Supreme Court Upholds SIDBI’s Actions in Bond Payment Dispute: Small Industries Development Bank of India vs. M/S. Sibco Investment Pvt. Ltd. (2022)

Date of the Judgment: January 3, 2022

Citation: (2022) INSC 1

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

Can a financial institution withhold payments on bonds when faced with regulatory restrictions and suspicions of fraudulent transactions? The Supreme Court of India recently addressed this complex question in a case involving the Small Industries Development Bank of India (SIDBI) and M/S. Sibco Investment Pvt. Ltd. The court examined whether SIDBI was justified in delaying payments on bonds due to directives from the Reserve Bank of India (RBI) and concerns about the legitimacy of the bond transfers. The judgment was delivered by a two-judge bench comprising Justice R. Subhash Reddy and Justice Hrishikesh Roy, with Justice Hrishikesh Roy authoring the opinion.

Case Background

The case revolves around 41 bonds initially issued by SIDBI to M/s. CRB Capital Markets Ltd. in 1993. These bonds were subsequently sold to Shankar Lal Saraf in February 1997, and then to M/s. SIBCO Investment Pvt. Ltd. (SIBCO) on July 1, 1998. The bonds, carrying interest rates of 13.50% and 12.50%, were to be redeemed on December 21, 2003, and December 21, 2004, respectively. However, CRB Capital faced winding-up proceedings initiated by the RBI, which led to complications in the transfer and redemption of the bonds. SIBCO, after purchasing the bonds, requested SIDBI to endorse the transfer, but SIDBI refused, citing the ongoing liquidation proceedings against CRB Capital. This refusal led to a series of legal battles, culminating in the present case before the Supreme Court.

Timeline

Course of Proceedings

Initially, SIBCO filed a writ petition (W.P. No. 1456 of 1998) in the Calcutta High Court, seeking a mandamus to compel SIDBI to transfer the bonds and pay accrued interest. The High Court, on January 9, 2001, directed SIBCO to approach the Company Court in Delhi, where the liquidation proceedings against CRB Capital were ongoing. Subsequently, Shankar Lal Saraf, SIBCO’s predecessor-in-interest, filed an application in the Delhi Company Court, which ruled on December 17, 2004, that the bond transactions were outside the purview of the liquidation. Following this, SIDBI paid the principal and interest to SIBCO on February 21, 2005. However, SIBCO later claimed interest for the delayed payment, which SIDBI refused, leading to the filing of CS No. 79/2006. The Trial Court dismissed SIBCO’s suit, but the Division Bench of the Calcutta High Court reversed this decision. SIDBI then appealed to the Supreme Court, which ultimately overturned the Division Bench’s judgment and restored the Trial Court’s order.

Legal Framework

The Supreme Court examined several key legal provisions to determine the validity of SIDBI’s actions. These include:

• Section 45-JA of the Reserve Bank of India Act, 1934: This section empowers the RBI to determine policy and issue directions to Non-Banking Financial Institutions (NBFCs) in the public interest or to protect the interests of depositors.
• Section 45-K of the Reserve Bank of India Act, 1934: This section grants the RBI the authority to collect information pertaining to NBFCs and issue directions regarding deposits.
• Section 45-L of the Reserve Bank of India Act, 1934: This section confers general powers on the RBI to call for information from financial institutions and issue directions to regulate the credit system.
• Section 45-M of the Reserve Bank of India Act, 1934: This section obligates NBFCs to furnish information as required by the RBI and comply with its directions.
• Section 45-MB of the Reserve Bank of India Act, 1934: This section empowers the RBI to prohibit NBFCs from accepting deposits and alienating assets if they violate any provisions or fail to comply with RBI directions. Specifically, Section 45MB(2) allows RBI to direct NBFCs not to sell, transfer, or deal with their assets without prior written permission for a period not exceeding six months. The court noted, “If any non-banking financial company violates the provisions of any section or fails to comply with any direction or order given by the Bank under any of the provisions of this Chapter, the Bank may prohibit the non-banking financial company from accepting any deposit.”
• Section 35-A of the Banking Regulation Act, 1949: This section enables the RBI to issue directions to banking companies in the public interest or to prevent actions detrimental to the interests of depositors or the banking company. The court quoted, “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 being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company; or (c) to secure the proper management of any banking company generally, it is necessary to issue directions to banking companies generally or to any banking company in particular, 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: This section defines fraudulent preference, stating that any transfer of property made by a company within six months before the commencement of its winding up, which would be deemed a fraudulent preference in individual insolvency, shall be deemed a fraudulent preference of its creditors. 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: This section clarifies that winding-up proceedings, other than voluntary winding-up, are deemed to have commenced from the date of presentation of the petition. The court stated, “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.”
• Section 8 of the Negotiable Instruments Act, 1881: Defines a ‘Holder’ of a promissory note as any person who is entitled to the possession of the note and to recovery of the due amount.
• Section 9 of the Negotiable Instruments Act, 1881: Defines a ‘Holder in due course’ as a person who acquires a promissory note for consideration, before it becomes payable, and without sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.

Arguments

Arguments by SIDBI (Appellant):

• SIDBI acted in accordance with the directives issued by the RBI, 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 under suspicious circumstances, knowing that two installments of interest had not been paid, and it failed to establish itself as a “holder in due course”.
• SIDBI proactively communicated with the RBI and the Official Liquidator; therefore, the amounts were not wrongfully withheld.
• Neither Saraf nor SIBCO claimed interest for the delayed payment in previous litigation, making their claim barred by constructive res judicata.
• The payments were accepted by SIBCO without protest, amounting to accord and satisfaction.
• SIBCO’s claim for interest pendente lite is an afterthought and not justified.

Arguments by SIBCO (Respondent):

• The RBI communication was merely an advice pertaining to assets held by CRB Capital and not applicable to the bonds owned by SIBCO.
• SIDBI’s action of withholding payment was not bona fide, especially since the Official Liquidator did not object.
• SIDBI is barred by res judicata from arguing fraudulent preference, as this issue was settled by the Company Court judgment of December 17, 2004.
• The 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’ does not arise.
• SIBCO has consistently claimed interest pendente lite at both the trial and appellate levels.

Issues Framed by the Supreme Court

The primary issue framed by the Supreme Court was:

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.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

Decision

The Supreme Court reversed the judgment of the Division Bench of the Calcutta High Court and restored the judgment of the Trial Court. The Supreme Court held that SIDBI was justified in withholding the payments on the bonds due to the RBI directives and concerns over fraudulent transactions. The court dismissed SIBCO’s claim for interest on the delayed payment. The Trial Court’s decision, which had originally dismissed SIBCO’s suit, was upheld.

Flowchart of Key Events

Ratio Table

Conclusion

The Supreme Court’s judgment in Small Industries Development Bank of India vs. M/S. Sibco Investment Pvt. Ltd. is a significant decision that clarifies the powers of the Reserve Bank of India (RBI) and the responsibilities of financial institutions in handling bond payments amidst regulatory restrictions and concerns of fraud. The court emphasized that financial institutions are bound to comply with the directives of the RBI and are justified in withholding payments when there is a reasonable suspicion of fraudulent transactions. This case underscores the importance of due diligence and prudence in financial dealings and provides valuable guidance for financial institutions navigating complex situations involving regulatory constraints and potential fraud. The judgment also highlights the need for claimants to diligently pursue their rights and not accept payments without protest if they intend to claim additional benefits.