Gujarat High Court
Shankarlal Sitaram Somani vs Idbi Bank Limited on 16 April, 2024
NEUTRAL CITATION
C/SCA/4017/2024 JUDGMENT DATED: 16/04/2024
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CIVIL APPLICATION NO. 4017 of 2024
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE HEMANT M. PRACHCHHAK
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1 Whether Reporters of Local Papers may be allowed Yes
to see the judgment ?
2 To be referred to the Reporter or not ? Yes
3 Whether their Lordships wish to see the fair copy No
of the judgment ?
4 Whether this case involves a substantial question No
of law as to the interpretation of the Constitution
of India or any order made thereunder ?
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SHANKARLAL SITARAM SOMANI & ANR.
Versus
IDBI BANK LIMITED
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Appearance:
MR SAURABH SOPARKAR SR.ADV. WITH RAVI PAHWA FOR THAKKAR
AND PAHWA ADVOCATES(1357) for the Petitioner(s) No. 1,2
MR BH BHAGAT(153) for the Respondent(s) No. 1
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CORAM:HONOURABLE MR. JUSTICE HEMANT M.
PRACHCHHAK
Date : 16/04/2024
ORAL JUDGMENT
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1. Today, Mr. Saurabh Soparkar, learned Senior Counsel assisted by Mr. Ravi Pahwa, learned Counsel for the petitioners has tendered the draft amendment. The said draft amendment is not objected by Mr. Bhagat, learned Counsel for the respondent. With broad consensus, the draft amendment is allowed. Amendment to be carried out within period of one week from the date of receipt of copy of the order.
2. Present petition is filed by the petitioners under Article 226 of the Constitution of India with the following reliefs:-
"(A) YOUR LORDSHIPS may be pleased to issue a writ of mandamus, or any other appropriate writ order or direction, quashing and setting aside the decision of Review Committee for Identification of Willful Defaulter taken in Minutes of Meeting dated 12.2.2024 as well as decision of Willful Defaulter Identification Committee of the respondent bank taken in purported Minutes of Meeting dated 5.10.2023 and the subsequent action of respondent bank in reporting of the name of petitioners to Reserve Bank of India / CIBIL as a willful defaulter, as being illegal, unreasonable, unjustified, arbitrary as also violative of Art.
14 and 19(1)(g) of the Constitution of India; (AA) YOUR LORDSHIPS may be pleased to issue a writ of mandamus or any other appropriate writ, order or direction quashing and setting aside the impugned notice dated 9.4.2024 issued by respondent bank as being illegal and bad in law.
(B) YOUR LORDSHIPS may be pleased to stay the implementation, operation and execution of impugned decision of Review Committee for Identification of Willful Defaulter taken in Minutes of Meeting dated 12.2.2024 as Page 2 of 28 Downloaded on : Fri Apr 26 21:07:59 IST 2024 NEUTRAL CITATION C/SCA/4017/2024 JUDGMENT DATED: 16/04/2024 undefined well as decision of Willful Defaulter Identification Committee of the respondent bank taken in purported Minutes of Meeting dated 5.10.2023 and the subsequent action of respondent bank in reporting of the name of petitioners to Reserve Bank of India / CIBIL as a willful defaulter pending the admission, hearing and final disposal of this petition.
(BB) YOUR LORDSHIPS may be pleased to restrain the respondent bank from taking any action in pursuance to the impugned notice dated 9.4.2024 pending the hearing and final disposal of this petition.
