CASE STUDY - 2 Background Mr. Dayanand, after qualifying Indian Police Service (IPS), joined the police department 35 years ago. Due to his calibre and best performance, he got promotions with quick intervals and he recently retired on superannuation from the post of the Commissioner of Police, Thane (Maharashtra). He received sumptuous retirement benefits such as PF, Gratuity and Encashment of Leave. Mr. Vijay He was happy at family front. His elder son, Mr. Vijay, was very brilliant since his childhood and completed his masters in engineering. After rendering services for five years in a renowned manufacturing company, he resigned and completed his post qualification MBA from IIM, Bangalore. Mr. Tushar His younger son Mr. Tushar was inclined to make his carrier in the film industry as an actor. Gradually, he started getting roles in the films and after struggling for some time, he earned good name and fame in the industry. He was blessed with money and wealth which he started investing in the relevant field. After some years, he established his own production house and started producing his independent web series, short films, and TV Serials. However, he came into contact with some anti-social elements and smugglers. He was forced to carry out smuggling and other illegal activities such as smuggling of narcotic drugs, opium, gold etc., dealing with huge illegal money despite his awareness that indulging in such activities is an offence punishable under the Prevention of Money Laundering Act, 2002 (PMLA). Mr. Dhananjay Mehta Mr. Dhananjay Mehta (Mr. DM) is the founder and Chairperson of Mehta Group having many entities. The Group's operations are wide and had a presence in various sectors. One such group company is Life Pharmaceuticals Limited (LPL), engaged in manufacturing of generic drugs and medicines. Mr. DM is the close friend of Mr. Dayanand and knows very well the qualifications and calibre of Mr. Vijay and hence offered him to be a Whole-time Director of LPL which was accepted by him. Mr. Dayanand gifted some amount out of the retirement benefits funds to Mr. Vijay to become the equity shareholder of LPL. Bank Borrowings In a short period, the production of various medicines was at its highest peak. In order to meet the working capital requirements and for infrastructure development to increase the production capacity and marketing level of the products, LPL approached Star Bank Limited (Star Bank) and Sky Bank Limited (Sky Bank) with a loan proposal of ₹10 crore to be financed by them jointly. Both banks, in consortium, Star Bank being consortium leader, sanctioned the loan proposal in equal proportion at 10% interest rate per annum. In compliance with the loan agreement, the security interest was created on the movable and immovable properties of LPL in favour of the banks which comprised plant and machinery, vehicles, office building, factory building and one open plot in an industrial area. In addition, collateral security by way of personal guarantee of Mr. DM was also provided. Setback However, over the years, due to entry of competitors, lack of attention in the affairs of the company of Mr. DM, owing to his old age, steep reduction in demand and other relevant factors, the turnover of LPL started declining causing losses and making serious defaults in servicing and repayment of the bank loan. Both the banks then classified the debt outstanding as non- performing asset (NPA) in their books and thereafter the Star Bank, being leader of consortium, served a notice to LPL mentioning therein to discharge, in full, its outstanding debts of ₹ 10 crore on the date of notice, as detailed below, within 60 days from the receipt of the notice failing which the measures for taking possession of the secured assets and also the management of the business of LPL will be taken under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (herein after called as "the SARFAESI Act"). The details of amount due was as below: (a) Star Bank: ₹4.00 crore including interest due of ₹1.00 crore. (b) Sky Bank: ₹6.00 crore including interest due of ₹5.00 crore. Filing of a Writ Petition LPL reacted against the action of the banks by filing a writ petition before the High Court of competent jurisdiction challenging inter alia, the classification of its account as NPA by the banks and prayed for setting aside the previous letters including demand notice issued by State Bank. The appeal was dismissed by the High Court. The second appeal was filed before the Supreme Court for the same relief which was also dismissed for the reason that LPL is moving the Court through writ / appeal without first availing the remedy available under the SARFAESI Act. Mr. DM's Apprehensions Mr. DM is of the opinion that the said Act is one sided in favour of the secured creditor, rather, it is unconstitutional. He has doubt whether he and Mr. Vijay will be entitled for compensation, for the loss of their office after taking over the management of the business of LPL by the secured creditors and have contended that notice of demand cannot be issued to LPL as it has got a notification issued in its favour under the Maharashtra Relief Undertakings (Special Provisions) Act, 1958 which suspends all its obligations and liabilities to secured creditor. Mr. Vijay is aggrieved by the measures being taken by the secured creditor under Section 13(4) of the SARFAESI Act, 2002 and intends to make an application before the Debt Recovery Tribunal (DRT) and seeks from you the fee payable for filing an application. Mr. Tushar's Actions Mr. Tushar was advised by some other friends already involved in such illegal activities as to how to bring back such illegal money in the formal financial system. As advised, he used to do multiple transactions in different banks in a single day and transferring the deposited amount to a third party for safe keeping and moving them around in a series of complex bank electronic transfers between different jurisdictions and through offshore accounts or financial transactions such as investing in real estate, purchasing jewellery for his family members, purchasing benami properties, forming trusts, business investments etc., and adopting the activities of sale and purchase of the real estate properties, gold and other jewellery, expensive gifts, loans etc. to reintroduce the funds into the financial system for further use. He started utilising such money for production of own web series, short films, financing to other film producers etc. As a measure of cleaning the tainted money, he purchased a bungalow for which 50% margin money was contributed by him out of the proceeds of crime and rest of the loan finance obtained from Jaya Bank Limited (Jaya Bank) which was unaware of the tainted money brought in by him for purchase of a bungalow as his self-financing and relying on the security provided by Mr. Tushar by mortgaging the bungalow Jaya Bank provided loan finance for purchase of this property. Mr. Tushar initially paid EMI regularly but afterwards he stated defaulting the payment of EMI for which Jaya Bank issued him a notice to pay the defaulted amount and bring the account in order, otherwise it will proceed for enforcement of the security interest. Provisional Attachment of Properties In the meanwhile, on receiving information of Mr. Tushar being indulged in smuggling activities of narcotic drugs, opium, gold etc. and has purchased a bungalow from the proceeds of crime, the Director, by order in writing, provisionally attached the property by following the due procedure. The provisional attachment of property was confirmed by the Adjudicating Authority. Afterwards, on conclusion of the trial, the Special Court passed an order for confiscation of the property. Jaya Bank referred the matter to its legal department to examine the feasibility of restoration of the property to it for enforcement of its security interest. Based on the above information you are requested to answer the following questions as contained in Part A and Part B: PART - A