Gujarat High Court
M/S Associates High Pressure ... vs Union Bank Of India, Byculla Branch on 18 January, 2023
Author: Bhargav D. Karia
Bench: Bhargav D. Karia
NEUTRAL CITATION
C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CIVIL APPLICATION NO. 8550 of 2021
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE BHARGAV D. KARIA
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1 Whether Reporters of Local Papers may be allowed
to see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy
of the judgment ?
4 Whether this case involves a substantial question
of law as to the interpretation of the Constitution
of India or any order made thereunder ?
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M/S ASSOCIATES HIGH PRESSURE TECHNOLOGIES (P) LTD.
Versus
UNION BANK OF INDIA, BYCULLA BRANCH
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Appearance:
MR MEHUL SHARAD SHAH(773) for the Petitioner(s) No. 1,2,3,4,5,6
MR AMAR N BHATT(160) for the Respondent(s) No. 3
MR CZ SANKHLA(3243) for the Respondent(s) No. 1,2
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CORAM:HONOURABLE MR. JUSTICE BHARGAV D. KARIA
Date : 18/01/2023
ORAL JUDGMENT
1. Heard learned advocate Mr. Mehul Sharad Shah for the petitioners, learned advocate Mr. Page 1 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined C.Z. Sankhla for respondent nos. 1 and 2 and learned advocate Mr. Amar N. Bhatt for respondent no.3
2. By this petition under Article 226 of the Constitution of India, the petitioners have challenged the Master Directions of Reserve Bank of India dated July 01, 2016 which is updated as on 03.07.2017 to the extent of non-inclusion of principles of natural justice, in violation of Article 14 and Article 19(1)(g) of the Constitution of India. The petitioner has also prayed to quash and set aside the action of respondent nos. 1 and 2 invoking powers under the RBI Master Circular on willful Defaulter dated 01.07.2015 and subsequently, to quash and set aside the impugned notice dated 23.04.2019. It is also prayed to quash and set aside the impugned action of respondent nos. 1 and 2 of declaring the account of the petitioner no.1 Page 2 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined company as "Fraud" and all further consequential actions.
3. Brief facts of the case are as under :
3.1) The petitioner no.1 is a Private Limited Company registered under the provisions of the Companies Act, 1956 and petitioner nos. 2 to 6 are its Directors. The petitioner no.1-company was earlier known as M/s. Axis Enterprises Private Limited.
3.2) The petitioner company made an application on 2.09.2007 to the Deputy Commissioner, Kandla Special Economic Zone for allotment of the land and the said application was approved vide letter dated 07.11.2007.
3.3) The petitioner company started the commercial production in the said premises.Page 3 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023
NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined The petitioner company was manufacturing CNG and Industrial Gas Cylinders with a production capacity of 2,40,000 cylinders per year and the petitioner company have started commercial production with effect from 01.11.2009.
3.4) It is the case of the petitioners that the petitioners are doing banking transactions with the respondent no.1 bank since April, 2008 and looking to the creditworthiness of the petitioners, respondent bank from time to time enhanced the credit facilities in favour of the petitioner company and such credit facilities were reviewed lastly on 26.06.2015 by the respondent no.1 bank. It is the case of the petitioners that the petitioners have always acted as per the terms and conditions of the sanction letter and there was not a single default since 2008. Against the credit Page 4 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined facilities, respondent no.1 claims to have security interest/charge over the assets, raw material and finished goods etc. and as a collateral security pledge of 51% of promoters share in the company. 3.5) The petitioner company mainly exported the goods to Iran and Pakistan in the year 2013-2014. It is the case of the petitioners that both Iran and Pakistan had issued ban on import of CNG Cylinders from India and further had imposed dumping duty and therefore, it had become difficult for the petitioner company to export the CNG and Industrial Gas Cylinders to these countries. The entire business of the petitioner company had therefore, suffered loss and as such, there was no demand for the product of the petitioner company in India. The petitioners therefore, could not survive its commercial production and was not in a position to Page 5 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined dispose of the finished goods. 3.6) It is the case of the petitioner company that they had spent huge amount in constructing the industrial shed and installing the machineries, whereby cost of plat and machinery installed was approximately Rs. 95 crores. All the machineries were in working condition before actual possession was taken over by Kandla authorities. The petitioner company could not pay the amount of rent and therefore, the total liability increased to Rs. 2.5 crores. 3.7) The petitioner company had to suffer financial crunch and therefore, the account maintained by the petitioner company with respondent no.1 became irregular. 3.8) Respondent no.1 bank invoked action under the provisions of Securitisation and Page 6 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined Reconstructions of Financial Assets and Enforcement of Security Interest Act, 2002 ('the SARFAESI Act') by issuing Demand Notice dated 12.05.2016 under section 13(2) of the SARFAESI Act whereby it was informed that the account has been classified as NPA as on 31.01.2016. The petitioners filed reply dated 7.07.2016 to the Demand Notice. 3.9) It is the case of the petitioners that for the amount of rent due, the Kandla Special Economic Zone(For short "KASEZ") auctioned the property through one agency M.S.T.C. without informing the petitioners. The petitioners therefore, filed Special Civil Application No.7428/2017 before this Court. Apprehending coercive action, the petitioners moved Civil Application No.5278/2017 for interim direction, wherein this Court vide order dated 17.04.2017 directed to maintain status-quo on the Page 7 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined movable and immovable properties belonging to the petitioners situated at Plot No.543-560 at KASEZ.
3.10) Respondent no.1-Bank also filed Special Civil Application No.8825/2017 against KASEZ praying to set aside the auction proceedings initiated by KASEZ. Upon being statement made on behalf of the Union that the auction purchaser had withdrawn his proposal and the auction proceedings have not attained finality, writ petition came to be disposed of by order dated 24.09.2019. 3.11) Respondent no.1 has also filed recovery proceedings i.e. Original Application No. 326/2017 before the Debts Recovery Tribunal-II, Ahmedabad for adjudication of the claim and for obtaining recovery certificate.
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NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined 3.12) Respondent bank also filed Special Civil Application No.1875/2020 praying for a declaration that the Bank has got first charge over the secured mortgaged assets lying on plot no. 543-560 in the main areas of KASEZ, Gandhidham belonging to the petitioner company as per section 26-E of the SARFAESI Act and further prayed that bank is entitled to sell the said property to recover its outstanding dues with costs and interest. It was also prayed to quash and set aside the illegal attachment made to the property by the Development Commissioner, KASEZ. This Court issued notice on 28.01.2020 making it returnable on 11.02.2020 and the said petition is pending for adjudication. 3.13) The Reserve Bank of India issued a Master Circular on "Willful Defaulters" on 1.07.2015 wherein guidelines and procedure has been prescribed before declaring anyone Page 9 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined as a Willful Defaulter.
3.14) It is the case of the petitioners that they have received an e-mail dated 30.11.2018 followed by reminder from H.M. Shah & Co., Chartered Accountants, as they were appointed as Forensic Auditor by the respondent bank for demanding documents. 3.15) The petitioners vide reply dated 9.01.2019 intimated the Assistant General Manager of the respondent bank that Factory cum Registered Office premises of the Company situated at Plot No.543-560 at KASEZ had been sealed by the KASEZ and even auction was held and since injunction order is in operation pursuant to the petitions filed by the petitioners and respondent bank, the petitioners are not in a position to provide documents sought for by the Forensic Auditor. Page 10 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023
NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined 3.16) Respondent bank thereafter issued the impugned notice dated 23.04.2019 to the petitioner reporting all the petitioners as Willful Defaulters.
3.17) It is the case of the petitioners that though respondent no.1 has invoked and initiated proceedings for declaring petitioners as a Willful Defaulter by issuing notice dated 23.04.2019, the petitioners are not aware about the outcome of the said proceedings, as the petitioners have never been called for personal hearing nor any order of Willful Defaulter Committee has been served upon the petitioners.
3.18) The petitioners gave preliminary reply through advocate on 20.05.2019 which was replied by the bank vide letter dated 1.06.2019. Thereafter the petitioners have filed a detailed reply on 3.06.2019 pursuant Page 11 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined to the show cause notice dated 23.04.2019. 3.19) Respondent bank gave reply dated 8.06.2019 informing the petitioners that the bank is not in a position to consider the reply of the petitioners based on the merits and therefore, the reply/representation of the petitioners was rejected. 3.20) The petitioners vide letter dated 6.08.2019 have submitted proposal for One Time Settlement (OTS) and requested the bank to consider the prevailing situation and overall perspective and to consider the proposal for OTS.
3.21) The petitioners thereafter vide letter dated 15.10.2020 informed the bank that the petitioners are in search of prospective investor/buyer for the property in question so as to submit fair proposal for Page 12 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined OTS.
3.22) The petitioners vide letter dated 22.12.2020, referring to the personal meetings held on 15.12.2020 and 16.12.2020 they had with the bank, requested to send a letter to KASEZ for a joint inspection and to show the factory to the proposed investor/buyer so as to ascertain reasonable price of the property in question. 3.23) The petitioners again sent a reminder on 18.05.2021 to the respondent bank for joint inspection of the property at KASEZ, Gandhidham.
3.24) The Officers of the CBI, New Delhi visited the office as well as the residential premises of the petitioner company as well as that of the Directors and it was informed by the CBI Officers that the bank has filed Page 13 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined complaint dated 5.06.2021 which was converted into an FIR dated 09.06.2021 under sections 406, 420, 120-B of the Indian Penal Code and under section 13(2) read with section 13(1)
(d) of the Prevention of Corruption Act, 1988 against all the petitioners and a Search Warrant under section 93 of the Code of Criminal Procedure, 1973 dated 10.06.2021 has been issued by the City Civil and Sessions Court, Ahmedabad.
3.25) Being aggrieved by and dissatisfied with the action of respondent nos.1 and 2 declaring the petitioners as Willful Defaulters, the petitioners have preferred the present petition.
4. Learned advocate Mr. Mehul Sharad Shah for the petitioners submitted that the impugned Master Directions on Frauds dated 1.07.2016 is unconstitutional and is in breach of Page 14 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined Articles 14, 19 and 21 of the Constitution of India.
4.1) It was submitted that invocation of Master Circular on Willful Defaulter dated 1.07.2015 and the action of the bank declaring the bank account of the company as "Fraudulent Account' is ex-facie illegal and in violation of the principles of natural justice and therefore, the impugned declarations pursuant to the RBI Master Circular and directions dated 1.07.2015 and 1.07.2016 respectively as well as all further and consequential proceedings based on the same, are required to be quashed and set aside.