(C) YOUR LORDSHIPS be pleased to grant such other and further reliefs as may be deemed fit by this Hon'ble Court in the interest of justice;"
3. Brief facts of the present case are in nutshell as under:-
3.1 It is the case of the petitioners that they are the erstwhile Directors of the Corporate Debtor. The respondent bank addressed a letter dated 11.2.2022 to the Corporate Debtor inter alia advising the Corporate Debtor to pay the entire outstanding of Rs. 133.60 Crores with unpaid interest immediately. The Corporate Debtor informed the respondent bank that no transactions have been undertaken by the Corporate Debtor which would attract the ingredients for examining the accounts of the Corporate Debtor as Willful defaulter account. The respondent bank addressed letter requiring the Corporate Debtor to pay the entire outstanding of Rs. 133.60 Crores. The Page 3 of 28 Downloaded on : Fri Apr 26 21:07:59 IST 2024 NEUTRAL CITATION C/SCA/4017/2024 JUDGMENT DATED: 16/04/2024 undefined Corporate Debtor explained that the Company was using non-
fund based working capital facilities by issuing letter of credit from the respondent bank for sourcing raw materials from various suppliers. It was further explained that in the year 2018, the Corporate Debtor faced severe cash crunch and the financial position of the Corporate Debtor was worsened. It was further stated that the account of Corporate Debtor was declared as Non- Performing Asset (NPA) on 14.10.2018. It was further stated that Bank of Baroda being the lead bank of consortium of lenders directed the Corporate Debtor to route all banking transactions through Bank of Baroda. In the consortium meeting held on 17.10.2018, the respondent bank also agreed that all transactions undertaken by the Corporate Debtor should be routed through Bank of Baroda only. It was further stated that the Bank of Baroda did not allow the Corporate Debtor to make payments to any other Banks including the respondent bank. It was further stated that the Corporate Debtor had addressed letter to respondent bank requesting the respondent bank to handle all the transactions through the account of Corporate Debtor maintained with respondent bank. However, there was no Page 4 of 28 Downloaded on : Fri Apr 26 21:07:59 IST 2024 NEUTRAL CITATION C/SCA/4017/2024 JUDGMENT DATED: 16/04/2024 undefined response to said letter. It was stated that the Corporate Debtor therefore could not make payment to the respondent bank and this transaction cannot be termed as "willful defaulter". The respondent called upon Corporate Debtor to explain the present arrangement with DGVCL. The Corporate Debtor addressed letter to respondent that Corporate Debtor is sourcing power from DGVCL every month and paying amount of electricity bills. It was stated that DGVCL was the sole supplier of electricity power to the Industries situated in and around Surat City regions. The Corporate Debtor confirmed that the Bank Guarantee amount which was revoked by DGVCL was kept as security deposit with DGVCI, and it was never utilized by the Corporate Debtor for paying electricity bills. The Corporate Debtor enclosed five electricity bills of DGVCL which showed that an amount of Rs. 8,30,25,606/- was still lying with DGVCL as security deposit. The respondent bank addressed letter to the Corporate Debtor inter alia stating that though it is true that all members had agreed at the JLM held on 17.10.2018 that all the financial transactions of the Corporate Debtor shall be routed through Bank of Baroda only and the same shall operate as per agreed Waterfall Page 5 of 28 Downloaded on : Fri Apr 26 21:07:59 IST 2024 NEUTRAL CITATION C/SCA/4017/2024 JUDGMENT DATED: 16/04/2024 undefined Mechanism, but the repayment of the devolved letter of credit ought to have been done through that Escrow Account. The Corporate Debtor informed the respondent that the financial position of the Corporate Debtor was gradually falling and was in distress and cash flows of the Corporate Debtor were disturbed since 2018. Due to distress financial health and mismatch in cash flows, some letter of credits with the consortium members got devolved including the respondent bank. It was further stated that it was true that the Escrow Account opened with Bank of Baroda was to be operated as per the agreed waterfall mechanism, however, the Corporate Debtor utilized funds only for plant operations and only as allowed by Bank of Baroda being the lead bank. All payments were made after due verification of the lead bank. It was further stated that the consortium members retained 5% of the inflows in the escrow account and the remaining amount was utilized by the Corporate Debtor for its working capital purposes. The petitioner requested Respondent Bank vide letter dated 29.11.2018 to allow to provide Hand Holding facility to start the operations through Respondent Bank on the same terms and conditions as Bank of Page 6 of 28 Downloaded on : Fri Apr 26 21:07:59 IST 2024 NEUTRAL CITATION C/SCA/4017/2024 JUDGMENT DATED: 16/04/2024 undefined Baroda but the same were unanswered by Respondent bank. The respondent bank informed Corporate Debtor that the Corporate Debtor was availing the benefits of continuous electricity supply from DGVCL on the basis of security deposit of Rs.8,30,25,606/- out of which Rs. 6,00,00,000/- is paid by the respondent bank as invoked Bank Guarantee amount.
