Madhya Pradesh High Court
M/S Ritebanc Green Agro Solutions Pvt ... vs Central Bank Of India on 7 August, 2023
Author: Vivek Agarwal
Bench: Vivek Agarwal
IN THE HIGH COURT OF MADHYA PRADESH
AT JABALPUR
BEFORE
HON'BLE SHRI JUSTICE VIVEK AGARWAL
ON THE 7th OF AUGUST, 2023
WRIT PETITION No. 13194 of 2022
BETWEEN:-
1. M/S RITEBANC GREEN AGRO SOLUTIONS PVT LTD
THROUGH DIRECTOR MUKUL KAKKAR 801 8TH
FLOOR PARAM HOUSE OFFICE WESTERN
EXPRESS HIGHWAY SANTACRUZ (E)
(MAHARASHTRA)
2. M/S KING SIZE PROP PVT. LTD. THROUGH ITS
AUTHORISED PERSON MUKUL KAKAR 801 801 8TH
FLOOR PARAM HOUSE OFFICE WESTERN
EXPRESS HIGHWAY SANTACRUZ (E)
(MAHARASHTRA)
3. MUKUL KAKAR S/O MR AJAY KUMAR KAKAR
OCCUPATION: M/S GOEL AGRIGREEN FIELDS PVT.
LTD. R/O 126 12TH FLOOR BELMONTE TOWERS
MOGAL LANE MAHIM WEST MUMBAI
(MAHARASHTRA)
.....PETITIONERS
(BY SHRI KISHORE SHRIVASTAVA SR. ADVOCATE ASSISTED BY SHRI
SHASHANK VERMA AND MS. ADITI SHRIVASTAVA - ADVOCATE )
AND
W.P. No. 13194 of 2022
2
1. CENTRAL BANK OF INDIA THR ITS BRANCH
INCHARGE ARERA HILLS BRANCH 9 ARERA HILLS II
FLOOR BHOPAL MP (MADHYA PRADESH)
2. CENTRAL BANK OF INDIA THORUGH ITS
COMMITTEE FOR IDENTIFICATION AND
CLASSIFICATION OF WILLFUL DEFAULTERS HEAD
OFFICE CHANDRAMUKHI BUILDING NARIMAN
POINT MAHARASHTRA INDIA INDIA
(MAHARASHTRA)
3. CENTRAL BANK THROUGH ITS REVIEW
COMMITTEE FOR IDENTIFICATION AND
CLASSIFICATION OF WILLFUL DEFAULTERS HEAD
OFFICE CHANDRAMUKHI BUILDING NARIMAN
POINT MAHARASHTRA INDIA (MAHARASHTRA)
.....RESPONDENTS
(RESPONDENT No. 1 BY SHRI ABHINAV SUNIL KHARDIKAR - ADVOCATE )
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Reserved on : 19.07.2023
Delivered on : 07 .08.2023
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This petition having been heard and reserved for order, coming
on for pronouncement this day, the Court pronounced the following:
ORDER
This writ petition is filed being aggrieved of the order passed by the Review Committee constituted in terms of the guidelines of the Reserve Bank of India declaring petitioners as wilful defaulter. W.P. No. 13194 of 2022 3
2. Petitioners' contention is that petitioners No.1 & 2 are the companies incorporated under the Indian Companies Act, 1956. Petitioner No.3 is the Guarantor, director and Shareholder of M/s Goel Agrigreen Fields Pvt. Ltd, the borrower company which had obtained loan from the respondent No.3 Bank. It is submitted that respondent No.3 is a Nationalized Bank and alongwith other banks namely State Bank of India, Central Bank of India, Punjab National Bank and Canara Bank formed a consortium and sanctioned credit facility. State bank of India was the lead bank of the said consortium.
3. Shri Kishore Shrivastava, learned Senior Advocate for the petitioners though submits that license which was issued in favour of M/s Goel Agrigreen Fields Pvt. Ltd for manufacture of absolute alcohol. Terms of that license expired and therefore, industry could not be established in time, resulting in some defaults but from the pleadings it is evident that a writ petition in the nature of Public Interest Litigation bearing W.P. No. 18785 of 2015 (PIL) was filed against M/s Goel Agrigreen Fields Pvt. Ltd, which will be called "borrower" hereinafter. In that PIL several allegations were made in regard to acquisition of land where unit was to be established and in that PIL lenders instead of supporting the borrowing company supported the petitioner and stopped disbursement of loan amount, as a W.P. No. 13194 of 2022 4 result of which establishment of distillery got delayed leading to cost and time over runs.
4. This writ petition W.P. No. 18785 of 2015 was withdrawn vide order dated 18.03.2016 passed by a Division Bench of this Court with liberty to seek review of the orders dated 29.10.2014 passed in W.P. No. 12209/2014.
5. W.P. No. 12209/2014 was dismissed on 29.10.2014 when the same counsel who was appearing in W.P.No. 18785/2015 had pleaded no instructions.
6. Cost was imposed on these petitioners in the PIL for concealment of facts, despite request of counsel for respondent Nos.15-16 to not to impose exemplary cost because the petitioner would then be advised to take up the matter in appeal which again will affect the business of the said respondents as they may have to pursue the matter not only before different authorities but also make it difficult to convenience their financiers to continue to offer finance for running of their business.
7. There is no order of Review filed on record in terms of the liberty which was sought by the counsel while W.P. No. 18785/2015 was disposed of.
8. Fact is that the borrower intended to establish a green base distillery and bottling plant at Kesla. It availed credit facilities from W.P. No. 13194 of 2022 5 consortium of four banks. Credit facilities to the tune of Rs.125 Crores was extended by the consortium in favour of the borrower and corporate guarantees were provided by petitioners No. 1 & 2.
9. Petitioners No. 1 & 2 are the companies incorporated under the Indian Companies Act, 1956. At the cost of repetition, petitioner No.3 is the alleged Guarantor, Director and Shareholder of M/s Goel Agrigreen Fields Pvt. Ltd i.e. the Borrower Company.
10. It is submitted that term loan facility was to be provided by respondent No.3 Central bank of India and vide sanction letter dated 17.07.2013, they had sanctioned Rs.40 Crores towards the term loan. Similar facility of term loan was also provided by other Banks namely the Punjab National Bank (Rs.20 Crores), Canara Bank (Rs.15 Crores).
11. Petitioners' contention is that the amount of financial assistance was to be disbursed in installments and total project cost was Rs.180 Crores out of which Rs.125 Crores was the revised estimate of debt and Rs.55 Crores was the revised estimate towards equity. Debt - Equity ratio was 2.33 and tenure of loan was 10 years. First disbursement of term loan was made in the month of September, 2013. It is submitted that since disbursement of financial assistance was not released on time as per the terms of the sanction, therefore, there were delays and cost over-runs.
W.P. No. 13194 of 20226
12. It is submitted that due to the PIL which was filed i.e. W.P. No. 18785 of 2015, considerable time of the petitioner was consumed in frivolous litigation, though, the said PIL was ultimately dismissed vide order dated 18.03.2016. Members of the consortium banks were also party to the PIL. It is submitted that despite various hardships borrowers serviced the interest but due to intervening circumstances project collapsed mainly due to delayed disbursement. It is submitted that since, borrowers' project, never took of, no income was generated by the borrower company from the unit which was to be established and that became the reason for default in repayment.
