M/S. Metrochem Api Private Limited vs. Reserve Bank Of INDIA

Facts

M/s. Metrochem API Private Limited (Petitioner) filed a writ petition challenging the wilful defaulter proceedings initiated against it by M/s. Canbank Factors Ltd. (Respondent No. 2), based on an RBI Master Circular dated 01.07.2015. The Petitioner alleged that certain invoices, purportedly for raw materials supplied by M/s. P. Praful & Company Agency (India) Private Limited, were fake and fraudulent. The Petitioner claimed these invoices were raised without any actual supply of goods, and that its employee colluded with the supplier's director to perpetrate the fraud. The Petitioner had lodged a complaint with the Cyber Crime Police, leading to a charge sheet being filed against the supplier's director for offences including cheating and forgery. The Petitioner contended that Respondent No. 2 lacked the jurisdiction to initiate wilful defaulter proceedings as there was no lending relationship between them, and the transactions were factoring arrangements.

Held

The Court held that Respondent No. 2 lacked the jurisdiction to initiate wilful defaulter proceedings against the Petitioner under the RBI Master Circular dated 01.07.2015. The Court reasoned that jurisdiction is a condition precedent for the valid exercise of power under the circular. An authority that does not fall within the definition of 'lender' cannot assume jurisdiction merely on the basis of contractual arrangements. The Court found the argument that undertakings converted the relationship into one of lender and borrower to be untenable, as such obligations do not metamorphose a factoring arrangement into a banking transaction. The Court also found merit in the submission that the show cause notices disclosed a pre-determined approach, vitiating the proceedings. The Court reiterated that in cases of lack of inherent jurisdiction or proceedings being ex facie contrary to law, the High Court need not relegate the aggrieved party to an alternative remedy. The continuation of such proceedings would cause grave and irreversible prejudice. Therefore, the impugned show cause notices were set aside, and Respondent No. 2 was restrained from taking further steps.

Key Issues

1. Whether Respondent No. 2, M/s. Canbank Factors Ltd., has the jurisdiction to initiate wilful defaulter proceedings against the Petitioner under the RBI Master Circular dated 01.07.2015, considering the nature of the transaction as factoring and the alleged fraud? Petitioner's arguments: The Petitioner argued that Respondent No. 2, a factoring company, lacked the inherent jurisdiction to initiate wilful defaulter proceedings. They contended that the underlying transactions were factoring arrangements, not lending, and that the RBI Master Circular was applicable only to banking transactions involving a lending relationship. The Petitioner highlighted the charge sheet filed by the police, which established the fraudulent nature of the invoices and the absence of actual supply or GST payment, further undermining the basis for wilful defaulter proceedings. They relied on the principle that jurisdiction is a condition precedent for exercising power. Respondent's arguments: The Respondent No. 2 argued that it was a notified financial institution and therefore entitled to initiate wilful defaulter proceedings. They contended that undertakings or authorisations issued by the Petitioner to make payments towards factored invoices converted the relationship into one of lender and borrower. (Note: The judgment does not explicitly detail the Respondent's arguments beyond this, but implies they relied on their status as a financial institution and the contractual undertakings.)