3.2 The Corporate Debtor informed respondent that as per the profit/loss statement of the Corporate Debtor, there is no cash surplus with the Corporate Debtor and therefore, the Corporate Debtor is not in a position to repay the amount of revoked letter of credit of DGVCL. It was stated that the Corporate Debtor is not in a position to arrange fresh Bank Guarantee from other sources. It was therefore reiterated that this transaction would not attract the ingredients to treat the Corporate Debtor as a wilful defaulter as per the circular of RBI. The respondent bank issued a show cause notice to the Corporate Debtor and its directors including the petitioners requesting the Corporate Debtor and the petitioners to show cause as to why the account of the Corporate Debtor and the petitioners should not be declared as willful defaulters account as per the guidelines of Page 7 of 28 Downloaded on : Fri Apr 26 21:07:59 IST 2024 NEUTRAL CITATION C/SCA/4017/2024 JUDGMENT DATED: 16/04/2024 undefined RBI. The Corporate Debtor explained each and every transactions. The Corporate Debtor stated that all the transactions undertaken by the Corporate Debtor were for day to day operations of the Corporate Debtor. The Corporate Debtor explained as to why letter of credits were devolved. The Corporate Debtor also explained the transaction with DGVCL. It was further stated that there was no diversion of funds. The Corporate Debtor therefore requested the respondent bank not to treat the account of Corporate Debtor and its directors including the petitioners as willful defaulters account. The respondent bank addressed email inter alia requesting the Corporate Debtor to provide certain clarifications on the reply of Corporate Debtor dated 24.8.2022. The Corporate Debtor submitted clarification and enclosed detailed working on facts and figures along with auditor's certificate. The Corporate Debtor also enclosed detailed working treatments of investment in Sumicot Limited. The respondent bank addressed a communication to the Corporate Debtor inter alia stating that a perusal of the statement of accounts of the Corporate Debtor's Escrow Account would reveal that the Corporate Debtor's Page 8 of 28 Downloaded on : Fri Apr 26 21:07:59 IST 2024 NEUTRAL CITATION C/SCA/4017/2024 JUDGMENT DATED: 16/04/2024 undefined revenue from operations is continuously rising from Rs. 204.45 Crores to Rs.282.62 Crores and further upto Rs.295 58 crores as on 30.6.2022. It was therefore stated that the step decline of funds through the escrow account does not commensurate the increased revenue from operations and there appears to be suspected diversion of funds. Therefore, the Corporate Debtor was called upon to make submissions in this behalf. The Corporate Debtor gave response stating that the Corporate Debtor was exclusively maintaining its account with the Bank of Baroda. It was further explained that previously Reliance Industries Limited was the main raw material supplier of Corporate Debtor. When Reliance Industries Limited came to know that restructuring plan given by the Corporate Debtor to the consortium lenders including respondent bank was not progressing well, then Reliance Industries Limited started insisting for advance payment of Bank Guarantee before supply of raw material. It was further stated that Corporate Debtor did not have liquidity to manage such advance amount and therefore, Reliance Industries Limited agreed to supply goods to other parties for final sale to Corporate Debtor. Because of this Page 9 of 28 Downloaded on : Fri Apr 26 21:07:59 IST 2024 NEUTRAL CITATION C/SCA/4017/2024 JUDGMENT DATED: 16/04/2024 undefined transaction, there was debit and credit of Rs. 75 Crores in the accounts of Corporate Debtor. It was therefore stated that this transaction also cannot be considered to treat the Corporate Debtor as a wilful defaulter as per the circular of RBI. The respondent bank called upon the Corporate Debtor to explain as to the reason for difference between closing balance of debtors as on 31.10.2022 both in debtors realization certificate and latest quarterly reports. The Corporate Debtor replied that the CA certificate issued by the statutory auditor of the Corporate Debtor reveals that the debtors balance as on 30.9.2022 is Rs. 9801.87 Lakhs as net debtors after adjusting credit balance of some receivable parties. It was further stated that whereas in quarterly results, the Corporate Debtor has shown debit balance of receivables under the head "current assets trade receivables and therefore, if the figure is netted out, then there will be no difference between the CA certificates and the quarterly results. So far as the second clarification was concerned, it was stated that as per the policy of Corporate Debtor, upto the quarter of June 2022, the Corporate Debtor has debited interest from the cut back to the extent of proposed interest payment on Page 10 of 28 Downloaded on : Fri Apr 26 21:07:59 IST 2024 NEUTRAL CITATION C/SCA/4017/2024 JUDGMENT DATED: 16/04/2024 undefined sustainable debt as per the resolution plan submitted to the respondent bank for restructuring of debts. 