Gujarat High Court
M S Hillery Fashion Cotfab Limited vs The Assistant General Managerbank Of ... on 4 May, 2022
Author: Bhargav D. Karia
Bench: Bhargav D. Karia
C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CIVIL APPLICATION NO. 17491 of 2021
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE BHARGAV D. KARIA
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1 Whether Reporters of Local Papers may be allowed
to see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy
of the judgment ?
4 Whether this case involves a substantial question
of law as to the interpretation of the Constitution
of India or any order made thereunder ?
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M S HILLERY FASHION COTFAB LIMITED
Versus
THE ASSISTANT GENERAL MANAGERBANK OF BARODA
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Appearance:
MR BM MANGUKIYA(437) for the Petitioner(s) No. 1,2,3,4
MS BELA A PRAJAPATI(1946) for the Petitioner(s) No. 1,2,3,4
BHASKAR SHARMA(9209) for the Respondent(s) No. 1,2,3
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CORAM:HONOURABLE MR. JUSTICE BHARGAV D. KARIA
Date : 04/05/2022
ORAL JUDGMENT
1. Heard learned Mr.B.M. Mangukiya for the petitioners and learned advocate Mr. Bhaskar Sharma for the respondent.
2. By way of this petition under Article of the Page 1 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 226 of the Constitution of India, the petitioners have challenged the action of the Committee of the Executives of Willful Defaulters (Identification Committee) and the Review Committee of the respondent - Bank of India identifying the accounts of the petitioners as willful defaulter and subsequent reporting of the name of the petitioners to Reserve Bank of India/ CIBIL as willful defaulter.
3. It is the case of the petitioners that the petitioners were informed about the decision of declaring the petitioners as willful defaulter vide communication dated 20th April, 2021.
4. The facts leading to the declaration of the petitioners as willful defaulter are as under :
4.1 For the purpose of expanding the business, the petitioner No.1 company required finance and, therefore, the petitioners approached the respondent Bank for loan. The respondent Bank vide sanction letter dated 01.05.2014 sanctioned various credit facilities i.e. cash credit, hypothecation limit (stock-cum-book debts) of Rs.2.60 crores and term loan (P&M) of Rs. 2.40 crores. As per the term of the Page 2 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 sanctioned letter dated 01.05.2014, the prime security in respect of the cash credit facility form Rs.2.60 crores was first charge /hypothecation of all book debts, sundry debtors upto 180 days of prime security towards the term loan of Rs.2.40 crores of hypothecation of existing as well as new plant and machinery acquired with the help of the finance released by the Bank. Copy of the sanctioned letter dated 01.05.2014 issued by the respondent Bank.
4.2 The account of the petitioner was operated regularly, however, the premise of the petitioners were sealed on account of an order passed by the Gujarat Pollution Control Board dated 17.07.2015. As a result of which, the petitioners were unable to fulfill the order received on account of the closure by the Gujarat Pollution Control Board, some of the orders were cancelled. Gujarat Pollution Control Board vide its order dated 13.08.2015 permitted the petitioners to carry on business after complying with terms and conditions as mentioned in the order for opening the premise. On account of closure the petitioners suffered severe loss.
4.3 The petitioner states that the Page 3 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 petitioners forwarded communication dated 27th November, 2015 to the respondent Bank. On account of the order of the Pollution Board, the payments have been held up, which had temporarily affected the liquidity position of the petitioners, which has subsequently resulted delay in making payments and the account has turned bad in the books of the petitioners. The premise has been opened and they have started approaching the customers and looking to re-establish the credential.
Their prime motive is to repayment of all irregularities in the account and bring the Bank account to the regular category. The petitioners requested the respondent Bank to allow operation in the account through holding on operation subject to retention of 7% of entire deposit by the bank for settlement of over dues and irregularities in the account. The petitioners are expecting Rs.75 lakhs to one monthly deposit to start with submitting to deposit cheques of worth Rs.2.65 lakhs.
4.4 The petitioners forwarded another communication dated 07.01.2016 to the respondent Bank, requesting for enhancement / operation in account. Petitioner's term loan and cash credit facility may be enhanced as Page 4 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 Rs.1.25 crores. Petitioners would be paying a sum of Rs.5 to 7 lakhs in overdue account and they are ready to provide further collateral security of Rs.1.25 crores in the form of commercial residential property. The petitioners have further submitted a proposal so as to see that the dues would be cleared by March, 2016 and the amount would be regular.
4.5 The respondent bank forwarded another communication dated 30.01.2016 to the petitioners, wherein the respondent bank has approved the proposal forwarded by the petitioners subject to the terms and conditions enumerated in the said communication.
4.6 The petitioners have carried out transactions in the account with the respondent bank for the period commencing from 01.02.2016 to 31.03.2016. The petitioners deposited a sum of Rs.15 lakhs approx, even thereafter the petitioners have further deposited a sum of about Rs.28.34 lakhs in the account of the applicants maintained with the respondent bank. As on 01.02.2016, the petitioners had paid aggregate amount of Rs.34.34 lakhs. The Page 5 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 petitioners were permitted to carry on transactions through the account operated with the respondent bank.
4.7 Despite the aforesaid facts, the petitioners were issued notice under the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (hereinafter referred to as "the SARFAESI Act' for short). The notice under sub-section 2) of section 13 of the SARFAESI Act was issued by the Bank on 07.05.2016, calling upon the petitioners to repay the loan amount with interest. The respondent Bank demanded a sum of Rs.5,33,21,772.66, which was alleged to be the aggregate of the amount due and payable by the petitioners along with further interest from 30.04.2016 with penalty interest of 2%. In the said demand notice, it is stated that the account of the petitioners was classified as Non-performing Asset (NPA) on 31.12.2015 in accordance with the directions / guidelines issued by the Reserve Bank of India. In the demand notice dated 07.05.2016, the respondent Bank has claimed to have security interest over the properties as mentioned in the notice, which are movable and immovable properties.
Page 6 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 4.8. Pursuant to the receipt of the notice dated 07.05.2016, the petitioners have forwarded communication dated 07.06.2016, requesting for re-scheduling and restructuring of term loan and the cash credit account. The petitioners have stated that the factory is working in progressive basis and working with approximate 200 persons. It is also stated that the company incurred loss and on account of the said financial crisis, the petitioners were unable to repay the loan amount. The petitioners are having term loan of Rs.2.40 crores and cash credit facility of Rs.2.60 crores, totaling to Rs.5 crores. The petitioners have requested that the cash credit facility may be reduced to Rs.1.40 crores and balance amount should be converted in WCTL for five years. The petitioners have also requested for installment of term loan should be postponed up to December, 2016. From January, 2017, the petitioners would pay installments of both the term loan i.e. Rs.6 lakhs per month approx, and the interest of all the loans would be paid regularly every month. One of the Directors Mr. C.K.Patel wants to resign from the Bank and his personal Page 7 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 guarantee was also to be released. The company would be appointing another Director with having net worth of more than that of Mr.C.K.Patel and would also give personal guarantee.
4.9 After having various discussions with the respondent Bank, the petitioners made request for financial restructuring vide application dated 11.07.2016.
4.10 Pursuant to the communication forwarded by the petitioners dated 11.07.2016 for restructuring, the respondent Bank forwarded communication dated 23.08.2016 for taking possession of the movable and immovable properties of the petitioners. It was intimated that the Authorized Officer of the respondent Bank shall take possession of the petitioners' movable and immovable properties on 01.09.2016.
4.11 The Authorized Officer of the respondent Bank took symbolic physical possession of the plant and machinery of the petitioners on 01.09.2016. The Authorized Officer also published possession notice in terms of Rule 8(1) and 8(2) of the Enforcement Rules in the newspaper named Page 8 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 Navgujarat Samay in its edition dated 06.09.2016. In the said notice, it has been stated that the symbolic possession of the property mentioned in the said notice has been taken along with machineries, stock and book debts, However, in the possession notice affixed on the premise of the petitioners, stock and book debts were not mentioned.
