abbas Rizwi and Anr.; [2012] 13 SCC 61: The Court relied on this case to interpret the meaning of ‘Public interest’.
• IDBI vs. Official Liquidator [2020] 15 SCC 517: The Court relied on this case to clarify the conditions for a transaction to be qualified as fraudulent preference.
• U. Ponnappa Moothan Sons, Palghat Vs. Catholic Syrian Bank Ltd. and Ors. [1991] 1 SCC 113: The Court relied on this case to define ‘holder in due course’ under Indian law.
• Clariant International Ltd. Vs. SEBI [2004] 8 SCC 524: The Court relied on this case to emphasize the conditions for awarding interest.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• RBI’s Authority: The Court emphasized the statutory authority of the RBI to issue binding directives to financial institutions in the interest of public policy and financial stability. The court observed, “the RBI under Ss. 45-MB of the RBI Act, 1934 and 35-A of the Banking Regulation Act, 1949 in our understanding has the requisite authority to issue the communication dated 09th June, 1997.”
• Bona Fide Actions of SIDBI: The Court noted that SIDBI acted prudently and proactively in compliance with RBI directives and sought clarification from the Official Liquidator. The court observed, “it can be said that the defendant acted prudently, being conscious of the legal obligation, to withhold such payment to the plaintiff.”
• Suspicion of Fraudulent Preference: The Court acknowledged that there was a reasonable basis for suspecting a fraudulent preference in the transfer of bonds, given the timing and the RBI’s concerns. The court observed, “it cannot be denied that there was a suspicion over the title of the plaintiff’s predecessor-in-interest. Ipso facto, the plaintiff’s title with transaction during the “suspect spell” was also under a cloud.”
• SIBCO’s Conduct: The Court noted that SIBCO had accepted the payment without protest and failed to raise the issue of interest in earlier proceedings. The court observed, “Pertinently the payment was accepted without protest and only after about 7 months, additional sums were demanded on the Bonds.”

[TABLE] of Sentiment Analysis of Reasons given by the Supreme Court

Fact:Law Ratio

Logical Reasoning Flowchart:

Ratio Decidendi

The ratio decidendi of the judgment is that:

• RBI directives issued under the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949, have statutory force and are binding on financial institutions.
• Financial institutions are justified in withholding payments on bonds based on RBI directives, especially when there is a reasonable suspicion of fraudulent preference.
• A party that accepts payment without protest and fails to raise the issue of interest in earlier proceedings is barred from claiming interest on delayed payment.

Obiter Dicta

The obiter dicta in the judgment include:

• The Court’s discussion on the regulatory powers of the RBI and the need for financial institutions to act prudently in compliance with RBI directives.
• The Court’s observations on the concept of ‘holder in due course’ and the circumstances under which a party’s title to bonds can be considered clouded.
• The Court’s comments on the principles of constructive res judicata and accord and satisfaction.

Dissenting Opinion

There was no dissenting opinion in this case. The judgment was delivered by a two-judge bench, with the majority opinion authored by Justice Hrishikesh Roy.

Conclusion

The Supreme Court’s judgment in Small Industries Development Bank of India vs. M/s. Sibco Investment Pvt. Ltd. (2022) reaffirms the binding nature of RBI directives on financial institutions. The Court upheld the actions of SIDBI in withholding payment on bonds due to RBI’s directives and concerns about fraudulent preference. This judgment highlights the importance of regulatory compliance and the need for financial institutions to act prudently in the interest of financial stability. The Court also emphasized the need for parties to raise all claims in a timely manner and not to pursue them as an afterthought.