4.2) Learned advocate Mr. Shah submitted that by virtue of clause 2.6 of Master Circular on Willful Defaulter dated 01.07.2015, the provisions of RBI Master Page 15 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined Circular dated 01.07.2015 are not applicable to the guarantee deeds which are executed prior to 09.09.2014. It was submitted that undisputedly, the alleged deeds of guarantees executed by petitioners No. 2 to 7 are much prior to 09.09.2014, and therefore, petitioners No. 2 to 7 cannot be and ought not to be subjected to the RBI Master Circular dated 01.07.2015 and cannot be declared as willful defaulters. In support of such contention, reliance was placed on judgment of Division Bench of Bombay High Court dated 24.11.2020 passed in WP (L) 5383 of 2020 in case of Gopa Pravin Mangukiya V. Union of India.
4.3) It was submitted that Master Directions on Fraud dated 01.07.2016 issued by the Reserve Bank of India, is also bad in law for non-inclusion of principles of natural justice.
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NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined 4.4) It was submitted that, according to Clause-3.12.1 of the Master Directions on Fraud dated 01.07.2016, the penal provisions would not only affect the borrower i.e. the Company, but would also adversely affect the Directors of the Company such as the petitioners. It was submitted that the impugned decision declaring the Bank Account of the Company as "Fraudulent", would adversely affect the petitioners' fundamental right guaranteed under Article 19(1)(g) of the Constitution of India and under Article 21 of the Constitution of India and therefore, Directors of the Company are also required to be protected.
4.5) Learned advocate Mr. Shah submitted that the petitioners are challenging the RBI Direction on Frauds dated 01.07.2016 issued by Respondent No.3 RBI as well as the Page 17 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined impugned action of the respondent No.2 for declaring the account of the petitioner No.1 Company as "Fraud" on various grounds as under:
(i) The action of the respondent Nos.1 & 2
declaring the account of the petitioner No.1 as "Fraud" has been performed blatantly without complying with the principles of natural justice as neither any show cause notice nor any prior intimation or letter was addressed by the respondent No.1 to the petitioner No.1 before taking the impugned action nor the decision to declare the petitioner No.1 as willful defaulter has been communicated to the petitioner no.1 by the respondent No.1 bank. Thus, the action is clearly arbitrary and discriminatory.
(ii) The impugned action of the respondent No. 1 & 2 solely based upon impugned Master Page 18 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined Directions is contrary to law. Respondent No.1 & 2 Bank have not complied with the procedure prescribed in the impugned Circular before declaring the petitioners' as fraud.
The action of the respondent No.1 & 2 Bank is contrary to Clause 8.9.4 and Clause 8.9.5 of the impugned Circular.
(iii) The Impugned action has been taken by the respondent No.1 & 2 without providing the petitioners any material/document which forms the basis of the purported decision against the petitioner No. 1.
(iv) It was the duty of the respondent No. 1 & 2 to pass a speaking order and specifically provide the detailed reasons on the basis of which the account of the petitioners has been classified as a "Fraud Account". However, no material, evidence or correspondence has been sent by the respondent No.1 & 2 Bank even for Page 19 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined clarifications or notifying the petitioner No.1 that the account maintained in the name of petitioner No.1 has been classified as "Fraud".
(v) The petitioner No.1 came to know from the search warrant that the account of petitioner No. 1 has been declared as "fraud". As per oral information available with petitioner, the impugned action of the respondent No.1 & 2 is based on a purported Forensic Audit Report. Copy of this report has also not been provided to the petitioner No.1. The action of the respondent No.1 & 2 on the said basis is therefore liable to be quashed at the threshold.
(vi) The effect of declaration of the account as "Fraud" under the RBI Circular has penal consequences as per Clause 8.12 and accordingly, the action taken by the Page 20 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined respondent No.1 & 2 Bank without giving an opportunity to the petitioner No.1 to a personal hearing or make prior representation before Review Committee is in gross violation of the fundamental rights guaranteed to the petitioners under Articles 14, 19(1)(g) and 21 of the Constitution of India.
(vii) The Hon'ble Supreme Court of India in the case of State Bank of India v. Jah Developers reported in 2019 (6) SCC 787 while dealing with the Master Circular of RBI on Willful Defaulter mandates the issuance of a show-cause notice because in case of being declared as a defaulter, the fundamental right guaranteed under Article 19(1)(g) of the Constitution of India gets impacted. Since the consequences of being declared a fraud under the impugned RBI Circular are harsher, the principles applied in the said decision of the Supreme Court also ought to Page 21 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined be applied to the impugned RBI Directions on Fraud dated 01.07.2016.
(viii) The RBI Directions on Fraud dated 01.07.2016 also despite having such harsh consequences against the account being declared as "fraud" does not provide for any provision of issuance of show cause notice, or affording an opportunity of representation or hearing to an aggrieved party before declaring it as a fraud. The decision to classify the account as 'fraud' is a significant administrative decision taken in the commercial realm and has serious consequences for the account holder. The RBI Circular is therefore in itself violative of Article 14 of the Constitution of India.
(ix) Apart from the principles of natural justice and other jurisdictional and procedural infirmities, the RBI Circular is Page 22 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined also vague and un-canalised as it does not provide any guidance on the meaning of "fraud" and is liable to be struck down. Each of the criteria listed in Clauses 2.2.1 and 2.2.2 of the RBI Circular are not directly relatable to offences under the Indian Penal Code and the said clauses of the Circular is vague and capable of misuse to the detriment of the aggrieved entity and is thus unconstitutional in terms of the judgment of the Hon'ble Supreme Court in the case of Shreya Singhal v. Union of India (2015) 5 SCC 1.
4.6) It was submitted that the impugned Circular issued by respondent No. 3 RBI does not provide for any procedure requiring a show cause notice, representation or a reasonable opportunity of hearing to the borrower and the commercial Banks have been at absolute discretion to declare and Page 23 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined categorize any borrower account as 'fraud' without affording any opportunity to the borrower to represent his case either pre or post decision. It was submitted that since the impugned Circular does not contemplate opportunity of hearing to the borrower, the same is contrary to the principles of natural justice and is unconstitutional on the vice of Article 14 of the Constitution of India. 4.7) Learned advocate Mr. Shah submitted that the action of the respondent Nos.1 & 2 Bank of declaring the account of the petitioner No.1 as "Fraud" has been performed without complying with the principles of natural justice as neither any show cause notice nor any prior intimation or letter was addressed by the respondent No.1 to the petitioner No.1 before taking the impugned action nor the decision to declare the petitioner No.1 as 'Fraud' has been Page 24 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined communicated to the petitioner No.1 by the respondent Bank. Thus, the action is clearly arbitrary and discriminatory. 4.8) It was submitted that the effect of declaration of the account as "Fraud" under the RBI Circular has penal consequences as per Clause 8.12 and accordingly, the action taken by the respondent No.1 & 2 Bank without giving an opportunity to the petitioner No.1 to a personal hearing or make prior representation before review committee is in violation of the fundamental rights guaranteed to the petitioners under Articles 14, 19(1)(g) and 21 of the Constitution of India. It was submitted that the effect of declaration of the account as "Fraud" under the RBI Circular has penal consequences as per Clause 8.12 as the petitioners upon such declaration will be debarred from availing any finance from the Banks. Accordingly, the Page 25 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined action taken by the respondent No.1 & 2 Bank without giving an opportunity to the petitioner No.1 to a personal hearing or make prior representation is in gross violation of the fundamental rights guaranteed to the petitioners under Articles 14, 19(1)(g) and 21 of the Constitution of India. In support of such contention reliance was placed on decision of Apex Court in case of Swadeshi Cotton Mills v. Union of India reported in (1981) 1 SCC 664 and in case of Nawabhkan Abbaskhan v. the State of Gujarat reported in (1974) 2 SCC 121.
4.9) It was submitted that the declaration of the account as fraud and the RBI Circular has penal consequences, the requirement of following the principles of natural justice and the procedure under the RBI Circular has to be of the highest standing. In support of such contention, Page 26 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined reliance was placed on decision in case of Abhay Kumar Jain v. South Delhi Municipal Corporation reported in (2015) 148 DRJ 335. 4.10) It was submitted that the impugned Fraud Classification Directions dated 01.7.2016 does not define the word "fraud". As per Clause 2.2. of the Impugned Directions, there are 6 categories of transactions specifically mentioned, and there is a 7th category that states generically of any other "fraud". However, the word "fraud" itself is nowhere defined. The category or classification is not a definition of "Fraud". Thus, impugned Master Directions of Fraud dated 01.07.2016 is defective.
4.11) It was submitted that the proceedings conducted under the RBI Directions are administrative proceedings, Page 27 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined with the stated purpose of detecting and reporting frauds early and taking timely consequent actions like reporting to the investigative agencies so that 'fraudsters' are brought to book early. It was submitted that a bare perusal of Paragraph 8.12.1 of the RBI Directions would make clear that any decision made under the same would have drastic civil consequences on the borrower, such as:
a. the penal provisions as applicable to Willful Defaulters would apply to the fraudulent borrower including the promoter director(s) and other whole time directors of the Company insofar as raising of funds from the Banking system or from the capital markets by companies with which they are associated is concerned, etc.; and b. being debarred from availing Bank finance Page 28 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined from Scheduled Commercial Banks, Development Financial Institutions, Government owned NBFCs, Investment Institutions, etc., for a period of five years from the date of full payment of the defrauded amount.
4.12) It was therefore, submitted that any decision taken by the respondents must comply with basic canons of administrative law, and must not be arbitrary, discriminatory, unjust or mala fide, and not be violative of petitioners' fundamental rights under Article 14 of the Constitution of India.
4.13) It was submitted that besides declaration of loan account as Fraud, respondent No.1 and 2 mischievously and with malafide intentions invoked measures under Master Circular on Wilful Defaulter dated 01.07.2015 but never acted as procedure Page 29 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined prescribed.
4.14) It was submitted that in spite of the above proceedings being pending, the respondent Bank, has adopted illegal means to recover the amount from petitioners, by filing false criminal complaint before the CBI, Delhi under Sections 406, and 120-B of the Indian Penal Code. It was submitted that, pursuant to the said FIR, search was carried out by the officers of the CBI at the Corporate Office, Mumbai and also at the residential addresses of the Directors of the Company and news were also published in the newspapers to malign the reputation of the Company and its directors and therefore, such illegal action initiated by the respondent Bank is required to be deprecated by this Court.
4.15) It was submitted that by the impugned Page 30 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined notice dated 23.04.2019, the Chief Manager informed all the petitioners that, it is decided to classify them as "Willful Defaulters" because of the reason that though they have the capacity to pay the loan amount, they have committed default in repayment. It was also alleged that, the amount of loan has been diverted for some other purpose and that they have siphoned off the funds. It was submitted that, the said notice is ex-facie illegal and issued without any basis and evidence and therefore, the same requires to be quashed and set-aside.