4.12 The petitioners, being aggrieved by the said action of the respondent Bank, preferred Securitization Application No.178 of 2016 before the Debt Recovery Tribunal-II at Ahmedabad.
4.13 The said Securitization Application No.178 of 2016 is pending before the Debt Recovery Tribunal-II at Ahmedabad.
4.14 The petitioners forwarded one more communication dated 14.10.2016 to the respondent Bank, which is revised proposal for financial restructuring.
4.15 The petitioners forwarded another communication dated 23.11.2016, requesting for one time settlement.
4.16 The respondent Bank forwarded Page 9 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 communication dated 18.03.2017 to the petitioners, which was in reference to the one time settlement proposal forwarded by the petitioners dated 03.12.2016, wherein they have rejected the request of the petitioners for accepting Rs.250 lakhs towards the one time settlement. Further, they have also stated that the petitioners may submit fresh proposal for one time settlement with increase in the amount.
4.17 The respondent Bank has preferred Original Application No.166 of 2017 under Section 19 of the Recovery of Debts and Bankruptcy Act, 1993, before the Debt Recovery Tribunal-I at Ahmedabad. The said application is filed on 18.03.2017, inter- alia, praying that the petitioners may be restrained from transferring or alienating the plant and machinery and the other immovable and movable properties.
4.18 The petitioners forwarded communication dated 17.4.2018 to the Assistant General Manager, Dena Bank, which was in relation to the one time settlement application submitted by the petitioners and in reference to the letter dated 21.03.2018 forwarded by the respondent Bank, wherein the Page 10 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 petitioners have sought permission to examine the possibility for permitting to sell the plant and machinery as well as other properties which are under the charge of the respondent Bank, so that the petitioners may be able to find best buyer and get maximum possible amount, so that their burden towards the Bank can lighter.
4.19 The petitioners state that the Securitization Application No.178 of 2016 preferred by the petitioners is pending. During the pendency of the said application, the District Magistrate, Ahmedabad, under section 14 of the SARFAESI Act, passed the order for taking actual physical possession of the movable and immovable properties of the petitioners situated at Bavala, which is non-agricultural land bearing rsn187/4/P/D1 admeasuring 2926.51 sq. mtrs. and Division II admeasuring 2926.57 sq. mtrs. Totally aggregating to 58 Hectare 053 ARES - 02 sq.mtr. in the scheme known as Dream City. It may be noted that the respondent Bank filed application before the District Magistrate, Ahmedabad, bearing Application No.154 of 2017 under section 14 of the SARFAESI Act, which was partly allowed vide order dated 04.07.2018. Thereafter, notice was issued on Page 11 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 19.10.2018, wherein it was informed that by way of e-mail auction, the security assets mentioned in the said notice of the petitioners would be sold on 22.11.2018. the said e-auction notice was published in the newspaper and, therefore, the petitioners preferred Misc. Application in the Securitization application No.178 of 2016 for amendment and for interim relief.
4.20 The respondent Bank further issued notice dated 14.11.2018 to the petitioners which was for hearing of the Company Petition No 526/07/NCLT/AHM/2018 on 11.12.2018, which was pending before the NCLT, Ahmedabad. It may be noted that the respondent Bank had simultaneously though the O.A, and the Securitization Application were pending before the Debt Recovery Tribunal, had preferred application under section 7 of the Insolvency and Bankruptcy Code, Said STAR) application was admitted vide order dated 23.10.2019 by appointing IRP with direction to take necessary actions in accordance with Code.
4.21 Dena Bank was merged with Bank of Baroda and, therefore, the respondent Bank through its Assistant General Manager issued Page 12 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 the show cause notice dated 09.12.2019 to the petitioners to show cause as to why the petitioners should not be declared as a willful defaulter. It has been alleged that as per the direction of the Committee of the Executives on willful1 defaulters of the Bank and on scrutiny of the action of the petitioners, based on their set, omission and commission, the petitioners should not be classified as willful defaulters as per the guidelines of the Reserve Bank of India, Five grounds have been alleged against the petitioners, i.e. unit is running, still the borrower is not repaying the dues, the business is run in the name of some other firm/company by utilizing the P&M financed by the Bank, the current account is maintained with other bank, stock purchased out of the cash credit limit has been removed and the realization of book debts has not been credited in the cash credit account, and initial disbursement of Rs. 2.40 crores is transferred to associate Firm M/s. Hillery Fashion Shoppe. The unit has defaulted in meeting with the payment and has not utilized the finance from the lender for specific purposes for which finance was availed of but has diverted the fund for other purpose and has siphoned of the fund, so that the funds Page 13 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 have not been utilized for the specific purpose for which the finance was availed of nor are the funds available with the unit in the form of other assets. The petitioners were called upon to submit their reply within a period of 15 days from the receipt of notice and in case of default, the petitioners would be declared willful defaulters.
4.22 The petitioner nos.1, 2 and 4 replied to the show cause notice dated 09.12.2019, which was received by the petitioners on 21.12.2019. The company has stopped operation since March, 2017 and all accounts were seized by the bank and since the company was unable to pay rent or security exchange, the owner allowed the other party to use the premise. The company is not in use of any machinery. The Bank has auctioned the plant and machinery and the buyer had already deposited Rs.41 lakhs into the bank but the machinery was not picked up. The said reply was in respect of the two points raised in the show cause notice. So far as point no.3 is concerned, the petitioners have stated that there is no current account maintained with any other bank except in Dena Bank, Gandhinagar, and Page 14 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 the account which was operated for business convenience was already seized by the bank before March, 2017. So far as point no.4 is concerned, the petitioners have stated that the company has deposited approximately Rs.1.20 crores after the account was declared NPA from sale of stock and realization of book debts on gradual basis and Rs 20 lakhs was further deposited in September, 2019 and Rs. 40 lakhs was received by the bank on account of sale of machinery. The petitioners have stated that the company made loss of Rs. 2 crores when the account was declared NPA. Since there was closure of the unit by the order recorded by the Gujarat Pollution Control Board and on account of the demonetization, the petitioners have stated that the business was closed after March 2017 and still there was realized debt of Rs.125 lakhs. The petitioners have further stated that the company still has assets of approximately Rs.1 crore which are being sold by the respondent bank. So for as point no.5 alleged in the show cause notice is concerned, the petitioners have stated that same is unrealistic and incorrect and without any reference or evidence. The petitioners have stated the previous named M/s. Hillery Fashion Cotfab Limited was M/s. Hillery Page 15 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 Fashion Shoppe Limited. The company had already cash credit of Rs.2.40 crores in the Central Bank. This loan was taken by Dena Bank with enhancement up to rs.2.60 crores. Thus, there is no company with the name M/s. Hillery Fashion shoppe Limited. Certificate was also attached along with the reply. On September, 2019, the petitioners have deposited a sum of Rs.22 lakhs towards the one time settlement. The said amount was also adjusted to the outstanding dues amount. All the records in respect of the account of the petitioners may be verified and rechecked. In 2015, the investigation was done by the vigilance team, which is also on the records of the bank. The bank had been conducting time to time audit. The correspondence with the Bank was also done regularly. OTS letters were submitted every times and token to the same have also been submitted. The Bank is already in symbolic possession of every assets of the company. The petitioners have paid a sum of Rs.120 lakhs after the account has become NPA. Further, the company is already in recovery proceedings.
