Bombay High Court
Immense Packaging Pvt. Ltd vs State Bank Of India on 18 June, 2024
Author: Gauri Godse
Bench: G. S. Kulkarni, Gauri Godse
2024:BHC-OS:8773-DB
1-2.2481.2024 WPL.DOC
Iresh IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION (L) NO. 2481 OF 2024
1. Immense Packaging Pvt. Ltd.
A company registered under the
Companies Act, 1956 and having its
registered office at 501, Dev Pooja
CHS Ltd, North Avenue Road,
Santacruz (W) Mumbai 400 054.
2. Pragya Umesh Kela
Adult Indian inhabitant, having her
residence at 501, Dev Pooja CHS Ltd.,
North Avenue Road, Santa Cruz(W)
Mumbai 400 054.
3. Lata Prakash Kela
Adult Indian inhabitant, having her
residence at 501, Dev Pooja CHS Ltd.,
North Avenue Road, Santa Cruz(W)
Mumbai 400 054.
4. Abhilasha Yogesh Kela
Adult Indian inhabitant, having her
residence at 501, Dev Pooja CHS Ltd.,
North Avenue Road, Santa Cruz(W)
Mumbai 400 054.
5. Prakash Kela
Adult Indian inhabitant, having his
residence at 501, Dev Pooja CHS Ltd.,
North Avenue Road, Santa Cruz(W)
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Mumbai 400 054.
...Petitioners
Versus
1. State Bank of India
a company registered under the
Companies Act, 1956, and a Banking
Company defined under Section 5
of the Banking Regulation Act, 1945,
having its registered office at State
Bank Bhavan, Corporate Centre,
Madame Cama Road, Mumbai,
Maharashtra 400021 Through
its Stressed Assets Management
Branch -II, Mumbai having its
office at Ground Floor Raheja
Chambers, Wing-B, Free Press
Journal Marg, Nariman Point,
Mumbai 400 021
2. The D.N. Road Branch of the State
Bank of India,
having its office at Videocon Heritage
1st Floor, Charanjit Ray Marg, Fort,
Mumbai 400 001, Branch Code 08599
3. The Stressed Assets Management
Branch of the State Bank of India
Having its office at Raheja Chambers,
Ground Floor, Nariman Point,
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Mumbai 400 021 ...Respondents
AND
WRIT PETITION (L) NO. 2531 OF 2024
1. Govinda Industries Pvt. Ltd.
A company registered under the
Companies Act, 1956 and having
its registered office at 401, Dev
Pooja CHS Ltd, North Avenue
Road, Santa Cruz (W) Mumbai
400 054.
2. Abhilasha Yogesh Kela
Adult Indian inhabitant, having her
residence at 401, Dev Pooja CHS Ltd.,
North Avenue Road, Santa Cruz(W)
Mumbai 400 054.
3. Sudarshan Chokhani
Adult Indian inhabitant, having
his residence at 23, Maheshwari
Mansion, Flat no. 23, 34 Napean
Sea Road, August Kranti Marg,
Mumbai 400 036
4. Mukesh Ashar,
Adult Indian inhabitant, having
his residence at 502, Ram Tower,
Yogi Nagar, Borivali West,
Mumbai-400 091.
5. Pragya Umesh Kela
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Adult Indian inhabitant, having her
residence at 501, Dev Pooja CHS Ltd.,
North Avenue Road, Santa Cruz(W)
Mumbai 400 054.
Versus
1. State Bank of India
a company registered under the
Companies Act, 1956, and a Banking
Company defined under Section 5
of the Banking Regulation Act, 1945,
having its registered office at State
Bank Bhavan, Corporate Centre,
Madame Cama Road, Mumbai,
Maharashtra 400021 Through
its Stressed Assets Management
Branch -II, Mumbai having its
office at Ground Floor Raheja
Chambers, Wing-B, Free Press
Journal Marg, Nariman Point,
Mumbai 400 021
2. The D.N. Road Branch of the State Bank of India,
having its office at Videocon Heritage
1st Floor, Charanjit Ray Marg, Fort,
Mumbai 400 001, Branch Code 08599
3. The Stressed Assets Management
Branch of the State Bank of India
Having its office at Raheja Chambers,
Ground Floor, Nariman Point,
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Mumbai 400 021 .....Respondents
Mr. Kunal Mehta a/w Mr. Rushabh Thacker for the petitioner
Mr. Subhash Gupta i/b Mr. Ajinkya Kurdukar for respondent-
State Bank of India
CORAM : G. S. KULKARNI &
GAURI GODSE, JJ
RESERVED ON : 22nd MARCH 2024
PRONOUNCED ON : 18th JUNE 2024
JUDGMENT:(PER GAURI GODSE, J.)