4.16) Learned advocate Mr. Shah submitted that the notice dated 23.04.2019 has been issued by the Chief Manager without referring to the fact about his authority to issue such notice and as per the procedure prescribed by the Master Circular dated 01.07.2015 issued by the RBI, it is incumbent Page 31 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined upon the respondent Bank to first form an Identification Committee and to give an opportunity of hearing to the petitioners and also to inform the decision of the Identification Committee as well as the Review Committee to the petitioners.
Thereafter, only the Committee can issue notice to the petitioners/borrowers. It was submitted that looking to the notice as it is, it is crystal clear that, nowhere it is stated that the Committee has delegated power to the Chief Manager to issue such notice. As such, such delegation is also not permissible in the eye of law. The Chief Manager is not even qualified to become member of the committee. Therefore, the notice dated 23.04.2019 is ex-facie illegal and against the Master Circular dated 01.07.2015 issued by the Reserve Bank of India and therefore, the said notice is required to be quashed and set-aside.
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NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined 4.17) It was submitted that, despite request being made by the petitioners, the respondent Bank neither provided any document/ evidence nor the minutes of the Committee, if it was formed, as per Para-3 of the RBI Circular.
4.18) It was submitted that, it is incumbent upon the respondent Bank to provide the documents, based on which it came to the conclusion that, petitioners are "Willful Defaulters". It was submitted that it is a settled proposition of law that, if such documents relied upon by the authority are not provided, then, such decision is bad in law. In support of such contention, reliance is placed on decision in case of Finolex Industries Ltd V. RBI reported in 2011 SCC Online Bom 1781 which was affirmed by the Apex Court in decision reported in (2013) 7 Page 33 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined SCC 369.
4.19) It was submitted that the petitioners have filed a detailed reply dated 03.06.2019 to the impugned notice dated 23.04.2019. Thereafter, the Respondent Bank did not give any decision on the said show- cause notice. It was submitted that, not only the decision of declaring all the petitioners as "Willful Defaulters" is not communicated, but, even the decision to declare the Bank Account of the Company as "Fraudulent" is also not communicated and the petitioners came to know only when the officers of CBI visited the Corporate Office at Mumbai on 11.06.2021. Therefore, apparently the action of the Bank is in violation of principles of natural justice.
4.20) It was submitted that, to the best of knowledge of the petitioners, the Bank has Page 34 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined filed FIR and also reached to a conclusion that, the Bank Account of the Company is fraudulent, only on the basis of report of Forensic Audit. It was submitted that the entire financial record and all relevant documents are lying at the Registered Office at KASEZ/Gandhidham, which is sealed by KASEZ and no such document is verified by the Auditor and without looking at relevant financial documents and business transactions carried out by the Company, report might have been submitted by the Forensic Auditor. It was submitted that copy of the said report was also not served upon the petitioners. Therefore also the entire proceedings initiated on the basis of such report, is ex- facie illegal and in violation of principles of natural justice.
4.21) In support of his contentions, reliance was placed on the decisions of Page 35 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined Supreme Court, in the case of State of Orissa Vs. BinaPani Dei, reported in AIR 1967 SC 1269 and in case of Swadeshi Cotton Mills V/s. Union of India, reported in (1981) 1 SCC, 664.
4.22) Learned advocate Mr. Shah submitted that the petitioners are having a good prima facie case in its favour and the balance of convenience is also in favour of petitioners. The action of the respondent No. 1 invoking powers under RBI Master Circular on willful defaulter dated 01.07.2015 as well as declaring the account of the petitioner No. 1 company as "Fraud" pursuant to impugned RBI Master Directions on Fraud dated 01.07.2016 is ex-facie illegal and in violation of the principles of natural justice. It was submitted that the RBI Master Directions dated 01.07.2016 with regard to "Fraud" is also quashed and stayed by many High Courts Page 36 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined for non inclusion of principles of natural justice and therefore also, it is incumbent upon the respondent Nos. 1 and 2 to provide the necessary documents relied upon by the Bank and also to provide the report of the Forensic Auditor. It was further submitted that if such interim relief as prayed for is not granted, then, it will cause great prejudice to the petitioners as their reputation is at stake.
5. On the other hand, learned advocate Mr. C.Z Sankhla for respondent nos. 1 and 2 submitted that the petitioners have not come with the clean hands before this Court and suppressed the material facts and on this ground alone present petition is required to be rejected. 5.1) It was submitted that the petitioners have stated in the petition that petitioners have filed a detailed reply dated Page 37 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined 03.06.2019 and thereafter, petitioners did not receive any order or communication passed by the Committee of the Bank enjoined under RBI Master Circular dated 01.07.2015 on Willful defaulter, however, this statement is false and fabricated to the knowledge of the petitioners themselves. It was submitted that the Bank replied to the petitioners vide letter dated 08.06.2019 and after issuance of show cause notice, the petitioners have been provided the personal hearing by the Identification Committee which was held on 14.10.2019, wherein the petitioner no.2 appeared personally which is evident as per the attendance sheet with the respondents. 5.2) It was submitted that no cause of action arises to file the present petition before this Court inasmuch as all the proceeding related to the declaration of Willful Defaulter as well as the fraud have Page 38 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined taken place at Mumbai, State of Maharashtra, apart from the fact that the petitioners as well as the respondents address is also that of Mumbai (Maharashtra State), therefore, this Court does not have jurisdiction to entertain the present petition and on that ground of jurisdiction alone the present petition requires to be rejected. 5.3) Learned advocate Mr. Sankhla submitted that respondent Bank have initiated two separate proceedings as per RBI Master Circular on Willful Defaulters dated July 1, 2015 and declared the account of the petitioners as Wilful Defaulter, which are civil in nature and as per the RBI Master Circular on classification of fraud dated July 1, 2016 declared the account as Fraud, which is a Criminal proceeding and the civil and criminal cases cannot be clubbed together, and therefore, the present petition Page 39 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined is even otherwise not maintainable on merit and is required to be dismissed. 5.4) It was submitted that the respondent Bank have already declared the account as "Fraud" and, thereafter, filed the complaint before the Central Bureau of Investigation(CBI) vide complaint dated 05.03.2021 and the same was taken into the consideration and FIR was registered vide FIR no. RC0502021A0008 on 09.06.2021. It was submitted that notwithstanding the above facts being on record and pleadings against the same before this Court, the Central Bureau of Investigation has not been made a party in the present petition, therefore, the present petition is required to be rejected on the ground of non joinder of necessary party alone.
5.5) Learned advocate Mr. Shankhla Page 40 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined submitted that that the petitioner Nos.2 to 6 are the directors of petitioner No.1 - company. The petitioner No.1 had approached the Union Bank of India for sanction of financial assistance to conduct their business and the Union Bank of India believing the submissions made to be true and correct had issued a sanction letter dt. 24.10.2008. Thereafter, the said facilities were renewed/modified at regular intervals and petitioner no.1 subsequently proposed for renewed/reconstituted/enhanced credit limits. Based on the proposal made by petitioner no.1, Union Bank of India had restructured financial assistance in the year 2015 by way of enhancing overall credit limit to Rs.90.46 Crores as tabulated below:
Type of Facility Facility forming part of the overall limit (90.46 crores) CCGEN Rs.15.00 Crores WCTL Rs.12.22 Crores FITL Rs.12.89 Crores Page 41 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined FTL Rs.42.85 Crores LC Rs.7.50 Crores Overall Limit 90.46 Crores 5.6) It was submitted that the said restructuring of financial assistance with renewed/reconstituted/enhanced limit was duly approved and accepted by the Board of Directors of petitioner no.1 company by way of Board Resolution dated 26.08.2015. In the said board resolution, the execution of various documents in favour of Union Bank of India had also been approved by Board of Directors of petitioner no.1 company. The petitioner company however, failed to conduct the accounts properly and repay overall credit facility granted by the Union Bank of India as per the terms and conditions of the restructuring and not even made any efforts towards compliance of restructured terms and conditions. The loan account of petitioner no.1 company was, therefore, required to be Page 42 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined classified as NPA (Non-Performing Assets) on 31.01.2016 in accordance with RBI guidelines in respect thereof.
5.7) Learned advocate Mr. Sankhla further submitted that the respondent Bank as a secured creditor had issued Demand notice/Statutory notice dated 12.05.2016 under section 13(2) of SARFAESI Act, 2002 to the petitioners, however, they failed to repay the dues during the statutory period and the total outstanding amount payable by petitioners to the respondent bank as on 30.06.2021 for the credit facilities is aggregating to Rs.146,29,73,855/-.
5.8) It was submitted that as per the terms and conditions of the executed security documents, the petitioners were required to repay the entire financial facilities.
However, the petitioners have failed to repay Page 43 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined the said financial facilities as per the agreed terms and conditions and whatever they have paid were irregular. Consequently, as per RBI circular dated 02.07.2012 and as per statutory provisions under section 2(1)(o) of the SARFAESI Act, the said loan account was classified as 'NPA' on 31.01.2016 when the petitioners have failed to repay the single amount for continuous 90 days. Subsequently, the respondent bank had issued various demand letters demanding the outstanding loan amount from the petitioners.
5.9) It was submitted that as per the RBI's circular dated 01.07.2015 and settled position under law with regard to the publication of details of willful defaulter, "The Willful Defaulter Committee" has been constituted. The said Committee is constituted of three members, wherein Executive Director and two Senior Executives Page 44 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined of Union Bank of India are the members. As per the definition of "willful defaulter" in clause No.2.1.3, the happening of any of the following events would make the borrower/unit as a willful defaulter.
a) Borrower defaults in repayment obligations, even when it has a capacity to honour the said obligations.
b) The finance amount is utilized for some other purpose or the funds are diverted for other purpose for which the sanction is not given.
c) The borrower has siphoned off the funds.
d) The borrower has disposed off the movable fixed assets or immovable property which had been given as security under the said finance.
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NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined 5.10) It was submitted that clause No.2.6 makes a provision of fastening the liability of willful defaulter on personal guarantors in case of borrower being a defaulter company as they had a joint liability, as per section 128 of the Indian Contract Act, 1872. As per the said clause, the moment the guarantor refuses or does not comply with the demand made by the bank at the time of invoking guarantee, such guarantors would be deemed as willful defaulter.
5.11) It was submitted that subsequently, upon perusing the records and reply of the petitioners, the Willful Defaulters Committee had resolved to forward the name of the present petitioners to be registered as willful defaulters in the list maintained by the RBI. The said decision of the Identification Committee was duly reviewed by Page 46 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined a Review Committee constituted for the purpose in accordance with the said RBI circular and the decision of the independent Committee has been upheld by the said Review Committee with respect to inclusion of petitioners in the list of willful defaulters.