4.23 The respondent Bank had initiated proceedings under the Insolvancy and Bankruptcy Act and filed Application under Page 16 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 Section 7 before the NCLT, Ahmedabad, being Application No.CP(IB)526/18. The conduct of the Bank is deprecated by the NCLT vide its order dated 09.01.2020. It may be noted that the application was filed by the respondent Bank under section 12A of the I.B. Code, read with Regulation 30A of the CIRP Regulations, 2016, for withdrawal of the aforesaid application No.526 of 2018 through IRP. In para nos.8 and RY 9, the NCLT has deprecated the conduct of the respondent bank. It is specifically held that the application filed under section 7 is nothing but misuse of not only process of law but other resources are also misutilized, causing loss to the Government Exchequer. NCLT vide order dated 09.01.2020 allowed application preferred by the bank and discharged IRP/RP and was permitted to withdraw Application No.CP(IB)526/18.
4.24 The respondent Bank issued a notice on 21.07.2020, fixing the date of personal hearing on 06.08.2020. The petitioners were called upon to remain present.
4.25 Pursuant to the notice dated 21.07.2020, issued by the respondent Bank, the petitioner no.2 raised further objections Page 17 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 to the show cause notice. The petitioners have not been intimated about the constitution of Willful Defaulter Committee of Bank of Baroda. There is no show cause notice issued by the Willful Defaulter Committee to the petitioner no.2 and, therefore, notice dated 09.12.2019 issued by the Assistant General Manager of the Bank is absolutely illegal. The Willful Defaulter Committee cannot delegate its powers to issue show cause notice to any subordinate officers of the Bank. Therefore, the notice is bad in law. In absence of any notice by the Willful Defaulter Committee of the bank and without providing ground on which the petitioners are sought to be declared as Willful Defaulters, no effective hearing can be conducted by the petitioners. The show cause notice dated 09.12.2019 issued by the Assistant General Manager of the Bank is not in consonance with the clauses contained in Master circular of the Reserve Bank of India dated 01.07.2015. Further, it is stated that no proper show cause notice as per the guidelines of Master circular of Reserve Bank of India dated 01.07.2015 is issued and no declaration can be done by Willful Defaulter Committee to declare me as a willful defaulter. The earlier tendered reply may also be Page 18 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 considered.
4.26 The petitioner no.4 similarly replied to the notice issued by the respondent Bank as per the reply submitted by the respondent no.2.
4.27 Again on 13.08.2020, the petitioners forwarded communication to the Assistant General Manager of Bank of Baroda, wherein the petitioners have again submitted a proposal for one time settlement.
4.28 The respondent Bank forwarded communication dated 05.09.2020 to the petitioners, calling upon the petitioners to show cause as to why they should not be declared as willful defaulters. The petitioners have been informed that if within a period of 15 days the bank does not receive any representation against the communication of the Bank to declare the petitioners as willful defaulters, it would be deemed that the petitioners have nothing to submit and Bank would proceed further and classify the account of the petitioners as willful defaulter and the Bank would also publish the name and photographs of the willful defaulters in the newspapers and would Page 19 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 initiate necessary recovery action as per extant guidelines issued by the Reserve Bank of India.
4.29 After receiving the communication dated 05.09.2020 from the respondent Bank, the petitioners submitted application dated September 19, 2020 through their Advocate to grant some time so as to enable the petitioners to collect necessary documents in relation to the aforesaid subject matter, and thereafter prepare effective reply and answer the show cause notice.
4.30 The respondent Bank, without following the due procedure in law and without following the guidelines of the Reserve Bank of India, and without affording any opportunity of hearing to the petitioners, declared the petitioners as willful defaulters, reserving rights to publish the names and photographs of the willful defaulters in the newspapers and also initiated necessary recovery actions as per the extant guidelines issued by the Reserve Bank of India.
4.31 The Reserve Bank of India has issued the master circular on willful defaulters Page 20 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 dated 01.07.2018 which consolidated the instruction in regards to declaring and/or identifying the willful defaulter.
5. Mr.B.M. Mangukiya for the petitioners submitted that the petitioners have been declared and/or identified as willful defaulters, though as per the guidelines of the master circular, the petitioners do not fall within the criteria thereof. It was submitted that clause (3) of the Master Circular issued by the Reserve Bank of India on willful defaulter clearly provides for a mechanism for identifying willful defaulters. The said procedure has been given total go bye by the respondents. It was the Identification Committee which has to pass the order, declaring the borrower as a willful defaulter. Therefore, admittedly procedure laid down in the Master Circular issued by the Reserve Bank of India deserves to be quashed and set aside.
6. Learned advocate Mr.B.M. Mangukiya for the petitioners submitted that the Division Bench of this Court in case of Ionic Metalliks and others Vs. Union of India and others in Special Civil Application N0.645 of 2014 and Special Civil Application No.10120 of 2014 has dealt identical issue, wherein this Court has set aside the show cause notice issued for declaring the borrower as Page 21 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 a willful defaulter on the ground that the show cause notice issued to the petitioners has failed to disclose any material and no 15 days clear time was given as an opportunity of hearing to meet with the show cause notice as stipulated in the Circular. It was further submitted that the said notice was also set aside on the ground that same was vague and contains no factual aspect or materials and no supporting materials were given. The Court has also found that the Bank while issuing notice had acted de hors the principle of natural justice. It was submitted that the siphoned notice was bereft of basic details and material particulars and in the present case, if the show cause notice is perused, vague allegations have been made against the petitioners, however, no supporting materials and/or documents have been made available to the petitioners. In order to make a show that the principle of natural justice have been followed, it has been stated that in the notice that the petitioners may sent their submissions for consideration by the Committee. However, they have stated that it would be open the discretion of the Committee whether to given an opportunity of personal hearing or not.
7. It was further submitted that from these facts, it becomes clear that some empty formality Page 22 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 has been made to show that proper fair opportunity has been given and that principle of natural justice has been observed. It was submitted that Master Circular issued by the Reserve Bank of India clearly provides for a personal hearing and it is not only open on behalf of the Committee that the hearing can be afforded, but it is mandatory to give a personal hearing before recording any order of willful defaulter by the Committee. Therefore, admittedly the guidelines have not been followed and the petitioners have been declared willful defaulters without following due procedure in law. Therefore, impugned order declaring the petitioners as willful defaulters deserves to be quashed and set aside.
8. Learned advocate Mr.Mangukiya submitted that as per the RBI's circular, the guarantors are exempted, if the guarantee is prior to September 9, 2014, only exemption is for in the case of Group Companies. Neither in the show cause notice nor the impugned orders the Petitioner is referred as Group Company. The Petitioners have been referred as Corporate Guarantor. Hence, the Master Circular fails to apply to the petitioners, and on this ground alone the petition requires to be allowed.
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9. Learned advocate Mr.Mangukiya submitted that the impugned order fails to give any reason for coming to the conclusion that why the petitioner is Willful Defaulter. There is not even whisper of reasoning. It was submitted that there are no merits in the contention of the Petitioner and Petitioner Company has been making profit and so declared as Willful Defaulter.
10. Learned advocate Mr.Mangukiya submitted that there is no whisper of an allegation in the show cause notice as against the petitioner in the show cause notice. Also, no material was provided to the petitioner prior to the hearing as to why the petitioner is classified as willful defaulter. Hence the proceedings are vitiated.
11. Learned advocate Mr.Mangukiya submitted that the notice issued upon the petitioner fails to match the criteria for the show cause notice as required in law. It makes mere allegation without relying upon any material, evidence, and documents and on the basis of the same wants to declare the petitioners as Willful Defaulter. There is no proof, material, detail, evidence with the notice that the Petitioner have earn year by year from which it can satisfied the dues.
12. Learned advocate Mr.Mangukiya submitted that Page 24 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 there is no proof, material, detail, evidence with the notice that why the petitioner is classified as Willful Defaulter.
13. Learned advocate Mr.Mangukiya submitted that the Petitioners have also not been provided with the decision of the Committee as stated in the Willful Defaulter notice.
14. Learned advocate Mr.Mangukiya submitted that the show-cause notice is absolutely vague and contains no factual or other materials.