13. It is submitted that the funds disbursed by the Bank were properly utilized. There was a condition that amount in installments will be disbursed by the concerned lender to the Company entrusted with the work of erection and commissioning of the project. Thus, no amount ever came to the account of the borrower directly, therefore, the allegations which have been made subsequently in the show-cause notices and the final order are half baked truth which have nothing to do with the aspect of wilfulness on the part of the borrower as well as the guarantors calling for such harsh action like declaration of the petitioners as willful defaulters.
14. Thus, it is submitted that in nutshell two reasons resulted in borrower company being non-operational, namely delay in extension W.P. No. 13194 of 2022 7 of credit and non-extension of Letter of Intent issued by the State Government.
15. It is pointed out that petitioner No.1 M/s Ritebanc Agri Tech Solutions Pvt. Ltd. is a separate entity to that of petitioner No.1.This company was entrusted with the responsibility of building of the distillation plant and part of loan was directly disbursed in favour of M/s RiteBanc Agri Tech Solutions Pvt. Ltd.
16. It is submitted that first show-cause notice was issued on 29.03.2017 mentioning therein that in the minutes of meeting held by circulation to examine and identify defaulting borrower accounts as willful defaulter Stage-I, committee had examined the accounts of borrower and found it to be the "Wilful Defaulter" on the grounds which are mentioned in the notice dated 29.03.2017 which is filed by the respondents with an application under Order 8 Rule 1(A), CPC as Document D-1.
17. It is further submitted that as per the requirements of the guidelines of the Reserve bank of India as contained in Annexure P-17 dated 1st July, 2015, reference to the Master Circular No. DBR.No.CID.BC.57/20.16.003/2014-15 dated July 1, 2014 is made but procedure prescribed has not been followed by the respondent authorities.
W.P. No. 13194 of 20228
18. It is pointed out that definition of 'Wilful Default' is given in para 2.1.3 of the aforesaid circular which reads as under:
"2.1.3 Wilful Default: A 'wilful 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 utilized 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 default in meeting its payment/repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilized 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 by him or it for the purpose of securing the term loan with the knowledge of the bank/lender."
19. Thus, reading definition of "wilful default", it is submitted by learned Senior Advocate that none of the acts attributed to the petitioners fall within the definition of 'wilful default'.
20. Reading from the reasons and justifications in brief to identify them as wilful defaulter as mentioned in document Annexure D-1 dated 29.03.2017 it is mentioned as under:
W.P. No. 13194 of 20229
"The party was sanctioned term loan of Rs.4000.00 Lakhs. Outstanding is FB Rs.3659.00 lakhs. M/s Goel Agrigreen Fields Pvt. Ltd. Company was sanctioned a term loan to set up a Green Field 120 Kiloliters Per Day (KLPD) grain based Extra Neutral Alcohol (ENA) distillery Unit.
Company approach to banks ..................... Inspection was conducted by Branch Officials on
21.10.2016. (Copy of inspection report enclosed) and observed that:-
1. There was no Industrial activities were going on.
2. No staff/Labour was seen at the site.
3. There was one Mr. Sunil Mishra Liaison Officer and Mr. Samim Khan reported that no work done for more than 12 months for want of funds.
4. Project was lying in incomplete condition.
5. Civil work was completed about 40%-50%.
6. As regards with P & M, there were few vessels and packed machinery kept in the sheds.
7. Tank for per-treatment and liquidation section and fermentation section, machinery for distillation, spent filtration, spent wash plant, feed dryer, fermentation bottling were seen at the site.
8. Other transfer and related electrical assembly items which were one boiler placed on the foundation, Brick making plant, RMC Plant, High Mast Towers and lighting systems, Weigh Bridge system, one tractor with trailer and one hauling vehicle and various fabrication work machinery i.e. lathe machine, building machine and little amount of Raw material - SS Plates and Vassels loops were seen at site.
The above mentioned details and observations given in inspection report shows that company had taken disbursement for the construction of factory building and installation of machinery was not done at site. The contract was awarded to the sister concern of the Company and money was disbursed then for execution W.P. No. 13194 of 2022 10 of contract. So it is very clear cut case of siphoning of funds."
21. Reading this, it is submitted that this decision of the Committee headed by the Executive Director and consisting of three General Managers was never communicated to the petitioners by the Committee. Vide Annexure R-1, dated 27.04.2017, is a communication by one Assistant General Manager. Thus, it is submitted by Shri Kishore Shrivastava that Assistant General Manager assumed the role of the committee whereas communication should have been made by the Committee because there could not have been any delegation of authority in favour of the Assistant General Manager. It is submitted that even otherwise, it is not mentioned in the communication (Annexure R-1) dated 27th April 2017, that it was made on behalf of the committee which was constituted to examine and identify the borrower's account as wilful defaulter.
22. It is submitted that there is nothing called Stage-I under the RBI Scheme and therefore, it is not evident that what did the respondents mean by Stage-I.
23. It is submitted that a reply was filed by Shri Mukul Kakkar as contained in Annexure R-2 and thereafter, another communication was made by the Chief Manager and not by the Committee informing that their request for withdrawal of the notice and providing an W.P. No. 13194 of 2022 11 opportunity of being heard is forwarded to our higher authorities for their consideration. It is submitted that, thereafter, there was complete silence for a period of about four years when documents Annexure D- 2 filed by the respondents with an application under Order 8 Rule 1(A) was received wherein minutes of the meeting of the Grievance Redressal Committee to identify borrower account for declaration of wilful defaulter (Stage-II) was sent. In this Stage-II notice there was an addition to the earlier observation mentioned in Stage-I notice in regard to diversion of funds by purchase of land at Silvasa. It is mentioned that as per un-audited balance sheet as on 31.03.2015of Ritebanc Agritech Solution Pvt. Ltd. the Company acquired land at Silvasa amounting to Rs.15.34 Crore which is a fixed asset and should have been financed out of long term source by the company, but no long term source is found to have been raised for this purpose. There is an increase in advance from customers by Rs.14.49 Crores which is an important source for the Company to invest in the land. In crease in advance by customers is mainly from M/s Goel Agrigreen Fields Pvt. Ltd. Thus, the bank funds have been used by the Company for purchase of land at Silvasa. The share holding of Mr. Mukul Kakkar is 84%, thus the funds have ultimately being siphoned of by Shri Mukul Kakkar of M/s Goel Agrigreen Fields Pvt. Ltd. through its EPC (Equipment Procurement Company) and other companies where the W.P. No. 13194 of 2022 12 promotor Mr. Mukul Kakkal is involved clearly indicating that the funds advanced by the Bank were not fully utilized and not returned to the Bank. It also made a note that some of the machinery/equipment have not been found at site by the valuer M/s Manoj Gupta and Associates indicating that the Company removed or disposed of movable fixed assets without the knowledge of the Bank.
24. Reading from this Stage-II notice it is submitted that firstly this notice does not fulfill the requirement of wilful default and secondly again a communication was made by the Senior Regional Manager and not by the Committee seeking reply/communication in writing within 15 days from the date of receipt of the notice, failing which it was informed that "we shall proceed to treat you as wilful defaulters and accordingly take steps to inform the RBI in this regard". It is submitted that since Sr. Regional Manager is not the member of the committee, he represented the Bank and not the committee therefore, that notice could not have been construed to be any action on the part of the Committee.