5.12) Learned advocate Mr. Sankhla submitted that the contention raised by the petitioners that the petitioners have not been served with any orders with respect to decision of Identification Committee as well as Review Committee for publication of details of the present petitioners as willful defaulters, is not tenable. It was submitted that as per clause 3 of the said circular, the said RBI Guidelines only mandate for issuance of Show Cause Notice by Independent Evaluation Committee (WDC) and there is no such requirement or procedure prescribed Page 47 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined therein for serving the order/ minutes of Independent Evaluation Committee or Review Committee. The said procedure as prescribed by the RBI has been duly followed by the respondent bank so as to ensure that the names of willful defaulters are identified in a bonafide, unbiased and prescribed manner. 5.13) Learned advocate Mr. Sankhla therefore, submitted that the case of the petitioners was considered by the Identification Committee on 14.10.2019 as well as Review Committee on 24.02.2020 and it had been decided by the said two committees to declare the petitioners as a Willful Defaulter and report the details to all credit information companies and RBI. 5.14) It was lastly submitted that the broad contention raised by petitioners that the bank has not replied to the objections of Page 48 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined the petitioners and had not followed the procedure laid down by the RBI is not correct inasmuch as the fact, remains that despite the said account becoming NPA as on 31.01.2016, the petitioners have failed to repay the said loan amount for more than last 5 years till date and now they are raising a ground that they are not willful defaulters under pretext of their unilateral interpretation of RBI circular claiming that the decision of the two committees were not served to them which is only an eye wash and an absolute abuse of process of law. On the contrary, the correct fact is entirely different, the developments in the matter and decisions were validly and timely communicated/ intimated to petitioners by the respondent bank against which there has been voluminous correspondence. Therefore, the present petition filed by the petitioners is a clear case of suppression of material facts Page 49 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined and the said petitioners have not come before this Court with clean hands.
5.15) It was submitted hat insofar as Forensic Audit Report is concerned, the petitioners did not cooperate in the process despite the fact that the Forensic Auditors requested vide email dated 30.11.2018 followed by reminders dated 03.12.2018 and 13.12.2018 for submission of requisite information. The petitioners, however, denied to comply vide their letter dated 09.06.2019. 5.16) Learned advocate Mr. Sankhla submitted that the petitioners instead of paying the huge amount of dues of the respondent bank which constitutes public money have filed this petition with the sole objective of defeating not only the interest of respondent bank but also keeping the option open to further misrepresent the facts Page 50 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined to other lenders in order to similarly cheat them by fraudulently resorting to dubious tactics and hence this petition seems to be the deliberate attempt to mislead this Court in order to fulfill their malicious designs. It was further submitted that the Criminal proceedings initiated by the Bank under RBI directives dated 01.07.2016 cannot be clubbed under the present petition filed for relief under action taken for Willful Defaulter vide RBI Circular dated 01.07.2015 and as such, these are two different and separate actions under two independent directives of RBI. 5.17) It was therefore, submitted that the petitioners have not been able to make out a case warranting intervention by this Court under its extraordinary jurisdiction under Article 226 of the Constitution of India and hence the present petition being devoid of merit may kindly be rejected.
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6. Learned advocate Mr. Amar Bhatt appearing for respondent no.3- Reserve Bank of India at the outset submitted that the petition is not tenable and is filed on the basis of misconceived interpretation of RBI Directions/Circulars. It was submitted that the petition also raises disputed question of facts and even otherwise, the directions impugned in the petition are a policy decision of RBI and it is a settled position of law that in the matter of economic policy, the Court may not interfere with the policy decision of RBI in the interest of Banking System as a whole and in the public interest. It was further submitted that the petitioners have failed to make out even a prima facie case for invoking the jurisdiction of this Court under Article 226, inasmuch as no rights much less the fundamental rights of the petitioners are violated by RBI. Page 52 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023
NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined 6.1) It was submitted that RBI is constituted under Section 3 of the Reserve Bank of India Act, 1934 and the preamble to that Act enjoins RBI to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage; to have a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while in mind the objective of growth. It has also been vested with the responsibility of superintendence and control of the banking business in the country under the provisions of the Banking Regulation Act, 1949. Under the Banking Regulation Act, 1949, RBI has been vested with various powers with respect to banking companies, such as granting licenses, conducting inspections, giving directions, advice, etc. In view of Page 53 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined the various provisions of the Banking Regulation Act, 1949 and RBI Act, the Reserve Bank is obliged to see that the banking business is carried on by banks, prudently and adhering to sound principles of banking. 6.2) Learned advocate Mr. Bhatt submitted that under the Banking Regulation Act, 1949, RBI has been vested with the powers to determine banking policy in the interest of the banking system, in the interest of monetary stability and sound economic growth, having due regard to the interests of the depositors. Further, RBI is concerned with organization of a sound and healthy banking system, ensuring effective co-ordination and control over credit through appropriate monetary and credit policies. RBI has the primary responsibility to ensure the stability of the banking system in the country, and guidelines are issued by it from Page 54 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined time to time, keeping such objectives and responsibilities in view. RBI being an expert body, its decisions with regard to the regulation of banks, deserve to be given due weightage. It was submitted that Section 35A of the Banking Regulation Act, 1949 also empowers RBI to issue directions to the banks. The Master Directions on Frauds has been issued by RBI, in public interest, under Section 35A of the Banking Regulation Act, 1949.
6.3) Referring to the circumstances leading to the issuance of Master Directions on Fraud-Classification and Reporting by the Commercial banks and select Financial Institutions dated July 01, 2016, updated as on July 03,2017, it was submitted that fraud has also been one of the reasons for huge NPAs in the banking industry and recognizing the fact that the origin of fraud can be Page 55 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined checked at the initial stage itself, the Reserve Bank of India has been impressing upon banks from time to time to strengthen the system by way of issuing various guidelines. RBI, in exercise of supervisory powers vested in it, have been issuing circulars in this regard from time to time directing the banks to take appropriate action to prevent frauds etc. It was submitted that on April 8, 1983 Reserve Bank of India issued a circular advising banks to periodically review and refine systems and procedures in banks to prevent recurrence of fraud and to ensure that warning signals did not go unnoticed.
6.4) It was submitted that in order to enquire into various aspects relating to frauds and malpractices in banks, a committee under the chairmanship of Shri Amitava Ghosh, Deputy Governor of RBI, (known as the "Ghosh Page 56 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined Committee) was set up. Based on the recommendations of the committee, a circular dated August 25, 1992 was issued by the Reserve Bank advising the banks to initiate steps to immediately implement the recommendations made by the Ghosh Committee mainly to contain the incidents of frauds in banks. However, in spite of public sector banks having certified implementation of most of the recommendations contained in the Ghosh Committee, frauds in banks continued to rise. 6.5) It was submitted that in September 2000, a Committee under the Chairmanship of Dr. N. L. Mitra, known as the "Mitra Committee", was set up by the RBI to examine issues on legal aspects of Bank Frauds. The Committee in its report, submitted to the Bank and recommended that a system of internal checks and control in the system management and reporting should be Page 57 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined introduced, and reiterated the instructions already issued to banks on the subject with special emphasis on the following circulars, namely:
i. RBI Circular dated April 8, 1983 advising banks to periodically review and refine systems and procedures in banks to prevent recurrence of fraud and to ensure that warning signals did not remain unnoticed.
ii. RBI Circular dated July 6, 1995 regarding reconciliation of outstanding entries in inter-bank accounts.
iii RBI Circulars dated October 11, 1993 and August 14, 1996 regarding introduction of concurrent audit.
iv RBI Circular dated November 1, 1996 regarding implementation of Jilani Committee Page 58 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined recommendations.
v. RBI Circular dated April 16, 1999 regarding implementation of the Narasimham Committee recommendations relating to internal control.
6.6) Learned advocate Mr. Bhatt submitted that among several initiatives that the RBI has taken in this behalf, one is to put in place a mechanism for the early detection and dissemination of information on fraud. In continuation of its effort to sensitize the banks against banking frauds and to have deterrent systems against such frauds, on March 22, 2001 RBI issued a "Master Circular on Frauds Classification and Reporting". To enable the banks to have current instructions at one place, RBI issued a Master Circular dated August 13, 2001, incorporating all the existing guidelines/instructions/ directives Page 59 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined on the subject. In order to enable both the Government of India and Reserve Bank of India to have required information on frauds, suitable reporting system came to be introduced and the circular gives details of the reporting of the fraud.
6.7) It was submitted that though the Circular dated March 22, 2001 prescribed the period for reporting, the practical experience of its working, brought out the need for an improved mechanism or framework.
In this behalf, at the instance of the Governor, RBI, the Central Vigilance Commission set up a High-Level Group with representatives from the Ministry of Finance, CVC, CBI, IBA and RBI. The Group submitted its Report in April 2002. The Group, inter alia, examined the reasons for the inordinate delay in banks taking action against officials involved in frauds and recommended Page 60 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined measures for reducing delay, suggested measures required to be taken by banks to strengthen the internal control system with a view to preventing frauds, etc. The High Level Group observed that banks often did not adhere to the time frames stipulated by RBI for reporting fraud cases. The Group, therefore, suggested that suitable penal action be taken against defaulting banks. It was submitted that as per the extant instructions, banks are required to report fraud to RBI within seven days of their coming to know about it by way of a D.O. letter. Thereafter, a detailed Report on the fraud in the prescribed format is required to be submitted to RBI within three weeks of its detection in terms of the instruction contained in paragraph 4.1.3 of the 'Master Circular on Frauds Classification and Reporting. RBI issued Circular dated May 3, 2002 relating to implementation of Page 61 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined recommendations of the Committee on Legal Aspects of Bank Frauds (Mitra Committee) and the recommendations of the High Level Group set-up by the Central Vigilance Commission applicable to all scheduled commercial banks (excluding Regional Rural Banks). 6.8) Learned advocate Mr. Bhatt submitted that the Hon'ble Supreme Court in its decision in the case of Pramod Malhotra v. Union of India reported in 2004 (2) SCR 688 expressed its concern on frauds taking place in the financial system and observed that "Before parting with the case, we would like to note that financial frauds are on the rise. We find that the police and CBI are not equipped to deal with such cases involving adroit financial manipulations. It is hoped that the Government would now set up a special cell, which has the expertise to unravel such frauds and the frauds. Such a Page 62 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined cell must have all the powers necessary for investigating, including powers of search and seizure but also be authorised to prosecute the defaulter."
6.9) It was therefore, submitted that in order to minimise the incidents of fraud in the banking system RBI has been putting in continuous effort, and has issued Circulars from time to time directing the banks to initiate appropriate action to contain incidents of fraud. A Circular was therefore, issued by RBI on August 7,2004 consolidating all the instructions on Fraud monitoring. RBI used to update the Master Circular on Frauds, annually, generally in July, incorporating the instructions issued till the said date.