3.3 It is the case of the petitioners that the Hon'ble Adjudicating Authority, National Company Law Tribunal, Ahmedabad Bench initiated Corporate Insolvency Resolution Process against the Corporate Debtor on an application u/s. 7 of Insolvency and Bankruptcy Code 2016 by respondent bank. The petitioner no.1 then attended the personal hearing through video conference before the Willful Defaulter Identification Committee of respondent bank. The petitioner no.1 also represented the petitioner no.2. In spite of number of detailed replies explaining all the transactions, the Willful Defaulter Identification Committee of respondent hank vide impugned order dated 5.10.2023 declared the petitioners as willful defaulters. The petitioners made a detailed representation to the Willful Defaulter Review Committee of respondent bank. The petitioners pointed out the lacunas in the decision of Willful Defaulter Identification Committee and gave clarifications to all the findings of the Identification Committee. Though the petitioners had requested the Review Committee to give an opportunity of Page 11 of 28 Downloaded on : Fri Apr 26 21:07:59 IST 2024 NEUTRAL CITATION C/SCA/4017/2024 JUDGMENT DATED: 16/04/2024 undefined personal hearing, the same was not afforded to the petitioners and instead, without appreciating the contentions raised by the petitioners in the representation or giving an opportunity of personal hearing to the petitioners, the Willful Defaulter Review Committee of respondent bank by impugned decision confirmed the decision of Willful Defaulter Identification Committee of respondent bank declaring the petitioners as willful defaulters. The respondent bank has not followed the guidelines issued by the Hon'ble Supreme Court in the case of State Bank of India vs. Jha Developers before taking the impugned decisions. The impugned decision are contrary to facts and law, as demonstrated in the petition.
4. Heard Mr.Saurabh Soparkar, learned senior counsel with Mr.Ravi Pahwa, learned counsel appearing for the petitioners and Mr.B. H. Bhagat, learned counsel appearing for the respondent - Bank. Perused the material on record.
5. Mr.Saurabh Soparkar, learned senior counsel with Mr.Ravi Pahwa, learned counsel appearing for the petitioners has submitted that the impugned order passed by the Willful Page 12 of 28 Downloaded on : Fri Apr 26 21:07:59 IST 2024 NEUTRAL CITATION C/SCA/4017/2024 JUDGMENT DATED: 16/04/2024 undefined Defaulter Review Committee (WDRC) of respondent bank is a non-speaking order and without giving an opportunity of personal hearing and thus the same is against the settled principles of law and violative of principles of natural justice. He has submitted that the request was made by the petitioners to afford an opportunity of personal hearing, however, except for considering the representation, no opportunity of hearing was given to the petitioners. He has submitted that the WDIC after considering the written submissions made on behalf of the petitioners passed the detailed reasoned order, but while confirming the said order, the Willful Defaulter Review Committee (WDRC) has not given an opportunity of persoal hearing as per the decision of the Hon'ble Supreme Court in the case of State Bank of India Vs. Jah Developers Private Limited and others reported in (2019) 6 SCC 787 wherein the Hon'ble Supreme Court has held and observed in para - 24 as under:-
"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 in-house proceedings contained in paragraph 3 of the Revised Circular dated 01.07.2015, as it is clear that the events of wilful default as mentioned in paragraph 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 Page 13 of 28 Downloaded on : Fri Apr 26 21:07:59 IST 2024 NEUTRAL CITATION C/SCA/4017/2024 JUDGMENT DATED: 16/04/2024 undefined 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 the borrower in a show cause 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 paragraph 3 of the Master Circular dated 01.07.2013 permitted the borrower to make a representation within 15 days of the preliminary decision of the First Committee, we are of the view that first and foremost, the Committee comprising of the Executive Director and two other senior officials, being the First Committee, after following paragraph 3(b) of the Revised Circular dated 01.07.2015, 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 01.07.2013 itself considered such steps to be reasonable, we incorporate all these steps into the Revised Circular dated 01.07.2015. The impugned judgment 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."
5.1 Mr.Soparkar, learned senior counsel has submitted that the WDRC while passing the order has not given any reason except Page 14 of 28 Downloaded on : Fri Apr 26 21:07:59 IST 2024 NEUTRAL CITATION C/SCA/4017/2024 JUDGMENT DATED: 16/04/2024 undefined making the observation that the justification provided by Promoters / Erstwhile Directors / Guarantors of SIL are not acceptable and are rejected. He has submitted that there is no independent reasons given by the WDRC in the order and therefore the same is non-speaking order. He has submitted that let the impugned orders be quashed and set aside and the matter may be remanded back to the WDRC for its decision afresh after giving full opportunity of hearing to the petitioners. He has referred to and relied upon the decision of the Hon'ble Supreme Court in the case of Oryx Fisheries Private Limited Vs. Union of India and others reported in (2010) 13 SCC 427 and submitted that in the said decision the Hon'ble Supreme Court has formulated the principles by following its earlier decision as enumerated in para 40 and in the present case there is breach of the principles enumerated by the Hon'ble Supreme Court.