15. Learned advocate Mr.Mangukiya submitted that the fundamental purpose behind the serving of Show Cause Notice is to make the notice understand the precise case set up against him which he has to meet. This would require the statement of imputations detailing out the alleged breaches and defaults he has committed, so that he gets an opportunity to rebut the same. Another requirement is the nature of action, which is proposed to be taken for such a breach, that should also be stated so that the notice is able to point out that proposed action is not warranted in the given case, even if the defaults/breaches complained of are not satisfactorily explained. When it comes to Willful Defaulter declaration, this requirement becomes all the more imperative, having regard to Page 25 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 the fact that it is harshest possible action.
16. Learned advocate Mr.Mangukiya submitted that the show cause notice is absolutely silent with regards to material relied upon for the allegation made therein. It could be the case of the bank that there has been a deliberate routing of funds, but before alleging, there has to be some material with the bank and the same should be prima facie disclosed to the Petitioners so that he could make good his case that there has been no routing of funds.
17. Learned advocate Mr.Mangukiya submitted that since the show-cause notice is bereft of basic details and material particulars, the entire procedure is vitiated.
18. Learned advocate Mr.Mangukiya submitted that the notice is not supported by any material as required by the Division Bench judgment in Special Civil Application 645 of 2014.
19. Learned advocate Mr.Mangukiya submitted that it is equally important to mention as to what would be the consequence if the notice does not satisfactorily meet the grounds on which an action is proposed. To put it otherwise, that in order to fulfill the requirements of principles of natural justice, a show cause notice should meet the Page 26 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 following two requirements viz.:
i) The material/grounds to be stated on which according to the Bank necessitates an action;
ii) Particular penalty/action, which is proposed to be taken. Both the basic requirements of the show cause notice have not been met by the impugned notice.
20. Learned advocate Mr.Mangukiya submitted that the impugned order is ex-facie illegal, arbitrary, ultra vires, inasmuch as the respondent has given complete go bye to the guidelines issued by the RBI while issuing Master Circular, more particularly clause 3 which provides with the mechanism for identification of willful defaulter. It was submitted that as per the clause 3 of the Master Circular, the Committee headed by the Executive Directors or equivalent and consisting of two other senior officers of the rank of General Manager Dy General Manager should examine the evidence of the will defaulter on the part of the borrowing company and its promoters, whole time Directors at the relevant time. If the Committee concludes that an event of' willful default has occurred, it shall issue show cause notice to the concerned borrower after giving opportunity to the borrower Page 27 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 and/or promoter/full time Director for personal hearing and issue order recording the fact of' will default and the reasons for the same. Therefore, it is pre-requisite condition that the Committee should initially examine the evidence of the willful default of the promoter/Director of the borrowing company. Therefore, there should be some sort of exercise carried out by the Committee before even issuing the notice. It was submitted that in the present case, there is no whisper in the show cause notice and/or impugned order as to whether any evidence was examined by the Committee as contemplated under clause 3 of the RBI circular. Therefore, the impugned order is ex- facie arbitrary, erroneous and deserves to be quashed and set aside.
21. It was submitted that as per clause 3 of the RBI Master circular, sub-clause (b) provides that the show cause notice is to be issued by the Committee. It may be noted that prior to issuance of the notice, the Committee has to examine the evidence regarding the willful default on the part of the borrowing company and its Promoter and/or full time Director and after verifying arrive at the conclusion that the willful default has occurred, the Committee shall issue the show cause notice. It was submitted that the Committee cannot delegate its powers upon any officers of the Bank. In the present case, if the show cause Page 28 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 notice is perused, the notice is issued by the Assistant General Manager. As per clause 3 of the RBI circular, the Committee shall be headed by the Executive Director or equivalent and shall consist of two other senior officers of the rank of General Manager / Dy. General Manager. The Assistant General Manager is not vested with any powers to issue the show cause notice. These facts though brought to the notice of the respondent, the same are not considered. Even in the entire order, there is no reference of the averments made and/or contentions raised by the petitioners in their reply. The issuance of the show cause notice is itself without any power and, therefore, the impugned order fails on that ground alone.
22. Learned advocate Mr.Mangukiya submitted that the Master circular of the RBI clearly provides that there should be an opportunity of hearing afforded to who is declared as a willful defaulter. It was submitted that in the present case empty formality has been made to show that the petitioner is given an opportunity of hearing. It was submitted that hearing of the notice was fixed on 19.09.2020. However, on 19.09.2020 on account of the pandemic of Covid- 19, the courts and Tribunals were not functioning fully. The proceedings are pending before the Debt Recovery Tribunal which are initiated by Page 29 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 both the parties. However, all the documents were required before preparing the effective reply to the show cause notice. It was submitted that in view of the situation of the pandemic of Covid- 19, the Advocates who are appearing for the petitioners were not attending their offices and, therefore, it was not possible for the petitioners to collect the documents and records, so as to enable the petitioners to answer the show cause notice. Therefore, a request was made through the Advocate of the petitioners to grant four weeks time to collect the relevant materials and documents and answer the show cause notice. This application appears to have been rejected and/or not considered by the respondent and straight away the impugned order has been recorded. Earlier the petitioners have submitted two replies, however, even the respondent Bank has failed to refer to the said replies in the body of the impugned order. Therefore, this is nothing but empty formality made by the respondent. Admittedly, no personal hearing was given to the petitioners before recording the impugned order. This is clear de hors of the guidelines of the RBI circular and, therefore, the impugned order deserves to be quashed and set aside.
23. Learned advocate Mr.Mangukiya submitted that Page 30 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 the respondent Bank has recorded in the impugned order two reasons for recording the impugned order. It was submitted that the said allegations and/or charges are not found in the show cause notice. In the show cause notice five charges are alleged against the petitioners. However, in the body of the impugned order, the respondent has recorded order on some other grounds for which no show cause notice was issued and, therefore, the impugned order cannot sustain and deserves to be quashed and set aside.
24. Learned advocate Mr.Mangukiya submitted that it is not case that the petitioners have not paid any amount towards the repayment of the loan. On account of some unavoidable circumstances, the petitioners' company has suffered huge losses. Inspite of that the petitioners have forwarded applications for OTS. However, on one occasion after taking amount towards the OTS proposal, the respondent Bank has not bothered to even answer the petitioners. Even said amount is taken away by the respondent Bank. The petitioners are desirous of making payment, however, the proposals submitted by the petitioners are never considered by the respondent Bank. It appears that the respondents are prejudiced against the petitioners and for some extraneous reasons, without following the guidelines laid down by the RBI even recorded the impugned order, which is Page 31 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 ex-facie erroneous, arbitrary and ultra vires and, therefore, same deserves to be quashed and set aside.
25. Learned advocate Mr.Mangukiya submitted that the show cause notice is issued by the Assistant General Manager, calling upon the petitioners to show cause as to why the petitioners should not be declared as willful defaulters, whereas the notice has been adjudicated by the Chief Manager of the respondent no.2 Bank. It may be noted that all the communications and the replies forwarded by the petitioners are addressed to the Assistant General Manager. Therefore, the Assistant General Manager has heard the matter and has issued the show cause notice. However, the same is adjudicated by the respondent no.2 which is in clear breach of principle of natural justice. As per the principle of natural justice, one who hears has to decide. In the present case, when the Committee is empowered to decide whether a person or company can be declared as a willful defaulter, the said powers could not have been exercised by the Assistant General Manager or the Chief Manager. This is clear violation of the fundamental principle of law that one who hears must decide. Therefore, the impugned order recorded by the respondent is ex-facie ultra vires and void.