6.10) It was submitted that since 2016, RBI has started issuing Master Directions on Page 63 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined each subject matter covering all instructions on that subject. The Master Directions are being updated suitably whenever there is a change in policy. All the changes would be reflected in the Master Directions available on the RBI website, along with respective dates on which the said changes are made. Accordingly. 'Master Directions on Frauds Classification and Reporting by Commercial Banks and Select Financial Institutions, was issued on July 1, 2016. The same is more or less an updation of the existing Master Circular on Frauds Classification and Reporting dated July 1, 2015. Subsequently, the Master Direction on Frauds was updated on July 3, 2017.
6.11) Learned advocate Mr. Amar Bhatt thereafter referring to sections 21 and 35-A of the Banking Regulation Act, 1949 submitted that in exercise of powers conferred under Page 64 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined Section 21 read with Section 35A of the Banking Regulation Act, 1949, the Reserve Bank of India issues various directives and guidelines to be complied with by the banks. Relying upon the judgments of Hon'ble Supreme Court in case of Joseph Kuruvilla Vellukunnel v. Reserve Bank of India reported in AIR 1962 SC 1371, Peerless General Finance and Investment Co. Ltd, and another v. Reserve Bank of India reported in (1992) 2 SCC 343 and Central Bank of India v. Ravindra reported in (2002) 1 SCC 367, it was submitted that the role of RBI is as the Banker's Bank as also the supervisory role and the directions issued by RBI are statutory in nature.
6.12) Learned advocate Mr. Bhatt submitted that the impugned circular is neither arbitrary nor violative of fundamental principles of the Constitution. The purpose Page 65 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined of Master Direction on Frauds, as mentioned at para 1.3 of the said Direction, is to provide a framework to banks enabling them to detect and report frauds early and taking timely consequent actions like reporting to the investigative agencies so that fraudsters are brought to book, examine staff accountability and effective fraud risk management. These directions also aim to enable faster dissemination of information by the RBI to banks on the details of frauds, concerned borrowers and related parties, based on banks' reporting so that necessary safeguards / preventive measures by way of appropriate procedures and internal checks are introduced and caution exercised while dealing with such parties by banks. 6.13) It was further submitted that a loan fraud is a breach/ violation of the terms and conditions of the contract by a borrower Page 66 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined having mala fide intent, as perceived by the bank which has granted the loan. It was submitted that in the commission of fraud by the borrower, the bank is the injured party and has a right to report the crime to law enforcement agencies. The procedure prescribed for identifying the fraudulent activity is not arbitrary. As per para 2.1.3 of the Master Direction, banks with the approval of their respective Boards, shall frame internal policy for fraud risk management and fraud investigation function, based on the governance standards relating to the ownership of the function. Each bank has structured organizational setup to identify and investigate he fraudulent activities in an account. The Master Direction on Frauds provides a framework for identifying and reporting the fraud.
6.14) It was submitted that as per Page 67 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined paragraph 2.1 of the Master Direction on Frauds, fraud risk management, fraud monitoring and fraud investigation function must be owned by the bank's CEO, Audit Committee of the Board and the Special Committee of the Board. It is required as per Paragraph 2.1.3 of the Master Direction on Frauds that banks with the approval of their respective Boards frame internal policy for fraud risk management and fraud investigation function, based on the governance standards relating to the ownership of the function and accountability resting on defined and dedicated organizational set up and operating processes.
6.15) Learned advocate Mr. Bhatt further submitted that one of the main objectives of the Master Direction on Frauds is to provide to all banks the details of frauds reported by any one of them, along with information on Page 68 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined the concerned borrowers and related parties so that they could exercise caution while dealing with such entities. To facilitate such ongoing process, it was essential that banks report to RBI complete information about frauds and the follow-up action taken thereon. Banks were therefore advised that they may adopt the reporting system for frauds as prescribed in the said Master Direction on Frauds.
6.16) It was submitted that paragraph 2.2.1 of the Master Direction on Frauds provides for 'Classification of Frauds. The said Paragraph was added in order to have uniformity in reporting frauds which have been classified based mainly on the provisions of the Indian Penal Code. It was submitted that this classification is only for sharing the information with other banks, on a private and secure basis. The consequent Page 69 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined action is decided upon investigation by law enforcement agencies. It was submitted that such classification is just an illustration for guidance of the banks. It was submitted that banks need to be alert against all types of frauds and need to strengthen their systems and controls to prevent similar incidents in the future. Hence, they are classified as a separate type for reporting by banks under the Master Direction on Frauds. The classification is only for reporting purpose and not for framing charges, which is to be done independently by the law enforcement agencies. The classification does not amount to adjudication of the borrower as guilty under the reported category. The purpose of the framework on classification and reporting of frauds is for banks to report such incidents early and also to enable dissemination of the reported information to other banks so that Page 70 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined necessary safeguards / preventive measures by way of appropriate procedures and internal checks may be introduced and caution exercised while dealing with such parties by other banks.
6.17) Learned advocate Mr. Bhatt thereafter submitted that Chapter VI of the Master Direction on Frauds provides the Guidelines for reporting frauds to Police/ CBI. Para 6.1 provides that while dealing with cases of fraud/ embezzlement, banks should not merely be actuated by the necessity of recovering expeditiously the amount involved but should also be motivated by public interest.
6.18) It was submitted that the data on frauds is accessible to the authorized officials only, of the banks/ Financial Institutions and the information in Central Page 71 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined Fraud Registry is displayed in the strictest confidence and is not revealed to any constituent.
6.19) It was further submitted that the information provided by banks on frauds has to be quick. Further, faster dissemination of information by the RBI to banks on the details of reported frauds prevents the fraudster from repeating the malfeasance elsewhere and cover his tracks by destroying evidence. Once an account is identified as a fraud, many attendant activities like reporting to investigative agencies and RBI, staff accountability examination, plugging the gaps which led to the Fraud are to be followed.
6.20) It was submitted that once a fraud is reported by a bank, it is important that other banks are sensitized regarding the Page 72 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined fraud. In this regard RBI issues Caution Advice to the banks, mentioning the details about the concerned borrowers and related parties and also about the modus operandi of the reported fraud, so that banks can exercise due diligence while dealing with the entities/individuals mentioned in the Caution Advices. It was submitted that in January 2016, Central Fraud Registry, a web enabled database of frauds reported by banks, replaced the issuing of Caution Advice, with a few exceptions. Access to Central Fraud Registry has been given only to the banks and select Financial Institutions. A bank has a fiduciary duty to its depositors. It holds deposits in good faith and promises to return the same with compensating interest. It cannot do so without assessing the creditworthiness of loan applicants. Hence, a bank, while extending credit to its clients (current or potential) has to carefully Page 73 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined assess their creditworthiness. It was submitted that one of the methods for screening applicants is by understanding their behavior in the past, as evidenced by reports from other lenders. All of this calls for a quick reporting of fraud by banks and effective sharing of information among banks. 6.21) Reliance was also placed on the decision of Apex Court in case of Kotak Mahindra Bank v. Hindustan National Glass reported in (2013) 7 SCC 369 on the issue of Circular on Wilful Defaulters containing instructions of the RBI to banks and financial institutions regarding reporting of willful defaulters to other banks and financial institutions and the measures to be imposed on willful defaulters by such banks and financial institutions.
6.22) Learned advocate Mr. Bhatt Page 74 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined therefore, submitted that the present petition filed by the petitioner is wholly misconceived. The Petitioners have totally misconstrued and utterly misunderstood the provisions and the objects of the impugned Circular and there is no unconstitutionality or arbitrariness as alleged by the petitioner in the Circular for reporting of Frauds by the Bank and as such the petition is liable to be dismissed.
6.23) On merits, learned advocate Mr. Bhatt submitted that the petitioners have mentioned certain cases of High Court of Delhi which are in nature of interim orders in matters which are pending adjudication before High Court of Delhi. It was submitted that the Delhi High Court has passed interim orders on 03.07.2020 in Kanta Devi Arya v. Reserve Bank of India in WP 3924 of 2020 and interim order dated 15.02.2019 in Apple Page 75 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined Sponge and Power Ltd & Ors v. Reserve Bank of India & Anr in WP(C) 306 of 2019, where Delhi High Court has clarified that it is open to the Bank to issue a show cause notice and pass reasoned order, after affording necessary hearing and it was further observed that, the interim order also will not prevent any investigation that is sought to be carried out by the concerned Criminal Investigating Agency. Therefore, it is only an interim order, however, the same does not prevent any investigation. It was submitted that the issues in the matter of Apple Sponge and Power Limited vs. Reserve Bank of India and Anr.(supra) have not been conclusively decided and said order dated 15.02.2019 is passed without prejudice to the rights and contentions of the parties, all of which are kept open.
6.24) It was further submitted that the Page 76 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined validity of the Master Direction of RBI dated 01.07.2016 regarding classification of accounts by banks and select Financial Institutions as fraud accounts was also challenged before the Telangana High Court in Rajesh Agarwal Vs Reserve Bank of India in Writ Petition No. 19102 of 2019, wherein the Court has passed the judgment and order dated 10.12.2020, holding, inter-alia, that the principles of Audi Alteram Partem, Part of principles of natural justice are to be read in clause-8.9.4 and 8.9.5 of the Master Circular. However, the said order was challenged by the Reserve Bank of India before the Hon'ble Supreme Court in Special Leave Appeal (C) No. 5056 of 2021 and the said case is presently pending adjudication before the Supreme Court. It was further submitted that in the said Special Leave Appeal (C) No. 5056 of 2021, the Hon'ble Supreme Court vide order dated 15.04.2021 has Page 77 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined granted stay on the Telangana High Court order dated 10.12.2020 insofar it observed that a personal hearing be given. 6.25) It was submitted that the Master Directions issued by RBI have not provided a mechanism for borrowers to be heard before reporting them as fraud for the following reasons :
(1) The information is shared with other banks on private and confidential basis. It is in the nature of a Banker's report on an account.
(2) The intent of sharing the information is for the purpose of exercising caution while dealing with such parties as indicated in Caution Advice / Central Fraud Registry.
(3) It is mandatory to file complaint with Page 78 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined Law Enforcement Agencies, who will independently investigate the matter and present it in Court of Law.
(4) The information on frauds is published by RBI only as statistics at aggregate level without revealing the details of individual cases.
(5) A loan fraud is a breach in the contract by a party (borrower) as perceived by the other party (the bank).
(6) In a fraud, the bank is the injured party. It has the right to report the crime to law enforcement agencies.
(7) The issue of show cause notice might forewarn the perpetrator and therefore, hamper investigation by law enforcement agencies and administration of justice.Page 79 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023
NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined (8) The procedure prescribed for identifying the fraudulent activity is not arbitrary. Each bank has structured organisational set- up to identify and investigate the fraudulent activities in the account.