25. It is pointed out that a detailed reply was furnished to the concerned as Contained in Annexure P-12 and specific request was made to provide them with a copy of the TRA Account and also seeking further information in that behalf. It was also pointed out that, the land purchased at Silvasa by the Company is a fixed asset acquired W.P. No. 13194 of 2022 13 by the Company for its business purpose and was acquired out of funds available to it for its business purposes and excluded advances received from M/s Goel Agrigreen Fields Pvt. Ltd.
26. It is also pointed out that RATSPL financed the purchase of the land at Silvasa from a mix of its own share capital, earned profits, loans from Directors, Project and Business related receipt from other project/business/company (i.e. excluding M/s Goel Agrigreen Fields Pvt. Ltd.) in this regard a certificate was also enclosed as Annexure-2. It was also pointed out that since the Banks defaulted and failed to disburse the loan amount as per the agreement and the matter is pending before the Debt Recovery Tribunal, where the borrower is confident of having a ruling in its favour, request was made to refrain from issuing the notice under reply till the decision of the DRT. It is also pointed out that the interest serving track record of the borrower be taken into consideration.
27. It is submitted that after receiving this reply dated 01.09.2021, a notice was issued on 21.03.2022 (Annexure P-13) asking the parties as to whether they wish to avail personal hearing or not. It was pointed out that in reply to the notice given by one of the Borrower namely Mr. Mukul Mahendru who sought personal hearing, competent authority considered the request of personal hearing and gave appointment for personal hearing to all W.P. No. 13194 of 2022 14 proprietors/partners/directors/guarantors and the personal hearing was fixed on 07.04.2022 at 11:50 a.m. It is submitted that Mr. Mukul Kakkar had informed that personal hearing be given after 20th April but his request was not considered and ultimately decision as contained in Annexure R-7 was taken declaring the petitioners as wilful defaulters.
28. Shri Kishore Shrivastava further submits that show-cause notice dated 29.04.2017 was served only on petitioner No.3 and not on petitioners No. 1 & 2, therefore, if the impugned order dated 07.04.2022 emanates from the said first show-cause notice then the entire process is vitiated.
29. There is no allegation of Silvasa's land in the first show- cause notice. At the cost of repetition, it is submitted that first show- cause notice was issued by the Assistant General Manager and not by the Committee. First show-cause notice merely reprinted Clause (B) & (C) of definition of wilful defaulter provided in the RBI Circular. Notice did not contain any specific allegations as to how the petitioner siphoned of the money or the funds but is not repaying the same.
30. It is submitted that due to long lapse of time, there was bona fide presumption of first notice being withdrawn. There are several illegalities in the order dated 27.07.2021, in as much as it did not consider the reply of the petitioner No.3 dated 15.02.2017. No W.P. No. 13194 of 2022 15 opportunity of personal hearing was provided. Copy of the order dated 07.04.2022 was not served on the petitioners and it is not signed by all the Committee members.
31. It is submitted that if a particular thing is to be done in a particular manner then it is to be performed in that manner or not at all. In support of this contention, reliance is placed on the judgment of Hon'ble the Supreme Court in the case of Bhavnagar University Vs. Palitana Sugar Mills Pvt. Ltd. & Ors. AIR 2003 (SC) 511, Competent Authority Vs. Barangore Jute Factory & ors. (2005)13 SCC 477 Para 5(C) and the case of Cherukuri Mani Vs. Chief Secretary Government of Andhra Pradesh & Ors. (2015)13 SCC 722 para 14 attention is drawn.
32. It is submitted that "siphoning" as defined in the dictionary makes it clear that no case of "siphoning off" is made out. It is submitted that the decision is not an independent decision as it is influenced by the recommendations. There is no mention of diversion of funds in the first show-cause notice. Reliance is placed on the Judgment of Hon'ble Supreme Court in the case of M/s Gorkha Security Services Ltd. Vs. Government (NCT) of Delhi & ors. (2014)9 SCC 105, where reading para 21 it is pointed out that the Fundamental purpose behind serving of show-cause notice is to make the noticee understand the precise case setup against him which he/she W.P. No. 13194 of 2022 16 has to meet. This would required the statement of imputations detailing out the alleged breaches and defaults 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. Reading from this judgment it is pointed out that no such thing is mentioned int he first notice.
33. Shri Kishore Shrivastava submits that declaring somebody as a wilful defaulter is to declare his Civil Death or more. If decision is influenced by somebodies opinion then it is vitiated. It is submitted that use of words, "hereby approved" means that there was non- application of mind. Reliance is placed on the judgment of Supreme Court in the case of Bahadur Singh Lakkhubai Gohil Vs. Jagdishbhai M. Kamalia & Ors. (2004)2 SCC 65. Placing reliance on Para -26 of the said judgment it is submitted that, it is held by the Supreme Court that "It is also well-settled that if any decision is taken by a statutory authority at the behest or on the suggestion of a person who has no statutory role to play, the same would be ultra vires. (See Commissioner of Police, Bombay v. Gordhandas Bhanji, AIR (1952) SC 16 and Mohinder Singh Gill and Another v. The Chief Election Commissioner, New Delhi and Others, [1978] l SCC 405".
34. It is submitted that, RBI Guidelines speaks of a committee and there is no reference to the Bank. Therefore, no suggestion could W.P. No. 13194 of 2022 17 have been given by the Bank. Referring to Section 35 A(1) of the Banking Regulation Act, 1949, it is submitted that there is a specific provision prescribing power of the Reserve Bank to give directions. It is submitted that, it is mentioned in Section 35(A)(1) that directions so issued to the Banking Company generally or to any banking company in particular, it may, from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions.
35. It is submitted that directions of the RBI is to be followed in letter and spirit. Reliance is placed on the judgment of Supreme Court in the case of Central Bank of India Vs. Ravindra & Ors. (2002)1 SCC 367, where reading para 53 & 55(5) it is pointed out that the direction issued by the RBI in terms of the power conferred by Section 21 & 35(A) of the Banking Regulation Act, 1949 is coupled with duty to act. The directions of the Reserve Bank of India are binding directions and have statutory force.
36. It is submitted that the committee did not issued any notice in terms of the Clause 2.5(H) of the RBI Circular which provides that it would be imperative on the part of 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 W.P. No. 13194 of 2022 18 solitary or isolated instance is not made the basis for imposing the penal action.
37. Reading from the above, it is submitted that there was no cause for declaring the petitioners as wilful defaulter on a single isolated instance.
38. Pointing out from the aforesaid, it is submitted that only committee was authorized to issue a show-cause notice and not anybody else. The committee never authorized the Bank to issue show cause notice and there is no provision in RBI guidelines authorizing the committee to delegate. Thus, it is submitted that once, there is no power to delegate then it cannot be sub-delegated in terms of the judgment of Supreme Court in the case of Marathwada University Vs. Seshrao Balwant Rao Chavan (1989)3 SCC 132, (para-20) where it is held that delegatius non potest delegare, a statutory power must be exercised only by the body or officer in whom it has been confided, unless sub-delegation of the power is authorized by express words or necessary implication.