Page 32 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022
26. Learned advocate Mr.Mangukiya submitted that the Master Circular of the RBI clearly provides that there should be a speaking order when the person or company is to be declared as willful defaulter. In the present case, admittedly there are no reasons worth the name recorded by the respondent no.2 as to what has weighed with him while recording such an order. It may be noted that the reasons are soul and body of the order. In absence of any reasons, it may not be possible for any person to assail the order before the higher Forum is any adverse order is recorded. This is the basic principle of natural justice. When the authority recording the order, should record reasons for arriving at the conclusion. The impugned order deserves to be quashed and set aside on the ground that the same is non-speaking order.
27. On the other hand, the learned advocate Bhaskar Sharma for the respondent supported the decision of the Identification Committee as also the Review Committee and submitted that there was no necessity to supply the copy of the order of the Identification Committee.
28. Having heard the learned advocates for the respective parties and having gone through the Page 33 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 materials on record, in order to appreciate the contentions raised by the respective parties, it would be germane to refer to few Clauses of Master Circular on willful defaulter dated 1 st July, 2015 issued by the RBI.
"Clause 2.1.3 : Wilful Default : A 'willful default' would be deemed to have occurred if any of the following events is noted:
(a) The unit has defaulted in meeting its payment/repayment obligations to the lender even when it has the capacity to honour the said obligations.
(b) The unit has defaulted in meeting its payment/ repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.
(c) The unit has defaulted in meeting its payment/ repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.
(d) The unit has defaulted in meeting its payment/ repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the bank/lender. The identification of the willful default should be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transactions/ incidents. The default to be categorised as Page 34 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 willful must be intentional, deliberate and calculated."
Clause no. 2.5 : Penal Measures The following measures should be initiated by the banks and FIs against the willful defaulters identified as per the definition indicated at paragraph 2.1.3 above:
a. No additional facilities should be granted by any bank / FI to the listed willful defaulters. In addition, such companies (including their entrepreneurs / promoters) where banks/ FIs have identified siphoning / diversion of funds, misrepresentation, falsification of accounts and fraudulent transactions should be debarred from institutional finance from the scheduled commercial banks, financial institutions,NBFCs, for floating new ventures for a period of 5 years from the date of removal of their name from the list of willful defaulters as published/disseminated by RBI/CICs.
b. The legal process, wherever warranted, against the borrowers/ guarantors and foreclosure for recovery of dues should be initiated expeditiously. The lenders may initiate criminal proceedings against willful defaulters, wherever necessary.
c. Wherever possible, the banks and Fis should adopt a proactive approach for a change of management of the willfully defaulting borrower unit.
d. A covenant in the loan agreements, with the companies to which the banks/ FIs have given funded/ nonfunded credit facility, should be incorporated by the banks/ FIs to the effect that the borrowing company should not induct on its board a person whose name appears in the list of willful defaulters and Page 35 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 that in case, such a person is found to be on its board, it would take expeditious and effective steps for removal of the person from its board. It would be imperative on the banks and FIs to put in place a transparent mechanism for the entire process so that the penal provisions are not misused and the scope of such discretionary powers are kept to the barest minimum. It should also be ensured that a solitary or isolated instance is not made the basis for imposing the penal action.
Clause no.3 : Mechanism for identification of willful defaulters. The mechanism referred to in paragraph 2.5 above should generally include the following :
(a) The evidence of willful default on the part of the borrowing company and its promoter/wholetime director at the relevant time should be examined by a Committee headed by an Executive Director or equivalent and consisting of two other senior officers of the rank of GM/DGM.
(b) If the Committee concludes that an event of willful default has occurred, it shall issue a Show Cause Notice to the concerned borrower and the promoter/ wholetime director and call for their submissions and after considering their submissions issue an order recording the fact of willful default and the reasons for the same. An opportunity should be given to the borrower and the promoter/ wholetime director for a personal hearing if the Committee feels such an opportunity is necessary.
(c) The Order of the Committee should be reviewed by another Committee headed by the Chairman/ Chairman & Managing Director or the Managing Director & Chief Executive Officer/ CEOs and consisting, in addition, to two Page 36 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 independent directors/ non executive directors of the bank and the order shall become final only after it is confirmed by the said Review Committee. However, if the Identification Committee does not pass an order declaring a borrower as a willful defaulter, then the Review Committee need not be set up to review such decisions."
Thus, clause 2.1.3 defines 'willful default' as to who can be said to have committed a willful default as enumerated in Clause (a) to (d). Whereas, Clause3 provides for mechanism for identification of willful defaulters. Clause - 2.5 provides consequences of declaring any lender as willful defaulter resulting into penal measures including criminal case. On perusal of the above provisions of Master Circular, the Identification Committee is required to examine the availability of evidence of willful default on the part of the borrower company and it promoter/whole time director and if such committee concludes that in the event of willful default is occurred, it is obligatory on the part of the Identification Committee to issue a show cause notice to the concerned borrower and promoter whole time director calling for their submissions and after considering their submissions an order recording the fact of willful default has to be passed giving reasons for the same. Therefore, it is incumbent upon the Page 37 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 Identification Committee to provide an opportunity of personal hearing to the borrower and promoter, whole time director or the persons, who are to be considered as willful defaulter and the decision of such Identification Committee is to be reviewed by any other Committee, which is Review Committee as per Clause-3(c) of the Master Circular.
29. The Division bench of the Bombay High Court in case of M/s. Kanchan Motors and others vs. Bank of India and others reported in 2018 SCC OnLine Bom 1761 has held as under with regard to violation of principles of natural justice as under:
"14. On the close scrutiny of the aforesaid provisions of Master Circular, it is clear that the consequences of declaring any lender as wilful defaulter are serious in nature. It is also clear that for declaring a lender to be wilful defaulter specific finding is required to have been recorded in terms of Clasue 2.1.3(a) to (d) as the case may be. The Master Circular also provides a mechanism to be adopted for identifying the wilful defaulter. It includes, availability of evidence of wilful default on the part of borrowing company and its promoter/wholetime director which needs to be ex amined by the Identification Committee. If the Committee concludes that an event of wilful default has occurred, it is obligatory on the part of Identification Committee to issue a show cause notice to the concerned borrow er and the promoter/wholetime director calling from Page 38 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 their submissions and after considering their submissions as may be received, an order re cording the fact of wilful default has to be passed after giving reasons for the same. It is also incumbent upon the Identification Committee to give an opportunity of personal hearing to borrower & promoter/whole-time director if it feels that such opportunity is necessary. The said order of the Committee needs to be reviewed by another Committee (Review Commit tee) as per Clause 3(c) of the Master Circular.
15. Examining the present matter on the touch stone of the aforesaid provisions, we find that the Respondent Bank has failed to comply with the aforesaid mechanism provided under the Master Circular. It is clear from the record that in response to the notice issued by the Bank informing the Petitioners about their intentions to proceed against them for declaring them as willful defaulter and giving last chance to deposit outstanding amounts, the Petitioners have submitted a detailed reply dated 29 th January, 2018 giving reasons as to why such proceeding cannot be initiated. However, it appears that thereafter the Identification Committee has passed an order on 9 th March, 2018 recording that the Petitioners have committed wilful default. It is also an admitted fact that the copy of the order dated 9 th March, 2018 was not supplied to the Petitioners even though a written request for the same was made. Moreover, in the stand of the Bank in reply to the Petition, it is stated that is not necessary to supply the copy of the order of the Identification Committee to the Petitioners.
16. In the circumstances, in our considered view the Respondents while declaring the Petitioners as willful defaulter have violated the provisions contained in the Page 39 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 Master Circular and have also acted in violation of the principles of natural justice. The impugned action which is penal in nature has been taken causing serious implication on the Petitioners without follow ing the basis principles of natural justice. The impugned order of Review Committee as is clear from a bare reading of it, is a non speaking order as the operative part of the order of Review Committee which contains the reasons reads thus:
"The Review Committee has examined and reviewed the proceedings initi ated order and the findings of the Identification Committee and found that they are in order and confirmed that you have committed the following willful default:--
(Reasons) The unit has defaulted reasons in meeting its payment/repayment obligation to the lender and has not utilized the finance from lender even when it has capacity to honour the said obligations."