6.26) Learned advocate Mr. Bhatt submitted that a misleading attempt has been made before this Court to draw parallel between the Master Circular on Willful Default dated July 01, 2015 and Master Directions on Frauds. The Master Circular on willful default and Master Directions on frauds cover the entirely different concepts and both issues are incommensurable. Part 1 of para 8.12.1 merely adopts and incorporates penal consequences that are prescribed for Willful defaulter as penal that would apply to fraudulent borrowers. The procedure contained in the Direction of Willful defaulters which Page 80 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined provides for issuance of notice or personal hearing is not applicable for reporting of frauds detected by banks. As there is an obligation under law to inform the investigating agencies on commission of any punishable offence, there cannot be any requirement to give prior notice before informing the investigating agency for investigation and further steps under law. It was submitted that the purpose of Master Directions is not to adjudicate but only to issue caution advice/ Central Fraud Registry to the Banks in order to take preventive measures also report to the investigating agencies. The borrower would have ample opportunity to defend himself during trial. In the case of Willful defaulters, Civil consequences ensue upon a bank declaring a borrower as a Willful defaulter after following the procedure prescribed therein. On the issue of providing an opportunity for Page 81 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined personal hearing before classifying an account as fraud, any discussion or opportunity of hearing may mar the process of investigation/ examination by the Bank and could lead to potential compromise of evidence and hence is not desirable. In any case, once the case is handed over to Law Enforcement Agency, it is for the Enforcement Agency to place the matter before the Court for a decision on the case. The classification of an account as fraud is for the limited purpose of Forewarning the banking system on the fraud and its modus operandi.
6.27) It was submitted that in order to have uniformity in reporting, frauds have been classified, broadly. It is a broad classification mainly derived from Indian Penal Code. However, banks need to be alert against such parties and strengthen their Page 82 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined systems and controls to prevent similar incidents. Hence, they are classified as separate types for reporting by banks under the Master Directions on Frauds. It is not possible to envisage all possible fraud scenarios. The classification is only for reporting purpose and not for framing charges, which is done by the Law Enforcement Agencies. Neither does it amount to adjudication of the borrower as guilty under the reported category. The purpose of the framework on classification and reporting of frauds, is for banks to report such incidents early and also to enable dissemination such cases.
6.28) It was further submitted that the said Master Direction on Frauds suffers from no infirmity and does not violate any statutory, legal or fundamental rights of the petitioner. It is therefore submitted that Page 83 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined the impugned Master Direction on Frauds is constitutionally as well as legally valid and no order or direction need be passed against the RBI as prayed for or otherwise.
7. Having heard the learned advocates for the respective parties and having gone through the materials on record, in order to appreciate the contentions raised by the respective parties, it would be germane to refer to few Clauses of Master Circular on willful defaulter dated 1st July, 2015 issued by the RBI.
"Clause 2.1.3 : Wilful Default : A 'willful default' would be deemed to have occurred if any of the following events is noted:
(a) The unit has defaulted in meeting its payment/repayment obligations to the lender even when it has the capacity to honour the said obligations.
(b) The unit has defaulted in meeting its payment/ repayment obligations to the lender and has not utilised Page 84 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.
(c) The unit has defaulted in meeting its payment/ repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.
(d) The unit has defaulted in meeting its payment/ repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the bank/lender.
The identification of the willful default should be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transactions/ incidents. The default to be categorised as willful must be intentional, deliberate and calculated."
Clause no. 2.5 : Penal Measures The following measures should be Page 85 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined initiated by the banks and FIs against the willful defaulters identified as per the definition indicated at paragraph 2.1.3 above:
a. No additional facilities should be granted by any bank / FI to the listed willful defaulters. In addition, such companies (including their entrepreneurs / promoters) where banks/ FIs have identified siphoning / diversion of funds, misrepresentation, falsification of accounts and fraudulent transactions should be debarred from institutional finance from the scheduled commercial banks, financial institutions, NBFCs, for floating new ventures for a period of 5 years from the date of removal of their name from the list of willful defaulters as published/disseminated by RBI/CICs.
b. The legal process, wherever warranted, against the borrowers/ guarantors and foreclosure for recovery of dues should be initiated expeditiously. The lenders may initiate criminal proceedings against willful defaulters, wherever necessary.
Page 86 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined c. Wherever possible, the banks and FIs should adopt a proactive approach for a change of management of the
willfully defaulting borrower unit.
d. A covenant in the loan agreements, with the companies to which the banks/ FIs have given funded/ non-
funded credit facility, should be incorporated by the banks/ FIs to the effect that the borrowing company should not induct on its board a person whose name appears in the list of willful defaulters and that in case, such a person is found to be on its board, it would take expeditious and effective steps for removal of the person from its board.
It would be imperative on the banks and FIs to put in place a transparent mechanism for the entire process so that the penal provisions are not misused and the scope of such discretionary powers are kept to the barest minimum. It should also be ensured that a solitary or isolated instance is not made the basis for imposing the penal action.
Clause no.3 : Mechanism for
identification of willful
defaulters.
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NEUTRAL CITATION
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undefined
The mechanism referred to in
paragraph 2.5 above should
generally include the following :
(a) The evidence of willful default on the part of the borrowing company and its promoter/whole-time director at the relevant time should be examined by a Committee headed by an Executive Director or equivalent and consisting of two other senior officers of the rank of GM/DGM.
(b) If the Committee concludes that an event of willful default has occurred, it shall issue a Show Cause Notice to the concerned borrower and the promoter/ whole-time director and call for their submissions and after considering their submissions issue an order recording the fact of willful default and the reasons for the same. An opportunity should be given to the borrower and the promoter/ 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 Page 88 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined Director or the Managing Director & Chief Executive Officer/ CEOs and consisting, in addition, to two independent directors/ non-
executive directors of the bank and the order shall become final only after it is confirmed by the said Review Committee. However, if the Identification Committee does not pass an order declaring a borrower as a willful defaulter, then the Review Committee need not be set up to review such decisions."
8. Thus, clause 2.1.3 defines 'willful default' as to who can be said to have committed a willful default as enumerated in Clause (a) to (d). Whereas, Clause-3 provides for mechanism for identification of willful defaulters. Clause - 2.5 provides consequences of declaring any lender as willful defaulter resulting into penal measures including criminal case. On perusal of the above provisions of Master Circular, the Identification Committee is required to examine the availability of evidence of Page 89 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined willful default on the part of the borrower company and its promoter/whole time director and if such committee concludes that in the event of willful default is occurred, it is obligatory on the part of the Identification Committee to issue a show cause notice to the concerned borrower and promoter whole time director calling for their submissions and after considering their submissions an order recording the fact of willful default has to be passed giving reasons for the same. Therefore, it is incumbent upon the Identification Committee to provide an opportunity of personal hearing to the borrower and promoter, whole time director or the persons, who are to be considered as willful defaulter and the decision of such Identification Committee is to be reviewed by any other Committee, which is Review Committee as per Clause-3(c) of the Master Circular.
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9. The Division bench of the Bombay High Court in case of M/s. Kanchan Motors and others vs. Bank of India and others reported in 2018 SCC OnLine Bom 1761 has held as under with regard to violation of principles of natural justice as under:
"14. On the close scrutiny of the aforesaid provisions of Master Circular, it is clear that the consequences of declaring any lender as wilful defaulter are serious in nature. It is also clear that for declaring a lender to be wilful defaulter specific finding is required to have been recorded in terms of Clasue 2.1.3(a) to (d) as the case may be. The Master Circular also provides a mechanism to be adopted for identifying the wilful defaulter. It includes, availability of evidence of wilful default on the part of borrowing company and its promoter/whole-time director which needs to be examined by the Identification Committee. If the Committee concludes that an event of wilful default has occurred, it is obligatory on the part of Identification Committee to issue a show cause notice to the concerned borrower and the promoter/whole-time director calling from their submissions and after considering their submissions as may be received, an order recording the fact of wilful default has to be passed after giving reasons for the same. It is also incumbent upon the Identification Committee to give an opportunity of personal hearing Page 91 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined to borrower & promoter/whole-time director if it feels that such opportunity is necessary. The said order of the Committee needs to be reviewed by another Committee (Review Committee) as per Clause 3(c) of the Master Circular.
15. Examining the present matter on the touch stone of the aforesaid provisions, we find that the Respondent Bank has failed to comply with the aforesaid mechanism provided under the Master Circular. It is clear from the record that in response to the notice issued by the Bank informing the Petitioners about their intentions to proceed against them for declaring them as willful defaulter and giving last chance to deposit outstanding amounts, the Petitioners have submitted a detailed reply dated 29th January, 2018 giving reasons as to why such proceeding cannot be initiated. However, it appears that thereafter the Identification Committee has passed an order on 9th March, 2018 recording that the Petitioners have committed wilful default. It is also an admitted fact that the copy of the order dated 9th March, 2018 was not supplied to the Petitioners even though a written request for the same was made. Moreover, in the stand of the Bank in reply to the Petition, it is stated that is not necessary to supply the copy of the order of the Identification Committee to the Petitioners.
16. In the circumstances, in our considered view the Respondents while declaring the Petitioners as wilful defaulter have violated the provisions contained in the Master Circular and have also acted in violation of the principles of natural justice. The impugned action which is penal in nature has been taken causing serious Page 92 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined implication on the Petitioners without following the basis principles of natural justice. The impugned order of Review Committee as is clear from a bare reading of it, is a non speaking order as the operative part of the order of Review Committee which contains the reasons reads thus:
"The Review Committee has examined and reviewed the proceedings initiated order and the findings of the Identification Committee and found that they are in order and confirmed that you have committed the following willful default:--
(Reasons) The unit has defaulted reasons in meeting its payment/repayment obligation to the lender and has not utilized the finance from lender even when it has capacity to honour the said obligations."
17. This according to our considered view the order of the Review Committee cannot be termed as reasoned order and as such it cannot be sustained.
18. We are also of the considered view that the Respondent Bank cannot be allowed to say that it is not necessary for them to supply copy of the order passed by the Identification Committee. As would be clear from Clause 3(b) of the Master Circular the Identification Committee has to record reasons while passing the order of recording the fact of commission of wilful default as also to assign valid reasons as to whether it is necessary to give the borrower and the the promoter/whole time director the opportunity of personal hearing. This requirement whether has been complied with or not could have been examined only if the said order was brought Page 93 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined on record. But strangely in reply the Bank has taken a stand that the order dated 9 th March, 2018 passed by the Identification Committee is the internal order and it is not supposed to be served upon the Petitioners. It is also stated by the Respondents in the reply that no question arises of serving the order dated 9th March, 2018 on the Petitioners and that the order dated 9th March, 2018 is the preliminary internal order and after its finalization by Review Committee, it is conveyed to the Petitioners. Thus from the stand taken by the Respondents, it is clear that they have neither supplied copy of the order passed by the Identification Committee to the Petitioners nor according to them it was necessary. It is also very strange that the said order has not even been brought on record by the Bank to deny the Petitioners' contention that their grounds raised th through reply dated 29 January, 2018 to show cause notice against proposed declaration of wilful defaulter have not been considered and that as to why the Petitioners were denied the opportunity of being heard.