1. Heard. Rule. Rule made returnable forthwith. Mr. Subhash Gupta waives service for the respondents. By consent of the parties, the petitions are taken up for final disposal immediately. BASIC FACTS IN BRIEF :
2. The petitions challenge the respondent's declaration of petitioner no.1's loan account as fraud vide declaration dated 4 th April 2020 ("fraud declaration") and orders dated 18 th February 2021 and 7th October 2021 ("willful defaulter orders") declaring the petitioners as willful defaulters. Respondents rely upon the Master Circular dated 1 st July 2015 issued by the Reserve Bank of India on willful defaulters ("RBI's Master Circular") for issuing the willful defaulter orders. Respondents for issuing the fraud declaration rely upon the Master Directions on Fraud - Classification and Reporting by Commercial 5/25 ::: Uploaded on - 18/06/2024 ::: Downloaded on - 19/06/2024 17:09:06 ::: 1-2.2481.2024 WPL.DOC Banks and Select Financial Institutions dated 1 st July 2016 issued by the Reserve Bank of India on the declaration of fraud ("RBI's Master Directions on Fraud").
3. Petitioner no. 1 in both petitions is the principal borrower of the respondent no. 2 branch of the respondent no. 1 bank. In the writ petition of Immense Packaging Private Limited, petitioners nos. 2 and 3 are the directors of petitioner no. 1 and petitioner no. 3 is the guarantor of petitioner no. 1 in respect of financial assistance availed from respondent no. 2 bank. Petitioner no. 4 was an erstwhile guarantor in respect of financial assistance availed by petitioner no. 1 from respondent nos. 1 and 2. In the writ petition of Govinda Industries Private Limited, petitioners nos. 2 to 4 are directors of petitioner no. 1, and petitioners nos. 2 and 5 are the guarantors of petitioner no. 1 in respect of the financial assistance which petitioner no. 1 availed from respondents nos. 1 and 2.
4. It is the petitioners' case that without issuing any notice to them and without giving an opportunity of hearing, petitioner no. 1's loan account has been declared to be a fraud account under the RBI's Master Directions on Fraud. It is the petitioners' case that they learnt about the fraud declaration only in the month of May/June 2023, as specifically pleaded in the petition. It is further the petitioners' case that 6/25 ::: Uploaded on - 18/06/2024 ::: Downloaded on - 19/06/2024 17:09:06 ::: 1-2.2481.2024 WPL.DOC an ordinary loan default has been arbitrarily categorized as a willful default on the grounds not mentioned in the show cause notice.
5. A perusal of the pleadings indicates that respondent no. 2 bank had called for a forensic audit report from two different auditors. Pursuant to a letter dated 22 nd November 2019, petitioners were called upon to give their response to the observations of the forensic auditor's observations. Accordingly, petitioner no. 1, i.e. Immense Packaging, by letters dated 26 th November 2019, 12th December 2019, and 30th December 2019, submitted a reply to respondent no. 2's letter dated 22nd November 2019. Petitioner no. 1, i.e. Govinda Industries, also by letters dated 27 th November 2019, 12th December 2019, and 30th December 2019, submitted a reply to respondent no. 2's letter dated 22nd November 2019. Petitioner no. 1, i.e. Immense Packaging by letter dated 6th January 2020, submitted a detailed response to the observation of the forensic audit report in reference to a letter dated 28th December 2019 issued by the respondent bank.