39. Similarly reliance is placed on the judgment of Hon'ble the Supreme Court in the case of Director General ESI & another Vs. T. Abdul Razak (1996) 4 SCC 708, where reference is made to para 14 of the Judgment wherein it is held that a statutory power must be exercised only by the body or officer in whom it has been confided, W.P. No. 13194 of 2022 19 unless sub-delegation of the power is authorized by express words or necessary implication.
40. It is submitted that Bank has no power to issue a show-cause notice and therefore, show-cause notice will be void being not issued by the Committee. It will be void for not mentioning the word 'wilful default'. There is no finding that money is available but not being paid. Notice to the borrower and guarantor cannot be one and same. It has to be as per individual responsibility. No case is set-up qua guarantor, whole case is set-up against the borrower. There is no averment that guarantors refused to pay their share of guarantee money. Referring Clause 3(B) of the RBI Circular, it is submitted that personal hearing was mandatory. Placing reliance on the judgment of Supreme Court in the case of Mahant Ramdas Vs. Ganga Das AIR 1961 SC 882 para 5 it is submitted that when one of the addressees namely Mukul A. Kakkar had informed that hearing be made after 20th then, the period could have been extended . It is submitted that committee did not even consider this request for extension. It could have been different, if the committee would have considered and rejected it on merits, since it has not considered, judgement in the case of Mahant Ramdas (supra) will have direct application to the facts of the case.
41. It is submitted that matter was directly placed before the Review Committee on 07.04.2022 without going before the First W.P. No. 13194 of 2022 20 Committee. There is no finding that the default is intentional, deliberate and calculated. Therefore, in terms of the judgment of Ravis Exports and others vs. Union of India by High court of Kerala at Ernakulam report in 2022 SCC Online Ker 2488; in para 17 it is held that the order of the Review Committee must also be given to the borrower and the COE must consider explanation submitted by the borrower and give reasons for recording the fact of wilful default. It is further held that the identification of wilful default should be made keeping in view of the track record of the borrowers and conclusion should not be based on isolated transaction/incident. Reliance is also placed on the judgment of Calcutta High Court in the case of Atlantic Projects Ltd. & Ors. Vs. Allahabad Bank & Ors. 2019 SCC Online Cal 611; wherein, in para 31 Calcutta High Court has observed as under:
"In my understanding, the words used in Clause 3(b) of the Master Circular on Wilful Default dated July 1, 2015 are such that, they do not allow the Identification Committee to delegate any of their functions to any other authority. If the functions noted above cannot be delegated, in my view, the requirement of issuance of the show-cause notice cannot also be delegated. That requirement, must be discharged by the Identification Committee. Preparation of the minutes of its decision on the materials first placed before the Identification Committee in terms of the first portion of Clause 3(b) of the Master Circular on Wilful Defaulters dated July 1, 2015 will not permit the Identification Committee to delegate its functions of issuance of the show-cause notice based upon such minutes or its conclusion that, an event of wilful default has occurred on the strength W.P. No. 13194 of 2022 21 of the materials placed by the bank before it. Clause 3(b) requires application of mind by the Identification Committee at all stages."
42. It is submitted that consideration is only qua Mukul Mahendru and there is no consideration for petitioner No.1, 2 & 3. The decision bears signatures of Mr. M.V. Rao, M.D. & CEO and Chairman of the Committee, it does not bears the signature of the other members of the Committee and therefore, the decision in regard to Mukul Mahendru holding 100% equity will not bind even Mukul Mahendru for which reliance is placed on the judgment of Hon'ble Supreme Court in the case of Heavy Engineering Mazdoor Union Vs. State of Bihar & Ors. AIR 1970 SC 82, where reading para 4 it is submitted that "A person is said to be authorized or to have an authority when he is in such a position that he can act in a certain manner without incurring liability, to which he would be exposed but for the authority, or, so as to produce the same effect as if the person granting the authority had for himself done the act".
43. Thus, it is submitted, whole action of the respondent is vitiated and is liable to be set-aside. Reliance is also placed on the judgment of Bombay High Court in the case of Kanchan Motors & Others Vs. Bank of India & Ors. 2018 SCC Online Bom. 1761 where relying on paragraph 21 it is submitted that absence of reasons in the order of Review Committee also amounts to denial of justice. W.P. No. 13194 of 2022 22 Reliance is also placed on the judgment of Hon'ble the Supreme Court in the case of State Bank of India Vs. Jah Developers Private Ltd. & Ors. (2019)6 SCC 787, where relying on para 24, it is submitted that the Committee comprising of the Executive director and two others senior officials being the first committee, after following para-3(B) of the revised circular dated 01.07.2015, must give its order to the borrower as soon it is made. The borrower can represent against such order within a period of 15 days to the Review Committee. It is directed that the earlier master circular dated 01.07.2013, itself, considered such steps to be reasonable and therefore all these steps were incorporated in the revised circular dated 01.07.2015. Thus, it is submitted that once there is incorporation of the earlier master circular dated 01.07.2013, in the revised circular, then, they were required to be followed in letter and spirit.
44. Shri Abinav Kherdikar, learned counsel for respondent No.1 submits that this issue of notice by the committee is already considered by the High Court of Calcutta, by a Bench headed by Justice Dipankar Datta, as he then was, and now a Judge of Hon'ble the Supreme Court in the case of Union Bank of India & Ors. Vs. Sudhir Kumar Patodia & Ors. 2020 SCC Online Cal 3259 wherein para 17 to 20 it is held as under:
W.P. No. 13194 of 202223
"17. Having regard to the scheme enshrined in the master circular as well as the object and purpose which is sought to be achieved by enforcement of the provisions thereof, in our considered view, the omission of the appellant No. 2 to refer to the decision taken by the committee neither invalidates the show- cause notice nor is it bad only because the master circular does not expressly provide for delegation of power to issue the show-cause notice to any other officer of the bank.
18. There can be no doubt that the master circular has been introduced to check siphoning of public funds by borrowers who, in the opinion of the lender bank, despite having resources to discharge their debt, neglect or omit to do so with a view to defraud the lender. While it is true that declaring a borrower as a willful defaulter may result in evil/civil consequences, there are adequate safeguards provided in the master circular which are conceived in the interest of the borrower.
19. In paragraph 3 of the master circular, one would find a reference to the pronoun ‘it’. Such pronoun ordinarily has to be read keeping in mind the noun preceding it, i.e., the Committee. The learned Judge literally read the provision and held that the identification committee is the sole repository of power to issue a show-cause notice. As can be discerned from the master circular, it is the primary duty of the identification committee to identify willful defaulters and power in that behalf has been conferred on it. If indeed the power of the identification committee to identify and then declare a borrower as a willful defaulter is delegated to some officer, such action would incur the wrath of the Court and not withstand judicial scrutiny.
20. However, in the instant case, the power has been exercised by the identification committee to prima facie identify the company as a willful defaulter and such committee also retained the power to consider the objection that might be raised by the company and/or its directors as to why it/they should not be declared as willful defaulters, prior to a final order being made in W.P. No. 13194 of 2022 24 this behalf in accordance with the master circular by the review committee. What the identification committee has delegated to the regional office of the appellant No. 1 is the issuance of the show-cause notice indicating the grounds on which the identification committee, prima facie, is of the view that there has been an occasion of willful default on the part of the company and/or its directors."