17. This according to our considered view the order of the Review Committee cannot be termed as reasoned order and as such it cannot be sustained.
18. We are also of the considered view that the Respondent Bank cannot be allowed to say that it is not necessary for them to supply copy of the order passed by the Identification Committee. As would be clear from Clause 3(b) of the Master Circular the Identification Committee has to record reasons while passing the order of recording the fact of commission of wilful default as also to assign valid reasons as to whether it is necessary togive the borrower and the the promoter/whole time director the opportunity of personal hearing. This requirement whether has been complied with or not could have been examined only if the said order was brought Page 40 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 on record. But strangely in reply the Bank has taken a stand that the order dated 9 th March, 2018 passed by the Identification Committee is the internal order and it is not supposed to be served upon the Petitioners. It is also stated by the Respondents in the reply that no question arises of serving the order dated 9 th March, 2018 on the Petitioners and that the order dated 9th March, 2018 is the preliminary internal order and after its finalization by Review Committee, it is conveyed to the Petitioners. Thus from the stand taken by the Respondents, it is clear that they have neither supplied copy of the order passed by the Identification Committee to the Petitioners nor according to them it was necessary. It is also very strange that the said order has not even been brought on record by the Bank to deny the Petitioners' contention that their grounds raised through reply dated 29 th January, 2018 to show cause notice against proposed declaration of wilful defaulter have not been considered and that as to why the Petitioners were denied the opportunity of being heard.
19. In our considered view the stand of the Bank that they are not obliged to furnish copy of the order passed by the Identification Committee cannot be sustained. Such stand if accepted would given rise to arbitrary exercise of powers as the Identification Committee may give complete go bye to the requirement of assigning reasons for declaring a party as Wilful Defaulter and also requirement of giving reasons as to why opportunity of personal hearing would not be necessary.
20. In the present case, as already observed even the order of Review Committee is bereft of any reasons for arriving at the conclusion that, "the Pe titioners have defaulted in Page 41 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 meeting its payment/repayment obligation to the lender even when it has capacity to honour the said obligation.
21. Having regard to the aforesaid in our considered view failure to supply the reasons by the Identification Committee of recording the fact that the Petitioners are in wilful default and as to why they need not be given an opportunity of hearing when in their reply dated 29th January, 2018 the Petitioners have raised various grounds opposing the proposed action of declaring them willful defaulter and sought opportunity of personal hearing cannot be said to be justified. Similarly absence of reasons in the order of Review Committee also amounts to denial of justice. It is now well settled that reasons are the live links between the minds of the decision taker to the controversy in question and the decision or conclusion arrived at. Reasons substitute subjectivity to objectivity right to reason is an indispensable part of sound judicial system. The rational is that the affected party can know why the decision has gone against him. One of the statutory requirement of the natural justice is spelling out reasons for the order made, in other words a speaking order. Even in respect of administrative order the giving of reasons is one of the fundamentals of good administration."
30 The Apex Court in case of State Bank Of India Vs. Jah Developers Private Limited and Others (Supra) while denying the right to be represented by a lawyer in the in house proceedings contained in Para 3 of the Revised Circular dated 01.07.2015, has held that Revised Circular ,being Page 42 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 in public interest ,must be construed reasonably as under:
"15. The next question that arises is whether an oral hearing is required under the Revised Circular dated 01.07.2015. We have already seen that the said circular makes a departure from the earlier Master Circular in that an oral hearing may only be given by the First Committee at the first stage if it is so found necessary. Given the scheme of the Revised Circular, it is difficult to state that oral hearing is mandatory. It is even more difficult to state that in all cases oral hearings must be given, or else the principles of natural justice are breached. A number of judgments have held that natural justice is a flexible tool that is used in order that a person or authority arrive at a just result. Such result can be arrived at in many cases without oral hearing but on written representations given by parties, after considering which, a decision is then arrived at. Indeed, in a recent judgment in Gorkha Security Services v. State (NCT of Delhi) [Gorkha Security Services v. State (NCT of Delhi), (2014) 9 SCC 105] this Court has held, in a blacklisting case, that where serious consequences ensue, once a show cause notice is issued and opportunity to reply is afforded, natural justice is satisfied and it is not necessary to give oral hearing in such cases (see para 20).
16. When it comes to whether the borrower can, given the consequences of being declared a wilful defaulter, be said to have a right to be represented by a lawyer, the judgments of this Court have held that there is no such unconditional right, and that it would all depend on the facts and circum stances of each case, given the governing rules and the Page 43 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 fact situation of each case. Thus, in Mohinder Singh Gill v. Chief Election Commr.
[Mohinder Singh Gill v. Chief Election Commr., (1978) 1 SCC 405] , in thecontext of election law, this Court held: (SCC p. 439, para 63) "63. In Wiseman v. Borneman [Wiseman v. Borneman, 1968 Ch 429 : (1968) 2 WLR 320 :
(1967) 3 All ER 1045 (CA)] there was a hint of the competitive claims of hurry and hearing. Lord Reid said: 'Even where the decision has to be reached by a body acting judicially, there must be a balance between the need for expedition and the need to give full opportunity to the defendant to see material against him' (emphasis added). We agree that the elaborate and sophisticated methodology of a formalised hearing may be injurious to promptitude so essential in an election under way. Even so, natural justice is pragmatically flexible and is amenable to capsulation under the compulsive pressure of circumstances. To burke it altogether may not be a stroke of fairness except in very exceptional circumstances. Even in Wiseman [Wiseman v. Borneman, 1971 AC 297 : (1969) 3 WLR 706 (HL)] where all that was sought to be done was to see if there was a prima facie case to proceed with a tax case where, inevitably, a fuller hearing would be extended at a later stage of the proceedings, Lord Reid, Lord Morris of BorthyGest and Lord Wilberforce suggested 'that there might be exceptional cases where to decide upon it ex parte would be unfair, and it would be the duty of the tribunal to take appropriate steps to eliminate unfairness' (Lord Denning, M.R., in Howard v. Borneman (2) [Howard v. Borneman (2), 1975 Ch 201 : (1974) 3 WLR 660 (CA)] sum marised the observations of the Law Lords in this form). No doctrinaire approach is desirable but the court must be anxious to salvage the cardinal rule to the extent permissible in a given case. After all, it is not obligatory Page 44 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 that counsel should be allowed to appear nor is it compulsory that oral evidence should be adduced. Indeed, it is not even imperative that written statements should be called for.
Disclosure of the prominent circumstances and asking for an immediate explanation orally or otherwise may, in many cases, be sufficient compliance. It is even conceivable that an urgent meeting with the parties concerned summoned at an hour's notice, or in a crisis, even a telephone call, may suffice." (emphasis in original)
17. In Kavita v. State of Maharashtra (1) [Kavita v. State of Maharashtra (1), (1981) 3 SCC 558 : 1981 SCC (Cri) 743] (Kavita), this Court held, in the context of preventive detention, that even when a detenu makes a request for legal assistance before the Advisory Board, the Advisory Board is vested with a discretion whether to allow or disallow such legal assistance. This was despite the fact that adequate legal assistance may be essential for the protection of the fundamental right to life and personal liberty guaranteed by Article 21 of the Constitution. On facts, it was held that since the detenu had not made any request to the Advisory Board for any such permission, the Court was not prepared to hold that the detenu was denied the assistance of counsel so as to lead to the conclusion that procedural fairness under Article 21 of the Constitution was denied to him. Likewise, in Nand Lal Bajaj v. State of Punjab [Nand Lal Bajaj v. State of Punjab, (1981) 4 SCC 327 : 1981 SCC (Cri) 841] , this Court referred to Article 22(3)(b) of the Constitution of India which states that the right to consult and be defended by a legal practitioner of his choice is denied to a person who is arrested or detained under any law providing for preventive detention. This Court then went on to hold that normally, Page 45 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 lawyers have no place in proceedings before the Advisory Board, and then went on to refer to Kavita [Kavita v. State of Maharashtra (1), (1981) 3 SCC 558 : 1981 SCC (Cri) 743] . It was finally held that since the detaining authority was allowed to be represented by counsel before the Advisory Board, whereas the detenu was not, the order of detention would be quashed as this would be discriminatory.