6. Thereafter, respondent no. 2 issued a show cause notice dated 18th July 2020 to the petitioners in the case of Immense Packaging, calling upon them to show cause as to why the petitioners' names should not be included in the list of willful defaulters as per RBI guidelines. Petitioners, in the case of Immense Packaging, responded 7/25 ::: Uploaded on - 18/06/2024 ::: Downloaded on - 19/06/2024 17:09:06 ::: 1-2.2481.2024 WPL.DOC to the show cause notice by reply dated 25 th September 2020. A similar show cause notice dated 17th January 2020 was issued to the petitioners in the case of Govinda Industries, and they responded by reply dated 17th February 2020.
7. On 12th May 2021, the petitioners were informed about inclusion of their names in the credit information company's list of willful defaulters. The copy of the order dated 18 th February 2021 issued by the Willful Defaulter Identification Committee - II (WDIC) was supplied to the petitioners. The petitioners accordingly made a representation to the willful defaulters review committee. Accordingly, on 7 th October 2021, the review committee rejected the representation of the petitioners. Hence, these petitions.
SUBMISSIONS ON BEHALF OF THE PETITIONERS :
8. Learned counsel for the petitioners submitted that the Hon'ble Supreme Court in the decision of SBI and others Vs. Rajesh Agarwal1 has held that the RBI's Master Directions on Fraud mandates compliance with the basic principles of natural justice, i.e. issuance of show cause notice and giving an opportunity of hearing before the account is declared as fraud. Learned counsel for the petitioners further submitted that respondents, in their affidavit-in-reply, have 1 2023 SCC Online 342 8/25 ::: Uploaded on - 18/06/2024 ::: Downloaded on - 19/06/2024 17:09:06 ::: 1-2.2481.2024 WPL.DOC failed to demonstrate any compliance with regard to the issuance of show cause notice or an opportunity of being heard to the petitioners before declaring petitioner no.1's loan account as fraud. A perusal of the copy of the fraud declaration produced on record by the respondents by way of affidavit-in-reply indicates that the same has been passed mechanically, though the forensic audit reports do not establish any fraud. Learned counsel for the petitioners submitted that the fraud declaration is in breach of principles of natural justice and suffers from procedural impropriety, arbitrariness, and non-application of mind, which is evident from the copy of the fraud declaration dated 4th April 2020.
9. Learned counsel for the petitioners submitted that the two reports of forensic audit dated 19 th October 2019 and 23rd December 2019, relied upon by the respondents opined that the petitioners' account could not establish fraud. However, respondents issued the fraud declaration in the absence of any material and without even issuing any notice to the petitioners. The fraud declaration resulted in a drastic consequence of declaring the petitioners as willful defaulters. Thus, the petitioners are barred from availing any further loan. Though the petitioners were served with show cause notice regarding declaration of willful defaulters, no particulars relied upon by the respondents for 9/25 ::: Uploaded on - 18/06/2024 ::: Downloaded on - 19/06/2024 17:09:06 ::: 1-2.2481.2024 WPL.DOC issuing the show cause notice were made available to the petitioners. The contents of the show cause notice and the orders passed by the respondents demonstrate that the same have been passed with a premeditated mind, and with an intention to declare the petitioners as willful defaulters. Thus, the learned counsel for the petitioners submitted that the action of the respondents is an arbitrary action amounting to a violation of Article 14 of the Constitution of India.