45. Thus, this issue of issuance of notice stands concluded. Similarly Hon'ble Supreme Court in the case of L&T Housing Finance Ltd. Vs. Trishul Developers & Ors. MANU/SC/0793/2020 has held as under:
"19. In the facts and circumstances, when the action has been taken by the competent authority as per the procedure prescribed by law and the person affected has a knowledge leaving no ambiguity or confusion in initiating proceedings under the provisions of the SARFAESI Act by the secured creditor, in our considered view, such action taken thereof cannot be held to be bad in law merely on raising a trivial objection which has no legs to stand unless the person is able to show any substantial prejudice being caused on account of the procedural lapse as prescribed under the Act or the rules framed there under still with a caveat that it always depends upon the facts of each case to decipher the nature of the procedural lapse being complained of and the resultant prejudice if any, being caused and there cannot be a straitjacket formula which can be uniformly followed in all the transactions."
46. To point out that nature of the procedural lapse being complained of and the resultant prejudice, if any, being caused and there cannot be a straitjacket formula which can be uniformly followed in all the transactions.
W.P. No. 13194 of 202225
47. It is submitted that master circular issued by the RBI on 1st July, 2013 as revised on 1st July, 2014 and thereafter on 1st July, 2015 provides for mechanism for identification and declaration of wilful defaulters. Procedure as laid down in the circular was followed by the committee, so constituted, decision was taken by the committee and was only communicated to the concerned by the Bank.
48. The definition of wilful default is provide under Clause 13 of the Master Circular which reads as under:
"2.1.3 Wilful Default: A "wilful 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 utilized 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 utilized 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 by him or it for the purpose of securing a term loan without the knowledge of the bank/lender."W.P. No. 13194 of 2022 26
49. Similarly, pointed out that diversion of funds is explained in clause 2.2.1 and siphoning of funds is explained in Clause 2.2.2 of the Master circular which reads as under:
"2.2 Diversion and siphoning of funds:
2.2.1 Diversion of funds : The terms “diversion of funds†referred to at para 2.1.3(b) above, would be construed to include any one of the under noted occurrences:
(a) utilization of short-term working capital funds for long-term purposes not in conformity with the terms of sanction;
(b) deploying borrowed funds for purposes / activities or creation of assets other than those for which the loan was sanctioned;
(c) transferring borrowed funds to the subsidiaries / Group companies or other corporates by whatever modalities;
(d) routing of funds through any bank other than the lender bank or members of consortium without prior permission of the lender;
(e) investment in other companies by way of acquiring equities / debt instruments without approval of lenders;
(f) shortfall in deployment of funds vis-Ã -vis the amounts disbursed / drawn and the difference not being accounted for.
2.2.2 Siphoning of funds: The term 'Siphoning of funds' referred to at para 2.1.3(c) above, should be construed to occur if any funds borrowed from banks / FIs are utilized for purposes unrelated to the operations of the borrower, to the detriment of the financial health of the entity or of the lender. The decision as to whether a particular instance amounts to siphoning of funds would have to be a judgement of the lenders based on objective facts and circumstances of the case."
W.P. No. 13194 of 202227
50. Clause 3 of the Master Circular provides for mechanism for identification of wilful defaulters, and the mechanism provided is as under:
"3. Mechanism for identification of Wilful Defaulters:
The transparent mechanism referred to in paragraph 2.5 above should generally include the following:
(a) The evidence of wilful default on the part of the borrowing company and its promoter/ whole-time director at the relevant time should be examined by a Committee headed by an Executive Director and consisting of two other senior officers of the rank of GM/DGM.
(b) If the Committee concludes that an event of wilful default has occurred, it shall issue a Show Cause Notice to the concerned borrower and the promoter/ whole-time director and call for their submissions and after considering their submissions issue an order recording the fact of wilful default and the reasons for the same. An opportunity should be given to the borrower and the promoter/whole-time 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 & the Chief Executive Officer/CEOs and consisting, in addition, to two independent directors/non-executive directior 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 wilful defaulter, then the Review Committee need not be set up to review such decisions.
(d) As regard a non-promoter/non-whole time director, it should be kept in mind that Section 2(60) of the W.P. No. 13194 of 2022 28 Companies Act, 2013 defines an officer who is in default to mean only the following categories of directors:
(i) Whole-time director
(ii) where there is no key managerial personnel, such director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified;
(iii) every director, in respect of a contravention of any of the provisions of Companies Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings and who has not objected to the same, or where such contravention had taken place with his consent or connivance. Therefore, except in very rare cases, a non-whole time director should not be considered as a wilful defaulter unless it is conclusively established that:
I. he was aware of the fact of wilful default by the borrower by virtue of any proceedings recorded in the Minutes of meeting of the Board or a Committee of the Board and has not recorded his objection to the same in the Minutes; or, II. the wilful default had taken place with his consent or connivance. the above exception will however not apply to a promoter director even if not a whole time director.
(iv) As a one-time measure, Banks/FIs, while reporting details of wilful defaulters to the Credit Information Companies may thus remove the names of non-whole time director (nominee directors/independent directors) in respect of whom they already do not have information about their complicity in the default/wilful default of the borrowing company. However, the names of promoter directors, even if not whole time 11 directors, on the board of the wilful defaulting companies cannot be removed from the existing list of wilful defaulters.W.P. No. 13194 of 2022 29
(e) A similar process as detailed in sub paras (a) to (c) above should be followed when identifying a non-
promoter/non-whole time director as a wilful defaulter."
51. Thus, it is submitted that the procedure adopted by the Committee for identifications and declaration of M/s Goel Agrigreen Fields Private Ltd. borrower and Mr. Mukul Kakkar and Mr. Mukul Mahendru (Guarantors) and M/s Ritebanc Green Agro Solutions Pvt. Ltd., Anhita Financial Services Bombay Pvt. Ltd. and Kingsize Property Pvt. Ltd. (corporate Guarantor) as wilful defaulters, cannot be faulted with.
52. The committee consisting of Executive Director and three General Managers had drawn minutes dated 29.03.2017 and resolved that there is evidence of wilful default. Thereafter, show cause notice was issued to the borrower and Mr. Mukul Ajay Kumar Kakkar (Director) and Mr. Mukul Mahendru on their respective addresses asking them to submit their reply, failing which committee will proceed to treat the petitioners as wilful defaulters and take steps to inform the RBI in this regard. Thereafter, petitioner No.3 submitted his reply to show-cause notice on 15.05.2017. Reply was duly considered and was replied vide letter dated 25.05.2017 (Annexure D-4).
53. On 27.07.2017 committee had passed the order recording reasons for occurrence of wilful default. Copy of the minutes of the W.P. No. 13194 of 2022 30 meeting of the committee are Document D-6 (Document D-2 to the application for taking document on record I.A. No. 10098/2022 filed on 26.07.2022). Show-cause notice was issued on 13.08.2021 and then Mr. Mukul Mahendru submitted his reply on 19.08.2021 to the show- cause notice dated 13.08.2021.Notice dated 21.03.2022 was issued to the borrower, Mr. Mukul Kakkar, Mr. Mukul Mahendru, M/s Ritebanc Green Agro Solutions Pvt. Ltd. , Anhita Financial Services Bombay Pvt. Ltd. and Kingsize Property Pvt. Ltd. and informed them that the opportunity of personal hearing will be granted on 07.04.2022. Venue was also informed. They were also given option to appear through Video Conference. It was also mentioned that no adjournment will be granted. Petitioner vide E-mail sought adjournment.