18. In J.K. Aggarwal v. Haryana Seeds Development Corpn. Ltd. [J.K. Aggarwal v. Haryana Seeds Development Corpn. Ltd., (1991) 2 SCC 283 : 1991 SCC (L&S) 483] , this Court, after discussing the case law, held in para 4, that the right of representation by a lawyer cannot be held to be a part of natural justice. No general principle valid in all cases can be enunciated. In the last analysis, a decision has to be reached on a case to case basis on situational particularities and the special requirements of justice of the case (see para 8).
19. In Crescent Dyes and Chemicals Ltd. v. Ram Naresh Tripathi [Cres cent Dyes and Chemicals Ltd. v. Ram Naresh Tripathi, (1993) 2 SCC 115 :
1993 SCC (L&S) 360] , this Court held that a workman under the Industrial Disputes Act, 1947 has no right, under principles of natural justice, that he must be represented by counsel. After discussing several judgments, this Court concluded: (SCC pp. 12627 & 129, paras 1213 & 17) "12. From the above decisions of the English Courts it seems clear to us that the right to be represented by a counsel or agent of one's own choice is not an absolute right and can be controlled, restricted or regulated by law, rules or regulations. However, if the charge is of a serious and complex nature, the delinquent's request to be represented Page 46 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 through a counsel or agent could be conceded.
13. The law in India also does not concede an absolute right of representation as an aspect of the right to be heard, one of the elements of principle of natural justice. It has been ruled by this Court in (I) N. Kalindi v. Tata Locomotive & Engg. Co. Ltd. [N. Kalindi v.
Tata Locomotive & Engg. Co. Ltd., (1960) 3 SCR 407 : AIR 1960 SC 914] , (ii) Brooke Bond (India) (P) Ltd. v. S. Subba Raman [Brooke Bond (India) (P) Ltd. v. S.Subba Raman, (1961) 2 LLJ 417 (SC)] and (iii) Dunlop Rubber Co. (India) Ltd. v. Workmen [Dunlop Rubber Co. (India) Ltd. v. Workmen, (1965) 2 SCR 139 : AIR 1965 SC 1392] that there is no right to represntation as such unless the company by its Standing Orders recognises such a right.
***
17. It is, therefore, clear from the above case law that the right to be represented through counsel or agent can be restricted, controlled or regulated by statute, rules, regulations or Standing Orders. A delinquent has no right to be represented through counsel or agent unless the law specifically confers such a right. The requirement of the rule of natural justice insofar as the delinquent's right of hearing is concerned, cannot and does not extend to a right to be represented through counsel or agent. In the instant case, the delinquent's right of representation was regulated by the Standing Orders which permitted a clerk or a workman working with him in the same department to represent him and this right stood expanded on Sections 21 and 22(ii) permitting representation through an officer, staffmember or a member of the union, albeit on being authorised by the State Government. The object and purpose of such provisions is to ensure that the domestic enquiry is completed with despatch and is not prolonged Page 47 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 endlessly. Secondly, when the person defending the delinquent is from the department or establishment in which the delinquent is working he would be well conversant with the working of that department and the relevant rules and would, therefore, be able to render satisfactory service to the delinquent. Thirdly, not only would the entire proceedings be completed quickly but also inexpensively. It is, therefore, not correct to contend that the Standing Order or Section 22(ii) of the Act conflicts with the principles of natural justice."
20. In Railway Protection Force v. K. Raghuram Babu [Railway Protection Force v. K. Raghuram Babu, (2008) 4 SCC 406 : (2008) 1 SCC (L&S) 1043], this Court, in the context of a domestic/departmental enquiry held: (SCC p. 408, paras 9-11) "9. It is well settled that ordinarily in a domestic/departmental enquiry the person accused of misconduct has to conduct his own case vide N. Kalindi v. Tata Locomotive & Engg. Co. Ltd. [N. Kalindi v. Tata Locomotive & Engg. Co. Ltd., (1960) 3 SCR 407 : AIR 1960 SC 914] Such an inquiry is not a suit or criminal trial where a party has a right to be represented by a lawyer. It is only if there is some rule which permits the accused to be represented by someone else, that he can claim to be so represented in an inquiry vide Brooke Bond (India) (P) Ltd. v. S. Subba Raman [Brooke Bond (India) (P) Ltd. v. S. Subba Raman, (1961) 2 LLJ 417 (SC)] .
10. Similarly, in Cipla Ltd. v. Ripu Daman Bhanot [Cipla Ltd. v. Ripu Daman Bhanot, (1999) 4 SCC 188 : 1999 SCC (L&S) 847] it was held by this Court that representation could not be claimed as of right. This decision followed the earlier decision Bharat Page 48 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 Petroleum Corpn. Ltd. v. Maharashtra General Kamgar Union [Bharat Petroleum Corpn. Ltd. v. Maharashtra General Kamgar Union, (1999) 1 SCC 626 : 1999 SCC (L&S) 361] in which the whole case law has been reviewed by this Court.
11. Following the above decision it has to be held that there is no vested or absolute right in any chargesheeted employee to representationeither through a counsel or through any other person unless the statute or rules/standing orders provide for such a right. Moreover, the right to representation through someone, even if granted by the rules, can be granted as a restricted or controlled right. Refusal to grant representation through an agent does not violate the principles of natural justice." Ultimately, the Court upheld the validity of Rule 153.8 of the Railway Protection Force Rules, 1987, which permitted a friend to accompany a delinquent, who will not, however, be allowed to address the inquiry officer or be allowed to crossexamine witnesses.
21. It has also been argued before us that the present case, being a case where "wilful default" consists of facts which are known to the borrower, and as "wilful default" would only be the borrower's version of facts, no lawyer is needed as no complicated questions of law need to be presented before the In- House Committees. Thus, in Krishna Chandra Tandon v. Union of India [Krishna Chandra Tandon v. Union of India, (1974) 4 SCC 374 :
1974 SCC (L&S) 329] , this Court held: (SCC p. 381, para 17) "17. It was next argued that the appellant had asked for the assistance of an advocate but the same was refused. It was submitted that having regard to the intricacies of the case and particularly the ill health of the Page 49 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 ap pellant, he should have been given the assistance of an advocate, and since that was not given there was no reasonable opportunity to defend. The High Court has rejected this submission and we think for good reasons. The appellant was not entitled under the Rules to the assistance of an advocate during the course of the enquiry. The learned Judges were right in pointing out that all that the appellant had to do in the course of the en quiry was to defend the correctness of his assessment orders. Clear indications had been given in the charges with regard to the unusual conduct he displayed in disposing of the assessment cases and the various flaws and defaults which were apparent on the face of the assessment records themselves. The appellant was the best person to give proper explanations. The circumstances in the evidence against him were clearly put to him and he had to give his explanation. An advocate could have hardly helped him in this. It was not a case where oral evidence was recorded with reference to accounts and the petitioner required the services of a trained lawyer for crossexamining the witnesses. There was no legal complexity in the case. We do not, therefore, accede to the contention that the absence of a lawyer deprived the appellant of a reasonable opportunity to defend himself."