10. With reference to the willful defaulter orders, learned counsel for the petitioners relied upon the decision of this court in the case of Milind Patel Vs. Union of India and others 2. By relying upon the legal principles settled by this court in the said decision, learned counsel for the petitioners submitted that the action of respondents does not fulfill the test laid down by this court in paragraph 26 of the said decision. Learned counsel for the petitioners submitted that the show cause notice issued to the petitioners does not reveal the fraud declaration. It does not reveal any basis for issuing the show cause notice. Show cause notices are vague, which deprived the petitioners of making appropriate representation to respond to the show cause notices that there was no requirement to declare the petitioners as willful defaulters. The review committee failed to give any cogent reasons for 2 Writ Petition (OS) No. 3671 of 2023 dated 4th March 2024 10/25 ::: Uploaded on - 18/06/2024 ::: Downloaded on - 19/06/2024 17:09:06 ::: 1-2.2481.2024 WPL.DOC not accepting the explanation given by the petitioners about each transaction, which was relied upon by the respondents, to declare the petitioners as willful defaulters. The petitioners had, in their reply, contended that the petitioners are part of a group of three companies and they had conducted their affairs in such a manner that the manufacturing entity was purchasing raw materials from another group of companies. Hence, the accounts of all three companies reflected payments to and for the group company. All three companies of the group were banking with respondent no. 1-Bank from the same branch, and thus, it was not unknown to the bank that transactions were happening between these two companies as they had legitimate business dealings with each other. The allegations in the show cause notice regarding ₹12 crores being paid to the director Pragya Kela, has been specifically explained that such payment was never made, and thus out of the alleged payments credited of ₹14.79 crores, the sum of ₹12 crores was a mistake. The remaining transaction, worth ₹ 2.79 crores, was explained by the petitioners in their reply to the show cause notice. However, the bank proceeded on the basis of credit summations of ₹10.81 crores, which is illogical as in every defaulting borrower's account, credit summations are always reflected. Thus, it is submitted on behalf of the petitioners that legitimate business 11/25 ::: Uploaded on - 18/06/2024 ::: Downloaded on - 19/06/2024 17:09:06 ::: 1-2.2481.2024 WPL.DOC transactions are illogically treated to mean that though money was available, it was not utilized to discharge the loan amount.
11. Learned counsel for the petitioners thus submitted that the fundamental explanations were not considered by the review committee, and the order declaring the petitioners as willful defaulters was confirmed by giving the reason for round-tripping of funds, which was not an allegation in the show cause notice. Learned counsel for the petitioners submitted that the declaration of petitioners as willful defaulters has serious civil consequences, and hence, they are entitled to a detailed proper notice with reasons for having formed a prima facie view while calling upon the noticee to show cause as to why the prima facie view must not translate into a final view.
12. Learned counsel for the petitioners thus relied upon this court's decision in the case of Milind Patel and submitted that the respondents need to follow the guidelines for conducting proceedings under the RBI's Master Circular before declaring the petitioners as willful defaulters.
13. With regard to the fraud declaration on 4 th April 2020, learned counsel for the petitioners submitted that, admittedly, no notice was issued to the petitioners before issuing the fraud declaration. Hence, 12/25 ::: Uploaded on - 18/06/2024 ::: Downloaded on - 19/06/2024 17:09:06 ::: 1-2.2481.2024 WPL.DOC the same is in breach of principles of natural justice, as held by the Hon'ble Supreme Court in the case of SBI and others Vs. Rajesh Agarwal. Learned counsel for the petitioners thus submitted that the fraud declaration and the willful defaulter orders suffer from non- compliance with the basic principles of natural justice and thus deserve to be quashed and set aside.
SUBMISSIONS ON BEHALF OF RESPONDENTS:
14. Learned counsel for the respondents supported the fraud declaration and the willful defaulter orders. He submitted that the fraud declaration is in accordance with the RBI's Master Directions on fraud. He submitted that the RBI's Master Directions on Fraud classifies the fraud in order to have uniformity in reporting fraud, which is based on misappropriation of funds, criminal breach of trust and fraudulent engagement through forged instruments and manipulation of books of accounts through vicious accounts and conversion of the property. The respondents, via email dated 24th July 2019, had called upon the petitioners to participate and cooperate with the forensic audit members. Hence, there is no substance in the grounds raised on behalf of the petitioners that order declaring the petitioner no. 1's account as a fraud account is in breach of the principles of natural justice. He submitted that two reports of the forensic auditors 13/25 ::: Uploaded on - 18/06/2024 ::: Downloaded on - 19/06/2024 17:09:06 ::: 1-2.2481.2024 WPL.DOC submitted prior to the declaration of petitioner no. 1's account as fraud were supplied to the petitioners and their response was taken into consideration before issuing the fraud declaration.
15. With regard to the orders passed, declaring the petitioners as willful defaulters, learned counsel for the respondents submitted that the response of the petitioners was taken into consideration by WDIC Committee. He submitted that it is not in dispute that petitioners have committed default in repayment of loan amount. Inspite of giving adequate opportunities to the petitioners, before the fraud declaration and before declaring petitioners as willful defaulters, the petitioners failed to submit appropriate explanations on the allegations made against the petitioners. Thus, learned counsel for the respondents submitted that all the basic principles of natural justice were followed, and there is no illegality in the impugned fraud declaration and the impugned orders declaring the petitioners as willful defaulters.