54. It is pointed out that concerned E-mail is dated 05.04.2022 at 11:49 p.m. as enclosed by petitioners as Annexure P-14 to the writ petition whereas in the notice for personal hearing it is mentioned that "Please let us have your confirmation by 04.04.2022 latest by 04:00 p.m. positively at our E-mail ID [email protected] and mobile No. 7024115025. Thus, any communication received after the deadline and due date was not required to be taken into consideration, therefore, judgement of Hon'ble Supreme Court to which reliance is placed by the counsel for the petitioners in the case of Mahant Ramdas Vs. Ganga Das (supra) is of no assistance. If communication W.P. No. 13194 of 2022 31 would have been made in time, then authorities would have been obliged to consider the request not otherwise.
55. It is pointed out that the Review committee vide minutes of meeting dated 07.04.2022 after considering the averments of Mr. Mukul Mahendru confirm and declare the parties as wilful defaulter as is evident from minutes of the meeting (Annexure R-7 to the reply). The Assistant General Manager vide communication dated 09.05.2022 informed the principal borrowers, directors, guarantors that they are declared as wilful defaulter and accordingly copy of this was furnished to RBI and credit information companies. There is no shortcoming or illegality in the said procedure and therefore, the impugned order does not call for any interference.
56. After hearing learned counsel for the parties following issues emerge for consideration, namely:-
(i) Whether the petitioners can be said to be wilful defaulters in terms of the definition of 'wilful defaulter' given in Clause 2.1.3 of the Master Circular issued by the Reserve Bank of India?
(ii) Whether petitioners are guilty of 'diversion and siphoning of funds' as defined in Clause 2.2.1 and 2.2.2 of the Master Circular issued by the Reserve Bank of India?W.P. No. 13194 of 2022 32
(iii) Whether the respondents committed any error in following the mechanism for identification of wilful defaulter as given in Clause 2.5 of the master circular issued by the Reserve Bank of India?
(iv) Whether issuance of notices by the Officers of the Bank and not by the Committee is a fault which rendered the whole proceeding to be null and void?
(v) Whether on the basis of the single incident Guarantors without asking them to pay the dues can be held to be wilful defaulters calling for action as has been taken vide impugned decision communicated vide order dated 02.05.2022.
57. Definition of 'Wilful Defaulter' as given in Clause 2.1.3 and as extracted above has basic ingredients that Unit has defaulted in meeting its payment/repayment obligations to the lender despite capacity to honour said obligation or has not utilized the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes, and/or has siphoned of the funds so that the funds have not been utilized for the specific purpose for which finance was availed of and/or has disposed of or removed the movable fixed assets or immovable property given for the purpose of securing a term loan.
58. 'Diversion of Funds' as defined in Clause 2.2.1 includes utilization of short terms working capital funds for long term purposes W.P. No. 13194 of 2022 33 not in conformity with the terms of sanction and deployment of borrowed funds for creation of assets other than those for which the loan was sanctioned and/or transferring borrowed funds to the subsidiaries/group companies for other corporate by whatever moderaties including short fall in deployment of funds viz a viz the amount disbursed.
59. Clause 2.2.2 defines siphoning of funds and says that Sub- Clause C of Clause 2.1.3 will be construed as siphoning of funds, any fund borrowed from Banks/Financial Institutions are utilized for purposes unrelated to the operations to the borrowers to the detriment of the Financial help of the entity or of the lander.
60. It is left to the judgment of the lenders based on objective facts and circumstances of the case to arrived at a decision as to whether the instances mentioned in the Master Circular amounts to siphoning of funds or not.
61. Clause 2.6 of the master circular provides that guarantors/sureties can also be declared as wilful defaulter taking into account Section 128 of the Indian Contract Act. Section 128 of the Act provides for Surety's Liabilities and it is provided that the liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.
W.P. No. 13194 of 202234
62. This is the ratio of the law in Kailash Nath Agrawal Vs. Pardeshiya Industrial and Investment Corporation of U.P. Ltd. (2003) 4 SCC 305. No material is brought to the notice of this Court to point out that contract provides for something which is not covered in terms of Section 128 of the Indian Contract Act. There are neither any specific pleadings nor any argument is made in this behalf that the liability of the surety is not co-extensive with that of the principal debtor. Therefore, the first argument that guarantors could not have been sued or no liability could have been fixed on the guarantors for the default of the borrowers, in terms of the provisions contained in Section 128 of the Indian Contract Act, looses its shine and is of no consequence, therefore, this issue needs to be decided against the petitioners that their liability being co-extensive, they cannot shirk their responsibility to be treated differently then the treatment meeted out to the borrower.
63. Clause 3 of the master circular deals with the Mechanism for identification of Wilful Defaulters. Mechanism prescribed in Clause 2.5 deals with penal measures. The words used in the clause 2.5 are "The following measures should be initiated by the Banks and FIs against the wilful defaulters identified as per the definition indicated at paragraph 2.1.3 above". Thereafter Clause 3(a) provides that the evidence of wilful default on the part of the borrowing company and W.P. No. 13194 of 2022 35 its promoter/whole-time director at the relevant time should be examined by a Committee headed by an Executive Director and consisting of two other senior officers of the rank of GM/DGM.
64. Thus, when clause 2.5 is read with Clause 3(a) then it is evident that preliminary identification of a wilful defaulter is to be carried out by the bank and the FIs and then the evidence so collected is to be examined by the Committee headed by an Executive Director or equivalent and consisting of two senior Officers.
65. In the present case this procedure is admittedly followed in as much as vide communication dated 29.03.2017 committee examined and concurred with the use of the Zonal office that the Unit has defaulted in meeting its payment/repayment obligations to the lender and has not utilized the finance for the specific purpose for which the finance was availed but has diverted the funds for the other purposes. It has noted the fact that despite taking disbursement for construction of factory, building and installation of machinery it was not done at the site. Contract was awarded to the sister concern of the Company and money was disbursed to them for execution of contract. It is very clear cut case of siphoning of funds.
66. Therefore, admittedly a show-cause notice was issued to the concerned borrower and the promoter/whole time Director calling for their submissions. Terminology used in Sub-Clause (b) of Clause (3) is W.P. No. 13194 of 2022 36 Show Cause Notice to the concerned borrower and the promoter/whole-time director and call for their submissions and after considering their submissions issue an order recording the fact of wilful default and the reasons for the same. It also provides that an opportunity should be given to the borrower and the promoter/whole- time director for a personal hearing if the Committee feels such an opportunity is necessary. Thus, notices issued to the promoters and Directors on their different addresses cannot be said to be in violation of the terms and conditions contained in Caluse-3. There is no provisions in Clause-3 for issuance of notices to the Guarantors/ Sureties.