22. Also, in National Seeds Corpn. Ltd. v. K.V. Rama Reddy [National Seeds Corpn. Ltd. v. K.V. Rama Reddy, (2006) 11 SCC 645 :
(2007) 1 SCC (L&S) 512] , this Court laid down: (SCC p. 648, para 7) "7. The law in this country does not concede an absolute right of representation to an employee in domestic enquiries as part of his right to be heard and that there is no right to representation by somebody else unless the rules or regulation and standing orders, if any, regulating the conduct of disciplinary Page 50 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 proceedings specifically recognise such a right and provide for such representation:
see N. Kalindi v. Tata Locomotive & Engg. Co. Ltd. [N. Kalindi v. Tata Locomotive & Engg. Co. Ltd., (1960) 3 SCR 407 : AIR 1960 SC 914], Dunlop Rubber Co. (India) Ltd. v. Workmen [Dunlop Rubber Co. (India) Ltd. v. Workmen, (1965) 2 SCR 139 : AIR 1965 SC 1392],Crescent Dyes and Chemicals Ltd. v. Ram Naresh Tripathi [CrescentDyes and Chemicals Ltd. v. Ram Naresh Tripathi, (1993) 2 SCC 115 : 1993 SCC (L&S) 360] and Indian Overseas Bank v. Officers' Assn. [Indian Overseas Bank v. Officers' Assn., (2001) 9 SCC 540 : 2002 SCC (L&S) 1043] "
23. The Court then held: (National Seeds Corpn. Ltd. case [National Seeds Corpn. Ltd. v. K.V. Rama Reddy, (2006) 11 SCC 645 :
(2007) 1 SCC (L&S) 512] , SCC pp. 65051, para
10) "10. Learned counsel for the appellant Corporation has brought to our notice office memorandum dated 21112003 by which the prayer to engage a legal practitioner to act as a defence assistant was rejected. Reference was made to the Rules, though no specific reference has been made to the discretion available to be exercised in particular circumstances of a case. The same has to be noted in the background of the basis of prayer made for the purpose. The reasons indicated by the respondent for the purpose were: (a) amount alleged to have been misappropriated is Rs 63.67 lakhs, (b) a number of documents and number of witnesses are relied on by the respondent, and (c) the prayer for availing services of the retired employee has been rejected and the respondent is unable to get any assist ance to get any other able coworker. None of these factors are really relevant for the purpose of deciding as to whether he should be granted permission to engage the legal practitioner.Page 51 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022
C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 As noted earlier, he had to explain the factual position with reference to the documents sought to be utilised against him. A legal practitioner would not be in a position to assist the respondent in this regard. It has not been shown as to how a legal practitioner would be in a better position to assist the respondent so far as the documents in question are concerned. As a matter of fact, he would be in a better position to explain and throw light on the question of acceptability or otherwise and the relevance of the documents in question. The High Court [K.V. Rama Reddy v. National Seeds Corpn. Ltd., 2004 SCC OnLine Kar 654] has not considered these aspects and has been swayed by the fact that the respondent was physically handicapped person and the amount involved is very huge. As option to be assisted by another employee is given to the respondent, he was in no way prejudiced by the refusal to permit engagement of a legal practitioner. The High Court's order is, therefore, unsustainable and is set aside."
24. Given the above conspectus of case law, we are of the view that there is no right to be represented by a lawyer in the inhouse proceedings contained in Para 3 of the Revised Circular dated 172015, as it is clear that the events of wilful default as mentioned in Para 2.1.3 would only relate to the individual facts of each case. What has typically to be discovered is whether a unit has defaulted in making its payment obligations even when it has the capacity to honour the said obligations; or that it has borrowed funds which are diverted for other purposes, or siphoned off funds so that the funds have not been utilised for the specific purpose for which the finance was made available. Whether a default is intentional, deliberate, and calculated is again a question of fact which the lender may put to Page 52 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 the borrower in a showcause notice to elicit the borrower's submissions on the same. However, we are of the view that Article 19(1)(g) is attracted in the facts of the present case as the moment a person is declared to be a wilful defaulter, the impact on its fundamental right to carry on business is direct and immediate. This is for the reason that no additional facilities can be granted by any bank/financial institutions, and entrepreneurs/promoters would be barred from institutional finance for five years. Banks/financial institutions can even change the management of the wilful defaulter, and a promoter/director of a wilful defaulter cannot be made promoter or director of any other borrower company. Equally, under Section 29A of the Insolvency and Bankruptcy Code, 2016, a wilful defaulter cannot even apply to be a resolution applicant. Given these drastic consequences, it is clear that the Revised Circular, being in public interest, must be construed reasonably. This being so, and given the fact that Para 3 of the Master Circular dated 172013 permitted the borrower to make a representation within 15 days of the preliminary decision of the First Comimittee, we are of the view that first and foremost, the Committee compris ing of the Executive Director and two other senior officials, being the First Committee, after following Para 3(b) of the Revised Circular dated 1-7-2015, must give its order to the borrower as soon as it is made. The borrower can then represent against such order within a period of 15 days to the Review Committee. Such written representation can be a full representation on facts and law (if any). The Review Committee must then pass a reasoned order on such representation which must then be served on the borrower. Given the fact that the earlier Master Circular dated 172013 itself considered such steps to be reasonable, we incorporate all these steps Page 53 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 into the Revised Circular dated 172015. The impugned judgment [SBI v. Jah Developers (P) Ltd., LPA No. 113 of 2015 sub nom Punjab National Bank v. Kingfisher Airlines Ltd., 2015 SCC OnLine Del 14128 : (2016) 154 DRJ 164] [Kingfisher Airlines Ltd. v. Union of India, 2015 SCC On Line Bom 6075 : (2016) 2 Mah LJ 838] is, therefore, set aside, and the appeals are allowed in terms of our judgment. We thank the learned Amicus Curiae, Shri Parag Tripathi, for his valuable assistance to this Court."
31. In view of the above conspectus of the law and undisputed facts of this case, it is apparent that the respondent bank has failed to comply with the aforesaid mechanism provided under the Revised Master Circular as petitioners were never informed by the Identification Committee by issuing show cause notice and the notice was issued by the respondent bank to which the petitioners filed detailed reply, but the order passed by the Identification Committee recording that the petitioners have committed willful default was never provided to the petitioners. The petitioners came to know about declaring them as willful defaulter only from the website of CIBIL.
32. It emerges from the record that the copy of the order passed by the Identification Committee was never supplied to the petitioners even though written request for the same was made by the Page 54 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 petitioners. In view of the above facts and circumstances, the respondent bank while declaring the petitioners as willful defaulter has violated the provisions contained in the Revised Master Circular and has also acted in violation of principles of natural justice. As the impugned action which is penal in nature has been taken causing serious implication to the petitioners without following the basis of principles of natural justice, the impugned action of the respondent bank identifying the account of the petitioners as willful default and subsequent reporting of name of the petitioners to the RBI/CIBIL as willful defaulters are liable to be quashed and set aside.
33. In view of the foregoing reasons, the petition succeeds and is accordingly allowed. The impugned action of the respondent bank identifying the account of the petitioners as willful defaulters and subsequent reporting of the names of the petitioners to RBI/CIBIL as willful defaulters is hereby quashed and set aside and the matter is remanded back to the Identification Committee of the respondent bank to follow the procedure as prescribed in Master Circular dated 1st July, 2015 by issuing a show cause notice to the petitioners and providing opportunity to the petitioners as per Clause-3 of Page 55 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022 C/SCA/17491/2021 JUDGMENT DATED: 04/05/2022 the said circular. Such exercise by the Identification Committee and thereafter by the Review Committee shall be completed within the period of six months from the date of receipt of this order. Rule is made absolute to the aforesaid extent. No order as to costs.
(BHARGAV D. KARIA, J) ALI Page 56 of 56 Downloaded on : Sat Dec 24 16:14:21 IST 2022