ANALYSIS:
16. We have considered the rival submissions made by both parties. It is not disputed that the fraud declaration is issued without giving an opportunity of hearing to the petitioners. Respondents were unable to place on record any document to indicate that any show cause notice 14/25 ::: Uploaded on - 18/06/2024 ::: Downloaded on - 19/06/2024 17:09:06 ::: 1-2.2481.2024 WPL.DOC with regard to the declaration of fraud was served upon the petitioners and that the copy of the fraud declaration was intimated to the petitioners. So far as the fraud declaration is concerned, the same is governed by RBI's Master Directions on Fraud. The willful defaulter orders are issued under the RBI's Master Circular. Though show cause notice was issued and a personal hearing was given to the petitioners before issuing the willful defaulter orders, a perusal of the show cause notice indicates that except for calling upon the petitioners to explain the allegations made in the show cause notice, no material was supplied to the petitioners indicating as to on what basis the respondent bank arrived at a prima facie opinion that petitioners are willful defaulters. The petitioners replied to the show cause notice tendering explanation with regard to all the allegations made in the show cause notice. The reply filed by the petitioners indicates that a specific grievance was made that reasons for the allegations in the show cause notice were not furnished to the petitioners. The affidavit- in-reply filed by respondents in both petitions does not indicate that the reasons for the prima facie opinion of the bank were furnished to the petitioners.
17. A perusal of the show cause notice does not disclose any material or record based on which the allegations are made in the 15/25 ::: Uploaded on - 18/06/2024 ::: Downloaded on - 19/06/2024 17:09:06 ::: 1-2.2481.2024 WPL.DOC show cause notice. After the reply was submitted by the petitioners, the respondent bank called the petitioners for a personal hearing before the WDIC. The letter issued by the bank calling upon the petitioners for a personal hearing does not indicate that the reasons, as requested by the petitioners, were at any time furnished by the bank. The letter issued by the bank for a personal hearing states that WDIC has offered an opportunity for a personal hearing to the petitioners to make their submissions before the committee. Pursuant to the said letter, a meeting was conducted before WDIC. Both the petitioners were represented through its directors. The minutes of the meeting dated 18th February 2021 record the presence of the parties and further refer to the applicable RBI instructions for willful default, the reasons classified for declaring the petitioners as willful defaulters, response/submissions made on behalf of the petitioners and the decision of the WDIC.
18. The reasons recorded by WDIC declaring the petitioners as willful defaulters in the case of Immense Packaging Private Limited refers to the transfer of funds to the subsidiary companies and transaction of ₹12 crores for classifying the petitioners as willful defaulters in criteria 2.2.1 of the RBI's Master Circular. In the case of Govinda Industries Private Limited, the reasons recorded by WDIC 16/25 ::: Uploaded on - 18/06/2024 ::: Downloaded on - 19/06/2024 17:09:06 ::: 1-2.2481.2024 WPL.DOC refer to substantial funds available with the company and failure on the part of the company to repay the loan amount. However, it is the case of the petitioners that in the show cause notice issued to Govinda Industries Private Limited, there was no allegation of siphoning off or round-tripping of funds.
19. Hence, the petitioners submitted representation before the review committee. The minutes of meeting of the proceedings before the review committee again refer to same transactions as referred by WDIC. In the case of Immense Packaging Private Limited, the review committee observed that the company has routed sales of ₹10.81 crores against the net sales realization of ₹17.44 crores and had not given any justification for the shortfall in the credit summations. The review committee further observed that company accepted diversion of funds and submitted the transfers as transaction on behalf of the group companies which is not justified. The review committee also observed that short-term loan given by the company to the proprietary concern of one of the directors from the company's account again showcases diversion of funds. In the case of Immense Packaging Private Limited, it is also observed by the review committee that remuneration paid to the directors refers to higher remuneration, despite of low profitability and short-term loan to the directors. Thus, the review committee 17/25 ::: Uploaded on - 18/06/2024 ::: Downloaded on - 19/06/2024 17:09:06 ::: 1-2.2481.2024 WPL.DOC observed that company failed to provide any justification for the transfer of funds, including transfer of ₹12 crores to the director of the company and office properties worth ₹11.59 crores was removed from the balance sheet and transferred to its Director.