67. Reply was taken on record, then at Stage-II final scrutiny was carried out which is in terms of the Sub-clause-C of Clause 3 of the Master Circular and the decision was taken in terms of criteria prescribed under clause 2.1.3 (B) and 2.1.3 (C) and then again a notice was issued as contained in Annexure P-11. Reply was received as contained in Annexure P-12 and signed by one Mukul Kakkar for M/s Goel Agrigreen Fields Pvt. Ltd, in his individual capacity as a guarantor for M/s RiteBanc Green Agro Solutions Pvt. Ltd. guarantor and for M/s Kingsize Property Pvt. Ltd. Thus, Mr. Mukul Kakkar adorned different caps at the same time rolling into one. After receiving reply notice for personal hearing as contained in Annexure W.P. No. 13194 of 2022 37 P-13 was given. In the notice itself it is mentioned that confirmation should be made by 04.04.2022 latest by 04:00 p.m. on the given e-mail ID and Mobile Number.
68. Admittedly massage sent by Mukul Kakkar is dated 05.04.2022 at 11:49 p.m., therefore, reply furnished after due time limit does not call for any consideration in as much as only that part could have been taken into consideration which was within the prescribed time limit.
69. Reliance on the judgment of Hon'ble the Supreme Court in the case of Mahant Ramdas Vs. Ganga Das (supra) is on different facts. In that case, in para 5 Hon'ble Supreme Court has noted that the application for extension of time was made before the time fixed by the High Court for payment of deficit court fee had actually run out and in that context, Supreme Court has held that not considering that application at all was not proper but in the present case no application was made for extension of time before the time fixed by the committee had actually run out, therefore, this judgment in the case of Mahant Ramdas Vs. Ganga Das (supra) is of no assistance to the petitioners.
70. Another important aspect is that non-promoter/ non-whole time director was not given notice then Section 2(60) of the Companies Act 2013 . It defines "Officer who is in default" and provides that for the purpose of any provision in this Act which enacts W.P. No. 13194 of 2022 38 that an officer of the company who is in default shall be liable to any penalty or punishment by way of imprisonment, fine or otherwise, means any of the following officers of a company, namely:â€"
(i) whole-time director;
(ii) key managerial personnel;
(iii) where there is no key managerial personnel, such director or directors as specified by the Board in this behalf.
71. Thus, in terms of the definition of "Officers Who is in Default" given in the Companies Act, act of the respondent authority in not giving notice to the Guarantors in the first place cannot be said to be contrary to the scheme floated by the RBI in as much as it only talks of identification of default on the part of the borrowing Company and then placing the material before the Review Committee and passing of orders but no where it is provided that Guarantors/Sureties be also given a notice because in terms of Section 128 of the Indian Contract Act, their liability is co-extensive with that of the principal debtor. Thus, lack of notice to the guarantor in the first place cannot be said to have vitiated the proceedings.
72. As discussed above and as is mentioned in the order that the Unit defaulted in meeting its payment/repayment obligations to the bank and it also failed to utilize the funds for the purpose for which finance was availed but diverted the funds for other purposes and also W.P. No. 13194 of 2022 39 there was removal of movable and fixed assets and movable property which was given as surety for securing loan, when these aspects are examined in terms of the definition of "wilful Default" siphoning and diversion of funds provided in the RBI circular then it cannot be said that these provisions are not fulfilled in the present case and impugned order has been passed.
73. Reliance on the judgment of Supreme Court in the case of Director General ESI & another Vs. T. Abdul Razak (supra),where attention of this Court is drawn towards para 14, so also to the judgment of Supreme Court in the case of Marathwada University Vs. Seshrao Balwant Rao Chavan (supra), where reliance is placed on para-20 is misplaced, with present context. In those cases the facts were different. There Supreme Court has held that the power to regulate the work and conduct of officers cannot include the power to take disciplinary action for their removal because the act under which university was created confer powers to appoint officers on the Executive Council and power to appoint include the power to remove. But in the present case Master Circular itself authorizes the Bank/Financial Institution to identify a wilful defaulters and than place that material before the Committee to be constituted for this purpose and therefore, it cannot be said that once notices were issued by the bank then the maxim delegatius non potest delegare, will be W.P. No. 13194 of 2022 40 applicable to the facts and circumstance of the present case. Therefore, this principle being not applicable to the facts of the present case. It cannot be said that there was any arbitrariness in issuance of show-cause notices by the bank officers and Committee was not authorized to ask the Bank Officer to issue notices to the borrowers/guarantors.
74. It is true that, guidelines issued by the Reserve Bank of India talks of a committee but at the same time it also talks about the bank as narrated above. In clause 2.5 the opening lines are that "the following measures should be initiated by the banks and FIs". Clause (B) uses the term the lenders may initiate criminal proceedings against wilful defaulters. In Claus (A) words 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 and NBFCs for floating new ventures for a period of 5 years. In Clause (C) the words used are the banks and FIs should adopt a proactive approach. In clause (D) also the words used are banks/Financial Institution.
75. The role which is assigned to the Committee in terms of Clause A of the Clause 3 of the RBI Circular is only to examine the evidence of wilful default. It does not say that evidence of wilful W.P. No. 13194 of 2022 41 default is to be collected by the Committee headed by an Executive Director.
76. Sub-Clause (B) provides for issuance of Show Cause Notice to the concerned borrower and the promoter/whole-time director and calling for their submissions, it does not say that the notice is to be issued only by the Committee and not by any Officers of Bank. Therefore, it is true that directions issued by the RBI have statutory force and they are binding on the banks and financial institutions as they have been entrusted with supervisory roles but as held by Calcutta High Court in case of Union Bank of India & Ors. Vs. Sudhir Kumar Patodia & Ors. (supra) the omission referred to the decision taken by the Committee neither invalidates the show-cause notice nor it is that only because the master circular does not express to provide for delegation of power to issue the show-cause notice to any other Officer of the Bank. Therefore, in absence of any prejudice being shown to the petitioners, judgments of Hon'ble the Supreme Court in the case of Central Bank of India Vs. Ravindra & Ors. (supra), will have no assistance to them so to assail the proceedings undertaken by the respondents. In fact, the notice which was issued on 27.04.2017 clearly makes a mention of the fact that inspite of repeated reminder/request the borrower/you have failed to regularize the account by not paying out dues. Admittedly, dues were of the bank W.P. No. 13194 of 2022 42 and not of the Committee. The committee is an independent mechanism to cross-check the event of wilful default/siphoning of funds, therefore, notice issued by the Assistant General Manager cannot be said to be arbitrary or illegal.
77. There is a communication dated 25.05.2017 informing the authority that it has been forwarded to the higher authorities for their consideration which means that there is continuity of communication between the petitioners and the Bank. At this stage, i.e. while reviewing the decision of the first committee, again certain facts were taken into consideration and notice dated 13.08.2021 was given to all concern enclosing the copy of the order of the empowered committee. Thus, no prejudice is caused to the petitioners. Lot of emphasis is placed on the judgment of Supreme Court in the case of Bahadur Singh Lakkhubai Gohil Vs. Jagdishbhai M. Kamalia & Ors. (supra), to emphasize that there was no application of mind. Because the term used by the Committee is 'hereby approved', but careful reading of the said judgment and specifically paragraph 26 reveals that decision taken by a statutory authority at the behest or on the suggestion of a person who has no statutory role to play, the same would be ultra vires. In the present case, as discussed above, specific role has been assigned to the Bank/Financial Institutions in clause 2.5 of the Master Circular and therefore, that role being assigned by the RBI, their initial W.P. No. 13194 of 2022 43 action of identifying wilful defaulters as provided in Clause 2.1.3 of the Master Circular, when examined in terms of Clause 2.4 which talks of End-use of Funds and provides that "in cases of project financing, the banks / FIs seek to ensure 'end use' of funds by, inter alia, obtaining certification from the Chartered Accountants for the purpose. In case of short-term corporate / clean loans, such an approach ought to be supplemented by 'due diligence' on the part of lenders themselves, and to the extent possible, such loans should be limited to only those borrowers whose integrity and reliability are above board. The banks and FIs, therefore, should not depend entirely on the certificates issued by the Chartered Accountants but strengthen their internal controls and the Credit Risk Management System to enhance the quality of their loan portfolio.
