When claim for interest on delayed payment by SIDBI was not raised by ‘Holder of Bonds’ in Writ Court, then subsequent Suit of SIBCO (successor holder) is barred by principle of Constructive Res Judicata: SC

Read Judgment: Small Industries Development Bank Of India vs. M/s. Sibco Investment Pvt. Ltd.

Pankaj Bajpai

New Delhi, January 5, 2022: The Supreme Court recently opined that SIBCO (Plaintiff) is not entitled to interest on the belated payment of principal sum and accrued interest for the Bonds issued by SIDBI (Appellant – Defendant), as SIBCO has already received their just entitlement and burdening the defendant with any further amount towards interest would be akin to Shylockian extraction of blood from the defendant.

A Division Bench of Justice R. Subhash Reddy and Justice Hrishikesh Roy observed that when SIBCO approached the Writ Court to validate their transaction, they failed to put forth any claim for interest on delayed payment and even chose to forgo the very first opportunity that arose for claiming interest on delayed payment, when the defendant was remitting the amount due to the plaintiff while complying with the Company Court verdict. 

The observation came pursuant to a judgment passed by the High Court of Calcutta, whereby the suit filed against Small Industries Development Bank of India (Appellant – SIDBI) seeking interest on the alleged belated payment of principal sum and accrued interest to SIBCO Investment (Plaintiff) for the Bonds issued by SIDBI, came to be dismissed. In the said decision, the High Court held that the suit was not barred either by accord or satisfaction as the plaintiff gave no acknowledgment that all claims stood satisfied at the time of receiving the payment warrants. 

After considering the submissions, the Apex Court noted that Section 35-A of the Banking Regulation Act, 1949 enables the RBI to give directions to banking companies, whereas, 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 (NBFCs), when they fail to comply with RBIs direction or infringe any statutory provisions. 

In the case at hand, vide the previous Notification dated April 10, 1997, the RBI restrained CRB Capital (an NBFC), from alienating or creating charge over their assets in ‘public interest’, and through the consequential directive dated June 9, 1997 has restrained the defendant from parting with any money in relation to securities held by the said NBFC, added the Court. 

Speaking for the Bench, Justice Roy observed that for ‘public interest’, the RBI is empowered to issue any directive to any banking institution, and to prohibit alienation of an NBFC’s property, and the term ‘Public interest’ has no rigid definition. 

The Top Court noted that actions in furtherance of grounds of ‘public policy’ by the RBI was justified, for issuing the Notification dated April 10, 1997, which itself clearly mentioned that it is issued for the benefit of depositors and creditors of CRB Capital. 

Therefore, when the legality of the RBI Notification is not under challenge, relief can’t be granted in the Suit without determining its legality, added the Bench. 

“A conjoint reading of Ss. 531 and 441(2) of the Companies Act, 1956 prima facie reveals that any transfer of property by or against a company in involuntary winding up, the suspect spell for deemed fraudulent transaction is six months before presentation of the winding up petition. In the present case, the petition for winding-up was submitted by RBI on 22.05.1997 and admittedly, the transfer in Shankar Lal Saraf’s favor was executed in February, 1997. Hence, the defendant’s prima facie suspicion that the transfer during the suspect spell, may be deemed fraudulent, is not misplaced”, observed the Top Court. 

Justice Roy found that the defendant’s impression that the transfer in favour of Shankar Lal Saraf was not legitimate, was a reasonable opinion, shared by many, including the RBI and the Official Liquidator. 

The defendant was in receipt of the RBI’s directions, not to part with payment as the Official Liquidator had treated the transaction as fraudulent, which had clearly placed a shadow over the plaintiff’s title to the Bonds and consequences must flow therefrom, added the Bench. 

The Top Court highlighted that the plaintiff has failed to show how the defendant derived any undue benefit by withholding the payment accrued on the Bonds, as the amount due on the Bonds was immediately transferred to the ‘Accrued Interest’ head and was not used by the defendant for their business. 

“While the Shankar Lal Saraf’s (holder) title over the Bonds/Promissory Notes is not in dispute but, Shankar Lal Saraf’s holding stood cleared by the Company Court only on 17.12.2004 but before the said judgment, there was a cloud over his title. Consequently, the plaintiff’s status as ‘holder in due course’ was suspect at the relevant point of time. The defendant bank was therefore justified in withholding payment till conclusion of dispute in Company Court, even though the relief claimed was in respect of an ‘unconditional undertaking’, as there were reasonable legal concerns for the transaction during the suspect spell, for making such payments”, observed the Top Court. 

The Apex Court clarified that SIBCO’s submission is not acceptable that the cause of action arose only on November 23, 2005, when the defendant refused to heed to the demand of interest on delayed payment, as the cause of action for the plaintiff accrued the first time, when the defendant allegedly failed to pay timely interest. 

Since such a claim was not raised in the writ court, the subsequent Suit of SIBCO is barred by the principle of Constructive Res Judicata, added the Court.