20. In the case of Govinda Industries Private Limited, the review committee observed that there were mis-quotes in the sales realization and credit summations, and the figures in the accounts indicated that the credit summation was in excess which the borrowers could have repaid the loan amount, however failed to do so. It is also observed that the company routed funds and transfers from Immense Packaging have been transferred to other accounts of the company and round tripping was done.
21. A perusal of the allegations in the show cause notice and the observations made by WDIC and the review committee indicates that the grounds accepted by WDIC and the review committee does not form part of the allegations in the show cause notice. Thus, the petitioners are justified in making a grievance that respondent bank has not followed the basic principles of natural justice before declaring the petitioners as willful defaulters. This court in the case of Milind Patel has taken a view that RBI's Master circular ensures transparent mechanism that would entail transparency to the noticee by notifying 18/25 ::: Uploaded on - 18/06/2024 ::: Downloaded on - 19/06/2024 17:09:06 ::: 1-2.2481.2024 WPL.DOC all the relevant facts that forms basis of determination and whether there has been a willful default. Thus, the discretion conferred on the commercial banks to inflict penal consequences was meant to be kept to the bare minimum, which underlines that exercise of the discretion has to be reasonable and not arbitrary. This court further observed that the absence of transparency with the reasons would render the exercise of discretion to be arbitrary. Thus, in view of the facts of the present case, the legal principles laid down by this court, in the case of Milind Patel squarely apply to the facts of both the petitions. It is a matter of record that the prima facie view taken by the bank in the show cause notice was not supported by any material supplied to the petitioners. Thus, the petitioners accused of being willful defaulters were unable to discharge their burden to prove their innocence.
22. The orders declaring the petitioners as willful defaulters results into serious civil consequences. Hence, the bank is under obligation to provide all the material relied upon to form prima facie opinion for calling upon the noticee to issue show cause. Thus, the orders passed in both petitions, declaring the petitioners as willful defaulters, suffer from a breach of principles of natural justice and thus are arbitrary, which deserve to be quashed and set aside.
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23. The Hon'ble Supreme Court in the case of SBI and others Vs. Rajesh has summarized the legal principles in paragraph 98 as under:
"98. The conclusions are summarised below:
98.1. No opportunity of being heard is required before an FIR is lodged and registered.
98.2. Classification of an account as fraud not only results in reporting the crime to the investigating agencies, but also has other penal and civil consequences against the borrowers.
98.3. Debarring the borrowers from accessing institutional finance under Clause 8.12.1 of the Master Directions on Frauds results in serious civil consequences for the borrower.
98.4. Such a debarment under Clause 8.12.1 of the Master Directions on Frauds is akin to blacklisting the borrowers for being untrustworthy and unworthy of credit by banks. This Court has consistently held that an opportunity of hearing ought to be provided before a person is blacklisted.
98.5. The application of audi alteram partem cannot be impliedly excluded under the Master Directions on Frauds. In view of the time-frame contemplated under the Master Directions on Frauds as well as the nature of the procedure adopted, it is reasonably practicable for the lender banks to provide an opportunity of a hearing to the borrowers before classifying their account as fraud.20/25 ::: Uploaded on - 18/06/2024 ::: Downloaded on - 19/06/2024 17:09:06 :::
1-2.2481.2024 WPL.DOC 98.6. The principles of natural justice demand that the borrowers must be served a notice, given an opportunity to explain the conclusions of the forensic audit report, and be allowed to represent by the banks/JLF before their account is classified as fraud under the Master Directions on Frauds. In addition, the decision classifying the borrower's account as fraudulent must be made by a reasoned order.
98.7. Since the Master Directions on Frauds do not expressly provide an opportunity of hearing to the borrowers before classifying their account as fraud, audi alteram partem has to be read into the provisions of the directions to save them from the vice of arbitrariness."