5.2 Mr.Soparkar, learned senior counsel appearing for the petitioners has urged that the impugned orders may be quashed and set aside and the matter may be remanded back to the WDRC for its fresh decision after giving the full opportunity of Page 15 of 28 Downloaded on : Fri Apr 26 21:07:59 IST 2024 NEUTRAL CITATION C/SCA/4017/2024 JUDGMENT DATED: 16/04/2024 undefined personal hearing to the petitioners.
6. Mr.B. H. Bhagat, learned counsel appearing for the respondent - bank has opposed the present petition and has submitted that the petition deserves to be dismissed. He has submitted that the petitioners had given an opportunity of hearing at the time of first decision taken by the WDC and, thereafter, at the second stage i.e. before WDRC, there is no need to given personal hearing to the petitioners. He has submitted that the petition is filed by the petitioners with mala fide intention and oblique object and the same is nothing but an abuse of the process of law. He has submitted that as per the directions of the WDC / WDRC, the respondent - bank has passed such order and, there is no violation of the guidelines issued by the Reserve Bank of India. He has submitted that the WDC and WDRC have not committed any error of facts and law in passing the orders and both the authorities have given an opportunity of hearing to the petitioners. He has referred to and relied upon the affidavit-in-reply filed on behalf of the respondent - bank and submitted that the petition is not maintainable under Article 226 of the Constitution of India as the petitioner has only prayed for Page 16 of 28 Downloaded on : Fri Apr 26 21:07:59 IST 2024 NEUTRAL CITATION C/SCA/4017/2024 JUDGMENT DATED: 16/04/2024 undefined violation of principles of natural justice while filing the petition. The relevant paragraphs of the affidavit-in-reply reads as under:-
"6. I say and submit that the petition is frivolous, vexatious and filed with an ulterior motive and therefore it deserves an outright dismissal with exemplary costs. The allegations are vague, indeterminate and without any merits or details or particulars. I say and submit that the object and purpose of the Master Circular for willful default is dissemination of credit information of the willful defaulter so that other lenders are cautioned and do not lend any further money. It is also aimed at preventing further fraud and loss of public money. A willful defaulter proceeding is not for recovery of debt. The repayment of debt will not ipso facto extinguish the default. This has to be assist and applied in the facts of the instant case. I say and submit that to stay willful defaulter proceedings, criminal proceeding or quasi criminal proceeding under any Section would defeat the object and purpose of the part III of the IBC and RBI Master Circular. Stay of such willful defaulter proceedings would also result in putting a premium on the impropriety and illegality for which the willful defaulter proceedings are initiated. I say and submit that the respondent bank has followed the Mechanism as provided in Clause 3 of the Master Circular. The whole procedure has been followed in as much as that in the instant case a well-reasoned show-cause notice is issued dated 01.08.2022 calling for their submissions, and to uphold the principles of natural justice, WDC of the Bank had offered opportunities of personal hearing before WDC and the petitioner appeared for the same and made arguments / submissions and also filed written representation. It would not be out of place to state that the bank had also replied to petitioners various letters / emails seeking clarification on certain points and clarified on all the issues raised by petitioners after giving personal hearing before WDC. Letter granting opportunity for personal hearing was also issued and they had availed. I say and submit that since the petitioner appeared for the same and made arguments and also filed written representation the WDC after considering their replies / submissions and written representation passed a proper reasoned and detailed order dated 14.09.2023 which was Page 17 of 28 Downloaded on : Fri Apr 26 21:07:59 IST 2024 NEUTRAL CITATION C/SCA/4017/2024 JUDGMENT DATED: 16/04/2024 undefined communicated vide letter dated 05.10.23 which eventually got reviewed by another Review Committee and WDRC after considering their replies / written representation(s) dated 08.11.23 & 09.11.23 and submissions passed a proper reasoned and detailed order dated 06.02.2024 which was sent vide letter dated 12.02.24. I say and submit that the order of WDC becomes final only upon confirmation of order by WDRC. Hence WDC order merges in WDRC order and only upon confirmation of order by WDRC the order becomes final and borrower is declared as willful defaulter and in the present case that order of WDRC is well reasoned and detailed order dealing with all their replies and submissions and written representation. I respectfully say and submit that the petitioner is squarely covered by provision 2.1.3(a), 2.1.3(b) and 2.2.1(c) of the master circular in as much as that in the instant case the order passed by WDRC clearly culls out and refers to breach of all the clauses of diversion of funds, transferring of funds and default in repayment obligations even when they have means to pay from the facts on record and petitioner's various replies.