19. In our considered view the stand of the Bank that they are not obliged to furnish copy of the order passed by the Identification Committee cannot be sustained. Such stand if accepted would given rise to arbitrary exercise of powers as the Identification Committee may give complete go bye to the requirement of assigning reasons for declaring a party as Wilful Defaulter and also requirement of giving reasons as to why opportunity of personal hearing would not be necessary.
20. In the present case, as already observed even the order of Review Committee Page 94 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined is bereft of any reasons for arriving at the conclusion that, "the Petitioners have defaulted in meeting its payment/repayment obligation to the lender even when it has capacity to honour the said obligation.
21. Having regard to the aforesaid in our considered view failure to supply the reasons by the Identification Committee of recording the fact that the Petitioners are in wilful default and as to why they need not be given an opportunity of hearing when in their reply dated 29th January, 2018 the Petitioners have raised various grounds opposing the proposed action of declaring them willful defaulter and sought opportunity of personal hearing cannot be said to be justified. Similarly absence of reasons in the order of Review Committee also amounts to denial of justice. It is now well settled that reasons are the live links between the minds of the decision taker to the controversy in question and the decision or conclusion arrived at. Reasons substitute subjectivity to objectivity right to reason is an indispensable part of sound judicial system. The rational is that the affected party can know why the decision has gone against him. One of the statutory requirement of the natural justice is spelling out reasons for the order made, in other words a speaking order. Even in respect of administrative order the giving of reasons is one of the fundamentals of good administration."
10. The Apex Court in case of State Bank Of India Vs. Jah Developers Private Limited and Others (Supra) while denying the right to be Page 95 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined represented by a lawyer in the in-house proceedings contained in Para 3 of the Revised Circular dated 01.07.2015, has held that Revised Circular, being in public interest, must be construed reasonably as under:
"15. The next question that arises is whether an oral hearing is required under the Revised Circular dated 1-7- 2015. We have already seen that the said circular makes a departure from the earlier Master Circular in that an oral hearing may only be given by the First Committee at the first stage if it is so found necessary. Given the scheme of the Revised Circular, it is difficult to state that oral hearing is mandatory. It is even more difficult to state that in all cases oral hearings must be given, or else the principles of natural justice are breached. A number of judgments have held that natural justice is a flexible tool that is used in order that a person or authority arrive at a just result. Such result can be arrived at in many cases without oral hearing but on written representations given by parties, after considering which, a decision is then arrived at. Indeed, in a recent judgment in Gorkha Security Services v. State (NCT of Delhi) [Gorkha Security Services v. State (NCT of Delhi), (2014) 9 SCC 105] this Court has held, in a blacklisting case, that where Page 96 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined serious consequences ensue, once a show-
cause notice is issued and opportunity to reply is afforded, natural justice is satisfied and it is not necessary to give oral hearing in such cases (see para 20).
16. When it comes to whether the borrower can, given the consequences of being declared a wilful defaulter, be said to have a right to be represented by a lawyer, the judgments of this Court have held that there is no such unconditional right, and that it would all depend on the facts and circumstances of each case, given the governing rules and the fact situation of each case. Thus, in Mohinder Singh Gill v. Chief Election Commr. [Mohinder Singh Gill v. Chief Election Commr., (1978) 1 SCC 405] , in the context of election law, this Court held: (SCC p. 439, para 63) "63. In Wiseman v. Borneman [Wiseman v. Borneman, 1968 Ch 429 : (1968) 2 WLR 320 : (1967) 3 All ER 1045 (CA)] there was a hint of the competitive claims of hurry and hearing. Lord Reid said: 'Even where the decision has to be reached by a body acting judicially, there must be a balance between the need for expedition and the need to give full opportunity to the defendant to see material against him' (emphasis added). We agree that the elaborate and sophisticated methodology of a formalised hearing may be injurious to promptitude so essential in an election under way. Even so, natural justice is pragmatically flexible and is amenable to capsulation under the compulsive Page 97 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined pressure of circumstances. To burke it altogether may not be a stroke of fairness except in very exceptional circumstances. Even in Wiseman [Wiseman v. Borneman, 1971 AC 297 : (1969) 3 WLR 706 (HL)] where all that was sought to be done was to see if there was a prima facie case to proceed with a tax case where, inevitably, a fuller hearing would be extended at a later stage of the proceedings, Lord Reid, Lord Morris of Borth-y-Gest and Lord Wilberforce suggested 'that there might be exceptional cases where to decide upon it ex parte would be unfair, and it would be the duty of the tribunal to take appropriate steps to eliminate unfairness' (Lord Denning, M.R., in Howard v. Borneman (2) [Howard v. Borneman (2), 1975 Ch 201 : (1974) 3 WLR 660 (CA)] summarised the observations of the Law Lords in this form). No doctrinaire approach is desirable but the court must be anxious to salvage the cardinal rule to the extent permissible in a given case. After all, it is not obligatory that counsel should be allowed to appear nor is it compulsory that oral evidence should be adduced. Indeed, it is not even imperative that written statements should be called for.
Disclosure of the prominent
circumstances and asking for an
immediate explanation orally or
otherwise may, in many cases, be
sufficient compliance. It is even
conceivable that an urgent meeting with the parties concerned summoned at an hour's notice, or in a crisis, even a telephone call, may suffice." (emphasis in original) Page 98 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined
17. In Kavita v. State of Maharashtra (1) [Kavita v. State of Maharashtra (1), (1981) 3 SCC 558 : 1981 SCC (Cri) 743] (Kavita), this Court held, in the context of preventive detention, that even when a detenu makes a request for legal assistance before the Advisory Board, the Advisory Board is vested with a discretion whether to allow or disallow such legal assistance. This was despite the fact that adequate legal assistance may be essential for the protection of the fundamental right to life and personal liberty guaranteed by Article 21 of the Constitution. On facts, it was held that since the detenu had not made any request to the Advisory Board for any such permission, the Court was not prepared to hold that the detenu was denied the assistance of counsel so as to lead to the conclusion that procedural fairness under Article 21 of the Constitution was denied to him. Likewise, in Nand Lal Bajaj v. State of Punjab [Nand Lal Bajaj v. State of Punjab, (1981) 4 SCC 327 : 1981 SCC (Cri) 841] , this Court referred to Article 22(3)(b) of the Constitution of India which states that the right to consult and be defended by a legal practitioner of his choice is denied to a person who is arrested or detained under any law providing for preventive detention. This Court then went on to hold that normally, lawyers have no place in proceedings before the Advisory Board, and then went on to refer to Kavita [Kavita v. State of Maharashtra (1), (1981) 3 SCC 558 : 1981 SCC (Cri) 743] . It was finally held that since Page 99 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined the detaining authority was allowed to be represented by counsel before the Advisory Board, whereas the detenu was not, the order of detention would be quashed as this would be discriminatory.
18. In J.K. Aggarwal v. Haryana Seeds Development Corpn. Ltd. [J.K. Aggarwal v. Haryana Seeds Development Corpn. Ltd., (1991) 2 SCC 283 : 1991 SCC (L&S) 483] , this Court, after discussing the case law, held in para 4, that the right of representation by a lawyer cannot be held to be a part of natural justice. No general principle valid in all cases can be enunciated. In the last analysis, a decision has to be reached on a case to case basis on situational particularities and the special requirements of justice of the case (see para 8).
19. In Crescent Dyes and Chemicals Ltd. v. Ram Naresh Tripathi [Crescent Dyes and Chemicals Ltd. v. Ram Naresh Tripathi, (1993) 2 SCC 115 : 1993 SCC (L&S) 360] , this Court held that a workman under the Industrial Disputes Act, 1947 has no right, under principles of natural justice, that he must be represented by counsel. After discussing several judgments, this Court concluded:
(SCC pp. 126-27 & 129, paras 12-13 & 17) "12. From the above decisions of the English Courts it seems clear to us that the right to be represented by a counsel or agent of one's own choice is not an absolute right and can be controlled, restricted or regulated by law, rules or regulations. However, if the charge is of a serious and complex nature, the delinquent's request to be represented Page 100 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined through a counsel or agent could be conceded.
13. The law in India also does not concede an absolute right of representation as an aspect of the right to be heard, one of the elements of principle of natural justice. It has been ruled by this Court in (I) N. Kalindi v. Tata Locomotive & Engg. Co.
Ltd. [N. Kalindi v. Tata Locomotive & Engg. Co. Ltd., (1960) 3 SCR 407 : AIR 1960 SC 914] , (ii) Brooke Bond (India) (P) Ltd. v. S. Subba Raman [Brooke Bond (India) (P) Ltd. v. S. Subba Raman, (1961) 2 LLJ 417 (SC)] and (iii) Dunlop Rubber Co. (India) Ltd. v. Workmen [Dunlop Rubber Co. (India) Ltd. v. Workmen, (1965) 2 SCR 139 : AIR 1965 SC 1392] that there is no right to representation as such unless the company by its Standing Orders recognises such a right.
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17. It is, therefore, clear from the above case-law that the right to be represented through counsel or agent can be restricted, controlled or regulated by statute, rules, regulations or Standing Orders. A delinquent has no right to be represented through counsel or agent unless the law specifically confers such a right. The requirement of the rule of natural justice insofar as the delinquent's right of hearing is concerned, cannot and does not extend to a right to be represented through counsel or agent. In the instant case, the delinquent's right of representation was regulated by the Standing Orders which permitted a clerk or a workman working with him in the same department Page 101 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined to represent him and this right stood expanded on Sections 21 and 22(ii) permitting representation through an officer, staff-member or a member of the union, albeit on being authorised by the State Government. The object and purpose of such provisions is to ensure that the domestic enquiry is completed with despatch and is not prolonged endlessly. Secondly, when the person defending the delinquent is from the department or establishment in which the delinquent is working he would be well conversant with the working of that department and the relevant rules and would, therefore, be able to render satisfactory service to the delinquent. Thirdly, not only would the entire proceedings be completed quickly but also inexpensively. It is, therefore, not correct to contend that the Standing Order or Section 22(ii) of the Act conflicts with the principles of natural justice."
20. In Railway Protection Force v. K. Raghuram Babu [Railway Protection Force v. K. Raghuram Babu, (2008) 4 SCC 406 :
(2008) 1 SCC (L&S) 1043] , this Court, in the context of a domestic/departmental enquiry held: (SCC p. 408, paras 9-11) "9. It is well settled that ordinarily in a domestic/departmental enquiry the person accused of misconduct has to conduct his own case vide N. Kalindi v.