(emphasis applied)
24. In the present case, there is no dispute that the bank has failed to issue a show notice and give an opportunity for a hearing to the petitioners before issuing the fraud declaration. The Bank has even failed to produce any record to show that a copy of the fraud declaration was supplied to the company. Thus, the legal principles laid down by the Hon'ble Supreme Court in the case of SBI and others Vs. Rajesh Agarwal squarely applies to the facts of both the petitions. The legal principles laid down in the said decision mandate compliance with the basic principles of natural justice, namely issuance of show cause notice and an opportunity to be heard before 21/25 ::: Uploaded on - 18/06/2024 ::: Downloaded on - 19/06/2024 17:09:06 ::: 1-2.2481.2024 WPL.DOC declaring the account as fraud. Hence, we are of the view that the declaration of the company's account as fraud stands vitiated on account of breach of principles of natural justice.
25. However, we do not intend to foreclose the bank's opportunity for effective determination of allegations made by the bank in the show cause notice. Hence, the bank would be at liberty to make a proper disclosure of all the material and information based on which the show cause notices were issued for declaring the petitioners as willful defaulters. The petitioners, on being supplied with the necessary material, shall be entitled to submit a fresh reply to such show cause notice based on which a fresh draft order may be issued by the WDIC in accordance with the RBI's Master Circular and be served upon the petitioners to enable them to make their representation to the review committee, if necessary. Thus, after following the basic principles of natural justice and after giving an opportunity to be heard, the review committee shall pass a fresh order in accordance with law.
26. Regarding the declaration of fraud of the company's account, it would be open to the bank to initiate fresh proceedings after following the due procedure prescribed by the RBI's Master Directions on Fraud and the legal principles settled by the Hon'ble Supreme Court in the decision of SBI and others Vs. Rajesh Agarwal .
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27. Hence, for the reasons recorded above, both petitions are partly allowed by passing the following order;
ORDER I. The fraud declarations dated 4th April 2020, declaring the account of Immense Packaging Private Limited and Govinda Industries Private Limited are quashed and set aside. II. Orders dated 18th February 2021 and 7 th October 2021 passed in the case of Immense Packaging Private Limited and Govinda Industries Private Limited, declaring the petitioners as willful defaulters, are quashed and set aside. III. Respondent bank shall supply all the necessary material based on which the show cause notices were issued to the petitioners for arriving at a prima facie opinion that the petitioners have committed willful default. Necessary material to be supplied to the petitioners in support of the show cause notices within six weeks from today.
IV. Petitioners to submit a fresh reply to the show cause notices within six weeks after the necessary material is supplied to the petitioners.
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1-2.2481.2024 WPL.DOC V. After giving a personal hearing to the petitioners, the Willful Defaulters Identification Committee of the State Bank of India shall deal with the petitioners' fresh reply and submissions and pass fresh order on the show cause notices. If the orders are adverse to the petitioners, they will be entitled to file representation before the review committee and the same shall be decided in accordance with law.
VI. It is open to the State Bank of India to follow due procedure prescribed in RBI's Master Directions on Fraud dated 1 st July 2016 and initiate fresh proceedings for declaration of the company's account as fraud by issuing a show cause notice. VII. All the rival contentions on merits with respect to the show cause notices for willful default and the fresh proceedings if any initiated under the RBI's Master Directions on Fraud dated 1st July 2016 are kept open.
VIII. For taking a fresh decision on the show cause notice applying the RBI's wilful defaulter's Master Circular, the bank shall follow the guidelines under the RBI's Master Circular, and the principles settled in Milind Patel's case.
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1-2.2481.2024 WPL.DOC IX. In regard to the proceedings for declaring the company's account as fraud, if initiated by the bank, due procedure under the RBI's Master Directions on Fraud and the principles of law as declared by the Hon'ble Supreme Court in the case of SBI and others Vs. Rajesh Agarwal shall be followed.
X. Rule is made absolute in the above terms with no order as to
costs
(GAURI GODSE, J.) (G. S. KULKARNI , J.)
Digitally signed
by IRESH
IRESH MASHAL
Date:
MASHAL 2024.06.18
19:54:21
+0530
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