7. I respectfully say and submit that all the orders of the Willful Defaulter Committee (WDC) and Identification Committee and Willful Defaulter Review Committee (WDRC) have been passed by the respective committees and only the communication of such order has been done by the concerned bank official as per directions of the WDC / WDRC. Therefore, there is no violation of the RBI guidelines in this regard.
10. I say and submit that the facts of the instant case are absolutely different from the facts of the judgements cited by the petitioner A) The orders passed by the Willful Defaulter Committee and the Review Committee were passed after proper personal hearing and relying upon their submissions / written representation and replies and are proper reasoned orders containing reasons for arriving at a conclusion with regard to declaration of borrowers as willful defaulters and also the copies of the same were provided to the petitioners. Whereas in the judgements cited by the petitioners the bank had not passed reasoned orders and that too without personal hearing and also had not supplied copies to the petitioner and moreover in one of the judgement cited by the petitioners is on declaration of FRAID which is entirely different law and governed by different circular of RBI. I say and submit that the facts of Page 18 of 28 Downloaded on : Fri Apr 26 21:07:59 IST 2024 NEUTRAL CITATION C/SCA/4017/2024 JUDGMENT DATED: 16/04/2024 undefined the instant case are absolutely different from the facts of the judgement cited by the petitioners in as much as there the joint lenders themselves had come to conclusion based on Revised Forensic Report that the petitioners should not be declared Fraud. Whereas in the instant case the criteria for willful default is absolutely different and also governed by different circular and the decision in based purely on Internal Investigation by the Bank. The petitioner is citing that fraud judgment which has no relevance to mislead the Hon'ble Court to obtained Ex-Parte favourable order. B) Internal investigation by the bank strongly suggest all the ingredients for declaration of willful defaulter and is entirely based on sound observations made by Internal investigation by the bank unlike the judgements cited by the petitioners where the petitioners therein were exonerated of any wrong doing by observing that there were no irregularities."
6.1 Mr.Bhagat, learned counsel appearing for the respondent has referred to and relied upon the order dated 10.02.2022 passed by the Coordinate Bench of this Court in Kirtilal Ravchandbhai Sanghavi Vs. Reserve Bank of India in Special Civil Application No.2518 of 2022 with Special Civil Application No.2943 of 2022, which came to be confirmed by the Division Bench of this Court vide order dated 02.01.2023 passed in Letters Patent Appeal No.596 of 2022. He has also referred to and relied upon the judgment dated 27.03.2023 passed by the Coordinate Bench of this Court in Jagdish Prasad Saboo Vs. IDBI Bank Limited in Special Civil Application No.19261 of 2022 which came to be confirmed by the Division Bench of this Court vide Page 19 of 28 Downloaded on : Fri Apr 26 21:07:59 IST 2024 NEUTRAL CITATION C/SCA/4017/2024 JUDGMENT DATED: 16/04/2024 undefined order dated 06.11.2023 passed in Letters Patent Appeal No.841 of 2023. He has submitted that there is no illegally and perversity in the impugned orders passed by both the authorities and both the authorities have not committed any breach of principles of natural justice. He has submitted that the petition being meritless deserves to be dismissed.
7. Considering the facts of the case, the issue involved in the present case is that whether an opportunity of personal hearing is given to the petitioners at the stage of taking the decision by the authority or not and if it is not given, whether it is violation of the principle of natural justice or not.