Tata Locomotive & Engg. Co. Ltd. [N. Kalindi v. Tata Locomotive & Engg. Co. Ltd., (1960) 3 SCR 407 : AIR 1960 SC 914] Such an inquiry is not a suit or criminal trial where a party has a right to be represented by a lawyer. It is Page 102 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined only if there is some rule which permits the accused to be represented by someone else, that he can claim to be so represented in an inquiry vide Brooke Bond (India) (P) Ltd. v. S. Subba Raman [Brooke Bond (India) (P) Ltd. v. S. Subba Raman, (1961) 2 LLJ 417 (SC)] .
10. Similarly, in Cipla Ltd. v. Ripu Daman Bhanot [Cipla Ltd. v. Ripu Daman Bhanot, (1999) 4 SCC 188 : 1999 SCC (L&S) 847] it was held by this Court that representation could not be claimed as of right. This decision followed the earlier decision Bharat Petroleum Corpn. Ltd. v. Maharashtra General Kamgar Union [Bharat Petroleum Corpn. Ltd. v. Maharashtra General Kamgar Union, (1999) 1 SCC 626 : 1999 SCC (L&S) 361] in which the whole case law has been reviewed by this Court.
11. Following the above decision it has to be held that there is no vested or absolute right in any charge-sheeted employee to representation either through a counsel or through any other person unless the statute or rules/standing orders provide for such a right. Moreover, the right to representation through someone, even if granted by the rules, can be granted as a restricted or controlled right. Refusal to grant representation through an agent does not violate the principles of natural justice."
Ultimately, the Court upheld the validity of Rule 153.8 of the Railway Protection Force Rules, 1987, which permitted a friend to accompany a delinquent, who will not, however, be allowed to address the inquiry officer Page 103 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined or be allowed to cross-examine witnesses.
21. It has also been argued before us that the present case, being a case where "wilful default" consists of facts which are known to the borrower, and as "wilful default" would only be the borrower's version of facts, no lawyer is needed as no complicated questions of law need to be presented before the In- House Committees. Thus, in Krishna Chandra Tandon v. Union of India [Krishna Chandra Tandon v. Union of India, (1974) 4 SCC 374 : 1974 SCC (L&S) 329] , this Court held: (SCC p. 381, para 17) "17. It was next argued that the appellant had asked for the assistance of an advocate but the same was refused. It was submitted that having regard to the intricacies of the case and particularly the ill health of the appellant, he should have been given the assistance of an advocate, and since that was not given there was no reasonable opportunity to defend. The High Court has rejected this submission and we think for good reasons. The appellant was not entitled under the Rules to the assistance of an advocate during the course of the enquiry. The learned Judges were right in pointing out that all that the appellant had to do in the course of the enquiry was to defend the correctness of his assessment orders. Clear indications had been given in the charges with regard to the unusual conduct he displayed in disposing of the assessment cases and the various flaws and defaults which Page 104 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined were apparent on the face of the assessment records themselves. The appellant was the best person to give proper explanations. The circumstances in the evidence against him were clearly put to him and he had to give his explanation. An advocate could have hardly helped him in this. It was not a case where oral evidence was recorded with reference to accounts and the petitioner required the services of a trained lawyer for cross-examining the witnesses. There was no legal complexity in the case. We do not, therefore, accede to the contention that the absence of a lawyer deprived the appellant of a reasonable opportunity to defend himself."
22. Also, in National Seeds Corpn. Ltd. v. K.V. Rama Reddy [National Seeds Corpn. Ltd. v. K.V. Rama Reddy, (2006) 11 SCC 645 : (2007) 1 SCC (L&S) 512] , this Court laid down: (SCC p. 648, para
7) "7. The law in this country does not concede an absolute right of representation to an employee in domestic enquiries as part of his right to be heard and that there is no right to representation by somebody else unless the rules or regulation and standing orders, if any, regulating the conduct of disciplinary proceedings specifically recognise such a right and provide for such representation: see N. Kalindi v. Tata Locomotive & Engg. Co. Ltd. [N. Kalindi v. Tata Locomotive & Engg. Co. Ltd., (1960) 3 SCR 407 : AIR 1960 SC 914], Dunlop Rubber Co. (India) Ltd. v. Workmen [Dunlop Rubber Co. Page 105 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023
NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined (India) Ltd. v. Workmen, (1965) 2 SCR 139 : AIR 1965 SC 1392],Crescent Dyes and Chemicals Ltd. v. Ram Naresh Tripathi [Crescent Dyes and Chemicals Ltd. v. Ram Naresh Tripathi, (1993) 2 SCC 115 : 1993 SCC (L&S) 360] and Indian Overseas Bank v. Officers' Assn. [Indian Overseas Bank v. Officers' Assn., (2001) 9 SCC 540 : 2002 SCC (L&S) 1043] "
23. The Court then held: (National Seeds Corpn. Ltd. case [National Seeds Corpn. Ltd. v. K.V. Rama Reddy, (2006) 11 SCC 645 : (2007) 1 SCC (L&S) 512] , SCC pp. 650-51, para 10)
"10. Learned counsel for the appellant Corporation has brought to our notice office memorandum dated 21-11-2003 by which the prayer to engage a legal practitioner to act as a defence assistant was rejected. Reference was made to the Rules, though no specific reference has been made to the discretion available to be exercised in particular circumstances of a case. The same has to be noted in the background of the basis of prayer made for the purpose. The reasons indicated by the respondent for the purpose were: (a) amount alleged to have been misappropriated is Rs 63.67 lakhs, (b) a number of documents and number of witnesses are relied on by the respondent, and (c) the prayer for availing services of the retired employee has been rejected and the respondent is unable to get any assistance to get any other able co- worker. None of these factors are really relevant for the purpose of deciding as to whether he should be granted Page 106 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined permission to engage the legal practitioner. As noted earlier, he had to explain the factual position with reference to the documents sought to be utilised against him. A legal practitioner would not be in a position to assist the respondent in this regard. It has not been shown as to how a legal practitioner would be in a better position to assist the respondent so far as the documents in question are concerned. As a matter of fact, he would be in a better position to explain and throw light on the question of acceptability or otherwise and the relevance of the documents in question. The High Court [K.V. Rama Reddy v. National Seeds Corpn. Ltd., 2004 SCC OnLine Kar 654] has not considered these aspects and has been swayed by the fact that the respondent was physically handicapped person and the amount involved is very huge. As option to be assisted by another employee is given to the respondent, he was in no way prejudiced by the refusal to permit engagement of a legal practitioner. The High Court's order is, therefore, unsustainable and is set aside."
24. Given the above conspectus of case law, we are of the view that there is no right to be represented by a lawyer in the in-house proceedings contained in Para 3 of the Revised Circular dated 1- 7-2015, as it is clear that the events of wilful default as mentioned in Para 2.1.3 would only relate to the individual facts of each case. What has typically to be discovered is whether a unit has defaulted in making its payment Page 107 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined 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 29-A of the Insolvency and Bankruptcy Code, 2016, a wilful defaulter cannot even apply to be a resolution applicant. Given these drastic consequences, it is clear that the Revised Circular, being in public interest, must be construed reasonably. This being so, and given the fact that Para 3 of the Master Circular dated 1-7-2013 permitted the borrower to make a representation within 15 days of the preliminary decision of the First Page 108 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined 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 Para 3(b) of the Revised Circular dated 1-7-2015, must give its order to the borrower as soon as it is made. The borrower can then represent against such order within a period of 15 days to the Review Committee. Such written representation can be a full representation on facts and law (if any). The Review Committee must then pass a reasoned order on such representation which must then be served on the borrower. Given the fact that the earlier Master Circular dated 1-7-2013 itself considered such steps to be reasonable, we incorporate all these steps into the Revised Circular dated 1- 7-2015. The impugned judgment [SBI v. Jah Developers (P) Ltd., LPA No. 113 of 2015 sub nom Punjab National Bank v. Kingfisher Airlines Ltd., 2015 SCC OnLine Del 14128 : (2016) 154 DRJ 164] [Kingfisher Airlines Ltd. v. Union of India, 2015 SCC OnLine Bom 6075 : (2016) 2 Mah LJ 838] is, therefore, set aside, and the appeals are allowed in terms of our judgment. We thank the learned Amicus Curiae, Shri Parag Tripathi, for his valuable assistance to this Court."
11. In view of the above conspectus of the law and undisputed facts of this case, it is apparent that the respondent bank has failed to comply with the aforesaid mechanism Page 109 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined provided under the Revised Master Circular as petitioners were never informed by the Identification Committee by issuing show cause notice and the notice was issued by the respondent bank to which the petitioners filed detailed reply but the order passed by the Identification Committee recording that the petitioners have committed willful default was never provided to the petitioners. The petitioners came to know about declaring them as willful defaulter only from the website of CIBIL.
12. It emerges from the record that the copy of the order passed by the Identification Committee was never supplied to the petitioners even though written request for the same was made by the petitioners. In view of the above facts and circumstances, the respondent bank while declaring the petitioners as willful defaulter has violated Page 110 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined the provisions contained in the Revised Master Circular and has also acted in violation of principles of natural justice. As the impugned action which is penal in nature has been taken causing serious implication to the petitioners without following the basis of principles of natural justice, the impugned action of the respondent bank identifying the account of the petitioners as willful default and subsequent reporting of name of the petitioners to the RBI/CIBIL as willful defaulters are liable to be quashed and set aside.
13. However, so far as action of the respondent bank for declaring the petitioners' account as "Fraud" as per RBI circular dated 01.07.2016 is concerned , the same would continue to operate as the matter pertaining to such action is pending before the Hon'ble Page 111 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined Supreme Court and such action shall be governed by the decision to be rendered by the Apex Court and as such contentions of both the sides in that respect are not dealt with and are kept open to be raised in future.
14. In view of the foregoing reasons, the petition succeeds in part. The impugned action of the respondent bank identifying the account of the petitioners as willful defaulters and subsequent reporting of the names of the petitioners to RBI/CIBIL as willful defaulters is hereby quashed and set aside and the matter is remanded back to the Identification Committee of the respondent bank to follow the procedure as prescribed in Master Circular dated 1st July, 2015 by issuing a show cause notice to the petitioners and providing opportunity to the petitioners as per Clause-3 of the said Page 112 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023 NEUTRAL CITATION C/SCA/8550/2021 JUDGMENT DATED: 18/01/2023 undefined circular. Such exercise by the Identification Committee and thereafter by the Review Committee shall be completed within the period of six months from the date of receipt of this order.
15. Rule is made absolute to the aforesaid extent. No order as to costs.
(BHARGAV D. KARIA, J) RAGHUNATH R NAIR Page 113 of 113 Downloaded on : Sun Sep 17 20:55:45 IST 2023