78. The requirement and related appropriate measures in ensuring and use of funds by the Bank and FIs should form a part of their loan policy documents.The following are some of the illustrative measure that could be taken by the lenders for monitoring and ensuring end-use of funds:
(a) Meaningful scrutiny of quarterly progress reports / operating statements / balance sheets of the borrowers;
(b) Regular inspection of borrowers’ assets charged to the lenders as security;W.P. No. 13194 of 2022 44
(c) Periodical scrutiny of borrowers’ books of accounts and the no-lien accounts maintained with other banks;
(d) Periodical visits to the assisted units;
(e) System of periodical stock audit, in case of working capital finance;
(f) Periodical comprehensive management audit of the ‘Credit’ function of the lenders, so as to identify the systemic-
weaknesses in the credit-administration.
(It may be kept in mind that this list of measures is only illustrative and by no means exhaustive.)"
79. Thus, it is the bank which has been given the authority to keep vigil over the advances given by them to the borrowers. Therefore, it cannot be said that with coming into picture of committee which is a check and balance mechanism, prescribed by the RBI, Bank looses its authority to scrutinize and communicate with the borrower/guarantor, therefore, this aspect too is not made out in favour of petitioners.
80. Reliance is placed on three judgments namely Cherukuri Mani Vs. Chief Secretary Government of Andhra Pradesh & Ors. (supra), Barangore Jute Factory & ors. (supra) so also Bhavnagar University Vs. Palitana Sugar Mills Pvt. Ltd. & Ors. (supra) pointing out that things are to be done in a particular manner or not at all, will W.P. No. 13194 of 2022 45 have no application to the facts because what is prescribed in the circular is that firstly there will be an identification of wilful defaulter in terms of the provisions contained in the RBI Policy. Clause 2.4 is the also part of the same scheme, which gives sufficient teeth to the bank to safeguard its assets and then a mechanism is provided by way of 'check and balance', to not only submit the incidence of wilful default to a Committee to be constituted in terms of RBI Circular and then to a Review Committee before taking any decision.
81. When all these aspects are examined then this check and balance phenomena has been observed by the Bank and the committee and therefore, on the basis of mere technicalities decision of the authorities to declare the petitioners as willful defaulter cannot be set aside merely for the asking.
82. In fact reliance placed on the Judgment of Hon'ble Supreme Court in case of Heavy Engineering Mazdoor Union Vs. State of Bihar & Ors. (supra), to say that decision in regard to Mukul Mahendru will not bind others is of no consequence in terms of the provisions contained in Section 128 of the Indian Contract Act. Thus, this Court is of the opinion that the purpose of the Master Circular issued by the RBI is mentioned in the purpose clause of the Master Circular on Wilful Defaulters namely "to put in place a system to disseminate credit information pertaining to willful defaulters for W.P. No. 13194 of 2022 46 cautioning banks and financial institutions so as to ensure that further bank finance is not made available to them". The purpose being to keep the health of the Financial Institutions including banks intact by preventing wilful defaulters from availing credit from other financial institutions, then the admitted position that credit availed was not utilized for the purpose for which it was taken, there being siphoning of the funds for purchase the land at Silvasa and then removal of plant and machinery from the site is sufficient to arrive at the conclusion that there is an act of wilful default and siphoning of the funds and therefore, declaration of as such to that affect cannot be said to be illegal or arbitrary merely on the hypothesis of certain procedural lapses.
83. In Raja Buland Sugar Company Ltd. Vs. Municipal Board, Rampur AIR 1965 SC 895 The Constitution Bench of this Court held that the question whether a particular provision is mandatory or directory cannot be resolved by laying down any general rule and it would depend upon the facts of each case and for that purpose the object of the statute in making the provision is the determining factor. The purpose for which the provision has been made and its nature, the intention of the legislature in making the provision, the serious general inconvenience or injustice to persons resulting from whether the provision is read one way or the other, the relation of the particular W.P. No. 13194 of 2022 47 provision to other provisions dealing with the same subject and other considerations which may arise on the facts of a particular case including the language of the provision, have all to be taken into account in arriving at the conclusion whether a particular provision is mandatory or directory. This aspect is taken into consideration and read alongwith the law laid down by Calcutta High Court in the case of Union Bank of India & Ors. Vs. Sudhir Kumar Patodia & Ors.(supra), specially in para 20 and 21, which reads as under:
"20. However, in the instant case, the power has been exercised by the identification committee to prima facie identify the company as a willful defaulter and such committee also retained the power to consider the objection that might be raised by the company and/or its directors as to why it/they should not be declared as willful defaulters, prior to a final order being made in this behalf in accordance with the master circular by the review committee. What the identification committee has delegated to the regional office of the appellant No. 1 is the issuance of the show-cause notice indicating the grounds on which the identification committee, prima facie, is of the view that there has been an occasion of willful default on the part of the company and/or its directors.
21. The regional office proceeding to issue the show- cause notice, even in the absence of express power of delegation, is insufficient to invalidate the proceedings that have been initiated under the master circular to declare the borrower and others, responsible for discharging the debt of the appellant No. 1, as willful defaulters."
84. Thus, there is no iota of doubt that once the purpose of the master circular on wilful defaulters for cautioning banks and financial W.P. No. 13194 of 2022 48 institutions and then impugned order having been passed in terms of the objective contained in the master circular, mere some technicalities will not be sufficient to defeat the purpose and set-aside the decision of the committee which otherwise is not pointed out to be suffering from any vice of malafide or arbitrariness.
85. Thus, issue No.1 that whether petitioners can be said to be willful defaulters in terms of the definition given in Clause 2.1.3 of the Master Circular issued by the Reserve Bank of India and whether they are guilty of diversion and siphoning of funds as defined in clause 2.2.1 and 2.2.2 of the Master Circular, is answered in affirmative.
86. Issue No.3, whether respondents committed any error in following the mechanism for identification of willful defaulter and Issue No.4 that whether there was any fault in issuance of notices by the officers of the bank and not by the Committee, are answered in negative.
87. Issue No.5 is answered that in terms of the fact that it was not a single incident, but series of acts, namely, diversion and siphoning of funds, removal of plant and machinery and other pictures from the site made the guarantors liable in terms of Section 128 of the Contract Act.
88. Therefore, when the decision of Hon'ble Supreme Court in the case of State Bank of India Vs. Jah Developers Private Ltd. & W.P. No. 13194 of 2022 49 Ors.(supra) incorporating the conditions of earlier master circular into the present master circular, and object of the circular is taken into consideration then impugned action does not call for any interference.
89. Petition fails and is accordingly dismissed.
(VIVEK AGARWAL) JUDGE Amitabh AMITABH RANJAN 2023.08.08 17:09:56 +05'30'