8. Considering the facts of the case and the submissions canvassed by the learned counsel appearing for both the sides, it is now well settled that at the time of passing the orders by the WDC and WDRC, the petitioners have to be given opportunity of personal hearing and after considering the representation / written submissions canvassed by the petitioners, both the authorities have to pass the orders by giving cogent and substantial reasons. However, in the present case, considering Page 20 of 28 Downloaded on : Fri Apr 26 21:07:59 IST 2024 NEUTRAL CITATION C/SCA/4017/2024 JUDGMENT DATED: 16/04/2024 undefined the written submissions of the petitioners, the WDRC has not passed any speaking or reasoned order except to agree / disagree with the submissions made on behalf of the petitioners which cannot be termed as speaking order in light of the observations made in para 39, 40 and 41 by the Hon'ble Supreme Court in the case of Oryx Fisheries Private Limited (supra), which reads thus:-
"39. On the requirement of disclosing reasons by a quasi- judicial authority in support of its order, this Court has recently delivered a judgment in the case of Kranti Associates Pvt. Ltd. & Anr. V/s. Sh. Masood Ahmed Khan & Others on 8th September 2010.
40. In M/s Kranti Associates (supra), this Court after considering various judgments formulated certain principles in para 51 of the judgment which are set out below a. In India the judicial trend has always been to record reasons, even in administrative decisions, if such decisions affect anyone prejudicially.
b. A quasi-judicial authority must record reasons in support of its conclusions.
c. Insistence on recording of reasons is meant to serve the wider principle of justice that justice must not only be done it must also appear to be done as well.
d. Recording of reasons also operates as a valid restraint on any possible arbitrary exercise of judicial and quasi- judicial or even administrative power.
e. Reasons reassure that discretion has been exercised by the decision maker on relevant grounds and by disregarding extraneous considerations.Page 21 of 28 Downloaded on : Fri Apr 26 21:07:59 IST 2024
NEUTRAL CITATION C/SCA/4017/2024 JUDGMENT DATED: 16/04/2024 undefined f. Reasons have virtually become as indispensable a component of a decision making process as observing principles of natural justice by judicial, quasi-judicial and even by administrative bodies.
g. Reasons facilitate the process of judicial review by superior Courts.
h. The ongoing judicial trend in all countries committed to rule of law and constitutional governance is in favour of reasoned decisions based on relevant facts. This is virtually the life blood of judicial decision making justifying the principle that reason is the soul of justice.
i. Judicial or even quasi-judicial opinions these days can be as different as the judges and authorities who deliver them. All these decisions serve one common purpose which is to demonstrate by reason that the relevant factors have been objectively considered. This is important for sustaining the litigants' faith in the justice delivery system.
j. Insistence on reason is a requirement for both judicial accountability and transparency.
k. If a Judge or a quasi-judicial authority is not candid enough about his/her decision making process then it is impossible to know whether the person deciding is faithful to the doctrine of precedent or to principles of incrementalism.
l. Reasons in support of decisions must be cogent, clear and succinct. A pretence of reasons or `rubber-stamp reasons' is not to be equated with a valid decision making process.
m. It cannot be doubted that transparency is the sine qua non of restraint on abuse of judicial powers. Transparency in decision making not only makes the judges and decision makers less prone to errors but also makes them subject to broader scrutiny. (See David Shapiro in Defence of Judicial Candor (1987) 100 Harward Law Review 731-737).
n. Since the requirement to record reasons emanates from the broad doctrine of fairness in decision making, the said requirement is now virtually a component of human rights and was considered part of Strasbourg Jurisprudence. See Page 22 of 28 Downloaded on : Fri Apr 26 21:07:59 IST 2024 NEUTRAL CITATION C/SCA/4017/2024 JUDGMENT DATED: 16/04/2024 undefined (1994) 19 EHRR 553, at 562 para 29 and Anya V/s.
University of Oxford, 2001 EWCA Civ 405, wherein the Court referred to Article 6 of European Convention of Human Rights which requires, "adequate and intelligent reasons must be given for judicial decisions". o. In all common law jurisdictions judgments play a vital role in setting up precedents for the future. Therefore, for development of law, requirement of giving reasons for the decision is of the essence and is virtually a part of "Due Process".
41. In the instant case the appellate order contains reasons. However, absence of reasons in the original order cannot be compensated by disclosure of reason in the appellate order"
9. On perusal of the record, it also appears that the petitioners have made such request for giving an opportunity of hearing more particularly in para - 7 of the representation, which reads as under:-
"7. In case, you are not satisfied with the above explanation, you are requested to please give an opportunity of personal hearing by sending an intimation to me in advance."
10. That though the petitioners have requested the WDRC to give an opportunity of personal hearing, but the same was not afforded and such aspect was not observed by the authority and not provided an opportunity of hearing to the petitioners before passing the order by the WDRC.
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11. In the affidavit-in-reply filed on behalf of the respondent - bank, it is specifically stated that "the petitioner is squarely covered by provision 2.1.3(a), 2.1.3(b) and 2.2.1(c) of the master circular in as much as that in the instant case the order passed by WDRC clearly culls out and refers to breach of all the clauses of diversion of funds, transferring of funds and default in repayment obligations even when they have means to pay from the facts on record and petitioner's various replies." For this, the order came to be passed by the WDC which came to be confirmed by the WDRC and, therefore, at this stage, the petitioners are required to be given an opportunity of hearing.
12. In view of the above facts which are emerging from the records it would be necessary to refer to the master circular of willful defaulter issued by the RBI on July 1, 2015 which defines willful default as per clause 2.1.3 as under:
"2.1.3 Willful 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 utilized the Page 24 of 28 Downloaded on : Fri Apr 26 21:07:59 IST 2024 NEUTRAL CITATION C/SCA/4017/2024 JUDGMENT DATED: 16/04/2024 undefined 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 willful must be intentional, deliberate and calculated." Clause 2.2.1 refers to diversion of funds and reads as under:
"2.2.1 Diversion of Funds: The term 'diversion of funds' referred to at paragraph 2.1.3(b) above, should be construed to include any one of the undernoted 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 Cooperates 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; Page 25 of 28 Downloaded on : Fri Apr 26 21:07:59 IST 2024
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(f)Shortfall in deployment of funds vis-à-vis the amounts disbursed/ drawn and ne difference not being accounted for."
12. As per clause 2.2.1(c) diversion of funds includes transferring borrowed funds to subsidiaries group companies or other corporate by whatsoever modalities. Similarly sub-clause (d) of clause 2.2.1 refers to routing of funds through any bank other than the lender bank or member of consortium without prior permission of the lender.
13. That the judgment and orders relied upon by learned counsel appearing for the respondents are not with regard to the opportunity of hearing given at the time of taking the decision by the WDRC and the said decisions are not applicable to the facts of the present case. But since the copy of the audit report was not provided to the petitioners and not given an opportunity of hearing, in such circumstances, the Court had come to the conclusion that the copy of the audit report is to be supplied and, therefore, on that basis, the representation may be decided by the authority.
14. The Division Bench of this Court while passing the impugned judgment and order in Letters Patent Appeal No.841 of 2023 has observed that "the report of the Identification Committee has been affirmed by the Review Committee after Page 26 of 28 Downloaded on : Fri Apr 26 21:07:59 IST 2024 NEUTRAL CITATION C/SCA/4017/2024 JUDGMENT DATED: 16/04/2024 undefined grant of opportunity of personal hearing to the appellant. No infirmity in the said decision making process can be pointed out by the learned counsel for the appellant. The only submission that the complete copy of the Forensic Audit Report has not been provided to the appellant before taking the impugned decision to declare him a willful defaulter, cannot be a reason to interfere, as according to us, no prejudice has been caused to the appellant by non-supply of the complete copy of the Forensic Audit Report."
15. This Court finds that there is substance in the contention. It is well settled that a quasi-judicial authority, while acting in exercise of its statutory power must act fairly and must act with an open mind while initiating a show-cause proceeding. A show- cause proceeding is meant to give the person proceeded against a reasonable opportunity of making his objection against the proposed charges indicated in the notice.
16. Considering the decision of the Hon'ble Supreme Court in the case of Jah Developers Private Limited and others (supra) as well as the judgment/s of this Court which is referred Page 27 of 28 Downloaded on : Fri Apr 26 21:07:59 IST 2024 NEUTRAL CITATION C/SCA/4017/2024 JUDGMENT DATED: 16/04/2024 undefined and relied upon on behalf of the petitioners, the petition deserves consideration.
17. In view of the aforesaid facts, it appears that the WDRC has not given any opportunity of personal hearing to the petitioner and committed an error of facts and law in passing the impugned order and, therefore, I am of the opinion that the present petition deserves to be allowed and the impugned order deserves to be quashed and set aside.
18. In the result, the petition is allowed. The impugned orders passed by the authorities are hereby quashed and set aside and the matter is remitted back to the WDRC. The WDRC is directed to decide the case afresh after giving full opportunity of personal hearing to the petitioners within a period of six months from the date of receipt of the writ of this order and pass appropriate / reasoned order. Direct service is permitted.
(HEMANT M. PRACHCHHAK,J) V.R. PANCHAL Page 28 of 28 Downloaded on : Fri Apr 26 21:07:59 IST 2024